Independent Contractor Issues: A Tale of Drivers, Strippers and Lawsuits

Drivers suing Uber and Lyft for allegedly treating them as independent contractors instead of employees could learn a few things from another group of workers who successfully navigated the same road — strippers.

Since 2012, exotic dancers have won more than $27 million in judgments or settlements in at least seven employee misclassification lawsuits across the country, said Rich Meneghello, a labor lawyer who’s a partner at Fisher & Phillips in Portland, Oregon.

The strippers’ cases involved some of the same legal issues at the center of lawsuits filed in recent years against Uber, Lyft and other companies built on the so-called on-demand or 1099 economy model, where independent contractors make up some or most of an enterprise’s workforce.

If exotic dancers, drivers, house cleaners or delivery service gophers don’t control their work environment, and if a business wouldn’t exist without them, they’re employees, not contractors, Meneghello said.

“The overwhelming groundswell is for courts and government agencies to find that these individuals are employees and not independent contractors,” he said.
Employee misclassification lawsuits aren’t new. But the boom in venture-backed Silicon Valley startups such as Uber and Lyft that rely on a large labor force of independent contractors has caused a related boom in employee misclassification lawsuits.

It’s not just startups coming under fire for treating workers one way and paying them another. Since before the recession, established companies in a variety of industries have offloaded work to independent contractors to control operating costs. Even when the U.S. economy improved, companies didn’t return to hiring full-time employees. All told, an estimated 53 million people in the country work as independent contractors or freelancers of some sort, according to a 2014 Freelancers Union survey.

In July, the escalating number of lawsuits and complaints filed with federal regulators led the Labor Department to publish its first guidance on the issue. A 15-page document from the department’s Wage and Hour Division details the standards that companies should use to determine who is an employee, in part using an “economic realities” test to determine whether a worker is economically dependent on an employer or in business for him or herself. The document also explains how to analyze the control workers have over “meaningful aspects” of what they do to ascertain whether it’s possible to view them as running their own business.

Questionable Levels of Compliance
Despite how widespread employee misclassification lawsuits have become, many companies still don’t take the necessary actions to avoid them.

“There are a lot of companies with questionable levels of compliance,” said Richard Reibstein, a partner at Pepper Hamilton in New York and head of the firm’s independent contractor compliance practice group. Companies believe that since “they haven’t been called to task yet, it’s unlikely they’re going to have to do anything.”

That thinking could be misguided. Companies that have lost or settled employee misclassification lawsuits have paid out millions, and in some cases, filed for bankruptcy protection. In June, FedEx Corp. agreed to pay $228 million to settle an employee misclassification lawsuit that, if approved by the U.S. District Court for the Northern District of California, will resolve claims by more than 2,000 drivers dating back to 2000. Last year, a Kansas court ruled that hundreds of FedEx drivers who worked in that state from 1998 to 2007 were employees and not independent contractors.  The delivery service changed its business model in 2011 and now hires drivers through an intermediary company.  Lawsuits in other states are pending.

Learning About Employee Classification

Here are courses and other resources for learning about worker classification regulations:

• U.S. Labor Department's Administrator’s Interpretation No. 2015-1 (PDF): The U.S. Labor Dept.’s Wage and Hour Division issued this 15-page memo in mid-July clarifying how employers should apply the Fair Labor Standard Act’s “suffer or permit” to determine whether workers are employees or independent contractors.
   
• Society for Human Resource Management (shrm.org): The HR professional association covers classification issues in online and in-person courses offered throughout the year, including “SHRM Essentials of HR Management,” “Manage & Engage Your Organization’s Human Capital” and, for California employers, “California HR: Applying CA Law to Employment Practices. Fees for the for-credit courses vary.
   
• American Bar Association (americanbar.org): The legal organization offers an online course, Independent Contractors and the Sharing Economy: Uber, Lyft, and other “Tech” Business Models based on a May 19 webinar with employment lawyers and 1099 economy companies involved in pending lawsuits. Fees for the continuing legal education course start at $89.
   
• Independent Contractor Compliance
  (independent
  contractorcompliance.com): The blog, published by Richard Reibstein and other lawyers in Pepper Hamilton’s independent contractor compliance practice group, covers employee misclassification and related issues, including recent lawsuits, Internal Revenue Service investigations, and state tax and workforce agency actions.
   
