Class action independent contractor misclassification cases continue to be filed and most seem to settle, often for large sums, as we have reported in our blog posts on legal developments each month. But some industries have countered this trend in one of three ways: legislation, voter initiatives, and a choice not to settle but rather vigorously defend. Two of those approaches were on display last month. In one, the real estate industry in New Jersey effectively used the legislative approach. In the face of what it regarded as a likely industry-altering development if the strict ABC test for IC status under the New Jersey wage payment and wage and hour laws was applied to certain real estate salespersons in that state, the industry sought a legislative change. In 2022, the New Jersey legislature amended the real estate law to exempt real estate salespersons from the state’s ABC test. Last month the New Jersey Supreme Court held that the law not only overrode that strict test for IC status, but it did so retroactively. Another industry used the vigorous defense approach in a class action invoking the wage payment law in Pennsylvania. That case involved a well-known baked goods manufacturer, which successfully secured a federal court appellate ruling that it was entitled to summary judgment holding that distributors of its food products were properly classified as ICs. Although other food product manufacturers had not prevailed in similar class and collective action cases initiated by distributors, this case demonstrates that structuring, documenting, and implementing IC relationships in a manner that maximizes compliance with IC laws – the three key steps in a process such as IC Diagnostics (TM) – can lead to successful results in court, especially in situations involving well-compensated independent contractors.

In the Courts (3 cases)

REAL ESTATE AGENTS ARE INDEPENDENT CONTRACTORS UNDER NEW INDUSTRY-SPECIFIC STATE LAW. The New Jersey Supreme Court has held that agreements between a real estate brokerage company and a real estate salesperson that identified the salesperson as an independent contractor preempted any state law that may otherwise have governed the parties’ relationship in view of a 2022 amendment to the New Jersey Brokers Act. In this case, the plaintiff real estate salesperson entered written agreements with a real estate brokerage firm, Weichert Co., in which the salesperson agreed to affiliate with the company as an independent contractor. The salesperson subsequently filed a class action complaint in 2019 alleging that the company violated the New Jersey Wage Payment Law (“WPL”) due to its alleged misclassification of the salespersons as independent contractors and unlawful deduction of marketing fees and other expenses from their commissions. He argued that the salespersons should be deemed employees under the strict ABC test applicable to the WPL to determine independent contractor/employee status. While the case was being litigated, the New Jersey legislature amended the Brokers Act in 2022 to provide that an agreement to treat a real estate salesperson as an independent contractors will be honored retroactively, “notwithstanding … any other law, rule, or regulation to the contrary.” The New Jersey Supreme Court concluded that, in view of word “notwithstanding” in the legislation, the parties’ agreement to treat the plaintiff as an independent contractor is dispositive and “override[s] conflicting provisions of any other [law],” including the ABC test governing the WPL. Kennedy v. Weichert Co., N.J., No. A-48/49 (Sup. Ct. N.J. May 13, 2024).

FOOD PRODUCT DISTRIBUTORS ARE INDEPENDENT CONTRACTORS UNDER PENNSYLVANIA WAGE LAW. The U.S. Court of Appeals for the Third Circuit has affirmed a district court’s decision that three delivery drivers for Pepperidge Farm are independent contractors under the Pennsylvania Wage Payment and Collection Law. Pepperidge Farm manufactures breads, cookies, and snack products across the country including in Pennsylvania. Distributors of such products filed a proposed class action complaint alleging that they have been misclassified as independent contractors and not employees and, as such, were subject to unlawful pay deductions in violation of the state wage payment law. The distributors each own Pepperidge Farm distribution routes for which they deliver the company’s food products to retail stores. Pepperidge Farm made a motion for summary judgment, which was granted by the district court. Applying the Pennsylvania ten-factor test to determine worker status, the district court concluded that all but two of the factors supported IC status. On appeal, the Third Circuit affirmed the district court’s decision and concluded that eight of the ten factors favored independent contractor status, including, among other things, that Pepperidge Farm did not have the right to control the time, place, or manner in which the work was done, did not have the right to terminate the drivers at will, and paid the drivers on a commission basis. The Third Circuit also found that plaintiffs supplied the vast majority of their own tools, did not report to Pepperidge Farm on a regular basis, and directed their own movement and schedules. Two factors – whether the drivers’ work was part of Pepperidge Farm’s “regular business” and whether the drivers’ business was “distinct” from Pepperidge Farm’s – were viewed by the Third Circuit as either neutral or in favor an employment relationship; but, on balance, the appeals court held that the drivers were not employees under the Pennsylvania Wage Payment and Collection Law but rather ICs‎. Carpenter v. Pepperidge Farm, Inc., No. 23-2372 (3d Cir. May 10, 2024).

