Independent Contractors

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In what some believe the first federal trial over the classification of this new 21st Century worker, a federal district court found a Grubhub driver an independent contractor rather than an employee. With this determination, the worker did not qualify for protections extended to employees under California law. This is a big win for Grubhub, although Lawson appealed to the 9th Circuit Court of Appeals.

All eyes were on the case Lawson v. Grubhub Inc. in California. Grubhub is an on-line food ordering service that connects people to restaurants for take-out. In select markets, Grubhub also offers delivery of food through its drivers rather than the customer picking-up directly or a restaurant using its own delivery service.

Raef Lawson, who had worked as a driver for the company for less than six months, sued Grubhub claiming violations of California law. He alleged Grubhub had failed to pay him a minimum wage, overtime, and reimbursement of his work-related expenses. Lawson had worked under a Delivery Service Provider Agreement with Grubhub. He also served as a driver for two of Grubhub’s competitors – Postmates and Caviar – during this same time.

At issue was whether Lawson was an employee subject to certain protections under the law or an independent contractor.  In reaching its determination, the trial court primarily considered Grubhub’s right to control Lawson as well as other secondary factors under California’s classification test, referred to as the Borello test. After a trial, the judge found that “considering all of the Borello factors as a whole in light of the trial record, the Court finds that Grubhub has satisfied its burden of showing that Mr. Lawson was properly classified as an independent contractor. While some factors weigh in favor of an employment relationship, Grubhub’s lack of all necessary control over Mr. Lawson’s work, including how he performed deliveries and even whether or for how long, along with other factors persuade the Court that the contractor classification was appropriate for Mr. Lawson during his brief tenure with Grubhub.”  While reaching this conclusion, the judge also noted that this test is “an all-or-nothing proposition” and queried whether the legislature should consider other options or tests for these type of on-demand gig economy jobs.

The “gig” economy is a term that refers to a workforce of temporary or freelance workers who take short-term assignments, projects, or gigs. The increase in this on-demand worker shows a shifting away from the traditional long-term work relationship with a single employer to one of temporary projects. For more information on the gig economy, see my segment with Fred Kocher, host of NH Business.

This case is recognized as the first misclassification trial for a worker in the gig-economy.  For years, many of us have been watching how the courts would classify these workers under current law.  My previous blog posts (here and here) followed the class action litigation involving current and former Uber drivers in Massachusetts and California.  Various other gig-economy cases are pending in federal and state courts. This recent decision is significant as it could influence those and other classification cases going forward.

Photo Credit: smlp.co.uk via Flickr (CC by 2.0)
Photo Credit: smlp.co.uk via Flickr (CC by 2.0)

In October, the EEOC unveiled its four year Strategic Enforcement Plan (SEP).  The SEP provides employers insight into areas the EEOC plans to focus on in the coming years.  This heads-up plan allows companies to take steps to ensure their businesses are compliant when there is a knock at the door.

The new SEP does not contain any major changes from the EEOC’s prior strategic direction.  Instead, the EEOC will continue its emphasis on many of the priorities that it set forth in the 2012-2016 four year SEP.  Employers should expect continued focus on the EEOC bringing litigation in large-scale, high-profile and high-impact cases.  Employers should also be careful when classifying workers as independent contractors or temporary workers.

For Fiscal Years 2017-2021, the EEOC has identified six priority areas under this new SEP.  Employers should be mindful of this direction and review their internal policies to confirm they are in conformity with the law in the following areas:

  1. Eliminating Barriers in Recruitment and Hiring

The EEOC will prioritize eliminating discrimination related to recruitment and hiring, including employer policies and practices of exclusion, screening that disproportionately impacts workers in protected categories, and placing of individuals into specific jobs inappropriately based upon protected categories.

Employers:  Review your hiring policies to confirm there are no discriminatory practices in your recruitment and hiring processes or procedures.  For example, revisit your employment applications and determine whether any tests or surveys you make employees complete disproportionately impact a protected class or are inaccessible for persons with disabilities.

  1. Protecting Vulnerable Workers, Including Immigrant, and Migrant Workers, and Underserved Communities from Discrimination

The EEOC will prioritize enforcing equality for immigrant and migrant workers and persons perceived to be members of these groups as well as other underserved communities.