• IRS (tinyurl.com/EmployerTaxGuide): The 2015 edition of the Employer’s Tax Guide (IRS Publication 15) is a comprehensive guide to federal regulations governing employees. Fill out and submit IRS Form SS-8 to determine whether a worker is an employee or independent contractor.
   
• Bar Association of San Francisco (tinyurl.com/Legal-SF): The bar’s Justice & Diversity Center memo, “Penalties for Misclassifying Workers as Independent Contractors,” explains applicable California state labor codes, includes a list of common factors used to determine if a worker is an employee, and includes links to additional resources.

—Michelle V. Rafter

In 2012, the Southern California division of limousine operator Carey International Inc. filed for Chapter 11 bankruptcy protection after 16 drivers won a $4.5 million arbitration award stemming from an employee misclassification lawsuit. The lawsuit came in the wake of a 2011 California law that broadened the state’s worker misclassification regulations, including creating penalties of up to $25,000 per violation for companies that willfully misclassify employees as independent contractors.

Uber has fared no better. In June, the California Labor Commissioner’s Office ruled that a driver for the app-based car service was an employee, not an independent contractor, and therefore was entitled to be reimbursed for mileage and other expenses. Uber appealed, but if the ruling is upheld, it would award the driver $4,000. More importantly, it could eventually force the company to pay for benefits such as health care and Social Security for all 160,000 of its drivers.

Drivers for Uber and Lyft also have filed separate civil lawsuits claiming they are employees and as such are entitled to be reimbursed for expenses such as gas and vehicle maintenance. The companies’ requests to dismiss the cases were denied earlier this year, allowing both to continue toward jury trials.

Uber and Lyft aren’t the only 1099 economy companies being sued by workers. Two former house cleaners for Handy, an on-demand house cleaning and handyman service, filed a lawsuit in Alameda County (California) Superior Court claiming the company deliberately misclassified workers as independent contractors instead of employees. In the lawsuit, the ex-workers say they had to follow set protocols spelling out how to dress, clean and act around customers, what products to use, and how much to charge. They point to the protocols as evidence that the company exerts significant control over workers and therefore should classify them as employees. The lawsuit is pending.

In a class-action lawsuit filed against Instacart in March, workers accused the app-based grocery delivery service startup for failing to pay them for expenses such as overtime, gas and workers’ compensation.

Strippers won judgments or settlements in similar employee misclassification lawsuits because strip-club owners blatantly treated them like employees but classified them as independent contractors, Meneghello said. In some cases that Meneghello included in a 2014 presentation on the subject, club owners set dancers’ schedules and work hours, made workers clock in and out for shifts, and gave them a “dancers’ packet” with house rules to follow. One club gave dancers the choice of being an employee or contractor but made no distinction in the work either group performed.

However, it’s not up to workers to choose how they want to be classified, Meneghello said. Employers have to decide which status is legally correct for the situation and apply it. “A worker’s wishes will not be determinative, especially since they might change their mind when they realize they have a legal claim against you,” he wrote in the presentation.

Regardless of the type of company, the decision to use independent contractors or other contingent labor typically comes from operations, finance or other C-level functions, not human resources, Reibstein said. But HR has to deal with the consequences, so HR managers and middle managers should keep tabs on the company’s contingent labor practices and alert higher-ranking executives if they’re at risk of running afoul of labor laws, he said.

One way HR can bring attention to the issue is by talking about the legal exposure the company could be opening itself up to, for example, if their independent contractor agreement doesn’t accurately reflect “the realities on the ground,” Reibstein said. “The courts will disregard it.”

He recommends companies analyze contracts that they ask independent contractors to sign to ensure the agreements are structured and documented to match how they’re being implemented. “There are a huge number of companies for whom their independent contractor agreements aren’t properly documented, and they need to have those restructured or re-engineered to be consistent with their business model,” he said.

Doing nothing isn’t an option, especially for companies built on the 1099 business model. “Every one of those companies, and there are some big ones, are getting hit left and right, and they all probably thought they didn’t have exposure,” Reibstein said. “What they don’t know in the C-suite will hurt them.”