Independent Contractor

President Obama released his FY 2014 budget (available here), which includes a request that Congress continue funding the federal government’s intensifying efforts to combat employee “misclassification” nationwide.  This program is described as follows (from p. 126):

When employees are misclassified as independent contractors, they are deprived of benefits and protections to which they are legally entitled, such as minimum wage, overtime, unemployment insurance, and anti-discrimination protections. Misclassification, together with the underreporting of cash income for those paid as independent contractors, also costs taxpayers money in lost funds for the Treasury and in Social Security, Medicare, the Unemployment Trust Fund, and State programs. The Budget includes approximately $14 million to combat misclassification, including $10 million for grants to States to identify misclassification and recover unpaid taxes and $4 million for personnel at WHD to investigate misclassification.

These funding levels are the same as seen in the President’s FY 2013 budget.  Of particular interest is the $10 million in state grants, which are doled out by the U.S. Department of Labor as an incentive for states to reclassify independent contractors as employees.  The Department of Labor’s FY 2014 budget (summary available here) goes into more detail regarding this program (from p. 25):

The FY 2014 UI State Administration request includes $10,000,000 for states to improve worker misclassification efforts. Modeled on a successful (SNAP) Supplemental Nutrition Assistance Program, this initiative will provide a “high performance bonus” to the States most successful at detecting and prosecuting employers that fail to pay their proper share of UI taxes due to worker misclassification and other illegal tax schemes that deny the Federal and State UI Trust Funds hundreds of millions of dollars annually. States will be able to use these incentive funds to upgrade their misclassification detection and enforcement programs. As part of this initiative, States would be required to capture and report outcomes and cost/benefit information to enable the evaluation of new strategies.

While it remains to be seen what Congress will ultimately enact, the President’s budget demonstrates that the executive branch of the federal government remains focused on combating “misclassification” – and in directly funding state agencies that do so as well.  Any company retaining the services of independent contractors (including owner-operators) should be sure to adopt and adhere to contractual and operating procedures which best protect independent-contractor status.

For additional information on the federal government’s attack on so-called “misclassification” or questions regarding the protection of independent-contractor status, contact Greg Feary, or Braden Core in the Firm’s Indianapolis office at (317) 637-1777
 

Northern District of California Judge Ronald M. Whyte denied a motion for class certification on September 7, 2012 with regard to a class of truck drivers from CEVA Freight, LLC seeking to be classified as employees instead of independent contractors.  Judge Whyte found that the circumstances for the owner-operators were too individualized to allow for them to proceed with their misclassification action as a class.  Some of the owner-operators hired their own teams to operate trucks while others operated their own trucks--these types of differences in circumstances were enough for the Judge to deny the motion.  The owner-operator plaintiffs claimed that, as a result of the misclassification, they were owed overtime, as well as meal breaks and other benefits.  With this ruling, the owner-operator plaintiffs would have to pursue their claims of misclassification individually, pending any appeal to the 9th Circuit Court of Appeals.  The case has been ongoing in federal court since 2005.

On remand from the Ninth Circuit, the United States District Court for the Southern District of California issued its decision on August 27, 2012, holding Affinity Logistics Corporation (“Affinity”), a motor carrier, carried its burden of establishing it properly classified as independent contractors a certified class of former owner-operator delivery drivers (the “contractors”) under California law.  Ruiz v. Affinity Logistics Corp., No. 05CV2125, slip op. at 21 (S.D. Cal. Aug. 27, 2012). 

The Southern District previously reached this same conclusion under Georgia law, which applies a presumption of independent contractor status, to the facts adduced at a three-day bench trial.  On appeal, the Ninth Circuit concluded California, not Georgia, law should apply to the contractors’ relationship with Affinity and remanded the case.  California law applies a presumption of employment status that a putative employer may overcome if the weight of the evidence supports a finding of independent contractor status when the court applies a multi-factor, common law right of control test.   

When it revisited the issue under California law, the Southern District applied the right of control test with “with deference for the remedial purposes of California’s protective legislation.”  Id. at 6.  This notwithstanding, the court found evidence that the contractors could “hire others to complete the deliveries Affinity hired them to do is strong evidence suggesting that Affinity did not have the requisite level of control over the manner and means of [the contractors’] work.”  Id. at 7.  The court further found the majority of the “secondary factors” considered by California courts, including, e.g., investment in equipment and opportunity for profit or loss, among others, favored independent contractor status.  Id. at 20-21. 