Employers:  Identify those vulnerable, immigrant, and migrant workers and underserved communities in particular areas.  Employers should assess whether they have workforce policies and practices that impact these workers or underserved communities.

  1. Addressing Selected Emerging and Developing Issues

The EEOC will focus on the following areas: (a) inflexible leave policies that discriminate against individuals with disabilities; (b) pregnancy-related limitations that violate the Pregnancy Discrimination Act and the Americans with Disabilities Act Amendments Act; (c) the increasing and continued complexity of employment relationships and work-structures, including those relationships involving temporary workers, staffing agencies, independent contractors, and the on-demand economy (for example, Uber drivers); (d) LGBTQ discrimination; (e) discriminatory practices against persons of Arab, Middle Eastern or South Asian descent, those who are Muslim or Sikh, and persons perceived to be members of these groups.

Employers:  Review your leave policies and ensure leave is considered as a reasonable accommodation for employees who are unable to work or to return to work after a leave due to a disability.  Review your policies on providing accommodations for pregnant workers.  Schedule training for all managers/supervisors and employees to educate them about laws protecting employees against discrimination and each person’s obligation to promote and maintain a discrimination and harassment-free workplace.

Determine whether you are properly classifying workers as employees, independent contractors, or temporary/seasonal workers, as the EEOC continues its focus in this area as it has in the past many years.  Importantly, this SEP acknowledges the changing workforce in the 21st Century.  More and more people are working in alternative or contingent workplace arrangements, including the Uber-like on-demand jobs of today.  This SEP will likely involve the EEOC’s closer look and focus on these types of emerging work arrangements, and employers can expect the EEOC to challenge and litigate these high-profile issues in the coming years.

  1. Ensuring Equal Pay Protections for All Workers

The EEOC will renew its focus on safeguarding compensation systems and ensuring such practices do not discriminate against workers based on race, religion, ethnicity, sex, age, disability, or any other protected categories under the law.

Employers: Employers should review their current compensation policies and practices to ensure that all employees are receiving the pay to which they are entitled.  This may include an audit of the company’s compensation structure.  Companies should consider having outside legal counsel perform such an audit as that process may allow for certain privilege protections.

  1. Preserving Access to the Legal System

The EEOC will target employer policies that impede the ability of employees to pursue their workplace rights.  This includes aiming its efforts at overly broad waivers or releases and mandatory arbitration provisions as well as ending practices that deter employees from exercising their legal rights. The EEOC will also focus on ensuring employers maintain the appropriate applicant and employee data and records as required by EEOC regulations.

Employers:  Review the language in your waivers, releases, and arbitration agreements.  Review the language in your handbook policies to ensure they do not stifle employees ability to exercise their legal rights in the workplace.  Confirm your company is properly retaining documents as required under the law.

  1. Preventing Systemic Harassment

The EEOC will renew its heightened focus on ending harassment in the workplace.  Continued attention will be given to workplace policies and practices.  Again, focus will be given to deterrence measures that put a stop to future harassment.  With an expected increase in litigation, this includes the EEOC bringing enforcement actions in court against companies that seek monetary damages and injunctive relief.

Employers:  Review your handbook policies and procedures on appropriate behavior in the workplace and anti-harassment and retaliation policies.  Train managers, supervisors, and employees about expected behavior in the workplace and everyone’s obligation to promote a harassment and discrimination free workplace.

Employer should start preparing for the next four years today.

Photo: Jason Lawrence via Flickr (CC by 2.0)
Photo: Jason Lawrence via Flickr (CC by 2.0)

Upon a motion for preliminary approval of the class-action settlement for $100 million, a federal court found that the settlement between Uber and drivers in two states was “not fair, adequate and reasonable” and denied approval.  It ordered the parties to confer about how they wanted to proceed.  A joint status report is due on September 8th and a status conference is scheduled with the court for September 15th.

