On this website, we will explore the various legal standards used to determine Who Is My Employee? We will examine new developments, trends, changes in the law, strategies, tips, and whatever else comes to mind.
I was in Phoenix last week and saw this sign at a Diamondbacks Game. The seats in Section 223 were probably plastic and hard to chew but otherwise looked pretty tasty. Still, I don’t think I could eat more than a few at a time.
Ok, I know what the sign intended, but my reading is a fair one too. Right? The message wasn’t quite clear.
The NLRB was much more clear in the message it sent last week in an Advice Memorandum from the Office of the General Counsel. The Board opined that UberX and UberBLACK drivers were independent contractors, not employees of the ride-share app.
The opinion letter applies only to federal labor law (the NLRA), not to wage and hour law, employee benefits law, tax law, or the vast potpourri of state laws, but it’s another sign that the current administration is intent on protecting independent contractor relationships — if the relationships are properly structured.
The memo applied the same Right to Control Test for determining Independent Contractor vs. Employee that the Board used in January in its SuperShuttle decision. In SuperShuttle, the Board ruled that a group of airport van drivers were independent contractors, not employees, under the National Labor Relations Act. The ten-factor Right to Control Test used by the Board is explained here.
This NLRB Advice Memorandum arrives less than three weeks after a similar opinion letter from the Department of Labor (DOL). The DOL’s April 29 letter concluded that service providers who use “virtual marketplace” apps to find customers are independent contractors, not employees. While the letter doesn’t identify the app it reviewed, the DOL’s analysis seems to apply to Uber and other ride-share apps and to the service providers (drivers) who use these apps to find customers. The DOL’s letter addressed only the Fair Labor Standards Act (FLSA), which applies a six-factor Economic Realities Test for determining Independent Contractor vs. Employee. Different law, different test.
Here are four takeaways from the two letters, viewed together:
Different tests apply to different laws, even for similar circumstances. That’s been a consistent theme in this blog, and these two letters — one interpreting the NLRA and the other interpreting the FLSA — reinforce the different approaches. Click here for a chart showing the different tests for Independent Contractor vs. Employee, as of January 2019.
The current administration and its executive agencies are much friendlier toward independent contractor relationships than their Obama-era predecessors. The Obama DOL and NLRB were outright hostile toward independent contractor relationships (see examples here for DOL and here for NLRB), so this is a major change.
These are not court decisions and do not bind the federal courts, even as to NLRA and FLSA cases.
These opinions apply only to the NLRA and the FLSA — two of the many federal laws that apply only to employees, not independent contractors. The opinions do not directly impact federal tax law or employee benefits law, and they do not impact any of the myriad state laws. In other words, the states don’t care.
The area of independent contractor misclassification and the never-ending quest to determine Who Is My Employee? continues to evolve at a pace that should keep readers on the edge of their seats. Just don’t sit too close to the edge, because if you abandon your seat, someone at a D-Backs game might try to eat it.
A Mongolian couple died from the bubonic plague earlier this month after eating raw marmot meat. An official from the World Health Organization told the BBC that the couple ate the rodent because they believed it would bring them good health. It didn’t.
Positive thinking can be powerful, but not as powerful as bubonic plague.
California businesses that use independent contractors should be similarly cautious about any positive thinking. After a series of court decisions and a new opinion letter from the California Labor Commissioner, use of the Dynamex ABC Test for determining Independent Contractor vs. Employee is expanding.
Which claims now use the Dynamex test for determining Independent Contractor vs. Employee? Here’s the latest list — at least according to the California Labor Commissioner and my reading of recent court decisions:
Dynamex ABC Test applies:
Reporting time pay;
Record keeping (including itemized pay stub obligations);
Business expense reimbursement for cash shortages, breakage, or loss of equipment;
Business expense reimbursement for required uniforms, tools, and equipment; and
Meal and rest periods.
Payment of wages upon termination of employment, under Section 203 of the California Labor Code; and
To determine Independent Contractor vs. Employee for these claims, the Labor Commissioner and a California Court of Appeal instruct that the Dynamex ABC Test applies if the claim is focused on enforcing payment of minimum wage, overtime, and other obligations set forth in the Wage Orders. If not, then the ABC Test does not apply.