While the court further found Affinity exercised “some control” over the contractors, the court deemed this evidence irrelevant to the ultimate question because “this control was either unrelated to the manner and means by which [the contractors] accomplished their work, or it was a result of other factors—such as federal regulatory requirements or [customer] preferences—rather than direct control by Affinity.”  Id. at 21.

The court therefore found in favor of Affinity.  Judgment has been entered against the plaintiff and class of contractors.  Plaintiff filed a Notice of Appeal on August 29, 2012.              

On March 29th, a federal court in the S.D. Indiana issued an opinion denying class and conditional certification of plaintiffs’ claims in the Scott v. NOW Courier case.  Plaintiffs are five former couriers who brought the action at issue in June of 2010, alleging they were misclassified as independent contractors, along with violations of the Fair Labor Standards Act ("FLSA") and Indiana employment law protections. Plaintiffs sought recovery of minimum wage and overtime under the FLSA and various benefits under Indiana law.

In its analysis, the court stated it found "disingenuous" plainitffs' assertions that NOW controlled the maner and means of deliveries by its drivers.  Furthermore, the evidence revealed that the indvidual drivers had considerable autonomy and independence in choosing the kinds of routes they wish to be assigned and schedules they wanted to work. As to the state claims, the court  stated it was not persuaded that certification was appropriate or necessary based on the same problems addressed in its FLSA analysis.  While the court did provide sub-groups of drivers may be appropriate, it stated no sub-groups were suggested nor were independent facts available upon which the court might determine such subsets exist.

On Friday, January 20, the First Circuit reversed the lower court's denial to hear an employment classification suit.  At issue was an action brought against the state by the Massachusetts Delivery Association ("MDA").  The First Circuit ruled that although MDA is currently facing litigation in state court, this fact does not bar MDA from bringing a separate action against the state in federal court.

MDA members are facing lawsuits in state court brought by independent contractors who allege they were misclassified.  After MDA filed a separate suit in federal court, the lower court refused to take up the action, stating MDA was an alter ego of the defendants appearing in state court. Therefore, pursuant to the Younger doctrine, MDA was precluded from bringing an action.

In its opinion, the First Circuit's three-judge panel ruled that the lower court misapplied the Younger doctrine. The Younger doctrine bars federal courts from hearing cases brought by parties who are simultaneously facing claims in state court.   According to the First Circuit opinion, the Younger doctrine was intended to prevent interference among court proceedings, however, given that the federal suit would not interfere with the state proceeding, the First Circuit provided that the doctrine did not apply.  The First Circuit also stated given the uncertainty as to whether MDA is a party to the state proceeding, it would be unfair to preclude a separate federal action.

Effective January 3, 2012, the Federal Motor Carrier Safety Regulations (“FMCSR”) prohibited commercial drivers from using hand-held mobile phones while operating a commercial truck or bus. Violations of the rule can result in fines of up to $2,750 to drivers and $11,000 to motor carriers.  Habitually offending drivers of this new rule can be disqualified from operating a CMV. This ban can also create additional hurdles for accident liability claims.   

Motor carriers should act quickly to ensure compliance.  To assist with this process, the Firm has prepared sample notices for both employee and independent contractor drivers.  Both of the these form are available to our clients for a flat fee of $200.  The forms achieve the goals of providing ample notice to the drivers of this change in the law and memorializing the motor carrier’s commitment to the compliance.  Also, to the extent allowed by law, the employee driver form includes a reimbursement provision for situations where a motor carrier incurs a fine because of the employee driver’s non-compliance. The independent contractor form references the independent contractor agreement indemnity language for situations where a motor carrier incurs a fine because of the independent contractor’s non-compliance.

If you would like to obtain these form, please contact asmith@scopelitis.com.  Upon your request, both of these forms will be emailed to you.   

