We highlight below the independent contractor misclassification and compliance developments that occurred in July and August 2022, but three deserve special mention. One of the most important judicial developments is a new lawsuit alleging that Perdue Farms misclassifies chicken growers as independent contractors. This lawsuit may signal that agribusiness is the next industry being targeted by class action lawyers. Another key legal development is a bipartisan initiative in Congress to propose legislation recognizing the legitimate use of independent contractors. While there is little likelihood that the pending bill will become law in this Congress, the fact it has bipartisan support suggests that it will be reintroduced in future sessions of Congress and may gain momentum. A third legal development is a regulatory initiative by the National Labor Relations Board and the Federal Trade Commission to coordinate agency action against companies, particularly those in the gig economy, regarded as undermining competition and the right to unionize through the misclassification of employees as independent contractors. There have been many coordinated agency efforts in the past that have focused on misclassification of independent contractors, but they have failed to result in any meaningful enforcement actions. Moreover, as explained below, the NLRB is not statutorily authorized to investigate companies referred to it by other administrative agencies, making any coordinated enforcement action between the NLRB and the FTC highly unlikely. Nonetheless, the heightened focus on the use independent contractors since President Biden’s election has sent a strong message to companies that use contractors: enhance your compliance with federal, state, and local independent contractor laws. Many companies have utilized a process such as IC Diagnostics (TM), which restructures, re-documents, and/or re-implements independent contractor relationships in order to minimize risk of misclassification liability in a customized and sustained manner, without altering the company’s business strategy or objectives.
In the Courts (8 cases)
CHICKEN PRODUCER SUED BY GROWERS IN CLASS ACTION FOR IC MISCLASSIFICATION. Perdue Farms faces a class action complaint brought in a Georgia federal court by chicken farmers claiming wage and hour violations under the Fair Labor Standards Act due to the farmers’ alleged misclassification as independent contractors instead of employees. The farmers, who raise chickens, which Perdue Farms own, from shortly after hatching until slaughter, also allege that Perdue breached their independent contractor agreements with the farmers and terminated a grower’s contract in retaliation for his contacting the USDA about a potential violation by Purdue. According to the complaint, Perdue “treats all of its [farmers] across the country in the same fashion, using the same restrictive contracts and guidelines with all of them to dictate nearly every aspect of how they run their farms.” The complaint also alleges that Perdue has “devised a scheme to saddle [farmers] with risk and debt, while at the same time directing and controlling every aspect of the chicken growing process….” The farmers claim they make large investments in barns, equipment, and “grow out” houses, often requiring them to take out large loans to finance their purchases, which causes the farmers’ compensation to fall below the minimum wage. Among other things, Perdue allegedly requires the farmers to work exclusively for Purdue; trains, supervises, and monitors the farmers; requires the chicken houses to meet certain precise specifications; requires each farmer to sign an identical Poultry Producer Agreement; requires compliance with its guidelines and bio-security policies; controls the methods used to raise the chickens; requires use of feed provided by Perdue; and controls the schedule of the growers’ work and timing for delivery of chicks. Parker v. Perdue Farms Inc., No. 5:22-cv-00268 (M.D. Ga. July 22, 2022).
NEW JERSEY SUPREME COURT REQUIRES HIGH EVIDENTIARY BURDEN TO ESTABLISH INDEPENDENT CONTRACTOR STATUS UNDER “ABC” TEST. The New Jersey Supreme Court applied that state’s restrictive “ABC” test for independent contractor status and held that drywall installers are employees, not independent contractors. At issue was whether 11 business entities providing drywall services were independent contractors under the state’s Unemployment Compensation Law. East Bay Drywall, LLC, a drywall installation company, engages workers to complete the drywall installation, taping, and finishing on a per-job basis. Applying the three-part conjunctive ABC test that applies in New Jersey, the state’s highest court found that Prong C – whether the individual is customarily engaged in an independently established trade, occupation, profession or business – was not satisfied by East Bay because it failed to introduce evidence that the entities maintained independent business locations, advertised, or had employees. Although East Bay testified that “the subcontractors worked for other contractors, that sometimes a subcontractor would leave the job before it was completed, and that the subcontractors were free to accept or decline work,” the court stated that such evidence was insufficient to prove the entities’ independence because “even wholly dependent employees may choose to work for more than one employer or abruptly resign from their position.” Likewise, although East Bay introduced evidence that most of the subcontractors had certificates of insurance and business registrations, the court stated that “these documents do not elucidate whether the disputed entities were engaged in independent businesses separate and apart from East Bay.”
