Two court cases we summarize below, decided in March 2024, demonstrate that while some companies may prevail in an IC misclassification lawsuit, others do not. Why? As a starting point, the legal test for IC status under the federal wage and hour law differs from the test under most state wage laws, and a number of states have different tests for IC status depending on whether the claims are brought for unpaid wages, reimbursement of expenses, workers’ compensation, or unemployment benefits. Do cases typically turn on what law is applicable? Sometimes, but not usually. More often, it’s the facts that matter more than the law. For example, the first case reported below involves a carpenter who was found to have been misclassified as an IC. Yet, in a prior blog post, we reported on a case in which other carpenters were found to be properly classified as ICs. The different results have far less to do with the law than the facts in those cases. What these types of cases teach is that companies can minimize their misclassification liabilities, regardless of the applicable tests for IC status, if their IC relationships are structured, documented, and implemented in a way that maximizes compliance with most if not all IC laws. Can that be done? Yes, indeed many companies have accomplished that objective in a customized and sustainable manner through a process such as IC Diagnostics (TM).
In the Courts (3 cases)
FEDERAL APPELLATE COURT UPHOLDS JURY VERDICT THAT A CATTLE RANCH MISCLASSIFIED A CARPENTER. The United States Court of Appeals for the Eleventh Circuit has affirmed a verdict by a Florida jury that a carpenter providing services to a cattle ranch was not an independent contractor but rather an employee who was entitled to overtime compensation under the Fair Labor Standards Act. The Eleventh Circuit also affirmed the jury’s verdict in favor of the cattle ranch on its counterclaim that the carpenter breached his agreement with the ranch when he falsely claimed he worked hours he had not. In concluding there was sufficient evidence for the jury to find that the carpenter was an employee, the appeals court cited testimony that the ranch offered benefits such as paid vacation days, a 401(k) plan, and insurance, and a supervisor set the carpenter’s work schedule, reviewed his time sheets and relayed assignments daily. The Eleventh Circuit also upheld the district court’s denial of the carpenter’s request for an award of liquidated damages because the ranch had acted in good faith by relying on the independent contractor acknowledgement form that the carpenter signed, his tax records on which he claimed he was self-employed, and the advice of legal counsel in treating him as an independent contractor. Cornelius v. Rollins Ranches LLC, No. 22-12862 (11th Cir. Mar. 15, 2024).
STATE APPELLATE COURT AFFIRMS DECISION THAT A TRUCK CLEANER HAD BEEN PROPERLY CLASSIFIED AS AN IC. An Ohio state appellate court has upheld a trial court’s decision that truck cleaner was an independent contractor and not an employee of a truck refurbishment company. Big Truck Rehab Center is a business that uses truck cleaners to pressure wash, detail, and paint trucks for resale to used truck dealerships. One of its truck cleaners filed suit in 2022 asserting he was entitled to unpaid overtime compensation under the Fair Labor Standards Act and the Ohio Minimum Wage Standards Act due to his alleged misclassification as an independent contractor. Following a bench trial culminating with the trial court finding that the cleaner was an independent contractor, the cleaner appealed. The state appeals court reached the same conclusion as the trial court but applied a different test for determining IC or employee status. Instead of using the FLSA’s economic realities test, which had been used by the trial court, the appeals court adopted a non-exclusive six-part test used by Ohio state courts. The appellate court focused on the facts that the cleaner had executed an independent contractor agreement; conducted his own detailing business; engaged helpers; had an employer tax number and took deductions for expenses including supplies, materials, and depreciation; was not told how to perform the work; determined his rate of pay and what he paid his own helpers; and set his own work hours. The court noted that the outcome of the case would be the same regardless of which test was applied. Coleman v. Big Truck Rehab Center Inc., No. 112964 (Ct. App. Ohio, Eighth Appellate Dist. Mar. 14, 2024).