Scopelitis, Garvin, Light, Hanson & Feary
www.scopelitis.com
(317) 637-1777

A number of new California employment laws are set to take effect January 1, 2012. Many of these new laws will have a significant impact on businesses operating in California. The following is a summary of a few of the more notable laws taking effect in the New Year: 

Wage Theft Prevention Act

Effective January 1, 2012, California Labor Code 2810.5 will require that employers provide the following information, in writing, to new employees upon hire:

1.    The rate or rates of pay and the basis for pay, i.e., whether the employee will be paid by the hour, shift, day, week, salary, piece, commission, or otherwise. The rate information must also include overtime rates.

2.    Any allowances claimed as part of the minimum wage, including meal or lodging allowances.

3.    The regular payday designated by the employer.

4.    The name of the employer, including any "doing business as" names used by the employer.

5.    The physical address of the employer's main office or principal place of business. The mailing address must also be provided if it differs from the principal physical address.

6.    The telephone number of the employer.

7.    The name, address, and telephone number of the employer's workers' compensation insurance carrier.

8.    Any other information the Labor Commissioner deems material and necessary.

These requirements apply to all non-exempt, non-union employees, and the duty to disclose this information continues after hiring.  When any of the information listed in this statute changes, employers must notify employees in writing within seven calendar days of the change.  The California Labor Commissioner posted a template for the required notice on the California Department of Industrial Relations’ web site:  http://www.dir.ca.gov/dlse/Governor_signs_Wage_Theft_Protection_Act_of_2011.html
 

Retention of Payroll Records

California also changed the time frame that payroll records must be kept under Cal. Labor Code section 1174 from two to three years (we recommend four years because there is a four-year statute of limitations for many Labor Code violations).

Misclassification of Independent Contractors

California Senate Bill 459, signed into law by Governor Jerry Brown on October 9, 2011,

penalizes employers who willfully misclassify workers as independent contractors. The law defines “willful misclassification” as “avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor.” The law makes it illegal to charge a willfully misclassified worker a fee or to make pay deductions where such a fee or deduction would have violated the law if the worker had not been misclassified. 

Employers in violation of the law are subject to civil penalties between $5,000 and $15,000 for each violation, in addition to any other penalties or fines permitted by law. Violators may also be ordered to display (either on the employer’s website or, if there is none, at every location where a violation occurred) a notice for an entire year advising, among other things, that (1) the employer has committed a serious violation of the law by engaging in the willful misclassification of employees; (2) the employer has changed its business practices in order to avoid committing further violations; and (3) any employee who believes that he or she is being misclassified as an independent contractor may contact the California Labor and Workforce Development Agency (“LWDA”).

Under other similar California statutes that prohibit “knowing,” “intentional,” and “voluntary” violations, courts have found that actions taken on the basis of a good faith belief in their legality do not give rise to liability. It is unclear whether this “good faith” defense will apply under the new misclassification law. Regardless, employers must be cautious when classifying employees as independent contractors, and must be able to explain and demonstrate the validity of the classification. 

Restriction on Use of Credit Checks

Starting in 2012, California employers may not, subject to certain exceptions, use consumer credit reports to evaluate candidates for employment. The use of credit reports to screen candidates for the following types of positions is not prohibited:

• Managerial positions covered by California’s executive exemption
• Positions involving regular access to certain personal financial, proprietary, or trade secret information
• Positions involving regular access to at least $10,000 of money belonging to the employer or its clients or customers
• Positions in which the applicant would be a signatory on the employer’s financial accounts or would have authority to transfer money or enter into financial agreements for the employer
• Positions for which credit information is required to be disclosed by law

Workers Compensation Notices

Among other amendments to California’s workers compensation laws, new legislation now requires that workers compensation notices posted by employers include the website address and contact information for employees to obtain further information about the workers compensation claims process.

These and several other new laws add additional layers of compliance for California employers already struggling to persevere in an extraordinarily difficult business climate. We recommend California employers take time to review their employment policies and practices to ensure compliance with California’s employment laws, both new and old. Questions should be directed to Jim Hanson, Chris McNatt, Bob Browning, and Adam Smedstad.

The federal judge presiding over the FedEx Ground Package System Inc. (“FedEx Ground”) multidistrict litigation (“MDL”) ruled this week that classes of FedEx Ground drivers in numerous states are independent contractors, not employees. In re MDL-1700 FedEx Ground Package Sys. Inc., Employment Practices Litig., No. 3:05-MD-527 RM (MDL 1700) (N.D. Ind. Dec. 13, 2010) (“Dec. 13, 2010 Order”).   

