CEOs May Be Personally Liable for Independent Contractor Misclassification: July 2021 Update

Independent Contractor Misclassification & Compliance Blog
August 16, 2021

Most class action cases of independent contractor misclassification are brought against corporate entities. Yet many laws also permit plaintiffs to sue company executives or managers for personal liability in such cases. In our roundup below of last month’s legal developments in this area of the law, a court denied a motion to dismiss claims against the CEO of a company alleged to have misclassified workers as independent contractors, thereby exposing him to the potential for individual liability. Most lawsuits seeking to impose personal liability on officers and decision-makers for allegedly misclassifying workers are brought under state wage and hour laws, but the first case reported below involves a misclassification collective action under the federal Fair Labor Standards Act. That law permits nationwide class action type lawsuits and is the most common way by which plaintiffs can mount a multi-state lawsuit against companies that operate on a nationwide or regional basis. Because the FLSA exposes companies to broad exposure if their classification of independent contractors is not compliant with the test for independent contractor status, enhancing compliance with that federal law is imperative.  This objective is even more important because courts have held that the FLSA permits plaintiffs to sue executive decision-makers who play a role in their companies’ designation of a group of workers as independent contractors. Many businesses operating throughout the U.S. have therefore used a process such as IC Diagnostics (TM) to restructure, re-document, and re-implement their independent contractor relationships that minimizes misclassification liability consistent with the company’s business model and does so in a customized and sustainable manner.

In the Courts (5 cases)

CEO UNABLE TO GAIN DISMISSAL OF INDEPENDENT CONTRACTOR MISCLASSIFICATION COLLECTIVE ACTION.  Delivery drivers engaged by an automobile parts supply company sued not only the auto parts company for allegedly misclassifying them as independent contractors but also staffing companies that supplied the ICs and the CEO of one of the staffing companies.  The lawsuit was brought in federal court for allegedly unpaid overtime and minimum wage violations under the FLSA and a number of state wage and hour laws.  The companies made a motion to dismiss the complaint and the CEO moved to dismiss the claim against him personally.

The court denied the CEO’s motion to dismiss.  It concluded that the complaint alleged sufficient facts, if proven, that the CEO was the drivers’ employer based on the allegation that the CEO negotiated the contract and employee code of conduct that dictated the terms and conditions of the drivers’ work, approved electronic devices used by the drivers, and maintained ultimate authority over the operations of the staffing companies. The court reasoned that such allegations, if proven, would lead to the conclusion that the CEO maintained management, supervision, and oversight of the related staffing agencies and that he controlled working conditions and could influence the drivers’ rates of pay.  Henao v. Parts Authority, LLC, No. 19-cv-10720 (S.D.N.Y. July 2, 2021).

FAST FOOD COMPANY SUED BY EXECUTIVE RECRUITER FOR DENIAL OF BENEFITS DUE TO ALLEGED MISCLASSIFICATION OF PLAINTIFF AS AN INDEPENDENT CONTRACTOR.  A veteran executive recruiter has filed a lawsuit in federal court alleging violations of the Employee Retirement Income Security Act and the California Labor Code for failure to provide pension, bonuses, and paid time off due to the fast food company’s alleged misclassification of him as an independent contractor. According to the complaint, the company operates “quick-service restaurant companies” throughout the United States and had a 25-year working relationship with the plaintiff.  The recruiter alleges he was responsible for “building an internal executive search and retention practice within the company.” He asserted numerous factual allegations in support of his claim, including that the company controlled the manner and means by which he performed his work, including directing when, where and how plaintiff’s work was to be done; required him to report directly to senior HR leadership team members; paid for and/or provided plaintiff with office supplies, his own private office at the company’s corporate headquarters, and a work computer and laptop; directed plaintiff’s hours and days off; required him to use the company’s corporate computer system to conduct all of his work; dictated the order and sequence of work to be performed in accordance with company policy; assigned, directed, supervised, and controlled the employee recruitment services performed by plaintiff; required him to attend employee-only events and meetings; conducted annual performance evaluations of plaintiff that were linked to his annual salary and bonus determinations; required plaintiff to complete annual employee trainings; and prohibited plaintiff from providing services to competitors.  The company is likely to deny all of the above allegations. Alders v. Yum Brands, Inc., No. 21-cv-01191 (C.D. Cal.  July 9, 2021).

