Direct Selling and Door-to-Door Sales Under Attack: May 2021 IC News Update

Independent Contractor Misclassification & Compliance Blog
June 10, 2021

Direct sellers and door-to-door salespersons are frequently classified as independent contractors – and that classification is increasingly under attack, both by class action lawyers and the U.S. Department of Labor, as reflected in two key case developments from May 2021.  It is undeniable that many door-to-door salespersons legitimately can be classified as independent contractors under federal and most state laws, yet at the same time some undoubtedly are misclassified.  That determination depends entirely on how the IC relationship is structured, documented, and implemented.  Direct sellers, on the other hand, are regarded as ICs under federal and most state tax laws and many state unemployment insurance laws by virtue of statutory provisions essentially excluding them from the definition of employee.  Yet, those direct seller laws have typically not been applied to claims arising under laws governing overtime pay, minimum wage, expense reimbursement, and other labor and employment laws – and the U.S. Department of Labor has adopted that position as described below. Direct selling companies and businesses using door-to-door salespersons can minimize IC misclassification risk by enhancing compliance with IC laws.  Many companies use a process such as IC Diagnostics (TM) to restructure, re-document, and re-implement their IC relationships in a customized manner, consistent with their existing business model.

Among the other cases on which we report below is a key federal appellate court decision holding that the U.S. Department of Labor is not bound to arbitrate an IC misclassification enforcement action brought on behalf of a group of workers who had signed arbitration agreements.  This decision confirms our oft-repeated observation that even an effectively drafted arbitration agreement with a class action waiver is not enough protection for businesses that engage a large number of ICs. Rather, an enhanced level of compliance with applicable IC laws remains a company’s best deterrent and defense to legal challenges alleging IC misclassification.

In the Courts (6 cases)

DOOR-TO-DOOR SALES REP FILES CLASS ACTION FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION.  A door-to-door sales representative selling home energy contracts has brought a proposed class and collective complaint in Pennsylvania federal court against Platinum Advertising LLC and its related entities alleging minimum wage and overtime violations under the FLSA and state law due to the alleged misclassification of the sales reps as independent contractors. The company offers marketing and sales expertise to both telecom and energy service companies. According to the complaint, the sales representatives typically worked six days per week, a minimum of eight hours per day and often more than ten, are required to make sales calls on personal time, and are paid solely on a commission basis, subject to the company’s approval, regardless of how many hours they work. In support of the misclassification claims, the plaintiff alleges that significant control was exercised by the company by requiring the sales reps to routinely work in excess of 60 hours per week, wear a company uniform, and follow a sales script. The plaintiff further asserts that the sales reps are not required to have any specialized skills to perform their jobs, do not have their own enterprise or separate business structure, are not permitted by the company to assign or delegate their responsibilities, and have no opportunity for profit and loss. McWilliams v. Platinum Advertising LLC, No. 2:21-cv-00607 (W.D. Pa. May 10, 2021).

DIRECT SELLING COMPANIES UNDER LITIGATION ATTACK BY THE U.S. DEPARTMENT OF LABOR FOR IC MISCLASSIFICATION.  The publisher of this blog was quoted in a May 9, 2021 article in Law360 Employment Authority by Jon Steingart, commenting on an appellate brief submitted by the U.S. Department of Labor. The DOL alleges that over 1,500 call center workers are owed $1.5 million in back wages due to their misclassification as independent contractors and not employees. In its brief, the DOL stated that the lower court had properly concluded that an Internal Revenue Code provision designating “direct sellers” as nonemployees did not apply to the FLSA’s exemptions and that, “The IRS provision, by its terms, plainly limits its applicability to federal tax law.” The publisher commented that the case is a reminder that independent contractor classification comes into play under a variety of laws that use different tests to pursue different purposes, noting: “A large number of direct selling companies mistakenly believe that an IRS rule, which says that direct sellers are not employees if paid on a commission-only basis, also applies to the federal and state wage and hour laws. Because of this misconception, direct selling companies often don’t give independent contractor classification the attention it deserves. Businesses in this industry should do just the opposite — enhance their level of contractor compliance.”  Walsh v. Wellfleet Communications, No. 20-16385 (9th Cir. May 12, 2021).  We first proposed that suggestion for direct selling companies over five years ago in an earlier blog post, and it remains our view today.

