What Companies Can Learn From an ERISA Case Alleging Independent Contract Misclassification: February 2022 IC Legal News Update

Independent Contractor Misclassification & Compliance Blog
March 7, 2022

This past month, the most notable lawsuit alleging independent contractor misclassification was an ERISA claim.  ERISA lawsuits by workers alleging independent contractor misclassification can potentially expose companies to enormous liability.  For example, in 2017 a federal district court entered a judgment following a jury trial involving ERISA claims by insurance agents seeking damages under several types of ERISA plans. That judgment reportedly would have imposed liability upon the insurance company defendant in the hundreds of millions of dollars, but it was reversed on appeal in January 2019 by the U.S. Court of Appeals for the Sixth Circuit.  The defendant argued that the agents were independent contractors and not employees, and the appellate court agreed.  That approach is but one way to defend against ERISA lawsuits by workers classified as independent contractors.  Another way is to argue that the workers, even if they are employees, were excluded from eligibility as participants in the ERISA plans. That was the thrust of a successful defense last month in an ERISA lawsuit brought by a worker classified as an independent contractor.  The court held that even if the worker was a common law employee and not an independent contractor, he did not allege he was an eligible participant in the plans in question.  This result teaches companies to buttress the language in their ERISA plans to exclude those they classify as independent contractors.  As we note in our blog describing the IC Diagnostics (TM) process, the language needed to exclude such workers is neither straightforward nor intuitive.  But companies that take steps to ensure that eligibility language in each ERISA plan is drafted in an effective manner, consistent with judicial precedent, can eliminate exposure to IC misclassification liability under ERISA, even if the workers can ultimately establish they were misclassified.

In the Courts (5 cases)

ERISA CLAIM IN IC MISCLASSIFICATION LAWSUIT DISMISSED.  A California federal judge has dismissed an ERISA lawsuit brought by an executive recruiter against a fast-food company for denial of benefits allegedly due to the company’s misclassification of the recruiter as an independent contractor. As we first mentioned in our blog post of August 16, 2021 shortly after the lawsuit had been filed, the recruiter alleged that the company, which operates “quick-service restaurant companies” throughout the United States, had a 25-year working relationship with the plaintiff, who claimed he was responsible for “building an internal executive search and retention practice within the company.” He also asserted among other things that the company controlled the manner and means by which he performed his work; required him to report directly to senior HR leadership team members; paid for and/or provided him with office supplies, a private office at the company’s corporate headquarters, and a work computer and laptop; directed plaintiff’s hours and days off; dictated the order and sequence of work he performed; 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 the plaintiff that were linked to his annual salary and bonus determinations; and required him to complete annual employee trainings.

In dismissing the ERISA case, the court did not address the question of whether the recruiter had been misclassified, but simply concluded that, even if he was a common law employee and not an independent contractor, he did not alleged in his pleadings a colorable claim to vested benefits under the company’s retirement plans and therefore did not have standing as a “participant” under ERISA.  The court reasoned that the amended complaint “is premised on the notion that Plaintiff was excluded from participating in the [company] plans and thus was not a participant in these plans.”  In that instance, the court held, Plaintiff ‘s pleading does not state a colorable claim to vested benefits [under ERISA].”  The result in this case may well have been dictated by poor drafting of the pleadings. Nonetheless, it should alert companies that utilize ICs to not only elevate their compliance with IC laws, but also to review their ERISA plans to make sure they exclude certain persons they classify as independent contractors – and to do so in a manner that is consistent with prior court decisions under ERISA.  Alders v. YUM! Brands, Inc., No. ACV 21-1191 (C.D. Cal. Feb. 1, 2022).                                                                           

BAKED GOODS COMPANY FACING CLASS ACTION IC MISCLASSIFICATION LAWSUIT BY DISTRIBUTORS.  Pepperidge Farm, a manufacturer and distributor of baked goods, ‎faces a new class and collective action brought in a Virginia federal court by a plaintiff who refers to himself as a delivery worker, filed on behalf of himself and others similarly situated, due to his alleged misclassification as an independent contractor.  The plaintiff claims that the company violated the wage and hour provisions of the federal Fair Labor Standards Act and Virginia state wage law.

According to the complaint, the plaintiff delivered and stocked the company’s products in stores in an assigned territory, primarily within southwest Virginia. The plaintiff, who was required to sign a Consignment Agreement with the company, claimed that he paid for the right to deliver and distribute the company’s product, but actual control of the route and territory belonged to the company. In support of his misclassification claim, the plaintiff alleged that the company closely monitors and directs the day-to-day operations of the delivery workers; the company sets mandatory sales goals for the workers and tracks their performance, through scanning software which must be purchased from the company; and the delivery workers have no discretion with regard to their customer base or manner of displaying the company’s products in the stores.  As we have commented in a prior blog post, companies using independent distributors have succeeded in defending IC misclassification lawsuits or avoided being sued when they elevate their IC compliance; those that don’t have faced judgments and astoundingly high settlement amounts.  Hill v. Pepperidge Farm, Inc., No. 3:22-cv-00097 (E.D. Va. Feb. 17, 2022).   