The opinion letter does not carry the weight that a court decision does, and it makes some assumptions that the California Supreme Court did not make when it adopted the ABC Test in Dynamex. So there’s always a chance that the California Supreme Court might rule that the scope of the Dynamex test is supposed to be limited to a narrower range of claims. But this is California, so that does not seem likely. In other words, don’t sample that marmot meat.
For these claims, either the S.G. Borello balancing test should apply if the claims are asserted under California law. For tax and employee benefit claims asserted under federal law, the Right to Control Test will apply. Read more here to understand how one California Court of Appeals determined which test applies to which claim. (Including entirely unnecessary references to G-L-O-R-I-A Gloooooria!)
One of the reasons independent contractor misclassification claims can be so challenging to defend is because different tests apply to different claims. This is not just a California problem.
Here is a similar chart, showing which test applies to which federal law claims.
In California, it’s getting harder and harder to prove independent contractor status, especially for claims applying the Dynamex ABC Test. Many Californians are into zen, meditation, and positive thinking, but the power of positive thinking might not get you too far when it comes to trying to preserve independent contractor status. There are still defenses, and it’s still possible to maintain independent contractor status in California, but it’s not easy.
Fighting misclassification claims in California can sometimes feel like eating raw marmot meat. It might seem like a good idea at first, but then you could end up with bubonic plague.
Cher - If I Could Turn Back Time (Official Music Video) - YouTube
In a mediocre and overplayed 1989 pop song, Cher sang about how she wished she could turn back time. If she could turn back time, according to the song, she’d take back those words that’ve hurt you and you’d stay.
The music video for “If I Could Turn Back Time” takes place on the deck of the battleship USS Missouri, which the U.S. Navy allowed because it believed the video could help boost recruitment. (How, exactly?) The song reached number one on the pop charts in Australia and Norway, causing me to question the collective judgment of the citizens of these otherwise fine nations.
As Cher well knew, you can’t turn back time. Doing so would cause all sorts of problems. As we will now see in California.
On May 2, the Ninth Circuit Court of Appeals ruled that California’s Dynamex decision (from April 2018) must be applied retroactively. In the Dynamex case, the California Supreme Court had ruled that a strict ABC Test should be used to determine whether workers are considered employees or independent contractors under California’s wage orders.
You can read more about the test here, but what’s most important for now is that the test is really hard to meet. That’s why in Vazquez v. Jan-Pro Franchising International, Jan-Pro argued that since it was being sued for events that took place before the Dynamex ruling, its lawsuit should be decided under the test that was used before the Dynamex ruling. Jan-Pro argued that the Dynamex decision made up new rules in the middle of the game, and Jan-Pro should not be held to the new, made-up rules for time periods before the new rules were made up.
That seems logical to me, but not to the Ninth Circuit. Instead, the Court of Appeals ruled that Dynamex must be applied retroactively. The Court’s reasoning makes little sense.
The Court based its decision on the general rule that new statutes are applied prospectively, but court decisions are applied retrospectively. That makes sense as a default rule — but only if the court decision is interpreting the text of a statute or is applying a well-known rule to a set of facts.
The ABC Test was invented by the California Supreme Court in its April 2018 Dynamex ruling. That test did not exist in any California statute enacted by the legislature or in any regulation. Before the Dynamex case, no business in California had any reason to believe that an ABC Test was the test — especially since for decades a different test had been used. The Dynamex decision, therefore, was much more like the enacting of a new statute than the judicial interpretation of a long-standing law.
In fact, the Ninth Circuit’s decision last week goes so far as to admit that the Dynamex decision was, in essence, the adoption by California’s Supreme Court of a Massachusetts statute that had never been passed by California’s legislature. The Ninth Circuit ruling includes this sentence, which precisely demonstrates my point: “Thus, by judicial fiat, California incorporated Massachusetts’ employment classification statute into its labor laws.” Before April 2018, Massachusetts had an ABC Test, by statute. California did not.
Judicial fiat! That quote says it all. Judicial fiat is when the judiciary (not the legislature) creates a new law. It is a term most commonly used to criticize a judicial decision as going too far and usurping the role of the legislative branch. But here the Ninth Circuit concedes that’s what the California Supreme Court did in Dynamex. Since the Dynamex decision adopted a Massachusetts statute by judicial fiat, then the only fair way to apply that rule is to treat it like a statute and apply it only prospectively. But no.