The court’s decision comes on the heels of its August 11, 2010 ruling that a class of Kansas drivers are independent contractors, not employees, under the Kansas Wage Payment Act. See In re MDL-1700 FedEx Ground Ground Package Sys. Inc., Employment Practices Litig., No. 3:05-MD-527 RM (MDL 1700), 2010 WL 3239363 (N.D. Ind. Aug. 11, 2010) (“August 11, 2010 Order”).  Following that ruling, the Court instructed the parties to file supplemental briefing explaining whether the Court should reach the same result – on claims under the laws of other relevant States relating to overtime, business expense deductions from wages, late payment of wages, meal-and-rest breaks, and similar wage-related statutory and breach-of-contract claims – in the MDL’s many other collected cases in which similar summary judgment motions regarding drivers’ employee-vs.-independent-contractor status were awaiting decision. 

The MDL consists of numerous class action cases filed by drivers against FedEx Ground in courts around the country that were combined for coordinated pre-trial proceedings in the U.S. District Court for the Northern District of Indiana in 2005.  In general, the cases allege that FedEx Ground drivers were improperly misclassified as independent contractors, and that the drivers were therefore covered by state and federal laws applicable to employees.  Some of the cases also alleged violations of federal law, including the FLSA and the FMLA, and common law causes of action for breach of contract.  Eventually, at least 56 separate putative class actions from 40 states were transferred to the Northern District of Indiana as part of the MDL.  In 2008 and 2009, the MDL court certified some of the cases as class actions and declined to certify others.  The parties then proceeded to file summary judgment motions on the issue of the drivers’ employee-vs.-independent-contractor status.  The Court’s ruling this week represents the latest stage of the litigation.

In its August ruling in the Kansas case, the Court summarized its conclusion that drivers were independent contractors as follows:

The plaintiffs have all signed Operating Agreements labeling themselves as independent contractors, they can hire others to perform their assigned work and go work for another delivery company, and they can sell their routes to other qualified drivers; yet, they contend they are employees.  The court sees it differently. Upon review of the evidence in the light most favorable to the plaintiffs, the only reasonable inference is that FedEx hasn’t retained the right to direct the manner in which drivers perform their work. FedEx supervises the drivers’ work and offers numerous suggestions and best practices for performance of assigned tasks, but the evidence doesn’t suggest that FedEx has the authority under the Operating Agreement to require compliance with its suggestions. Further, other factors strongly weigh in favor of independent contractor status; in particular, the parties intended to create an independent contractor arrangement, the drivers have the ability to hire helpers and replacement drivers, they are responsible for acquiring a vehicle and can use the vehicle for other commercial purposes, they can sell their routes to other qualified drivers, and FedEx doesn’t have the right to terminate contracts at-will. Although some facts weigh in favor of employee status, after considering all the relevant factors, the court finds that the plaintiffs are independent contractors as a matter of law.

See Aug. 11, 2010 Ruling at 3.  In this week’s decision, the court repeated this same passage (beginning with “Upon review of the evidence…”).  See Dec. 13, 2010 Ruling at 11-12 (quoting Aug. 11, 2010 Ruling at 3). 

In the vast majority of states involved (AL, AZ, AR, CA, FL, GA, IN, KY, LA, MD, MN, NH, NJ, NY, NC, OH, OR, PA, RI, SC, TN, TX, UT, WV, WI, in addition to KS), the MDL court this week ruled that drivers were independent contractors under each respective state’s legal test. The Court’s detailed reasoning, state by state, is set forth on pages 18-176 of the decision.

The Court noted (at 4-5) that in arriving at both the Kansas decision and this week’s decision, it “has considered evidence common to the drivers’ relationships with FedEx on a nationwide basis:  the Operating Agreement [lease] and generally applicable Policies and Procedures.  As a condition of class certification, the court excluded particularized evidence of actual control between FedEx and the drivers. …These cases might or might not come out differently under a different procedural posture allowing wider scope for review of extrinsic and particularized evidence, but that situation is not before the court today.” 

