Not So Fast: January 2021 Independent Contractor Law Update

Independent Contractor Misclassification & Compliance Blog
February 5, 2021

January 2021 may well be remembered in the independent contractor area of law as the “not so fast” month. The Fifth Circuit Court of Appeals told lower courts “not so fast” when it comes to certifying collective actions.  That appellate court imposed a new and more rigorous standard that plaintiffs will have to meet to attain certification of their collective actions under the Fair Labor Standards Act. GrubHub and other companies that engage couriers to deliver food from restaurants have generally succeeded in compelling arbitration of courier claims for independent contractor misclassification.  These companies have avoided application of the arbitration exemption in the Federal Arbitration Act for interstate transportation workers.  As we reported here on September 18, 2020, the United States Court of Appeals for the Seventh Circuit held that couriers providing deliveries for customers of GrubHub were not involved in interstate commerce. But only last week, as reported below, a Massachusetts court essentially said, “not so fast,” reaching the opposite conclusion when it held that couriers providing deliveries to GrubHub customers of pre-packaged and non-food items originating outside of Massachusetts (such as soft drinks, chips, toilet paper, cleaning products, and flowers) were exempt from arbitration under the interstate transportation worker exemption. This area of the law is evolving with new arguments by plaintiffs’ class action lawyers seeking to circumvent arbitration agreements.

“Not so fast” is also pertinent expression regarding the application of regulations and opinion letters issued by the U.S. Department of Labor in the waning days of the Trump Administration. On his first day in office, President Biden imposed a regulatory freeze, which seemed to cover the new independent contractor regulation issued in final form by the Labor Department on January 7, 2021. But, for those who may jump to conclusions that the regulatory freeze has put the new IC status regulation on ice, we note in our analysis below that there appears to be an argument that the IC regulation may well become valid and cannot simply be frozen in time.

Businesses can insulate themselves from the vagaries of court and administrative pronouncements that seem to change from year to year, sometimes more often. Enhancing a company’s compliance with federal and state IC laws can minimize or eliminate a company’s risk of IC misclassification liability.  Many businesses have used a process such as IC Diagnostics (TM) to restructure, re-document, and/or re-implement their IC relationships in a customized and sustainable manner.  Doing so will help companies stay ahead of the curve with regard to new laws, regulations, or judicial decisions that seem to constantly change the legal landscape of independent contractor compliance.

In the Courts (7 cases)

NEW YORK-BASED LIFE INSURANCE COMPANY SUED IN CLASS ACTION FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION.  A new independent contractor misclassification class action has been brought against National Income Life Insurance Company by a former trainee/agent on behalf of himself and potentially hundreds of other insurance and annuities sales trainees and agents.  The named plaintiff alleges that the company violated the minimum wage and overtime provisions of the federal Fair Labor Standards Act and the New York Labor Law due to its alleged misclassification of the agents as independent contractors and not employees. According to the complaint, the company required its agents to engage in prolonged training periods for which they were not paid; take training classes and a licensing exam for which they were not reimbursed; pay for specific software required by the company; and use their personal cell phones for work purposes. In addition, the plaintiff asserts that the company required trainees and agents to be on-site or shadowing agents during certain hours; directed the agents to adhere to the company’s policies and protocols; and controlled the method and means of their work. Turner v. National Income Life Insurance Co., No. 21-cv-00003(N.D.N.Y. Jan. 4, 2021).

INSURANCE COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTIONS WITH SALES AGENTS FOR $6 MILLION.  A California federal court has granted final approval of a nearly $6 million class action settlement covering more than 7,000 insurance sales agents who alleged they had been misclassified as independent contractors. The settlement resolves three related cases alleging claims for overtime, minimum wage, and rest and meal breaks under the California Labor Code and California Wage Order #4. The plaintiffs claimed that as prospective agents, they were required to undergo week-long training without being paid; had to pay for their own work-related expenses, and were subject to chargebacks against their commissions if they sold policies later cancelled by the policyholder. Under the settlement terms, the company denied liability. Joh v. American Income Life Insurance Co., No. 18-cv-06364 (N.D. Cal. Jan. 7, 2021).

