Independence Days in Court

The topic du jour in employment law is the misclassification of employees as independent contractors. Generally speaking, in an employment relationship, the employer directs or controls the means and manner of accomplishing a given result. Independent contractors, on the other hand, are autonomous in determining the means by which a specific result is accomplished.

Claims of misclassification pose significant financial risk for companies using independent contractors. A finding that an employee was misclassified can result in an employer’s liability for the payment of minimum wages, overtime, workers’ compensation, statutory penalties and attorneys’ fees.

And class actions alleging intentional misclassification of independent contractors are on the rise. Companies that use independent contractors should carefully examine their written policies and practices to minimize the significant exposure that is certain to follow a successful misclassification claim.

Although short of an all-out declaration of war against companies using independent contractors, recent actions by state and federal regulators demonstrate a heightened scrutiny of independent contractor relationships. Ride-hailing company Uber Technology Inc.’s relationship with its drivers has been attacked in numerous class-action lawsuits brought by some of its drivers.

In July, however, state regulators also weighed in on the issue. The California Division of Labor Standards Enforcement ruled that a single Uber driver was an Uber employee and had been misclassified by the company as an independent contractor.

Uber has appealed the ruling, and a California trial court will reconsider the state’s finding. The case is likely to go to trial next year. Although the administrative finding has no legal effect beyond the one driver involved, the ruling has been widely covered by the press (and some have even predicted Uber’s demise). Although the state’s ruling affects only the claims of a single driver, its determination may have some persuasive value in the class-action lawsuits.

This past June, FedEx Corp. reached a $228 million class settlement with FedEx ground and home delivery drivers in California. The parties settled the decade-old case, which must be approved by the district court, after the 9th Circuit Court of Appeals ruled that FedEx had misclassified some of its drivers as independent contractors.

The claims against FedEx were litigated for more than a decade. Although misclassification claims are not new, government regulators are bringing far greater scrutiny to independent contractor relationships.

Under the Obama administration’s direction, the U.S. Labor Department has initiated investigations into restaurants, contractors, janitorial companies and other businesses that use the independent contractor structure. Just recently, the Labor Department’s Wage and Hour Division issued a formal “Interpretation” of the federal Fair Labor Standards Act as it pertains to the classification of independent contractors.

This advisory opinion significantly expands the criteria to be applied in assessing whether an independent contractor is entitled to be paid as an employee. Under the government’s recent pronouncements, both the government and independent contractors will find it easier to challenge the classifications.

The introductory paragraph of the Labor Department’s interpretation speaks volumes to the apparent intention of its regulators to continue their attack on independent contractor relationships:

Misclassification of employees as independent contractors is found in an increasing number of workplaces in the United States, in part reflecting larger restructuring of business organizations. When employers improperly classify employees as independent contractors, the employees may not receive important workplace protections such as the minimum wage, overtime compensation, unemployment insurance and workers’ compensation. Misclassification also results in lower tax revenues for government and an uneven playing field for employers who properly classify their workers. … Although independent contracting relationships can be advantageous for workers and businesses, some employees may be intentionally misclassified as a means to cut costs and avoid compliance with labor laws.

The government advisory concludes, “In sum, most workers are employees under the [federal law’s] broad definitions.”

Although the Labor Department’s interpretation is not binding, the interpretation signals the intention of the agency to continue its war on independent contractor classification. To be certain, the courts will look to the government advisory or guidance in misclassification lawsuits. And the Labor Department is not the only federal agency looking to get in on the action. The IRS has likewise indicated its intention to closely examine independent contractor relationships because of the potential that companies are intentionally avoiding payment of unemployment taxes and withholding payment of Social Security and Medicare taxes.

Joining the chorus, Democratic presidential candidate Hillary Clinton recently announced her intention to examine independent contractor relationships. “I will crack down on bosses who exploit employees by misclassifying them as contractors or even stealing their wages,” she said.

The attack on these relationships by plaintiffs’ lawyers and the government is certain to continue. Government investigations, administrative charges and class-action lawsuits are incredibly expensive to defend — even when the company wins.

If you use these relationships, you may wish to re-examine them. If they are appropriate, make sure that your written materials do not dictate the manner in which services are delivered.