The litigation involves current and former Uber Technologies Inc. drivers in Massachusetts and California who brought claims alleging that they were improperly classified as independent contractors rather than as employees.  The actions cover about 385,000 drivers.  After three years of contentious litigation, and on the eve of trial earlier this year, the parties reached a settlement of these two class-action lawsuits.  Among other terms, Uber agreed to pay $84 million plus an additional $16 million depending if the company went public.  Drivers would remain classified as independent contractors and Uber agreed to institute certain processes and procedures internally.  See my previous post about some of the settlement terms.

In his review of the proposed settlement, Judge Edward Chen of the U.S. District Court for the Northern District of California cited case law noting that “whether a settlement is fundamentally fair…is different from the question whether the settlement is perfect in the estimation of the reviewing court.”  But “when…the settlement takes place before formal class certification, settlement approval requires a ‘higher standard of fairness.'”  As the judge explained, in this case, “because the Settlement Agreement covers the claims of both certified class members and drivers who fall outside the class definition and thus have not been certified (for example, all Massachusetts drivers and the California drivers who drove for a third-party transportation company or under a corporate name), this Court must apply the more ‘exacting’ standard in determining whether this settlement is fair, adequate, and reasonable.”

Of primary concern to the court was that the $1 million allocated to California’s “Private Attorneys General Act” (PAGA) claim was modest.  PAGA is a law that allows private citizens to seek civil penalties for labor violations.  The judge noted that the settled PAGA portion was .1% of the potential $1 billion-plus statutory penalty against Uber claimed in the lawsuit.  “Here, the court cannot find that the PAGA settlement is fair and adequate in view of the purposes and policies of the statute.”  Essentially, the federal court found that the amount of the settlement allocation to the state was not large enough.

The court also ruled that the arbitration provision on appeal deserved further consideration. The appeal pending at the 9th Circuit Court of Appeals on an earlier decision by Judge Chen involves a determination as to whether certain arbitration agreements signed by drivers are enforceable.  Judge Chen recognized that if he were reversed on appeal, it would have a significant impact on the case as many of the drivers would need to proceed through arbitration.

Both sides have reported their disappointment in the ruling.  This ruling by the federal court, however, does not prevent the parties from reaching a new settlement which addresses the judge’s concerns, particularly as to the PAGA.

This case is being watched closely by those companies using on demand workers.  It is also a good reminder about the potential class-action liability employers face for the misclassification of a group of employees.   All employers should be reviewing their independent contractor classifications to make sure those persons are not really employees under an incorrect label.

6584474_1On May 11, 2016, President Obama signed into law the Defend Trade Secrets Act of 2016 (DTSA).   The DTSA had passed with overwhelming bipartisan support in the Senate and House.  It became effective upon its enactment.

In an area that has long been the province of state law, the DTSA now allows a company to bring a federal claim with federal remedies and federal jurisdiction for the misappropriation of trade secrets.   Nothing in the act is intended to preempt any other provision of law.  It is intended to supplement state law.

This new federal civil remedy will allow for a more uniform federal law on protecting a business’s trade secrets.  Previously, companies had to rely upon various state laws for protection or the contractual remedies set forth in their employment, confidentiality/nondisclosure, or noncompetition agreements.  With this uniformity also comes the ability for companies to file actions in federal court.

Remedies.  The DTSA sets forth federal remedies for the misappropriation of trade secrets, which include the following.

  1. Ex parte seizures of the property at issue in “extraordinary circumstances” to “prevent the propagation or dissemination of the trade secret.”  In any order for seizure issued, the court must set forth specific findings of fact and conclusions of law to justify the seizure.  Any order for seizure must also describe the property with reasonable particularity and provide for the narrowest seizure of property necessary to achieve the purpose of the act.  The court must also set a hearing no later than seven (7) days after an order issues.
  2. Monetary damages for actual loss and unjust enrichment caused by the misappropriation of the trade secret, or a reasonable royalty in exceptional circumstances that render an injunction inequitable.
  3. For willful and malicious misappropriation, a party may recover exemplary damages of up to two-times the amount of monetary damages and its attorney’s fees.
  4. If a claim is made in bad faith or a motion to terminate an injunction is made or opposed in bad faith, the prevailing party is entitled to its reasonable attorney’s fees.
  5. In an action brought for wrongful or excessive seizure of property, a party’s recovery of damages for such wrongful or excessive seizure will not be limited by the required security or bond posted with the court.

