Last month, two key legal developments in the area of independent contractor misclassification and compliance highlighted the risks posed to customer service companies that use an independent contractor business model. The first involves a Colorado company using agents to provide customer support through an app-based platform. The company was sued in a proposed class and collective action lawsuit based on the allegation that the company misclassified the agents as ICs and not employees. The second involves a $3 million settlement between a nationwide customer service support company and the U.S. Department of Labor, which sued the company alleging it had misclassified as ICs the workers that provide customer service to its clients. Many companies in the customer service industry use an independent contractor business model. Workers in that type of trade or occupation usually can be classified legally as ICs under federal and most state laws if their relationships with the companies engaging their services is structured, documented, and implemented in a manner that enhances compliance with those laws. One way some companies have elevated their level of IC compliance is by a process such as IC Diagnostics (TM), a comprehensive system that minimizes IC misclassification liability in a customized and sustainable manner consistent with applicable laws.

In the Courts (7 cases)

CUSTOMER SERVICE COMPANY SUED BY AGENTS UNDER FEDERAL AND COLORADO LAW FOR IC MISCLASSIFICATION. LiveXchange Technologies Inc. d/b/a GigCX Marketplace is an app-based platform for sourcing, recruiting, and managing global on-demand customer experience talent. It engages customer service agents and classifies them as independent contractors. Last month, an agent filed a class and collective action complaint alleging minimum wage and overtime violations under the Fair Labor Standards Act (FLSA) and Colorado state law claiming the agents are employees and not ICs. The complaint charges that, through the company’s app, agents are required to download the company’s proprietary software to their devices, after which the company assigns the agents to customer service job vacancies for the company’s clients. The agents assert they are required to follow the company’s formal written policies and handbook provisions; are not in business for themselves; are subject to significant control by the company, including where and when to work and what attire to wear; do not exercise skill and initiative; do not have the opportunity for profit or risk of loss; are not permitted to assign or delegate their work; have a minor investment relative to the company; and engage in work that is not intended to be temporary or seasonal. Coleman-Jackson v. LiveXchange Technologies, Inc., No. 1:24-cv-01914 (D. Colo. July 11, 2024).

NATIONWIDE CUSTOMER SUPPORT COMPANY AGREES WITH U.S. LABOR DEPARTMENT TO PAY $3 MILLION TO SETTLE IC MISCLASSIFICATION LAWSUIT. A nationwide customer support service company has agreed to pay $3 million to resolve an IC misclassification lawsuit brought by the United States Department of Labor (DOL) in a Florida federal district court. As reported in greater detail in our blog post of July 12, 2023, the DOL sued the company, which provides business process outsourcing, consulting services, and customer ‎support services, including voice, email, live chat, text, social media, and technical support, alleging it violated the ‎minimum wage and overtime violations of the FLSA due to the alleged ‎misclassification of 22,000 service workers as independent contractors and not employees. According to the complaint, the company recruited, ‎engaged, and trained a nationwide group of service workers to provide customer support to the ‎company’s clients through its internet platform, where customer care opportunities are made ‎available to the workers.‎ After an investigation by the DOL’s Wage and Hour Division, the Division concluded that, although the employer often recruited workers with promises they ‎would “be their own bosses” and that they could generate income for themselves by providing ‎customer support services to Fortune 500 clients, the workers allegedly had no real autonomy, ‎were subject to the company’s stringent work scheduling policy, were expected to pay for ‎mandatory training, and had to buy their equipment before providing the company’s clients with ‎service and generating income. A jury trial was scheduled to commence on July 22, but beforehand the parties reached a proposed settlement to compensate the individuals who were allegedly misclassified as independent contractors. The agreement also provides that the company may continue to engage “small businesses that use the [company’s] platform as independent contractors.” Finally, the proposed agreement provides that it “shall not be construed as an admission or acknowledgment of any fault or wrongdoing of any kind on the part of [the company] in any proceeding, whether or not involving the Department of Labor.” Su v. Arise Virtual Solutions Inc., No. 0:23-cv-61246 (S.D. Fla. July 12, 2024).

LOGISTICS COMPANY UNABLE TO PERSUADE COURT TO DISMISS IC MISCLASSIFICATION CASE OR PREVENT IT FROM BEING CERTIFIED AS CLASS AND COLLECTIVE ACTION. An Illinois federal district court has denied a transportation and logistics company’s motion to dismiss a complaint filed by a delivery driver on behalf of himself and others similarly situated, and granted the driver’s motion for conditional certification as a class and collective action. The driver alleged that Select One, Inc., a company specializing in both dry van and refrigerated freight services, made improper deductions from the drivers’ wages, failed to reimburse them for work-related expenses, and did not pay at least the minimum wage in violation of the Illinois Wage Payment and Collection Act and the FLSA due to its alleged misclassification of the drivers as ICs and not employees. In concluding that the driver satisfied his pleading burden with regard to his misclassification claims under the FLSA, the court stated that the allegations in the complaint “are sufficient to infer that the company exercises significant control over [the driver] in various material ways, including by dictating nearly every aspect of how [the driver] makes his deliveries, limiting his business opportunities to those provided by Select One, and demanding [the plaintiff] use Select One equipment.” In the court’s view, those allegations were sufficient to show the driver is “dependent upon the business to which he rendered service which ‎would render him an employee under the FLSA.” Additionally, the court granted conditional certification of an opt-in collective action because the driver satisfied the “modest” burden of showing that other delivery drivers were victims of a common policy or plan that violated the law. Brown v. Select One, Inc., No. 24 CV 903 (N.D. Ill. July 12, 2024).

