Hunton Employment & Labor Perspectives

The Department of Labor’s Wage and Hour Division is expected to propose new rules on independent contractor classification and overtime entitlement requirements in the coming weeks.  The proposals would alter the qualifications for certain employees to receive overtime payments under the Fair Labor Standards Act when they work in excess of 40 hours in one week.

A critical ruling in the world of franchising, in Haitayan v. 7-Eleven, Inc., 2021 WL 4078727 (C.D. Cal. Sept. 8, 2021), the U.S. District Court for the Central District of California applied the so-called Borello test to find that franchisees were independent contractors, instead of employees, for purposes of their claims for unpaid business expense reimbursements under California’s Labor Code section 2802.

On May 2, 2019, the Ninth Circuit ruled in Vazquez v. Jan-Pro Franchising International, holding that the new independent contractor test established by the California Supreme Court in its 2018 decision in Dynamex v. Superior Court applies retroactively to franchisors. As a result of this decision, employers and franchisors who have classified workers as independent contractors may see an increase in wage and hour class actions alleging that the workers are or have been misclassified. Additionally, the decision has serious implications for any California companies that operate under a franchise business model.

In a highly anticipated opinion, a Federal Judge in California ruled in favor of GrubHub, an internet food ordering service, finding it properly classified a delivery driver as an independent contractor.

In Lawson v. GrubHub, the plaintiff, a delivery driver, alleged that GrubHub violated California’s minimum wage, overtime and employee expense reimbursement laws by misclassifying him as an independent contractor when he was really an employee.  He brought the case on behalf of himself and as a representative action pursuant to the California Private Attorney General Act (PAGA).

Following the Supreme Court’s game-changing decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011), courts have struggled to determine the level and nature of proof a class plaintiff must present at the class certification stage. This is especially so when it comes to the requirements related to commonality: that there be questions of law or fact common to the class and that the common questions predominate over any questions affecting only individual class members. Fed. R. Civ. P. 23(a)(2), (b)(3). Recently, Chief District Judge George King of the Central District of California refused to certify a wage-and-hour class on the ground that plaintiff was unable to establish commonality. See Pedroza v. PetSmart, Inc., No. ED CV 11-298-GHK (DTBx) (C.D. Cal. Jan. 28. 2013) (minute order).  This detailed order offers many great lessons for wage-and-hour actions brought on a class basis.

On July 8th, partially relying on the U.S. Supreme Court’s June 20th decision in Wal-Mart Stores, Inc. v. Dukes (for an analysis of the Dukes decision, see our previous blog entry), the United States District Court for the Northern District of California decertified a class of current and former store managers who alleged that Dollar Tree Stores Inc. had misclassified them as exempt employees and denied them overtime pay.  The case, Cruz v. Dollar Tree Stores, Inc., proves that although Dukes involved discrimination as opposed to wage and hour claims, the rationale in Dukes can also be used to defeat wage and hour class actions.

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 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.

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.

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.