When It Rains It Pours – Electric Scooter Company Target of Multiple Lawsuits: February 2020 Update

Independent Contractor Misclassification & Compliance Blog
March 8, 2021

Micro-mobility company Lime, which provides electric scooter and bike sharing to customers through its mobile app, has been targeted by plaintiffs’ lawyers in class action and representative lawsuits attacking one of the core components of its business model.  Lime engages drivers to recharge the batteries of electric scooters and bikes for its customers.  It treats the drivers as independent contractors.  As detailed below, on the same day a state court rejected Lime’s effort to settle four related representative lawsuits for $5 million, it was sued again in the same court in a proposed class action lawsuit. The litigious assault Lime has experienced mirrors the challenges other companies using an independent contractor business model have experienced: multiple lawsuits.

Perhaps the best way to avoid multiple lawsuits alleging IC misclassification is for businesses to enhance their compliance with state and federal IC laws and to include state-of-the-art arbitration clauses in their IC agreements.   Many savvy companies utilize a process such as IC Diagnostics (TM) to elevate their level of IC compliance by restructuring, re-documenting, and/or re-implementing their IC relationships in a customized and sustainable manner.  As part of the process, companies have included effectively-drafted arbitration clauses with class action waivers to avoid class action lawsuits. While representative lawsuits in California under the Private Attorneys General Act (PAGA) are not arbitrable, nor are regulatory proceedings and audits, class action lawsuits remain the “worst nightmare” for companies utilizing ICs.  A well-drafted arbitration clause can typically avoid or minimize class actions.  When combined with an IC agreement reflecting an enhanced level of compliance, many businesses using ICs also can minimize exposure to PAGA lawsuits and regulatory / administrative proceedings.

In the Courts (5 cases)

COURT REJECTS $5 MILLION “PAGA” SETTLEMENT BETWEEN LIME AND DRIVERS.  A California state court has rejected a proposed $5 million settlement of PAGA representative claims in four related independent contractor misclassification lawsuits brought by drivers providing services to Lime. The lawsuits alleged that Neutron Holdings, Inc., d/b/a Lime, misclassified drivers as independent contractors and failed to pay them in violation of various provisions of the California Labor Code and Wage Orders, including those providing for minimum wage, overtime, and meal breaks. In denying the motion without prejudice, the court concluded that it had concerns that inadequate discovery had been conducted prior to the settlement, that the calculations of maximum damages were inaccurate and incomplete, and that the circumstances surrounding settlement negotiations engaged in by one of the named plaintiffs caused it to question the bona fides of the settlement. The court was concerned that the “[s]ettlement is not the product of the group negotiation process all parties to the coordinated action initially agreed to,” and “evidences an ‘odor of mendacity,’ a lack of arms-length bargaining, and a likely reverse auction.” Neutron Holdings Wage and Hour Cases, No. CJC-19-005044 (Super. Ct. San Francisco County, Calif. Feb. 18, 2021)

LIME SUED AGAIN FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION.  On the same day a court rejected Lime’s bid to settle the four related PAGA lawsuits referenced above, Lime was sued by drivers in the same venue for independent contractor misclassification claims under the California Labor Code and Wage Order. In their class action lawsuit brought in a California state court, the drivers allege that Lime failed to properly classify them as employees. According to the complaint, the drivers were required to comply with the company’s code of conduct, policies, practices, and procedures, including how to perform their tasks, which scooters to charge, and how to interact with customers; had to execute a contract on a take–it-or-leave-it basis; had their compensation set by the company; did not operate distinct businesses separate from the company; and were subject to close monitoring by the company. The drivers claim they are owed compensation for overtime hours, meal and rest period premiums, reimbursement of business expenses, and non-productive time such as time waiting to retrieve or return scooters and planning their routes.  Wallace v. Neutron Holdings Inc., No. CGC-21-589622 (Super. Ct. San Francisco County, Calif. Feb. 18, 2021).

NEW JERSEY SUPREME COURT TO DECIDE IC EXCEPTION STATUS OF INSURANCE AGENTS.  The New Jersey Supreme Court has agreed to answer a question certified to it in August 2020 by the U.S. Court of Appeals for the Third Circuit regarding the independent contractor status of insurance agents. The certified question derives from the 2015 decision by the New Jersey Supreme Court in Hargrove v. Sleepy’s, LLC, which was the subject of a post on this blog.  In Sleepy’s, the state’s highest court decided to borrow and apply the so-called ABC test set forth in the New Jersey Unemployment Compensation Act as the standard for determining IC status under the New Jersey wage payment laws.  The New Jersey Unemployment Compensation Act, however, includes dozens of exceptions from the ABC test, including one encompassing insurance agents receiving compensation based exclusively on commissions.