A federal court is prohibited from entering an order except where there is evidence of threatened misappropriation and not merely on the information the person knows.  Thus, the inevitable disclosure doctrine recognized by some states does not apply under this federal law.  The DTSA also prohibits entry of injunctions that “conflict with an applicable State law prohibiting restraints on the practice of a lawful profession, trade, or business.”

Whistleblower Protections.  The DTSA specifically provides a person immunity from civil and criminal liability under both federal and state trade secret law.  This immunity extends to whistleblowers who disclose trade secrets “in confidence” to a federal, state or local government official, directly or indirectly, or to an attorney solely for the purpose of reporting or investigating a suspected of violation of the law.  Immunity also extends to persons who file a lawsuit where the filings are made under seal and the trade secret is not disclosed except pursuant to a court order.

Notice Requirements.  In addition to these whistleblower protections, the DTSA requires employers to provide notice of the immunity to an employee in any contract or agreement that governs the use of confidential or trade secret information.  Alternatively, an employer may fulfill this notice requirement by cross-referencing in the contract or agreement a policy document it provided to the employee that details the employer’s reporting policy.  This may include a provision in an employment handbook or some other policy document.

Of note, the DTSA broadly defines “employee” to include “any individual performing work as a contractor or consultant for an employer.”   This expands those persons who are covered by these whistleblower protections.  The notice requirement is prospective as it applies to “contracts and agreements that are entered into or updated after the date of enactment.”

In an effort to obtain compliance with this notice provision, the DTSA provides that if an employer fails to give the required notice to an employee, the employer may not be awarded exemplary monetary damages or attorney’s fees in an action brought against that employee.  The DTSA, however, provides no guidance on the required disclosure or cross-referenced policy language.

Statute of Limitations.  A private civil action under the DTSA must be brought within “three years after the date on which the misappropriation with respect to which the action would relate is discovered or by the exercise of reasonable diligence should have been discovered.”

What should businesses do in the wake of this new federal law?  Companies should review their agreements that provide for confidentiality or similar trade secret provisions and amend them accordingly moving forward.  These may include employment agreements, noncompetition agreements, and business agreements with independent contractors or consultants.  To fully enjoy the federal remedies allowed, an immunity notice should be included in all new and updated employee agreements as well as contractor and consultant agreements with independent contractors.  Employers should also review their handbooks and policies relating to protection of confidential or trade secret information so that they may also rely on a policy document for compliance.

Photo: Jason Lawrence via Flickr (CC by 2.0)
Photo: Jason Lawrence via Flickr (CC by 2.0)

UBER has settled two class-action lawsuits — one filed in California in 2013 (O’Connor) and one in Massachusetts in 2014 (Yucesoy) — by drivers who sought to be considered employees rather than independent contractors.  In those cases, plaintiffs were seeking additional compensation, including reimbursement for expenses and tips.  The two cases had about 385,000 drivers as class members.

In the settlement reached in April 2016, UBER agreed to pay $84 million to the class of plaintiff-drivers.  UBER will pay an additional $16 million if it goes public and if its valuation increases by one and a half times its 2015 valuation within the first year of an IPO.

Additionally, under the terms of the settlement, drivers will remain independent contractors and not employees.  UBER will provide drivers with more information about their individual ratings and how each driver compares with his or her peers.  It agreed to introduce a policy explaining the circumstances under which UBER deactivates drivers from using its app.  The company’s official driver deactivation policy has been posted.  UBER also agreed to create an association in each state to allow drivers a venue for discussing drivers’ issues.  Furthermore, UBER drivers will be allowed to post signs in their cars that tell passengers that while not required, tips are welcome.

While a judge needs to approve the settlement, UBER’s Co-Founder and CEO Travis Kalanick issued a press release highlighting the settlement terms.  He views the resolution a win for the company.  He expressed that many drivers prefer to be their “own boss” and would remain independent contractors under these settlement terms.  As Mr. Kalanick explains, “Uber is a new way of working: it’s about people having the freedom to start and stop work when they want, at the push of a button.  As we’ve grown we’ve gotten a lot right—but certainly not everything. “

Lessons to be learned from UBER?  Companies should review how they classify workers.  Companies should also review and update any third party services agreements they are currently working under.  Misclassification creates risks for companies that may lead to costly class action lawsuits.