VENDOR SERVICING WORKERS WIN IC MISCLASSIFICATION CLASS ACTION UNDER MASSACHUSETTS LAW.   A Massachusetts federal court has granted summary judgment in favor of vendor servicing workers in a class action alleging violations of the Massachusetts wage and hour law due to misclassification of the vendor associates as independent contractors and not employees. The InStore Group LLC contracted with retailing and manufacturing clients to provide vendor associates to perform retail services, including inventory correction, order entry, display building, audits, surveys, and rack placing. The company advertises specific project opportunities with retail customers on its internal website for vendor associates registered with the company. If a vendor associate accepts an opportunity with a company’s customer, the work is required to be completed within parameters set by the client, which also provides instructions and directions as to how the project services are to be performed.

In granting the plaintiff’s motion for summary judgment, the court applied the conjunctive three-prong test used in Massachusetts to determine independent contractor/employee status. It concluded that under Prong 1, issues of material fact existed whether plaintiff was free from the company’s control. As to Prong 3, the court ruled that the plaintiff customarily engaged in an independently established trade, occupation, profession, or business because he had the right to contract with other companies and did not depend on the company for all of his engagements. However, under Prong 2, which requires that the business establish that the plaintiff’s services are outside the usual course of business of the company, the court concluded as a matter of law that the plaintiff “was providing services in the company’s usual course of business: retail services.” The company had argued that the plaintiff’s provision of retail services was distinct and incidental to the company’s usual course of business, which it argued was the coordination of retail services. The company contended that it does not actually perform retail services, but rather, “connects retailers and manufacturers seeking vendor associate services with independent contractor vendor associates seeking to perform such services.” In rejecting these arguments, the court said it was following the Massachusetts Supreme Judicial Court’s refusal in another case to accept the “false dichotomy between the administrative and operational aspects of their business.” It also concluded that without the services of the vendor associates, the company would cease to operate. The court also granted the plaintiff’s motion for class certification, finding that it was the superior method for adjudicating the case given “the common evidence and common issue of employment classification under InStore’s policies.” Hogan v. The InStore Group, LLC, No. 17-10027 (D. Mass. Jan. 11, 2021).

DYNAMEX IS TO BE APPLIED RETROACTIVELY ACCORDING TO CALIFORNIA SUPREME COURT.  The California Supreme Court has held that the strict ABC test used to determine independent contractor/employee status under the Court’s April 30, 2018 decision in Dynamex applies retroactively for purposes of California’s Wage Orders. As we discussed in our blog post on the date the Dynamex decision was issued, the California Supreme Court had rejected the continued use of its IC test that derived from a 1989 case entitled S.G. Borello & Sons, Inc. v. Dep’t of Industrial Relations, which had established a multi-factor test where no one factor was determinative of IC status. Instead, the California Supreme Court endorsed in Dynamex a rigid ABC test for the California lower courts to use when determining IC status under California Wage Orders.  The strict ABC test in Dynamex was later codified and expanded with the enactment of Assembly Bill 5 (AB5) and later Assembly Bill 2257 (AB2257). The Court concluded that “the standard set forth in Dynamex applies retroactively – that is, to all cases not yet final as of the date our decision in Dynamex became final.” The holding in this case may well be limited to the litigants in the case on appeal and to those situations involving active litigations pending at the time that the Dynamex decision became final. The significance of this decision, if any, on cases not pending at the time the Dynamex decision was issued, and the intervening passage of AB5 and AB2257, are matters the Court did not address. Vazquez v. Jan-Pro Franchising International, Inc., No. S258191 (Jan. 14, 2021).