The court chose not to analyze Prongs A and B because Prong C was not satisfied and the failure to satisfy any prong dooms any company from establishing independent contractor status because the ABC test requires that all three prongs must be proven. Although the Supreme Court did not need to reach the issue, different constituencies have been concerned about how Prong B, which requires the entity’s work to be “outside the usual course of the business” or “outside of all the places of business” of the potential employer, might be interpreted by the courts in New Jersey. In a footnote to its decision, the Supreme Court suggested, in light of the prevalence of remote work, that the New Jersey Department of Labor and Workforce Development promulgate regulations clarifying where an enterprise “conducts an integral part of its business” and what constitutes the “usual course of business.” East Bay Drywall LLC v. Department of Labor and Workforce Development, No. 085770 (Sup. Ct. N.J. Aug. 2, 2022). .
FEDERAL APPEALS COURT REVERSES CLASS ACTION CERTIFICATION AND SUMMARY JUDGMENT IN FAVOR OF PLAINTIFFS IN IC MISCLASSIFICATION CASE. The U.S. Court of Appeals for the Ninth Circuit has ruled in favor of a pre-foreclosure property preservation company on its appeal of a district court’s certification of a class of workers who provide in foreclosure property preservation services and the district court’s grant of summary judgment in favor of the workers. The complaint had alleged that Field Asset Services, LLC (FAS) willfully misclassified the named plaintiff and over 150 similar workers as independent contractors and not employees, and that by doing so it allegedly resulted in FAS’s failure to pay overtime compensation and to reimburse the proposed class members for their business expenses. The district court had certified the class and granted partial summary judgment in favor of the class members, finding that they had been misclassified as independent contractors and were entitled to damages. On appeal, the Ninth Circuit reversed, concluding that the class members had failed to meet the class action “predominance” requirement because it could not establish by common evidence that the workers all worked overtime or incurred business expenses but rather could only be proven by highly individualized inquiries as to whether each particular class member ever worked overtime or incurred necessary business expenses. The appeals court found that summary judgment was inappropriate on the expense reimbursement issue because the determination whether FAS controlled the class members’ work should have been decided by a jury and not by the district court judge. The case was remanded to the district court. Bowerman v. Field Asset Servs. Inc., Nos. 18-16303 and 18-17275 (9th Cir. July 5, 2022).
ANOTHER FEDERAL APPEALS COURT REVERSES SUMMARY JUDGMENT IN FAVOR OF U.S. LABOR DEPARTMENT IN IC MISCLASSIFICATION CASE. The U.S. Court of Appeals for the Eighth Circuit has reversed a district court’s grant of summary judgment in favor of the U.S. Department of Labor, finding that there were genuine disputes of material fact that should have been submitted to a jury regarding the appropriate worker classification of drivers providing services to a non-emergency medical transport company. Travelon Transportation engages drivers to transport patients to and from medical appointments and assigns trips to drivers through an app on the drivers’ tablets. The district court, applying the economic realities test, concluded that the company violated the Fair Labor Standards Act due to its misclassification of the drivers as independent contractors and not employees. On appeal, the Eighth Circuit reversed and concluded that “issues of material fact remain as to the working relationship between Travelon and its drivers.” The court noted that Travelon had offered evidence from which a rational trier of fact could find that three factors in the economic realities test – “control,” “profits and losses,” and “integral to business” – weigh in favor of the drivers being independent contractors.” The Eighth Circuit also found that there was competing evidence about whether the drivers could reject trip assignments, the extent of control the company had over the drivers’ hours, whether the drivers could provide services independent of their work with the company, and whether the services rendered by the workers are integral to the business of the company. The appeals court directed the district court, on remand, to resolve “these competing narratives” before it makes its legal conclusion as to whether an employment relationship existed between the Company and its drivers. Walsh v. Alpha & Omega USA Inc., No. 21-02961 (8th Cir. July 14, 2022).