The Court denied the plaintiffs’ request to give preclusive effect – that is, to treat as already having decided the issue – the California Court of Appeal’s decision in Estrada v. FedEx Ground Package System, Inc., 64 Cal. Rptr. 3d 327 (Cal. Ct. App. 2007) that a FedEx Ground Single Work Area (“SWA”) class of drivers were employees.  The Court stated (at 8): “The facts before the Estrada court and those before this court are dissimilar insofar as the facts available to this court don’t go beyond the Operating Agreement and generally applicable Policies and Procedures…. Also, the SWA class in Estrada was markedly different from the classes before this court because the MDL classes lump together SWA and MWA drivers.  Thus, though the parties litigated a right to control issue in Estrada, the issue decided in Estrada, isn’t identical to issue before this court.”

The Court also rejected the plaintiffs’ assertion that it viewed as dispositive the Operating Agreement’s indication that the parties intended to create an independent-contractor relationship.  The Court said (at 10) that “the intent factor weighed ‘strongly’ because the intent expressed in the contracts was so clear, not because the intent factor had special status or carried dispositive weight.”

The Court went on to declare (at 10-11, citations omitted) that “Most important in Kansas – and the most important under the common law and Restatement tests generally – is the right to control, which typically is the weightiest factor….  This court held that there was no reasonable inference that FedEx retained the right to control the methods and means of the drivers’ work on a class-wide basis. This finding came in light of the distinction between control of means and control of results.  In most states, control of results doesn’t indicate employee status; control of means used to achieve contracted-for results does indicate employee status.  Drawing the line between means and results is a challenging, highly contextual and fact-specific task.  Bright-line rules prove elusive here.  This court held that the controls reserved to FedEx were results-oriented:   FedEx provides work to and pays contractor-drivers to provide the specific result of timely and safely-delivered packages to FedEx customers.  The totality of the circumstances and review of all the relevant facts and factors led to this results-oriented conclusion.”

The Court further explained (at 11) that it “found the drivers’ entrepreneurial opportunities to be highly probative of independent contractor status.”

The drivers are expected to appeal the court’s ruling.  
 

A new study released this week by the National Employment Law Project (“NELP”), a union advocacy coalition, Change to Win, and Rutgers University charges motor carriers with misclassifying more than 110,000 port truck drivers as independent contractors, as opposed to employees. The release of this study comes on the tails of a call to action by the American Trucking Association regarding Senate Bill 3786, the Fair Playing Field Act of 2010, as an offset for the 9/11 Health and Compensation Act. The Bill targets the use of independent contractors and requires the treasury to release guidelines to help clarify the status of individuals as independent contractors or employees for the purpose of federal employment taxes.

The NELP study, based on surveys from drivers at seven major ports, including Seattle, Oakland, Los Angeles, Long Beach, New York and New Jersey, estimated that approximately 82% of port truck drivers are treated as independent contractors. The study criticizes the use of the independent contractor model, claiming, in part, drivers classified as independent contractors earned, on average, 18% less than employee drivers, are asked to use illegal and unsafe equipment, and face health problems imposed by high concentrations of diesel emissions.

Effective as of November 11, 2010, the California Highway Patrol has adopted regulations affecting motor carriers usinig equipment they do not own.  The language closely mirrors the federal leasing regulations found at 49 CFR 376 ("Lease and Interchange of Vehicles" to Title 13).  Under the new California regulations, all intrastate carriers using owner-operators on a non-temporary basis will have a new regulatory obligation, and CHP may now enforce the provisions of CFR 376 "Lease and Interchange of Vehicles" on interstate carriers. This includes the authority to examine lease agreements in order to determine which entity (overlying motor carrier or underlying independent contractor) is responsible for vehicle safety and maintenance during BIT inspections.
 

Note that while they are effective now, subsection (g) of the regulations provides for a transition period:

“For those business entities which have engaged in some sort of vehicle leasing relationship enacted prior to the filing of these regulations, the terms of these regulations will be met no later than June 30, 2011.”

Cal. Admin. Code Tit. 13, § 1235.7(g) (Westlaw 2010).