COURT GIVES FINAL APPROVAL TO $30 MILLION SETTLEMENT IN IC MISCLASSIFICATION LAWSUIT BY COMMERCIAL CLEANING FRANCHISEES. After almost 20 years of litigation, including appearances before the California Supreme Court and the U.S. Court of Appeals for the Ninth Circuit, a trial court has given final approval to a $30 million settlement in a class action alleging independent contractor misclassification by commercial cleaning franchisees against a nationwide cleaning services franchisor. As we reported in our blog post of October 9, 2023, the complaint alleged that Jan-Pro Franchising International, Inc. subjected the janitorial franchisees to systematic misrepresentations and breaches of contract and by misclassifying them as independent contractors and not employees in violation of the California minimum wage, overtime, expense reimbursement,‎ and unlawful deduction laws. The court certified a class as to the franchisees’ minimum wage claim (but only regarding the issue of mandatory training), the franchisees’ expense reimbursement claim (but only regarding required uniforms, cleaning supplies, and equipment), and the franchisees’ unlawful deductions claim (but only regarding management, sales, and marketing fees).

An order issued by the court in August 2023 set a trial date for October 2023 for over 2,000 class members. A month before trial, the parties reached a proposed settlement. In its final approval order last month, the court stated that length of the action was in large part due to a shift in caselaw pertaining to the relevant test to determine whether someone is an employee or independent contractor. It noted that the California Supreme Court’s 2018 adoption of the “ABC Test” in the Dynamex case “caused this action to move through this Court, our court of appeals, the California Supreme Court, and back to this Court.” Roman v. Jan-Pro Franchising Int’l, Inc., No. 3:16-cv-05961 (N.D. Cal. May 23, 2024).

Legislative Developments (1 item)

NEW MINNESOTA LAW SETS 14-PART TEST FOR IC STATUS IN CONSTRUCTION INDUSTRY AND IMPOSES LIABILITY FOR IC MISCLASSIFICATION. The Minnesota Legislature passed a tax omnibus bill that includes prohibitions and penalties for misclassifying employees as independent contractors, sets forth special rules regarding construction contractors, and sets a minimum pay for app-based drivers. Among other things, House File 5247, which was signed into law by Governor Tim Walz on May 24, 2024, provides a section intended to combat worker misclassification. Effective July 1, 2024, in the context of misclassification of employees that are not in the construction industry, a person shall not (1) fail to classify, represent, or treat an individual who is the person’s employee as an employee in accordance with the requirements of any applicable local, state, or federal law; (2) fail to report or disclose to any person or to any local, state, or federal government agency an individual who is the person’s employee as an employee when required to do so under any applicable local, state, or federal law; and (3) require or request an individual who is the person’s employee to enter into any agreement or complete any document that misclassifies, misrepresents, or treats the individual as an independent contractor or otherwise does not reflect that the individual is the person’s employee. In addition to employers facing liability for violations of the misclassification provisions, the new law also provides for individual and successor liability, together with compensatory damages (such as the value of supplemental pay the misclassified employee should have received like minimum wage, overtime, shift differentials, etc.) and a penalty of up to $10,000 for each individual the person failed to classify, represent, or treat as an employee.