ELECTRIC SCOOTER AND BIKE RENTAL COMPANY TO PAY $8.5 MILLION TO SETTLE IC MISCLASSIFICATION PAGA CLAIM.  A California state court has approved a proposed $8.5 million settlement of representative ‎claims brought under the state’s Private Attorneys General Act (PAGA) in four related independent contractor misclassification lawsuits brought by drivers ‎providing services to Lime, an electric scooter and bike rental company. The drivers, known as “juicers,” collect, recharge, and redistribute the company’s electric scooters and bikes.  As discussed in our blog post of March 8, 2021, the lawsuits alleged that ‎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. The court previously denied a settlement of the PAGA claims but in mid-July, following the submission of further filings and arguments of counsel, the court approved the settlement finding that “the terms of the [$8.5 million] settlement agreement as a whole are fundamentally fair, adequate and reasonable in light of PAGA’s policies and purposes.” The settlement included a clause where the company denied the claim that the class members had been misclassified.  Neutron Holdings Wage and Hour Cases, No. CJC-19-‎‎005044 (Super. Ct. San Francisco County, Calif. July 13, 2021).

OWNER-OPERATOR DRIVERS FOUND TO BE INDEPENDENT CONTRACTORS BY COLORADO FEDERAL COURT FOLLOWING TRIAL.  After a non-jury trial, a federal judge in Colorado has found owner-operator drivers for a truck leasing company to be independent contractors.  The lawsuit, brought as a collective action in 2016 on behalf of owner-operators claimed, among other things, that Pathway Leasing LLC had violated the minimum wage provisions of the Fair Labor Standards Act due to its misclassification of the drivers as independent contractors and not employees. In ruling the drivers were properly classified as independent contractors, the court applied the economic realities test. It found that there was a lack of control exerted by the company because the drivers were not required to drive the leased trucks themselves but could hire their own drivers or work as a team; that the drivers used their own business judgment to accept or decline loads based on profitability considerations; the drivers determined where they would drive and the routes they would travel; and they were not subject to any contractual or policy restrictions on when or how much time they took off. Four other factors also favored independent contractor status, including that the drivers had the opportunity for profit and loss; they had a significant investment in their businesses because they had to secure a lease or own a truck to provide services as well as bear the expense of truck payments, maintenance and repairs, fuel costs, workers compensation, and business liability insurance; and there was impermanence in the working relationship.  Merrill v. Pathway Leasing LLC, No. 16-cv-02242-KLM (D. Colo. July 21, 2021).

CAB COMPANY’S WIN, ESTABLISHING THAT NEVADA TAXI DRIVERS WERE PROPERLY CLASSIFIED AS IC’S, IS REVERSED.  The Nevada Supreme Court has reversed a class action IC misclassification lawsuit by Reno cab drivers, finding that the district court applied an improper standard for assessing worker classification. The drivers brought suit in 2015 alleging that due to their misclassification as independent contractors and not employees, their take-home pay was often less than the minimum hourly wage under the Nevada Minimum Wage Amendment and that they were not paid all the wages they were owed at the time of separation, entitling them to waiting time penalties under state law. The district court granted the cab companies’ motion for summary judgment relying solely on the fact that the drivers held Nevada Transportation Authority-approved taxicab leases and reasoning that when the Transportation Authority approves a lease, it confirms that the parties to the lease entered into “a statutorily created independent contractor relationship.” The drivers appealed the decision. In its opinion reversing and remanding the district court’s decision, the Nevada high court clarified that employee status for purposes of the state minimum wage law is determined only by the economic realities test and not as a result of a lease approval by the state taxi commission.  Myers v. Reno Cab Company, Inc., No. 80448 (Sup. Ct. Nev. July 29, 2021).

Administrative and Regulatory Developments (1 matter)

NEW JERSEY ENACTS A SERIES OF INDEPENDENT CONTRACTOR MISCLASSIFICATION INITIATIVES.  New Jersey Governor Phil Murphy has signed a series of legislative initiatives aimed at combatting employee misclassification. As detailed in a July 8, 2021 press release, the Governor’s enactment of a four-bill legislative package furthering state efforts to curtail employee misclassification, he is building on his commitment to ensuring that workers and employers in New Jersey are treated fairly by signing a four-bill legislative package furthering state efforts to stop employee misclassification.  Specifically, A-5890/S-3920 concerns strengthening the enforcement of employee misclassification and stop-work order laws; A-5891/S-3921 creates the Office of Strategic Enforcement and Compliance within the Department of Labor and Workforce Development and appropriate $1 million to effectuate these efforts; A-5892/S-3922 streamlines the identification of employee misclassification; and A-1171/S-1260 requires the Commissioner of Labor and Workforce Development to create a state-wide database of certified payroll information for public works projects. Governor Murphy stated: “These business practices are unfair, abusive, and illegal and they cannot be tolerated. Today’s actions will give the state more tools to root out and prevent misclassification.”

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