A federal appeals court denied appeal after the lower court granted certification of a class of deliverymen, who brougt action against their employer, San Diego's North County Times.  The class was certified in the face of one judge's objections that the potential $18 million in damages could sound the paper's death knell.

The class includes nearly 800 newspaper carriers who claim they were wrongly classsified as independent contractors.

The newspaper carriers sued in 2008, claiming that the paper called them “independent contractors” to dodge labor laws on minimum wage, overtime and rest breaks.

The paper maintains that their work duties — picking up newspapers from the presses, assembling them offsite and delivering them with their own cars — are far enough removed from the paper's control that the carriers should not be considered employees.

The majority only briefly explained its decision not to hear the case — a one paragraph note says the court relied on the Ninth Circuit's decision in Chamberlain v. Ford Motor Co.

Even that decision, though, calls for class certification appeals where one of the parties faces a “death-knell” situation, the 9th Circuit's Judge O'Scannlain noted in the court's dissent.

“[Lee] faces a 'death-knell situation' because certification will expose it, a member of the struggling newspaper industry, to $18 million in liability,” he said. “I would grant permission to appeal.”

The Fair Playing Field Act of 2010 (the “Act”) was introduced in both the U.S. House of Representatives and Senate and backed by the Whitehouse this week in an effort to end the current moratorium on Internal Revenue Service guidance addressing worker classification. The Act will require the treasury to release guidelines to help clarify the status of individuals as independent contractors or employees for the purpose of federal employment taxes.

If passed, the Act could significantly impact the ability of transportation (and other) companies to seek the protections afforded by Section 530 of the Revenue Act of 1978, as amended, reprinted at 27 U.S.C.A. § 3401 note (2008), a safe harbor provision which was intended to prevent the IRS from forcing expensive reclassifications of workers as employees when companies had, in good faith, based upon prior IRS audits, judicial precedent, or significant industry practice, treated the workers consistently as independent contractors for employment tax purposes.

Among other requirements and potential civil penalties for potential or repeated violations, the Act will compel transportation companies that engage independent contractor drivers to provide the drivers with a written statement detailing federal tax obligations imposed on and labor and employment practices denied independent contractors. The notice must further inform the contractors of the ability to request a status determination from the IRS.

A federal judge presiding over the FedEx Ground Package System Inc. (“FedEx”) multidistrict litigation (“MDL”) proceeding ruled this week that the class of Kansas drivers who originally filed an action against FedEx in a Kansas federal district court are independent contractors, not employees, under the Kansas Wage Payment Act, Kan. Stat. Ann. § 44-313 (the “Wage Act”).  In re MDL-1700 FedEx Ground Package Sys. Inc., Employment Practices Litig., No. 3:05-MD-527 RM (MDL 1700) (N.D. Ind. Aug. 11, 2010).  The MDL court’s 103-page decision is available here: FedEx MDL SJ Order 8 12 10.  The ruling by Judge Robert L. Miller Jr. of the U.S. District Court for the Northern District of Indiana came in response to cross-motions for summary judgment on the issue of the employment status of FedEx’s Kansas drivers.  The ruling does not end the FedEx MDL proceeding.  Rather, the parties have been directed to file supplemental briefing explaining whether the employment classification issue should come out the same way in the other cases in which similar summary judgment motions regarding driver employment status are pending.  Those briefs are due 30 days from date of the Court’s order.  We will continue to follow the impact of this decision in the FedEx MDL and in the numerous other similar wage and hour cases filed by independent contractor drivers against transportation providers around the country. 

This week, in Murray v. Principal Fin. Group, Inc., __ F.3d __, No. 09-16664, 2010 WL 2902512 (9th Cir. Jul. 27, 2010), the Ninth Circuit held that an insurance agent was an independent contractor and not an employee for purposes of Title VII.

In its opinion, the court specifically addressed Title VII, but generally referred to its analysis as a clarification of the appropriate test to apply in the federal statutory context, mentioning ERISA and the ADEA in addition to Title VII.  The court found the appropriate test to apply is the “common law agency approach.”  Id. at *2.  As such, when determining whether an individual is an independent contractor or employee in this context, the court found it must apply a twelve-factor test, placing emphasis on whether the hiring party has the right to control the manner and means by which the work is accomplished.  Id. (citing Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318 (1992).