It seems blatantly unfair for a court to make up new rules by adopting a different state’s statute — one that California’s legislature never adopted — and then to hold California’s businesses liable for failing to comply with a set of rules that did not yet exist.
So, Todd, tell me how you really feel.
Anyway, that’s now the law in California. The ABC Test invented by California’s Supreme Court in the Dynamex court now applies when determining whether someone is an employee under California’s wage orders, even for time periods before the test was invented.
You can read more about the Dynamex decision here and here.
California business are being advised to consider moving to Australia.
Long before mobile apps were a thing, Pete Townsend and The Who were already going mobile. In the 1971 song, Townsend sings about the virtues of life on the open road, living in a mobile home. I’m an air-conditioned gypsy.
In an important opinion letter released this week, the DOL went mobile too, lending support to businesses in the “on-demand” or “sharing” economy. The letter is the first significant ruling that supports independent contractor status for service providers who obtain work through virtual marketplace apps.
A virtual marketplace app is a matchmaking service. It connects consumers who need a service (driving, housekeeping, handyman, anything) with service providers who do the work. Virtual marketplace companies (VMCs) are frequently the target of misclassification claims. In these types of claims, service providers — and the plaintiffs’ lawyers who love them — file lawsuits claiming that the service providers are really employees of the VMC. Frequent targets have been Uber, Lyft, Doordash, and Grubhub.
In Monday’s letter, the DOL opined that service providers are indeed independent contractors of the VMC, not its employees, at least under the facts of this particular case. The letter does not identify the specific VMC at issue, but the facts in the letter are going to be generally applicable to lots of VMCs.
The opinion letter considered the Independent Contractor vs. Employee question only under the Fair Labor Standards Act (FLSA), not under any other law. The DOL evaluated the facts under a six-factor Economic Realities Test. The relevant factors are:
Degree of VMC’s control over the workers;
Permanency of the worker’s relationship with the VMC;
Amount of worker’s investment in facilities, equipment, or helpers;
Amount of skill, initiative, judgment or foresight required for the worker’s services;
Worker’s opportunity for profit or loss; and
Extent of integration of worker’s services into the VMC’s business.
When considering these factors, the DOL found it persuasive that the workers:
Provided services for the customer, not for the VMC;
Chose when to work and which tasks to accept;
Could price their services;
Could hire helpers;
Invested in their own tools and equipment;
Could discontinue their relationship with the VMC at any time;
Could find work using multiple VMCs, including competing VMCs;
Were not trained by the VMC in how to perform their particular skill or trade; and
Were not required to accept any minimum number of tasks.
The DOL found that the primary purpose of a virtual marketplace app is not to provide services to customers, but rather to provide a referral system — a virtual marketplace — that enables service providers to connect with customers.
While opinion letters do not carry the same weight as a court decision, there are special privileges granted to businesses who rely on them when designing their pay practices. Under the Portal-to-Portal Act, reliance on an opinion letter is a defense against a claim that the business violated the FLSA. VMCs, therefore, might consider structuring their business in ways that are consistent with the facts in this letter, then creating a record showing their reliance on the opinion letter.
A few cautionary notes:
The DOL’s opinion is limited to the specific facts presented, but those facts are going to apply to a lot of virtual marketplace apps; and
The DOL’s opinion is limited to the FLSA and its Economic Realities Test. The decision is of little help against claims that are brought under state laws, most of which do not apply an Economic Realities Test and do not recognize Portal-to-Portal Act reliance as a defense. The decision is also not applicable to other laws, such as federal tax law and employee benefits law, both of which use a Right to Control Test, which examines different factors.
The Fair Labor Standards Act is often criticized as a 1930s-era law that fails to account for the realities of the modern economy. This letter is the DOL’s first significant recognition that the law may be able to co-exist with the gig economy in ways that do not necessarily convert independent contractors to employees.
So play the tape machine, make the toast and tea! I’m going mobile.
Meatloaf’s “You Took the Words Right Out of My Mouth” opens with a dialogue by Jim Steinman, who wrote the song, and actress Marcia McClain, who played Dee Stewart in the soap opera As the World Turns. He asks, “On a hot summer night, would you offer your throat to the wolf with the red roses?”