FEDERAL JUDGE DISMISSES IC MISCLASSIFICATION LAWSUIT AGAINST RIDE SHARING COMPANY. As we reported in our blog post last month, two successive juries in a federal court IC misclassification case failed to reach a unanimous verdict in a trial in which ride share drivers claimed ‎they were misclassified as independent contractors and not employees under federal and ‎Pennsylvania state law. As a result, a Pennsylvania federal district court judge dismissed with prejudice the IC misclassification claims of UberBlack limousine drivers after nearly nine years of litigation. Following the second hung jury, the judge decided to use the court’s “inherent authority to dismiss the action where, as here, futility flows not from the frivolousness of the core allegations in the complaint or a plaintiff’s failure to prosecute, but instead from an obvious stalemate.” The judge stated: “Any other outcome would be administratively and economically untenable. Simply put, a district court must have some mechanism to end the infinite loop this Court currently confronts.” Razak v. Uber Technologies Inc., No. 2:16-cv-00573 (E.D. Pa. July 30, 2024).‎

CALIFORNIA PROP 22 VOTER INITIATIVE UPHELD AS CONSTITUTIONAL. The California Supreme Court has upheld the constitutionality of the voter-approved Proposition 22, which permits gig-economy companies such as Uber, Lyft, and DoorDash to classify workers as independent contractors. As we discussed in our blog post of November 4, 2020, “Essentially, [under Prop 22,] … unlike all other businesses in California required to meet the strict Dynamex ABC test or, if they are exempted from this test, the more rational multi-factor Borello test, companies in these two gig economy industries [ride share and app-based delivery services] now have a safe harbor, provided they confer the benefits set forth in Prop 22 to their independent drivers and couriers.” ‎A few drivers and two unions asserted that Prop 22 conflicted with the California Constitution, which vests the Legislature “with plenary power, unlimited by any provision of this Constitution, to create, and enforce a complete system of workers’ compensation, by appropriate legislation.” But the California Supreme Court, disagreed, unanimously concluding that Prop 22 does not conflict with the state Constitution as it relates to workers’ compensation. Castellanos v. California, Cal., No. S279622 July 25, 2024.

SNACK FOOD COMPANY SUED FOR IC MISCLASSIFICATION IN CLASS AND COLLECTIVE ACTION BY DISTRIBUTORS. A snack food company has been sued in a class and collective action lawsuit by distributors alleging that the company violated the minimum wage and overtime compensation provisions of the FLSA and the North Carolina Wage and Hour Act due to their alleged misclassification as independent contractors. The distributors assert that they pick up snack food ‎products from local warehouses and deliver them to the company’s retail customers, including major grocery chains and convenience stores via the direct-store-door (DSD) delivery method requiring them to shelve the products at the customer locations. According to the complaint, the distributors have been misclassified as ICs instead of employees because the company allegedly dictates each distributor’s route or territory; controls the price, shelf space, displays and promotions of the products; supervises and instructs the distributors; establishes the process by which the distributors must report missing or damaged products; requires the distributors to comply with policies, procedures, requests, and requirements imposed upon them by the companies’ customers; and regulates the distributors’ ability to hire helpers. Dunst v. Campbell Soup Co., No. 1:24-cv-00568 (M.D.N.C. July 10, 2024).

This is but one of a number of DSD distributor lawsuits and administrative proceedings that have been brought over the years, some of which have resulted in determinations that such distributors have been properly classified as independent contractors. One such action recently led to a decision by the U.S. Court of Appeals for the Third Circuit, which we summarized in a blog post two months ago, concluding that the distributors were properly classified as a matter of law.

ELECTRICAL CONSTRUCTION FIRM SETTLES CASE WITH WASHINGTON, D.C. ATTORNEY GENERAL FOR USING LABOR CONTRACTORS THAT SUPPLIED WORKERS ALLEGEDLY MISCLASSIFIED AS IC’S. The Attorney General of Washington, D.C. sued a number of defendants including an electrical construction firm and downstream labor contractors that had provided the firm with electrical workers whom the Attorney General alleged had been misclassified by the labor contractors as independent contractors instead of employees. The Attorney General asserted that the workers were deprived of benefits due to them as employees, including statutory paid sick leave benefits. He also alleged that the defendants were liable for penalties resulting from the misclassification of the electrical workers as ICs under the D.C. Workplace Fraud Act, which provides for liability of companies for using workers misclassified as ICs by labor contractors. The electrical construction firm and other defendants in the case agreed to a Consent Order with the Attorney General whereby the firm would pay $3.75 million to settle the lawsuit – $1.742 million to the affected workers, $1.128 million in penalties to the District, and $880,000 in legal fees to the law firm representing the D.C. government and workers. The Consent Order also provides for injunctive measures to avoid future violations of law, a recital that the electrical construction firm continues to deny the allegations against it, and a provision that the Consent Order is not an admission of wrongdoing or liability. District of Columbia v. Power Design, Inc., No. 2022 CA 001977B (Super. Ct. D.C., July 22, 2024).

Administrative Developments (1 item)

U.S. DEPARTMENT OF LABOR COLLECTS $1.5 MILLION FROM HVAC COMPANY IN TEXAS FOR IC MISCLASSIFICATION OF TECHNICIANS. A United States Department of Labor investigation has resulted in the recovery of over $1.5 million in back wages and damages for 430 HVAC technicians in Texas due to their misclassification as independent contractors and not employees. In a news release issued by the DOL’s Wage and Hour Division on July 25, 2024, it was reported that the Dallas-area heating, ventilation, and air conditioning company, C&G HVAC LLC, has paid the technicians it has classified as ICs $753,000 in unpaid overtime compensation and another $753 million in liquidated damages due to their misclassification as ICs.