Hunton Employment & Labor Perspectives

Last month, a judge out of the Alameda County Superior Court ruled California’s Proposition 22 unconstitutional, constituting a significant legal obstacle to this young statute.

Proposition 22 (formally the Protect App-Based Drivers and Services Act, Bus. & Prof. Code, §§ 7448, et seq.) was a ballot initiative passed by a majority of California voters in the November 2020 election, which primarily aimed to classify application-based transportation and delivery companies’ drivers as independent contractors rather than employees. Proposition 22 arose in response to Assembly Bill 5, 2019 legislation codifying the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court, which created a new “ABC” test for determining whether workers are properly classified as independent contractors. (More information on AB 5 can be found in this previous Hunton Employment & Labor Perspectives post.)

On September 10, 2020, the United States District Court for the District of Massachusetts issued a Memorandum and Order granting summary judgment in favor of a franchisor in response to claims by a purported class of franchisees that they were not truly independent contractors, but employees of the franchisor.

The main issue addressed in the case was whether specific federal legal requirements that are imposed upon franchisors trump the general Massachusetts independent contractor classification statute. The federal court reasoned that applying the Massachusetts independent contractor classification statute to the franchise business model would render franchisors regulated by the Federal Trade Commission (“FTC”) criminally liable under state law for employee misclassification simply by virtue of their compliance with the FTC’s requirements.

In a press release issued this morning, the Department of Labor has announced that it is withdrawing two administrative interpretations issued by the Department of Labor under the Obama administration in 2015 and 2016 relating to misclassification of independent contractors and joint employment. These two administrative interpretations sought to expand the definition of employee, thereby increasing the possibility of misclassification cases, and, as some argued, expanding the concept of joint employer under the Fair Labor Standards Act.  While this is a welcomed ...

On October 13, Pennsylvania Governor Edward G. Rendell (R) signed the Construction Workplace Misclassification Act (H.B. 400), which sets forth a number of prerequisites for classifying construction industry workers as independent contractors as opposed to employees.  Under the Act, the consequences for misclassifying a worker as an independent contractor are severe.  The Act is part of a large trend, as similar legislation has been enacted or is being considered in a number of other states.

In yet another employee misclassification case, Kentucky Attorney General, Jack Conway, brought suit against FedEx Corp. alleging that FedEx violates Kentucky state law by misclassifying its drivers as independent contractors.  The Complaint contends that FedEx violated state law in regards to unemployment insurance, workers compensation, payroll taxes, and the Kentucky Consumer Protection Act.  The lawsuit asks the Court to order FedEx to classify its drivers as employees and to pay the contributions and penalties required by state law, which includes back pay dating to 2000 and totaling at least $10 million.

Our prior posts have chronicled recent attempts by Congress and state legislatures to crack down on employers who misclassify employees as independent contractors, the most notable of which was the Employee Misclassification Prevention Act that, among other things, seeks to create a cause of action under the FLSA for misclassification and to require employers to keep records of hours worked by independent contractors.  On September 15, Congress took yet another step in the enforcement direction when Senator John Kerry (D-Mass.) and Representative Jim McDermott (D-Wash.) introduced The Fair Playing Field Act of 2010 (S. 3786, H. 6128), which seeks to close a so-called “loophole” under the current tax regime.

The U.S. Court of Appeals for the Ninth Circuit recently held—consistent with other courts that have considered the issue—that “insurance agents are independent contractors and not employees for purposes of various federal employment statutes,” including ERISA, the ADEA, and Title VII.  In Murray v. Principal Financial Group, Inc., case number 09-16664, the panel unanimously affirmed a district court order granting summary judgment in favor of a purported employer because it found that the plaintiff was an independent contractor, not an employee entitled to the protections of Title VII.  The panel’s opinion clarifies the appropriate test for distinguishing between employees and independent contractors in the context of Title VII, and concludes that despite apparent precedent for multiple tests, there is, in fact, only one.