For a quick trip back to 1978-79, listen to the album version, not the shortened single, which cut out the dialogue, presumably because it distracted the roller skaters. The song is about teenage lovers and passion, and the lyrics are rich with intense imagery.
Offering a new twist on this old classic, the Supreme Court last week issued a ruling on arbitration agreements that can be paraphrased as “You took the words right out of the air because they weren’t in my arbitration agreement.” This decision will inflame passions in the pro-worker camp, but it’s a good decision for businesses. The case is called Lamps Plus v. Varela.
The Court ruled: When an arbitration agreement is ambiguous about whether the arbitration can take the form of a class action, the contract must be interpreted to prohibit class arbitration. That is, the individual must arbitrate claims on an individual basis.
The 5-4 majority reasoned that one of the primary benefits of an arbitration agreement is that it avoids complex, lengthy proceedings like what occurs in a class action. If the Court were to read into an arbitration agreement that class actions are permitted, that would deprive the parties of one of the primary benefits of arbitration (says the majority).
The dissenters argued passionately that the Court should apply the often-used principle of contract interpretation called “contra proferentem,” which is Latin so no one knows what it really means. Ambiguities in contracts are normally interpreted against the party that wrote the agreement. If that principle had been applied in this case, then the ambiguity — whether the contract permitted arbitration on a class basis — would have been interpreted in favor of the individual, not the company that drafted the contract or its lawyer who sweated bullets for three years while the meaning of the document was picked apart by a federal district court, the Ninth Circuit Court of Appeals, and finally the U.S. Supreme Court.
In any event, the majority rejected that principle for arbitration agreements. The Court held that a core principle of the Federal Arbitration Act (FAA) is that arbitration is a matter of consent. Therefore an arbitration agreement subject to the FAA cannot be read to permit a form of arbitration that the parties did not specifically agree upon in their contract. Most arbitration agreements will be subject to the FAA.
This particular case involved an arbitration agreement between an employee and an employer. The employee wanted to bring a class action claim after a data breach led to the disclosure of personal information about 1,300 employees, which eventually resulted in a fraudulent tax return being filed in the name of the lead plaintiff.
Although this case involved employee-employer arbitration agreements, the ruling applies equally to arbitration agreements with independent contractors. The main exception would be agreements in the interstate transportation industry, which are not covered by the FAA.
Arbitration agreements can be a powerful tool in preventing class actions, and the 5-4 conservative majority is providing a little wiggle room for companies whose arbitration agreements are not as tightly drafted as they should be.
To ensure paradise by the dashboard lights, companies should make sure that their arbitration agreements (1) require disputes to be settled through arbitration rather than in the courts, (2) include a limited carve out for some proceedings to be handled outside of arbitration, such as injunctions, workers comp claims, and agency proceedings, and (3) include a clear waiver of the right to bring or participate in class or collective actions.
Baby, we can talk all night (about this case) but that ain’t getting us nowhere. So I’ll the end the post here with this bit of advice. The safest approach is to write the class and collective action waiver more clearly. Avoid ambiguity whenever possible.
Yesterday I was at Ohio E-check. When they use their fancy vehicle emissions testing equipment, they ask you to get out of your car and wait in a small glass-walled waiting area. Inside there are two signs. The first says: “Ohio E-Check. No cell phones!” The second says: “Ohio E-Check. How are we doing? To comment, use this QR code.”
Regrettably, I complied with the first sign, so I do not have a picture for you of the two signs. (While waiting, I tried like hell to memorize that QR code!)
When waiting for E-Check, mixed messages are funny. When retaining independent contractors, however, mixed messages are no joke. If enough signs suggest that a contractor is really an employee, the risk of a misclassification finding is heightened, and the consequences of misclassification can be severe.
One common way that companies send mixed messages is by allowing contractors to portray themselves in ways that make them appear to the general public as if they are employees. Examples can include allowing the contractor to use a company email address (email@example.com), a company ID badge, or a company business card.
Or companies sometimes send the mixed messages themselves, such as by listing independent contractors on the company website as part of “Our Team” or “Our Staff.” (Note to Spanky & Alfalfa: ok to keep using “Our Gang.”)