CUSTOMER SERVICE COMPANY AGREES TO PAY $2.9 MILLION TO RESOLVE IC MISCLASSIFICATION LAWSUIT BY D.C. ATTORNEY GENERAL. A nationwide customer support service provider has agreed to a $2.9 million consent order with the Washington D.C. Attorney General’s Office to resolve a lawsuit claiming that over 250 customer service agents had been misclassified as ICs and thereby denied minimum wage, overtime compensation, and sick leave. According to a news release issued by the Office of the Attorney General on March 12, 2024, the company contracts with businesses seeking to cut costs by outsourcing call-center services through the use of customer support “agents” that work remotely using the company’s internet platform from their homes. Under the terms of the March 12, 2024 Consent Order, the company will pay about $2 million to the agents, pay about $900,000 to the District in civil penalties, and will cease doing business in D.C. The Consent Order includes a recital that “[the company] contends that the Lawsuit’s claims and allegations are meritless and further contends that at all times it has complied with relevant laws in the District.” District of Columbia v. Arise Virtual Solutions Inc., No. 2022-CA-000247-B (Super. Ct. D.C. Mar. 12, 2024).
Legislative Initiatives (1 item)
PROPOSED NYC BILL WILL REGULATE NON-COMPETES FOR FREELANCERS. The New York City Council has introduced a bill (Int. 375-2024) seeking to regulate covenants not to compete for freelance independent contractors. The City Council’s summary states that the use of non-compete agreements in contracts for freelance work, especially in the fashion industry, can lead to unreasonable restrictions on freelancers being able to find new work. The summary also provides that the bill, if passed, would prohibit companies from requiring freelance workers to enter into non-compete agreements unless they agree to compensate the freelance worker during any period in which a non-compete agreement would restrict the freelancer from seeking other work. The bill would also create a private right of action if the company did not pay the agreed upon compensation during the non-compete period, allowing freelancers to seek a declaratory judgment that a non-compete agreement is void and awarding them statutory damages of $1,000. The bill also provides that the City’s Corporation Counsel can bring a lawsuit if a company has engaged in a pattern and practice of violations, subjecting a company to a civil penalty of up to $25,000.
Regulatory and Administrative Actions (1 item)
U.S. LABOR DEPARTMENT’S FINAL RULE NOW EFFECTIVE. The final Independent Contractor Rule issued by the Biden Administration’s Labor Department took effect March 11, 2024. As we described in detail in our blog posts of January 9, 2024 and most recently March 5, 2024: “The legal impact of the final rule … will hardly ripple the waters. After all, it is the courts that create law on this subject, not regulatory agencies.” But we also cautioned that “the final rule issued today will give renewed impetus to disaffected workers classified as independent contractors to file class actions seeking minimum wage, overtime payments, and employee benefits under applicable laws.” Our January 9 blog post summarized the new rule, explained how it differed from the Trump Administration’s 2021 rule it replaced, explained why the new rule would have virtually no legal significance, and provided key takeaways for businesses that operate with an IC business model. Our March 5 post sought to reassure businesses that no law is changing because the 2024 regulation is essentially an interpretation by the Labor Department of the Fair Labor Standards Act that the federal courts are unlikely to follow. Consistent with this view, the publisher of this blog was quoted on March 18, 2024 in a Law360 Employment Authority article by reporter Jon Steingart in an article entitled “Five Threats to DOL’s Independent Contractor Rule,” stating: “Our review of reported case decisions shows that no federal judge ever cited to the official citation to the 2021 rule in the three years in which it was in existence,” and “I would expect the courts to give the 2024 rule the same lack of attention.”
Other Noteworthy News (1 item)
In our blog post of March 18, 2024 entitled, “Can You Legally Get Background Checks on Independent Contractors?”, we discussed how, under federal law, the Fair Credit Reporting Act (FCRA) establishes permissible purposes for obtaining consumer credit reports including criminal background checks from credit reporting agencies. We noted that the permissible purpose with which most companies are familiar is when an employee seeks employment. But a thorny question exists as to whether a business can use the employment-related permissible use if the persons on which they are doing background checks are independent contractors. We cautioned that this is an undeveloped area of the law that poses substantial risks for companies using independent contractors. While there is some legal authority that the employment-related purpose can be used for independent contractors, including one or more opinion letters from the Federal Trade Commission (the agency that once had exclusive authority to enforce the FCRA), there has been a dearth of case law addressing this issue. Further, as we reported in the blog post, compliance with FCRA may not be sufficient to protect companies that procure criminal background checks on independent contractors because many states and municipalities have laws governing the acquisition and use of criminal background information, and a number of those laws differ from FCRA in key respects.
Edited and compiled by Janet Barsky, Managing Editor.