Photo: US Department of Labor - Tim Evanson (CC by SA 2.0)
Photo: US Department of Labor – Tim Evanson via Flickr (CC by SA 2.0)

Unless they have been run out of a cabin in the woods with no internet for the last five years, most businesses are starkly aware of the ongoing efforts by state and federal regulators to find and eliminate the misclassification of independent contractors. What started as a concern in the construction industry is now affecting all types of businesses, from health care to high tech.  Despite the well-publicized and well-organized battle against misclassification, companies and individuals continue to put themselves at risk by treating people who should more properly be employees as contractors.

If all of the notices and warnings issued by agencies ranging from the state department of labor to the IRS have not made an impression, a cursory read of the US Department of Labor’s recent guidance should bring focus to the issue.  On July 15, 2015, the Administrator of the US Department of Labor issued a document entitled The Application of the Fair Labor Standards Act’s “Suffer or Permit” Standard in the Identification of Employees Who Are Misclassified as Independent Contractors. The lengthy document focused on the so-called Economic Realties Test used to determine whether workers are truly independent.  The Administrator summarized the issue by saying, “ The analysis whether the factors are met must focus on whether the worker is economically dependent on the employer or truly in business for him or herself.”

What does that mean? It means your neighbor’s son isn’t an independent contractor when you hand him a paintbrush and ask him to paint your fence for $50.00.  It means your company’s retired former CFO is not a “consultant” when he fills in for your new CFO who is on maternity leave for the next six weeks.  It means your VP of Sales working out of his home in California is indeed an employee even though he would prefer that you give him a 1099 and not deduct taxes from W-2 wages and is even willing to sign an agreement to that effect.

Is the purpose of this post to tell businesses that they cannot utilize the services of independent contractors without being at grave risk?  Not at all.  However, the most important take away is that a very careful assessment should be done prior to entering into an independent contractor arrangement. The questions to be asked in conducting the analysis follow:

  1. Is the work being performed by the individual an integral part of the employer’s business? If so, the worker is likely not independent as he would more likely be economically dependent on the employer’s business.
  2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss? If not, it is more difficult to view the individual as being established in her own business.
  3. How does the worker’s relative investment compare to the employer’s investment? The relative investments of the parties are significant to a determination of whether the worker is engaged in an entrepreneurial endeavor.
  4. Does the work performed require special skill and initiative? A worker’s business skills, judgment, and initiative, not her technical skills, will aid in determining whether the worker is economically independent on the employer.
  5. Is the relationship between the worker and the employer permanent or indefinite? Permanency or indefiniteness in the worker’s relationship with the employer suggests that the worker is an employee.
  6. What is the nature and degree of the employer’s control? The worker must control meaningful aspects of the work performed such that it is possible to view the worker as a person conducting his own business.

The test above is one employed by the US DOL.  Each state will also have its own tests, often different ones, for determining whether an individual is an independent contractor for unemployment, worker’s compensation and state wage and hour purposes.  Many of those tests, including those used by the New Hampshire, Massachusetts and Maine Departments are even more stringent than the one described above.

Therefore, the first order of business for a company seeking to engage an independent contractor is to review all of the relevant statutes and tests, preferably with counsel. Once convinced that the criteria are met, do the following:

  • Have a written contract setting out mutual obligations and expectations;
  • Negotiate the fee for service on some basis other than hourly payment for time worked;
  • Require the contractor to carry his or her own worker’s compensation and liability insurance;
  • Determine whether the contractor is in an independent business, preferably established as an LLC or corporation offering similar services to others; and
  • Require the contractor to provide his or her own tools, equipment and assistants.

This issue is likely to remain challenging for businesses, and it is important that careful steps are taken to minimize risk by following the law and documenting all efforts to do so.  The US DOL Administrator’s guidance summed it up by saying that “most workers are employees under the FLSA’s broad definitions.”  Businesses should heed this warning; if you think your contractors are independent, think again and then think one more time.  At least five state and federal agencies are looking to prove you wrong.