So what have we learned today? I learned that after yesterday, I won’t need E-Check for another two years. But I’ve already made a note in my calendar to bring my phone inside. You know, for the QR code.
Forgive me in advance if I sound condescending. And skeptical. And incredulous. But above all, I am amused.
This is the story of a strip club called the Godfather. When one of its dancers, a young lassie named Tassy, tried to sue, alleging that she had been misclassified as an independent contractor, the Godfather asked the court to send her claims to arbitration, as required under the Godfather’s dancer agreement.
But the Godfather had one small problem. It could not produce the agreement because, it claimed, the agreement was washed out in a flood caused by a rusted-out water heater in the back room. As everyone knows, the flood-prone back room with the rusted-out water heater is the best place for storing corporate legal documents. (Note to self: update template document retention guidelines.) Preferably, as the Godfather did, store them in unmarked boxes with no index or system for determining exactly what was in the boxes. But Tassy’s agreement was in there. They’re pretty sure, anyway.
So the court held an evidentiary hearing, and that’s when the rest of the wheels fell off. The Godfather produced two key witnesses, and they contradicted each other in virtually every aspect of their testimony — about the content of the agreements, the procedure for signing agreements, the procedure for signing other new dancer paperwork, the procedure for being retained, the procedure for auditioning, what other documents had been lost in the flood, who worked in the back office, who was the most talented Jonas Brother, and what were the real lyrics to Wild Thing by the Troggs.
The only things the witnesses could agree on were that there were different versions of the agreement in place at different times, that the versions “constantly changed,” that some versions had an arbitration clause and others did not, and that neither of them was sure which version Tassy signed.
The judge, in a written opinion, excoriated the club, finding none of its witnesses to be credible and expressing a general bewilderment at the supposed back room filing system, which was meticulously described by the Godfather’s key witness as follows: “There was boxes of paperwork back there.” That is an exact quote from the opinion.
The court ruled that the Godfather failed to prove that Tassy had signed an arbitration agreement. She will therefore be allowed to proceed with her claims of independent contractor misclassification in court.
I hope this one goes to trial because it would be hilarious.
Why did the cassowary cross the road? To get to the other side.
Careful planning and foresight are important. For example, it would have been a good idea for a Gainesville, Florida man to have read up a little more on cassowaries before choosing to own one as a pet. A cassowary is a large flightless bird that grows up to six feet tall and can weigh 130 pounds. It has a four-inch claw on each foot, used to slice open its prey. (Infomercial: It’s both a fork and a knife!) The bird has powerful legs that it can use to kill its prey with a single kick — or chase it down by running at speeds up to 30 mph. Think Big Bird meets Edward Scissorhands meets pissed-off hungry crocodile in a go-cart.
Anyway, some guy in Gainesville bought one as a pet. It promptly killed him. Poor planning. I would have recommended a labradoodle.
A better example of planning ahead is GrubHub and its independent contractor arbitration agreements.
Two drivers recently challenged the validity of those agreements, arguing that after the Supreme Court’s recent New Prime decision (see blog post here), they were “transportation workers” and therefore not covered by the Federal Arbitration Act (FAA) and therefore their arbitration agreements could not be enforced. The FAA is a federal law that favors enforcement of arbitration agreements.
The GrubHub drivers wanted to bring a federal lawsuit alleging independent contractor misclassification and failure to comply with federal and state (Illinois and California) wage and hour laws.
After the Supreme Court’s New Prime ruling — that drivers in interstate commerce were not protected by the FAA — the plaintiffs’ bar began filing lawsuits to test the bounds of what it means to be a driver in interstate commerce.
A federal court in Illinois recently ruled that GrubHub drivers are retained for local deliveries, not for the type of interstate transportation that is covered under the FAA exception. Since the GrubHub drivers’ deliveries are local, not interstate, the FAA does apply. Since the FAA applies to the GrubHub drivers and their arbitration agreements, their dispute must be referred to arbitration.
The court dismissed the case, and the drivers’ claims will have to be brought before an arbitrator.
In contrast to the court decision we blogged about on Monday, this ruling shows that a well-written arbitration agreement can and will be enforceable. Make sure your arbitration agreements are carefully written and include all procedural and substantive safeguards. You can never be too careful when drafting an arbitration agreement — or when choosing a pet bird.