LOW NUMBER OF CLASS MEMBERS RESULTS IN DENIAL OF CLASS ACTION CERTIFICATION IN IC MISCLASSIFICATION CASE. Goya Foods succeeded in defeating a motion for class certification by two Pennsylvania sales representatives in an independent contractor misclassification lawsuit filed in New Jersey federal court. Goya utilizes a workforce of sales representatives who have executed broker agreements to distribute its products to supermarkets, grocery stores, and restaurants. Some of the sales representatives had also signed arbitration amendments to the agreements. According to the complaint, the sales representatives claimed that Goya unlawfully misclassified them as independent contractors and took unlawful deductions from their pay in violation of the Pennsylvania Wage Payment and Collection Act. In denying plaintiffs’ motion for class certification, the court concluded that the sales representatives failed to satisfy the “numerosity” requirement for class action certification. At its maximum possible size, the proposed class would have amounted to 37 members, including the two plaintiffs. Further, the court noted that because 16 of the sales representatives signed arbitration agreements, the number of possible class members might be as low as 21. The court stated that even assuming that the 16 sales representatives who had signed arbitration agreements were included in the proposed class, “joinder [of all the proposed class members as individual plaintiffs] is not impracticable here.” Ortiz v. Goya Foods Inc., No. 2:19-cv-19003 (D.N.J. Aug. 3, 2022).
DISMISSAL OF IC MISCLASSIFICATION CLASS ACTION BY TRUCKERS IS REVERSED ON APPEAL. The U.S. Court of Appeals for the Seventh Circuit has reinstated a class action brought by a trucker alleging that a freight hauling company misclassified him and other similarly situated drivers as independent contractors. Schneider National Inc. engaged plaintiff as an owner-operator driver who leased a truck from the company and provided services under an independent contractor (owner-operator) agreement. The plaintiff claimed, among other things, that the company violated the minimum wage provisions of the Fair Labor Standards Act and Wisconsin’s state wage and hour law. The district court granted the company’s motion to dismiss all claims, but on appeal the Seventh Circuit reversed. It concluded that the district court erred by only considering the written terms of the contract and not the economic reality of the working relationship when determining whether the plaintiff and other drivers were independent contractors or employees. The appeals court further concluded that the plaintiff’s allegations about the economic reality of his working relationship with the company stated a viable claim under the FLSA and Wisconsin state law. In reaching its conclusion regarding the FLSA claim, the Seventh Circuit considered the plaintiff’s allegations that he could not hire additional drivers to assist with shipments; had no real ability to exercise choice over his schedule and routes; could not exercise his managerial skill to increase profits by selecting more profitable loads or by driving for other carriers when the company offered shipments with unfavorable terms; had a disproportionately small stake in the trucking operation compared to the company; and engaged in services that were an integral part of the Company’s business. The court stated, “[the plaintiff] alleges facts allowing the plausible inference that he was so controlled by and dependent on the Company that he must be considered an employee as a matter of economic reality.” Brant v. Schneider National Inc., No. 21-2122 (7th Cir. Aug. 3, 2022). .
SHUTTLE DRIVERS IN ILLINOIS GAIN CLASS CERTIFICATION IN IC MISCLASSIFICATION ACTION. An Illinois federal district court has certified a class of over 60 shuttle drivers who allege federal, state, and local wage and hour violations by Bosman Trucking, Inc. due their classification as independent contractors and not employees. The court found that the “numerosity” requirement for class certification was met because there were more than 60 past and present shuttle and spotter drivers. The court found the “commonality” requirement was satisfied because the class representatives and the proposed class members all presented identical wage and hour claims under the FLSA, Illinois Minimum Wage Law, and Chicago Minimum Wage Ordinance, and all have allegedly been subject to similar or identical work policies, procedures, rules and duties. The “typicality” requirement was also met according to the court where the class representatives and all class members are suing to enforce the provisions of local, state and federal wage and hour statutes arising from similar or identical wage and hour practices of the trucking company. Finally, the court found the “adequacy” requirement was met because the class representatives have demonstrated sufficient interest in the outcome of the litigation and have effectively and vigorously prosecuted the action. Johnson v. Bosman Trucking Inc., No. 1:19-cv-02066 (N.D. Ill. Aug. 8, 2022).