The Supreme Court in Sleepy’s did not address whether the exceptions from the ABC test in the Unemployment Compensation Act would be applied to claims under New Jersey’s wage payment laws. That prompted the question now to be answered by the New Jersey Supreme Court: does the Unemployment Compensation Act’s definition of “employment” for “[s]ervice performed . . . by agents of insurance companies…compensated wholly on a commission basis” also apply to determinations of whether such agents are employees or independent contractors under New Jersey’s Wage Payment Law.

This question arises out of a plaintiff’s appeal of a New Jersey federal district court decision that granted a motion for summary judgment by defendant Northwestern Mutual Life Insurance Co.  As noted in one of our blog posts, the district court found an insurance agent who claimed to be an employee of Northwestern had been properly classified by the carrier as an IC under the ABC test.  Although the district court did not see the need to address the issue as to whether the insurance agent was exempt from the ABC test, the Third Circuit has asked the New Jersey Supreme Court to rule on that very question.  Walfish v. Northwestern Mutual Life Insurance Co., No. 084836 (Sup. Ct. N.J. Feb. 12, 2021) and Walfish v. Northwestern Mutual Life Insurance Co., No. 19-2105 (3d Cir. Aug. 11, 2020).

HAIR SALON DENIED MOTION FOR SUMMARY JUDGMENT ON IC MISCLASSIFICATION CLAIMS.  A hair stylist suing two hair salons for wage and hour violations under the FLSA and New York Labor Law due to alleged misclassification as an independent contractor prevailed at a significant stage in a federal lawsuit when the court denied the salons’ motion for summary judgment. The court concluded that there were genuine issues of fact as to employee or independent contractor status warranting a jury trial on those factual issues.  Specifically, the court found that although the salons presented an agreement describing the stylist as an independent contractor who set his own service rate and managed his own appointment schedule, evidence was introduced by the stylist that he did not sign that agreement; that text messages purportedly showing that the stylist set his own hours revealed that this flexibility related only to one appointment in the course of a year; and although the stylist advertised on social media platforms, the bulk of the ads were posted when the stylist was not working with the two salons.  As a result, the case will proceed to a jury trial of the stylist’s claims.  Dong Yuan v. Hair Lounge Inc., No. 18-cv- 11905 (S.D.N.Y Feb. 8, 2021).

CLASS CERTIFICATION DENIED IN FRANCHISEE’S IC MISCLASSIFICATION LAWSUIT.  A California federal district court denied the class certification motion of 7-Eleven franchisees claiming they were misclassified as ICs and are owed unpaid expense reimbursements under California’s Labor Code and Wage Order No. 7.  Plaintiffs each entered a franchise agreement with 7-Eleven. The franchisees alleged that they were required to complete mandatory training sessions; keep stores open 24 hours per day or be subject to financial penalties; use 7-Eleven’s system for bookkeeping, placing orders and handling daily activities; and provide daily financial data to 7-Eleven. Additionally, they assert that 7-Eleven controls access to stores’ bank accounts; selects and negotiates contracts with armored car services to deliver bank deposits; maintains a camera system to monitor all transactions within stores; and requires franchisees to use standard advertising and promotions. In denying the franchisees’ motion for class certification as to their Labor Code claim, the court concluded that the franchisees failed to meet the burden of adequately explaining why common questions predominate under the Borello test. Class certification of the wage order claim also was denied “in light of the individualized issues needed to show franchisees are not exempt executives for purposes of the Wage Order….” The court stated the determination of whether certain tasks in particular contexts are exempt or non-exempt “cannot be made on a class-wide basis as each franchisee spends unique amounts of time completing different tasks,” and “there is no common proof  suggesting a simple ‘yes’ or ‘no’ across the class.” The court continued: “To examine each franchisee’s exact activities week-by-week to determine if they were in fact exempt executives, the Court would ‘need to hold several hundred mini-trials with respect to each [franchisee’s] actual work performance.’” Haitayan v. 7-Eleven, Inc., No. 17-cv- 07454 (C.D. Cal. Feb. 8, 2021).

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