The new law includes a separate section regarding workers in the construction industry. It provides that, effective March 1, 2025, determining whether a ‎construction industry worker is an employee or an independent contractor ‎will be based upon a new 14-factor test that focuses on the time at which the ‎services were provided. The new test ‎requires that any written proposal, contract, or change order provide that the ‎business entity controls the means of providing the services and, in fact, ‎controls the provision or performance of the services. Further, the writing ‎must be signed and dated by both an authorized representative of the ‎business providing the service and the person for whom the services are ‎provided, and provide for compensation on a commission, or per-job or ‎competitive bid basis, and not any other basis.‎ Construction contractors may also incur ‎liability by: (1) misrepresenting themselves as independent contractors when ‎they fail to meet the 14-factor test; (2) as a condition of payment, requiring ‎an individual who is an employee to register with the state labor department as a ‎construction contractor or agree to be classified as an independent ‎contractor; or (3) requiring an employee to register as a construction ‎contractor.‎ In addition to the penalties available in ‎general industry, construction contractors may also face penalties of up to ‎‎$10,000 each time a person is misclassified under the 14-factor test, or for ‎each employee they require to register as a construction contractor. As with ‎general industry, construction contractor owners, officers, or agents who ‎knowingly or repeatedly engage in any of the prohibited activities may be ‎held individually liable.‎ The law covers those who engage the services of a business entity that performs construction services.

Another provision in the new law establishes a minimum pay for app-based drivers of $1.28 per mile and 31 cents per minute.

Other Noteworthy News (2 items)

NEW WAGE STANDARDS FOR GIG WORKERS ARE A “SEA CHANGE” FOR THOSE WHO ENGAGE INDEPENDENT CONTRACTORS. Gig workers are benefitting from wage and hour protections as legislatures pass new laws. The publisher of this blog was quoted at length on May 24, 2024 in a ‎Law360 Employment ‎Authority ‎article by reporter Max Kutner entitled “Four Places That Are Leading The Gig Worker Pay ‎Push.” The article described how more and more state and cities, such as California, Minnesota, New York City, and Seattle are enacting ‎laws setting mandatory wage floors for gig workers, who, as independent contractors would not ‎otherwise be subject to wage and hour protections.‎ The publisher was quoted as stating: “Wage standards and minimum wage rates for gig workers is something that few people only a ‎few years ago thought would ever happen. Prior to 2020 or so, most legislative bodies still focused on increasing ‎penalties for independent contractor misclassification or imposing stricter standards for ‎classifying workers as independent contractors.”‎ He also explained that “while businesses have opposed such standards, the requirements at least further cement the ‎workers’ status as independent contractors,” and that “[m]any types of these ‎workers are now being presumed to have been properly classified.” According to the publisher, “The New York City ‎law dealing with food delivery workers sets wage rates and standards only for those who are ‎independent contractors. This is a sea change.”‎ He cautioned that misclassification litigation will continue, especially now that a new U.S. Department of Labor independent contractor rule is in place, and that “[i]t may cause some of the gig workers who would otherwise be protected by ‎these new state and local wage standards to lose those protections, if these workers are deemed ‎to be employees under certain laws.”‎

INCREASE IN COLOR DISCRIMINATION CHARGES AT EEOC PARTLY DUE TO IC’S THAT FILE MISCLASSIFICATION CHARGES. Employees who allege they have been misclassified may be a contributing factor in a 40% upswing in allegations of workplace color discrimination in U.S. workplaces. In a May 30, 2024 article entitled, “3 Factors That May Underlie EEOC Color Bias Charge Spike,” written by Vin Gurrieri for Law360 Employment Authority, the publisher of this blog was quoted as saying that individuals who are classified as independent contractors are not precluded from lodging bias charges with the EEOC or a state agency alleging they are employees and have been misclassified. ‎The publisher also noted that ‎”[a] lot of people who engage independent contractors really don’t think that these types of ‎workers are covered [by anti-discrimination laws] and therefore they may be surprised to learn ‎that they have to apply those same nondiscrimination principles to contractors as they do to ‎employees. That is especially important in the area of discrimination on the basis ‎of race or color.” The publisher was referring to the Civil Rights Act of 1866, 42 U.S.C. Section 1981, which applies not just to employees but anyone (including independent contractors) who has been denied the right to enter into contracts (i.e., not retained or terminated as a contractor) because of their color.