PACKAGE DELIVERY AND SHIPPING COMPANY SUED IN CLASS ACTION FOR IC MISCLASSIFICATION BY “LAST MILE” DRIVERS.  OnTrac, a shipping and package delivery company, has been sued in a California federal district court by delivery drivers alleging wage and hour violations under the Fair Labor Standards Act and the California Labor Code due to their alleged misclassification as independent contractors and not employees. According to the class and collective action complaint, Express Messenger Systems, Inc. d/b/a OnTrac markets itself as an affordable alternative for parcel logistics and offers package delivery services on the West Coast to customers through the use of “independent contractors,” who contract directly with OnTrac or third party intermediaries referred to as Regional Service Providers. OnTrac moves packages from its customers to local warehouses; once at the warehouse, the package is moved to UPS or provided to a local OnTrac driver for delivery. When a package is to be delivered directly to the addressee, OnTrac engages “last mile” delivery drivers, like plaintiff, either directly or through Regional Service Providers. The drivers allege that OnTrac controls the drivers’ operations, retains control over the drivers’ assignments and  schedules, sets customer service standards, requires the drivers to wear uniforms and drive vehicles bearing OnTrac’s logo; and directs that customer comments and complaints be registered with  OnTrac. Morgan v. Express Messenger Systems, Inc., No. 21-cv-00189 (N.D. Cal. Jan. 8, 2021).

NEW APPROACH TO COLLECTIVE CERTIFICATION ADOPTED BY FIFTH CIRCUIT COURT OF APPEALS.  The United States Court of Appeals for the Fifth Circuit has adopted a one-step approach to determine when to certify a collective action under the Fair Labor Standards Act. Previously, district courts within the Fifth Circuit, like courts in most ‎jurisdictions, applied a “two-step” certification process in FLSA collective actions as set forth in Lusardi v. Xerox Corporation.  The first step, conditional certification, is an initial determination that proposed members of a collective are similar enough to receive notice of the pending action based on the pleadings and parties’ affidavits, requiring little more ‎than substantial allegations that collective members were subject to a ‎single decision, policy, or plan. The second step occurs at the ‎conclusion of discovery when the court makes a second and final determination, using a stricter ‎standard, about whether the named plaintiffs and opt-ins are “similarly situated” and shall proceed to trial as a collective or be “de-certified” as a collective action.

‎In its decision rejecting the application of the two-step Lusardi process, a three-judge panel of the Fifth Circuit concluded that “a district court must rigorously scrutinize the realm ‎of ‘similarly situated’ workers, and must do so from the outset of the case, not after a lenient, ‎step-one ‘conditional certification.’”  The Court instructed district courts to identify, at the ‎outset of the case, what facts and legal considerations would be material to determining the issue ‎of whether putative collection action members are “similarly situated” and then authorize preliminary discovery accordingly. The Court stated that the new methodology allows courts to address potentially dispositive threshold issues that previously would have been deferred at the first step until the completion of discovery. Unlike the Lusardi test, where litigation over issues ‎on the merits were often reserved for the second step, the panel stated that district courts should ‎consider all available evidence (including as to the merits, if appropriate) in conducting the ‎rigorous “similarly situated” analysis.

In the case before the Fifth Circuit, KLLM Transport Services LLC, a company that transports ‎refrigerated goods nationwide, was sued by plaintiff drivers who alleged the company violated ‎the minimum wage provisions of the FLSA due to its misclassification of the drivers as ‎independent contractors and not employees. In 2019, a federal judge conditionally certified the class of delivery drivers using the two-step approach, but also certified his decision for appeal because “[f]ew areas of the law are less settled than the test for determining whether a collective action should be certified.” On appeal, the Fifth Circuit reversed and vacated the district court’s conditional certification, and remanded the case for further proceedings under the new standard. It remains to be seen whether other Circuits will adopt the Fifth Circuit’s approach.  The panel’s decision may also be subject to review by the entire Fifth Circuit Court of Appeals. Swales v. KLLM Transport Services, LLC, No. 19-60847 (5th Cir. Jan. 12, 2021).