U.S. LABOR DEPARTMENT NOT BOUND BY PRIVATE ARBITRATION CLAUSE IN IC MISCLASSIFICATION CASE.  The U.S. Court of Appeals for the Ninth Circuit has held that the U.S. Department of Labor is not bound by a private arbitration agreement between a company defendant and workers covered by a Labor Department lawsuit where the DOL is bringing an FLSA enforcement action against the company and its owner. The DOL brought the action against Larry Browne and two of his companies, alleging they violated the FLSA’s minimum wage, overtime, record-keeping, and anti-retaliation provisions by misclassifying delivery drivers as independent contractors. Browne and his companies moved to compel arbitration of the Labor Department’s enforcement action based on arbitration agreements between his companies and him with the drivers. The DOL was not a party to the arbitration agreements. The district court denied the motion and Browne and his companies appealed. In affirming the denial of the motion to compel, the Ninth Circuit concluded that “Because the Secretary, not the employees on whose behalf relief is sought, has authority to direct an FLSA enforcement action, the Secretary cannot be compelled to arbitrate, even if the employees have agreed to arbitrate. ‘To hold otherwise would undermine the detailed enforcement scheme created by Congress simply to give greater effect to an agreement between private parties that does not even contemplate the [Secretary’s] statutory function.’” Walsh v. Browne, No. 20-15765 (9th Cir. May 18, 2021).

RESTAURANT GROUP SUED BY U.S. LABOR DEPARTMENT FOR CLASSIFYING COOKS AND DISHWASHERS AS IC’S.  In one of the first independent contractor misclassification lawsuits brought by the Biden Administration, the U.S. Department of Labor has sued a Minnesota restaurant group in federal court seeking to enjoin and restrain it from withholding minimum wage and overtime compensation under the FLSA due to its alleged misclassification of cooks and dishwashers as independent contractors. According to the complaint, the cooks and dishwashers at Ramejo, LLC d/b/a Rancho Loco Mexican Grill & Bar and Fiesta Red Wing, LLC d/b/a Rancho Loco Grill & Bar were economically dependent on the restaurants because the workers lacked any opportunity for profit, needed no more than limited skills and initiative to perform their jobs, and were subject to control of their work and wages by the restaurant group.  Walsh v. Ramejo LLC, No. 21-01171 (D. Minn. May 7, 2021).

TEXAS INSURANCE COMPANY FOUND TO HAVE MISCLASSIFIED AGENCY MANAGERS AS INDEPENDENT CONTRACTORS.  Insurance agency managers who recruit and train sales agents for an insurance company as well as sell home, auto, and life insurance policies are employees and not independent contractors, according to a Texas magistrate judge’s recommendation granting the managers’ motion for partial summary judgment. Plaintiffs, a conditionally certified class of 12 agency managers, are seeking overtime compensation from the Texas Farm Bureau and its related entities under the FLSA due to their alleged misclassification as independent contractors. In reaching his recommendation, the magistrate judge applied the economic realities test, finding that each of the factors weighed in favor of employee status: the company exercised a significant degree of control over the managers’ work because it restricted them from selling competing insurance products; the company had a much greater relative investment in the business than the managers; the managers’ opportunity for profit and loss was significantly influenced by the company because the Texas Farm Bureau had the ultimate say in hiring and firing of agents; and the company maintained control over the books of business that generated renewal commissions. The magistrate judge also found that managers required only general skills to manage their offices and teams; all of the managers had worked for the company for several years under indefinite contract terms; and managers were integral to the company’s business because they supervise over 700 agents on a day-to-day basis, and no one else recruits agents to sell the company’s policies. The Farm Bureau asserted as a defense to the overtime claim, in the event the managers were found to be employees, that the managers were covered by the outside sales exemption to the FLSA, but the magistrate judge held that that exemption does not apply because the primary duty of the managers was recruiting and training sales agents, not making sales.  The magistrate judge’s recommendation is subject to review by the district court and further appeal if the district court adopts the recommended decision. Ferguson v. Texas Farm Bureau, No. 6:17-cv-00111 (W.D. Tx. May 19, 2021).

OIL AND GAS COMPANY WINS SUMMARY JUDGMENT IN CLASS ACTION ALLEGING IC MISCLASSIFICATION.  An oil and gas directional drilling company prevailed in a worker misclassification case before a Texas federal district court, which granted its motion for summary judgment, holding that the plaintiff driller is an independent contractor and not an employee. Aim Directional Services LLC provides oil and gas directional drilling, as well as other types of drilling and measurement services to various clients throughout the U.S. and Mexico. To conduct drilling operations, the company engages services from directional drillers like plaintiff, who assist drilling operations by guiding the path of the drill-bit consistent with the plan requested by the client. Plaintiff posted his availability through a third party staffing agency and the company engaged his services as an independent contractor in New Mexico and Texas. Plaintiff later brought suit against the company alleging that he was denied overtime compensation in violation of the FLSA and the New Mexico Minimum Wage Act as a result of his misclassification as an independent contractor.