You can’t always get what you want, said a wise English sage in 1969. This advice still holds true. For example, Chinese Foreign Ministry spokesman Lu Kang recently declared that the reincarnation of the Dalai Lama must comply with Chinese law. Good luck with that.
The enforcement mechanism for Lu’s edict is unclear, but the Chinese Communist Party knows what it wants. (Allow me a brief diversion. My favorite sentence in the cnn.com story: “It isn’t completely clear whether the Dalai Lama will allow himself to be reincarnated after he dies.” You and me both, brother!)
Another example arose in a recent court case, in which a messenger service required its independent contractor messengers to sign an arbitration agreement. Like spokesman Lu, the messenger service may have demanded a bit too much. A California Court of Appeal declared the arbitration agreement invalid, ruling that it was both procedural and substantively unconscionable.
What makes an arbitration agreement so one-sided that it’s unconscionable?
Here are the terms that, taken together, the court said rendered the agreement procedurally unconscionable:
The agreement was presented as a take-it-or-leave it proposition, not subject to negotiation;
The contractor’s native language was Portuguese; he spoke very little English; and no one offered to translate or explain to him the meaning of the document;
He was asked to sign on the spot, with no opportunity to review it, translate it, or seek legal advice;
The agreement said that the rules of the American Arbitration Association (AAA) would apply, but did not specify which of the many AAA rules would govern; and
He was not given a copy of the rules.
The court also ruled that the agreement was substantively unconscionable — in other words, so unfair it could not be enforced. The court focused on these defects in the agreement:
The individual was barred from bringing any claims with an administrative agency (he tried to bring a claim with before the Commissioner of Labor);
The agreement barred representative claims from being brought under California’s Private Attorneys General Act (PAGA);
The agreement prohibited any recovery of punitive damages, statutory penalties, equitable relief, or attorneys’ fees; and
The agreement required any dispute to be heard before a panel of three arbitrators, each of whom must have transportation industry experience and a legal background. (The court ruled that it would be very expensive to find and pay three people with these required credentials, which would make it prohibitively expensive for the individual to bring any claim since the agreement also required the parties to split all arbitrator fees.)
This case is a good reminder to check the terms of any arbitration agreements you have with independent contractors. The messenger service will not get what it wants (nor what it needs). The court invalidated the arbitration provision as a whole, finding it so defective that it the invalid portions could not be severed in a way that would otherwise save the agreement.
Arbitration agreements with independent contractors can be a valuable tool for resolving disputes, but only if they are enforceable. Not even the all-powerful Chinese Communist Party can impose terms that are unfair. But they get points for trying. So far, I have found no truth to the rumor that spokesman Lu has asked the Dalai Lama to sign a pledge to arbitrate any disputes over his reincarnation. Maybe Jagger, Richards, and Wood could serve as the three arbitrators.
Vacation is all the Go-Go’s and their misplaced apostrophe ever wanted. Vacation, had to get away. Vacation, had to be spent alone.
Employees want vacation too, and so do independent contractors. Should your company’s vacation policy apply to independent contractors too? Can you grant your independent contractors a certain amount of paid vacation?
Not a good idea.
In the various tests for Independent Contractor vs. Employee, one of the recurring themes is that a contractor is in business for himself/herself. The contractor is supposed to be able to work when he or she wants, so long as deadlines are met.
Providing paid vacation to an independent contractor may seem like a nice thing to do, but it’s not consistent with the idea of being an independent contractor. Vacation should be an employee benefit, not a perk available to contractors too. You shouldn’t be paying contractors for not performing work.
Belinda Carlisle took a long vacation from the Go-Go’s in 1985, when she embarked on a solo career featuring several annoying songs such as “Mad About You” and “Heaven is a Place on Earth.” The Go-Go’s later reunited, broke up again, reunited, and broke up again, none of which was noticed by anyone.
In contrast, offering your independent contractors employee benefits like paid vacation could get noticed by regulators as a sign of independent contractor misclassification. Paid vacation for contractors would also be a negative fact in any misclassification lawsuit.
When trying to maintain legitimate independent contractor classifications, it is important to respect the lines between employees and contractors. On this topic, we have nothing more to say for now. Our lips are sealed.