GRUBHUB MUST LITIGATE CLASS ACTION IN COURT AND NOT IN INDIVIDUAL ARBITRATION, ACCORDING TO MASSACHUSETTS COURT.  A Massachusetts court has denied a motion to compel arbitration of a courier’s IC misclassification claims, finding that the Federal Arbitration Act’s exemption from arbitration for interstate transportation workers applies to GrubHub because the couriers (in addition to delivering meals prepared by restaurants) also deliver pre-packaged and non-food items that originated outside of Massachusetts (such as soft drinks, chips, toilet paper, cleaning products, and flowers). GrubHub is an online and mobile food ordering and delivery company that allows its customers to order from various restaurants throughout Massachusetts and other states. Plaintiff delivery drivers alleged that the company misclassified drivers as ICs instead of employees and thereby unlawfully retained service and delivery charges, failed to reimburse them for travel expenses, and later retaliated against them. GrubHub contended that the drivers were not exempt from the FAA as interstate transportation workers simply because, in addition to prepared meals from local restaurants, they occasionally delivered pre-packaged items that emanated from states outside of Massachusetts. The court agreed with the drivers, concluding that, as the final participants in the moving stream of commercial transactions that transported and delivered pre-packaged and non-food items ‎to their ultimate users or consumers, the drivers qualified as “workers engaged in foreign or interstate commerce” for purposes of the FAA arbitration exemption. Additionally, because the drivers were exempt from arbitration, the court invalidated the class action waiver contained in GrubHub’s arbitration agreement.  This decision is at odds with a recent decision by the U.S. Court of Appeals for the Seventh Circuit, which held that couriers who make deliveries to GrubHub customers are not interstate transportation workers. An appeal is expected.  Archer v. GrubHub, Inc., No.1984CV03277 (Suffolk Super. Ct. Mass. Jan. 13, 2021).

Administrative and Regulatory Developments

REGULATORY FREEZE IMPOSED BY BIDEN ON MANY LABOR DEPARTMENT ADMINISTRATIVE ACTIONS UNDERTAKEN DURING THE TRUMP PRESIDENCY.  On January 20, 2021, President Biden sought to place a regulatory freeze on the U.S. Department of Labor’s final independent contractor regulation and opinion letters issued in last days of the Trump Administration. As we discussed in detail in our September 22, 2020 and January 6, 2021 blog posts, the Department of Labor issued the final regulation regarding the classification status of independent contractors to be effective March 8, 2021. The publisher of this blog was quoted in an article in the January 7, 2021 issue of the Bloomberg Daily Labor Report, remarking that: “This [Regulation] hasn’t changed the law. Basically, this is destined to the legal junkyard. Even if it did take effect, it doesn’t do much more than set forth a preferred analysis for businesses.” In the effort to impose a regulatory freeze, President Biden directed the Heads of Executive Departments and Agencies not to propose or issue any rule until the new administration reviews them. The independent contractor regulation may fall within that “regulatory freeze.” Although many have reported that the January 20, 2021 White House directive effectively rescinds the U.S. Department of Labor’s final regulation on independent contractor classification, another point of view has been expressed that calls that conclusion into question.

Additionally, as we reported in our two blog posts of January 19, 2021, one day before the end of the Trump Administration, the Labor Department issued a series of three opinion letters, two of which addressed independent contractor issues. One opinion letter concluded that certain distributors that resell to retail outlets food products they purchase from two or more unnamed food manufacturers can be lawfully classified as independent contractors under the Fair Labor Standards Act. The other opinion letter determined that certain owner-operator drivers that provide services to a transportation and logistics company are independent contractors and not employees under the FLSA. On January 26, 2021, the Department of Labor’s Wage and Hour Division withdrew those opinion letters, stating: “These letters were issued prematurely because they are based on rules that have not gone into effect . . .  and . . . may not be relied upon as statements of agency policy as of the date of withdrawal.”

The post Not So Fast: January 2021 Independent Contractor Law Update appeared first on Independent Contractor Compliance.

Independent Contractor Misclassification and Compliance Blog

Visit our Independent Contractor Misclassification and Compliance Blog for the latest news and developments.

Visit the blog