In granting the company’s motion for summary judgment, the court applied the economic realities test and relied heavily on a prior Fifth Circuit decision, Parrish v. Premier Directional Drilling, which also involved an FLSA overtime dispute against a business in a similar energy service industry. As to the control factor under the test, the court found that although the plaintiff was provided with a well-plan, he made that plan work and the Company did not control how he completed particular calculations. The court found that although the plaintiff was required to turn in reports, the decision in Parrish considered them to be “good-client service” and not meaningful control.  With regard to the argument that the company exercised control by mandating that the plaintiff wear a hardhat and steel-toes boots, the court found that those measures are safety-related and not the type of control indicative of employee status. The court also concluded that the opportunity for profit and loss, the skill and initiative needed for the engagement, and lack of permanency of the relationship also favored IC status.  Hargrave v. Aim Directional Services, No. 18-cv-00449 (S.D. Tex. May 24, 2021).

Legislative Developments (1 item)

WEST VIRGINIA ENACTS A NEW TEST FOR INDEPENDENT CONTRACTOR STATUS.  The West Virginia Employment Law Worker Classification Act, enacted earlier this year, became effective yesterday, June 9, 2021.  It applies the same multi-factor test for purposes of determining independent contractor ‎status under West Virginia unemployment compensation, wage payment, workers’ compensation, and human rights ‎statutes. The new law (SB 272), signed by Governor Jim Justice in March, aims to bring clarity and certainty with regard to differentiating employees from independent contractors under those various West Virginia employment laws. ‎ Under the Act’s new test, to be an independent contractor, the individual worker must sign a written contract that ‎states that he/she is engaged as ‎an independent contractor, containing five ‎acknowledgments. The statute also contains ‎several additional ‎criteria.‎ In the event that the elements of that test cannot be satisfied, SB 272 allows the IRS test to be used for ‎‎purposes of determining worker status for purposes of those laws.‎ This new enactment appears to have overlooked applying the new test for IC status to the minimum wage and ‎‎overtime laws in the state. ‎

Administrative and Regulatory Developments (3 matters)                                                                                               

BIDEN LABOR DEPARTMENT WITHDRAWS TRUMP ADMINISTRATION REGULATION ON INDEPENDENT CONTRACTOR CLASSIFICATION. On May 6, 2021, the Biden Administration’s Department of Labor withdrew the Trump Administration’s regulation setting forth a test to classify workers as independent contractors or employees under the FLSA. As discussed more fully in our blog post that day, this withdrawal foretells a return to the Obama era in terms of the Labor Department’s position as to who is and who is not an independent contractor. While the Labor Department’s view is not legally binding, as only the courts decide cases brought under the FLSA, this action by the Biden Labor Department sends a signal to businesses that his Labor Department views IC classification through a different lens.  The withdrawal rule states: “Having considered the comments submitted in response to the [proposed new rule], the Department has decided to finalize the withdrawal of the Independent Contractor Rule. The Department believes that the Rule is inconsistent with the FLSA’s text and purpose, and would have a confusing and disruptive effect on workers and businesses alike due to its departure from longstanding judicial precedent.”

BIDEN ADMINISTRATION BUDGET FOR LABOR DEPARTMENT CALLS FOR INCREASES IN STAFFING FOR IC MISCLASSIFICATION ENFORCEMENT. President Biden’s proposed White House budget for fiscal year 2022 seeks additional resources, including hiring of enforcement personnel for combatting independent contractor/employee misclassification. The proposal, released on May 28, 2021, calls for “ending the abusive practice of misclassifying employees as independent contractors, which deprives these workers of critical protections and benefits.”  The Budget document also states, “In addition to including funding in the Budget for stronger enforcement, the Administration intends to work with the Congress to develop comprehensive legislation to strengthen and extend protections against misclassification across appropriate Federal statutes.” We discussed the DOL’s 2022 Budget request in a blog post dated June 3, 2021, where we also note that David Weil – the Obama Administration’s Wage and Hour Administrator – is the Biden Administration’s choice to serve in the same position.

“SECTORAL” BARGAINING LEGISLATION IN GIG ECONOMY INDUSTRIES MAY BE ADVANCED IN NEW YORK.  The New York State legislature is considering a set of bills that would, if enacted, establish a form of “sectoral” bargaining for selected gig economy independent contractors. As discussed more fully in our blog post of May 23, 2021, the proposed bills, if enacted, would dramatically alter the landscape of laws in New York affecting independent contractor drivers who provide services to customers of ride-sharing technology companies like Uber and Lyft and delivery technology companies such as DoorDash, Instacart, and Amazon Flex. If enacted, “sectoral” bargaining would be established for the first time in the U.S. between a number of companies negotiating as an industry with a union for wages, hours, and terms and conditions of work. The bills not only would require collective bargaining between network companies and workers, but also provide state benefits in the form of workers’ compensation coverage and unemployment insurance, financed by the transportation and delivery network companies. The key characteristic of the proposed legislation is that it would not designate the workers as independent contractors or employees. If enacted, there are likely to be legal challenges to this type of legislation, including arguments that it violates federal antitrust law and is preempted by the National Labor Relations Act.  The legislative session in New York is ending today and refinements to the proposed bill are expected to be made in the interim to take into account comments from additional stakeholders.

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