RIDESHARE DRIVERS MUST ARBITRATE THEIR IC MISCLASSIFICATION CLAIMS.  U.S. Court of Appeals for the Ninth Circuit affirms a federal district court’s decision that Lyft drivers must arbitrate their claims that the ride-sharing company misclassified them as independent contractors and not employees. At issue on appeal was “whether Lyft drivers are engaged in interstate commerce and therefore exempt from the Federal Arbitration Act (FAA).” Section 1 of the FAA exempts from the Act’s coverage, “all contracts of employment of…any… class of workers engaged in foreign or interstate commerce.” In reaching its conclusion, the three-judge appellate panel, in an unpublished opinion, relied on its prior decision in Capriole v. Uber Techs.  Inc. that rideshare drivers do not fall within the interstate commerce exemption from the FAA and therefore must arbitrate their claims under the arbitration provisions of their independent contractor agreement.  Rogers v. Lyft, Inc., No. 20-15689 (9th Cir. Feb. 16, 2022). This result is similar to another decision last month by a different federal district court, where the judge granted Uber’s motion to compel arbitration, even though the drivers occasionally cross state lines.  Leaks v. Uber Techs. Inc., No. 1:20-cv-06423 (N.D. Ill. Feb. 23, 2022).

RIDESHARE DRIVERS IN CALIFORNIA THAT OPTED OUT OF ARBITRATION WILL RECEIVE SIZEABLE PER-DRIVER AMOUNTS IN SETTLEMENT.  A proposed $8.4 million class action settlement reached between Uber and just over 1,300 California drivers who had opted out of the arbitration provisions in their independent contractor agreement will pay on average over $6,000 per driver, far more than prior class and collective actions settled in the ride-sharing industry. According to the plaintiffs’ motion for preliminary approval of the settlement, the same court in O’Connor v. Uber Techs. Inc., had previously approved a $20 million settlement on behalf of about 15,000 California and Massachusetts drivers who were not bound by Uber’s arbitration clause, or about $1,300 per driver on average. The proposed settlement in this subsequent case covers a much smaller class – only 1,322 Uber drivers – who continued to opt out of Uber’s arbitration clause in each new contract after the $20 million settlement became effective on February 28, 2019.  The size of the settlement is also notable because it only covers a period of about 22 months, or until December 17, 2020, when Proposition 22 was enacted in California. The proposed settlement does not resolve the issue of whether Uber drivers are employees under California law, but the class stated in its motion papers that the settlement is “nonetheless of significant value.” James v. Uber Technologies, Inc., No. 3:19-cv-06462 (N.D. Cal. Feb. 17, 2022).

Legislative Initiatives                                                            

COMPROMISE LEGISLATION FOR RIDE-SHARING DRIVERS ABOUT TO BE ENACTED IN WASHINGTON STATE.  Washington State is about to enact legislation passed by the state House and Senate providing access to benefits for ride-hail drivers while avoiding the issue of whether they have been misclassified as independent contractors. HB2706 was passed by the state House (55-42) on February 23, 2022 and Senate (40-8) on March 4, 2022. It now awaits Governor Jay Inslee’s approval. The bill, which represents a compromise between ride-hail companies and at least one union (the Teamsters), provides that drivers providing “network services” (whether employees or independent contractors) would be entitled to benefits such as sick leave and a minimum pay rate from “transportation network companies” (like Uber or Lyft), as well as a process for drivers to appeal “deactivations” from the companies’ apps. The bill defines a “transportation network company” as one that “provides a driver platform within the state of Washington,” and “network services” ‎means “services related to the transportation of passengers through the driver platform that are ‎provided by a driver while logged in to the driver platform.” Representative Liz Berry, one of the sponsors of the bill, stated:  “My focus has been: What do the workers want? What are the drivers asking for? And we deliver on every single thing they asked for…. [O]ur bill has real benefits that employees in the state of Washington enjoy.” Conversely, Representative Debra Entenman, who opposed the bill, remarked that “this bill requires too much from the state, delivers too little for the drivers, and increases transportation costs for my constituents.”  We have reported on similar legislative efforts in New York, but no legislation has been enacted in that state yet.

Other Noteworthy News

NURSES INCREASINGLY BECOMING PART OF GIG ECONOMY.  As online staffing platforms offer greater independence and flexibility than employment relationships, the nursing profession is increasingly being swept into the gig economy.  In an article published in Law360 Employment Authority dated February 8, 2022, author Max Kutner discussed how the United States is facing a nurse shortage due to burnout from COVID spikes, an increasingly elderly population, and resistance by nurses to vaccine mandates. As online staffing platforms sign up more on-demand nurses, the workers’ attorneys are concerned about the nurses’ rights and protections as independent contractors, while employers’ attorneys advise their clients about potential wage and hour litigation that may result from possible misclassification claims. Regarding the specter of misclassification claims, the publisher of this blog was quoted in the article: “There is nothing wrong with legitimate independent contractor relationships, but contracts for those relationships should be robust. You can have nurses who are independent contractors legitimately, and you can have nurses who are not legitimately independent contractors, who are misclassified. You shoot yourself in the foot [with legitimate independent contractors] if you don’t have an independent contractor agreement that is state-of-the-art.”

By Richard Reibstein

The post What Companies Can Learn From an ERISA Case Alleging Independent Contract Misclassification: February 2022 IC Legal News Update appeared first on Independent Contractor Compliance.

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