The most significant development last month in the law of independent contractors was not one of the four cases we summarize below but rather a bill passed by the New York Senate. If enacted into law, it would be the first legislation in the nation to curtail IC misclassification by the use of stop-work orders. The Senate bill would authorize the state’s Commissioner of Labor to issue stop-work orders to businesses that the Commissioner of Labor has found to have “knowingly misclassified employees as independent contractors.” Under the bill, a business would have 72 hours to come into compliance and, if it does not, the Commissioner could order the company to cease all business operations at every site at which a violation is occurring. The bill, more fully described below, allows a company to apply to the Commissioner for a hearing to contest whether it violated the law, but it also provides that “[a] stop-work order shall remain in effect until the Commissioner issues an order releasing the stop-work order upon finding that the employer has come into compliance.” While the bill has a number of defects that hopefully will be ironed out by the New York Assembly or Governor should it ever be enacted, its passage would dramatically alter the legal landscape in New York and may serve as a prototype for other states addressing IC misclassification. This is yet another reason for businesses to enhance their IC compliance. Many companies have minimized their exposure to IC misclassification liability by using a process such as IC Diagnostics (TM), which provides a sustainable approach to maximize IC compliance consistent with each company’s business model.
Legislative Developments
NEW YORK SENATE PASSES STOP-WORK BILL FOR IC MISCLASSIFICATION. In March, the New York Senate passed a bill (S.1514) that empowers the Commissioner of Labor, after an investigation, to issue stop-work orders to companies found to have “knowingly misclassified” employees as ICs. The bill requires the Commissioner to notify the company of an intention to issue a stop-work order, inform the company of its right to a hearing, and provide an explanation of the factual basis for the decision to issue a stop-work order. As drafted, the bill states that the business has 72 hours to come into compliance and, if it does not, the Commissioner “shall issue a stop-work order requiring the cessation of all business operations of the [company] at every site at which the violation occurs.” The bill next provides that the “stop-work order shall remain in effect until the Commissioner issues an order releasing the stop-work order upon finding that the [business] has come into compliance …” (Emphasis added.)
Yet the bill provides that a company has the right, within 10 days after the stop-work order has been issued, to request that the Commissioner conduct a hearing to contest whether the business engaged in a violation. As the publisher of this blog was quoted by reporter Max Kutner in a Law360 Employment Authority article, “State And Local Wage And Hour Updates To Watch,” “A big problem is that it is unclear whether an employer, which has a right to contest the stop-work order in 10 days, gets a stay of the stop-work order automatically or has to go into court to get a stay.” Essentially, this bill seems to put the cart before the horse, and may arguably violate constitutional due process protections, essentially imposing a stop-work directive before a company has the right to participate in a hearing and present evidence that it is in compliance with the applicable state law test for IC status.
Another defect in the Senate bill is the absence of any good faith defense to a finding of misclassification. Does a company “knowingly” misclassify employees as ICs if it has a legitimate reason to believe that its classification of the workers is valid? These are compelling reasons why the New York State Assembly should refrain from passing a version of this bill that contains these deficiencies. Another reason is that New York already has some of the strongest penalties in the nation (double damages) for companies failing to pay minimum wages and overtime to employees found to be misclassified as ICs. Finally, the bill’s use of a stop-work order seems out of place, as such orders typically are used only by regulators to prevent safety and health violations that can cause injury, which is not the case with employment violations. In the Law360 article, the publisher cautioned that ”[t]his type of legislation may well get a toehold in state legislatures across the country, and employers should be ahead of the curve by taking steps to enhance their independent contractor compliance.”
In the Courts (3 cases)
DIRECT SELLER OF COSMETICS FACES PROPOSED IC MISCLASSIFICATION CLASS ACTION. A multi-level network marketing cosmetics company, Color Street, is the subject of a proposed class action brought by a stylist on behalf of herself and others claiming the company misclassified them as independent contractors and not employees in violation of various California labor laws. The class action complaint alleges that plaintiff is one of 130,000 “stylists “in the U.S. who sell Color Street products through their online networks and recruit and train new stylists, all on a commission basis. Her complaint asserts further that due to the company’s classification of the stylists as ICs, the company does not pay them minimum wage or overtime compensation; does not reimburse their business expenses, such as internet connections, laptops, smart phones, or … promotion over Facebook, YouTube, and Instagram; and fails to pay for rest or meal breaks. The company allegedly does not permit price adjustments; does not allow stylists to allow a customer to get a discount; and restricts stylists from using any platform other than Color Street’s website to make online sales. Finally, the complaint asserts that while California law has a direct sales exemption that might arguably permit the company to classify the stylists as ICs, the stylists assert that the exemption in inapplicable because Color Street’s “sales have moved from in-person to primarily online” and “the California exemption applies narrowly to jobs like door-to-door salespersons or the direct sellers who work almost exclusively through the home party circuit.” Fields v. Color Street LLC, No. 25 STCV 07668 (Super. Ct. Cal., Los Angeles County Mar. 17, 2025).
FREIGHT LINE SUBJECT TO $1.3 MILLION DEFAULT JUDGMENT FOR IC MISCLASSIFICATION. A federal magistrate judge recommended that a default judgment be entered in the amount of $1.3 million to five drivers who claimed a now-defunct transportation company misclassified them as ICs and not employees in violation of the California wage and hour laws. The freight line offered less-than-truckload (LTL) and cross-border freight services within the U.S. According to the second amended complaint, the company allegedly misclassified the drivers to avoid paying and providing for, among other things, payroll taxes and mandatory insurance premiums, overtime compensation, meal and rest breaks, and business expenses, and failed to provide complete and accurate wage statements to the drivers. After seven years of litigation, the company advised the court that it was closing its business. Following the company’s failure to respond to a second amended complaint, the drivers moved for entry of a default judgment, which the Magistrate Judge recommended be granted. It is anticipated that the judgment will be entered by a district court judge. Henry v. Central Freight Lines Inc., No. 2:16-cv-00280 (E.D. Cal. Mar. 14, 2025).
VIRGINIA SUPREME COURT ISSUES LIMITED RULING ON IC STATUS OF APP-BASED DRIVERS. In a case mainly involving appellate procedural issues, the Virginia Supreme Court has upheld a lower appellate court’s holding, which affirmed an administrative decision by the Virginia Employment Commission, regarding the employment status of drivers who made deliveries for an app-based retailer. The company had classified the drivers as ICs, but the state Employment Commission disagreed, finding that they were employees under the state’s unemployment law. As a result, the company was ordered by the Employment Commission to pay unemployment taxes on “wage” payments to the drivers. The company had argued that the decision by the state’s Employment Commission was limited to the one driver that sought unemployment benefits, but the Virginia Supreme Court found that the administrative determination applied to all of the drivers in the state. The decision is limited to the unemployment law in that state and does not apply to the proper classification of the drivers under federal or state wage and hour laws or federal employee benefit laws. Amazon Logistics Inc. v. Virginia Employment Commission, No. 230765 (Sup. Ct. Va. Mar. 6, 2025).