The Senate Committee on Health, Education, Labor, and Pensions has announced that it will conduct a hearing on Thursday, June 17, 2010 on the Employee Misclassification Prevention Act, which was introduced in both the Senate and House on April 22, 2010.  The Act seeks to amend the Fair Labor Standards Act so that worker misclassification is a violation of federal law.  The act also requires employers to maintain records reflecting hours worked and wages paid to independent contractors.  See our previous post for a detailed discussion of the legislation.

The proposed 2011 fiscal year federal budget signifies a renewed commitment to combating employee misclassification, as it contemplates funding an additional 4,700 investigations into worker misclassification issues.  With penalties for worker misclassification being quite steep -- including back taxes, interest, and even punitive fines -- employers should audit their workforce to ensure that their independent contractors are properly classified.

Unfortunately, there is no bright line test to determine whether a particular worker has been properly classified as an independent contractor.  In fact, the precise definition of an independent contractor not only varies between federal and state law, but can also vary from state to state and even statute to statute.  

Continuing a trend in Congress to limit employers’ use of independent contractors, on April 22, 2010, Rep. Lynn Woolsey (CA) and Senator Sherrod Williams (OH) introduced the Employee Misclassification Prevention Act (H.R. 5107, S. 3254) (“EMPA”) in the House and Senate respectively.  The EMPA would amend the Fair Labor Standards Act (“FLSA”) and render worker misclassifications a violation of federal law.  Employers would be required to maintain records reflecting hours worked and wages paid for employees and non-employee workers.  They also would be required to provide workers a “notice” that identifies: the worker’s classification, a yet to be created Department of Labor website (containing an on-line complaint link), contact information for the applicable Department of Labor office, and other additional information as prescribed by regulation.  For workers classified as non-employees, the Notice would be required to state: “Your rights to wage, hour, and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you may have been misclassified, contact the U.S. Department of Labor.”

In its recently published Spring 2010 Regulatory Agenda, the Department of Labor (“DOL”) announced that it plans to propose a rule that would amend the current recordkeeping regulations under the Fair Labor Standards Act (“FLSA”).  Under the proposed rule, any employers seeking to exclude workers from the FLSA’s coverage will be required to perform a classification analysis, disclose that analysis to the worker, and retain that analysis to provide to Wage and Hour Division (“WHD”) enforcement personnel upon request.  The proposal will also address burdens of proof when employers fail to comply with records and notice requirements.

President Obama’s proposed $3.8 trillion federal budget for 2011 includes $117 billion for the U.S. Department of Labor.  The Department’s Wage and Hour Division, which will receive $244 million under the new budget (an increase of almost $20 million from last year), pledges to use the money to increase its number of investigators, to train investigators to detect misclassification of workers as independent contractors, and to focus on industries where misclassification is most prevalent.

Many employers recognize the advantages of “alternative” work arrangements with independent contractors, consultants, freelancers, temporary staffers, and “as needed” workers.  Generally, employers utilize these arrangements because they hope to obtain cost savings and increased flexibility, particularly in an uncertain business climate.  In some companies, use of a contingent worker expands working capacity without increasing employee headcount, which can be particularly attractive during a hiring freeze.

Previously we have discussed the risks associated with contingent worker arrangements (engagements of independent contractors, consultants, freelancers, temporary staffers, and “as needed” workers, etc.).  These risks will continue to grow in the coming months, as more claimants emerge seeking damages, government agencies increase their enforcement efforts, and state and federal legislators create new restrictions and penalties associated with classifying workers as independent contractors.

Government agencies are being urged to step up their efforts to address the potentially widespread problem of improper classification of workers as independent contractors, according to a recent study by the United States Government Accountability Office (GAO).  In a 70-page document, the GAO concluded that the U.S. Department of Labor (DOL) and the Internal Revenue Service (IRS) have not sufficiently focused on misclassification in the past, and that they have not consistently assessed penalties against companies found to have improperly classified workers.