CHOICE OF LAW PROVISION IN INDEPENDENT CONTRACTOR AGREEMENT IS NO GUARANTEE THAT STATE’S LAWS WILL BE APPLIED. Diakon Logistics, Inc. coordinates delivery and installation of merchandise for retailers nationwide. Diakon, whose headquarters is in Virginia, engages truck drivers as independent contractors to perform those delivery services. Two drivers, who were Illinois citizens, provided such services from a retailer’s warehouse in Illinois and delivered goods to homes in Illinois. The two drivers filed a lawsuit in an Illinois federal court alleging violations of that state’s Wage Payment and Collection Act due to their alleged misclassification as independent contractors. Both drivers had signed independent contractor agreements containing a choice-of-law provision selecting Virginia law to govern the parties’ relations. A dispute arose over whether Illinois or Virginia law applied. Although the district court decided that Virginia law applied, the U.S. Court of Appeals for the Seventh Circuit reversed that decision and concluded: “[P]laintiffs’ claims to undiminished wages arise from their work in Illinois, not from their contracts. The [Illinois Wage Payment and Collection] Act governs payment for work in Illinois regardless of what state’s law governs other aspects of the parties’ relations.” The editor of this blog was quoted in an August 29, 2022 article by Jon Steingart in Law360 Employment Authority about this case: “One key lesson from this Seventh Circuit decision is, don’t assume your choice of law provisions will govern in an independent contractor misclassification lawsuit. The court’s decision that Illinois law applies is especially significant because Illinois is also one of the few states whose test for independent contractor status is extremely challenging to meet for many industries.” Johnson v. Diakon Logistics Inc., No. 21-2886 (7th Cir. Aug. 17, 2022).
BIPARTISAN BILL IN CONGRESS WOULD RECOGNIZE INDEPENDENT CONTRACTOR STATUS AS A CHOICE OF WORKER. The Worker Flexibility and Choice Act (HB 8442) was introduced in Congress on July 20, 2022. The bill, introduced on a bipartisan basis, would establish a new work arrangement that combines flexibility of independent contractor work with certain workplace protections and opportunities for benefits. As announced in a press release that day from Rep. Elise Stefanik (R-NY), one of the bill’s co-sponsors, the bill seeks to “empower individuals with the choice to determine how they wish to engage in the modern economy, while providing legal certainty that will expand economic opportunities through independent work and allow businesses to offer workplace benefits without undermining the flexibility of the work arrangement.” The relationship between the worker and the business would be clearly defined through a “worker flexibility agreement” that would ensure the worker retains the freedom and flexibility to accept or reject offers to provide their services, giving them control over when, where, and how much they wish to work; promote worker freedom without infringing on certain workplace rights, including protections against discrimination, retaliation, and harassment; allow the worker to engage with and provide services for multiple entities at any given time; and provide the worker a written summary of any health, pension, training, other benefits they may be eligible to receive. Under a worker flexibility agreement, the worker would not be treated as an employee for federal tax purposes or under the FLSA. In addition, a worker’s choice to work flexibly under an agreement would be protected by a provision in the law that supersedes and preempts state and local wage and hour and tax laws that would otherwise require the worker to be treated as an employee. Rep. Stefanik stated in her press release: “The bipartisan Worker Flexibility and Choice Act will empower workers to choose the type of work that best fits their needs, while allowing businesses to offer workplace benefits traditionally only available to employees….” The other co-sponsors are Reps. Henry Cuellar (D-TX) and Michelle Steel (R-CA). While the bill is a bipartisan initiative, it has little chance of passage in this Congress.
NLRB AND FTC ENTER INTO MEMORANDUM OF UNDERSTANDING FOCUSING ON IC’S IN THE GIG ECONOMY, BUT NOT LIKELY TO BE CONSEQUENTIAL. The National Labor Relations Board and Federal Trade Commission have entered into a Memorandum of Understanding on July 19, 2022 that is intended to “better root out practices that harm workers on the ‘gig economy’ and other labor markets, to enhance the enforcement of federal laws and regulations administered by the agencies, and to promote inter-agency collaboration through information sharing, cross-agency training and coordinated outreach.” The MOU provided that the NLRB and FTC “recognize that continued and enhanced coordination and cooperation concerning common regulatory interest will help protect workers against unfair methods of competition, unfair or deceptive acts or practices, and unfair labor practices.” Common areas of regulatory interest include labor market developments relating to the gig economy, claims and disclosures about earnings and costs associated with gig and other work, and the classification and treatment of workers. In a news release issued by the NLRB on July 19, NLRB General Counsel Jennifer A. Abruzzo said: “Workers in this country have the right under federal law to act collectively to improve their working conditions. When businesses interfere with those rights, either through unfair labor practices, or anti-competitive conduct, it hurts our entire nation. This MOU is critical to advancing a whole of government approach to combating unlawful conduct that harms workers.” There have been a large number of articles and commentaries about this MOU, with most suggesting that the FTC will refer cases to the NLRB. However, the NLRB’s Office of General Counsel does not have any investigative authority and can only act in response to unfair labor practice charges or union election petitions filed with the NLRB, not with referrals from other agencies like the FTC. Further, past MOUs between agencies such as the U.S. Labor Department, state labor commissioners, the IRS, the NLRB, and other governmental agencies have produced little in the way of concrete results made known to the public.
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