Independent Contractor

I am a big believer in the importance of USDOL Opinion Letters because they show the thinking of the agency and how it interprets various provisions of the Fair Labor Standards Act.  I often look to the published body of these letters for guidance and I lamented when the DOL (back in 2010) decided to stop issuing these letters.  Well, there seems to be good news around the corner.  The newly nominated Secretary of Labor, Alexander Acosta, has indicated that he is amenable to re-instituting this practice.

He stated that he believes “there’s a value from opinion letters…from the fact that they’re grounded in a specific set of facts, and not in broad legal premises.”  He continued by adding that he sees “no reason why I would not encourage opinion letters.”

The nominee made these comments when responding to a question from Sen. Mike Enzi (R-Wyo.).  The Congressman referenced a fairly common employer complaint that the agency stopped issuing this kind of specific (or, sometimes, general) guidance when it decided to issue so-called Administrator’s Interpretations, which were essentially major pronouncements on certain issues, such as independent contractor status and joint employer relationships.

writing letter
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Speaking of which, what is unclear and yet unanswered is whether the new Secretary (if confirmed) would rescind these two “controversial” Interpretations.  Both of these documents were very much pro-employee.  One widened the agency’s definition of joint employer status, making two entities liable for minimum wage and overtime violations.  The independent contractor Interpretation expanded the definition of “employee” to include many more so-called independent contractors.

The Takeaway

I think this would be a great idea.  When individuals or entities write in for opinions, on a particular set of facts, employers throughout the country can take definitive guidance from the factual scenarios presented and apply those lessons to their facts.  That is what employers want—to know how to comply with the law.

Opinion letters help employers do just that.

There have been a number of cases in which the FLSA employee status of exotic dancers has been litigated.  Well, in a very recent one, the plaintiffs’ counsel is strongly attacking the Company’s early summary judgment motion.  The dancers argued they were employees, not independent contractors; the Court has now granted conditional certification to the class.  The case is entitled Shaw et al. v. The Set Enterprises Inc. et al., and was filed in federal court in the Southern District of Florida.

Former dancers Sarah Shaw, Rebecca Wiles and Ashley Howell argued that the amount of control exerted over them by the club owners was the key in deciding what their status should be.  The plaintiffs reeled off many cases in which just such findings were made.  Their papers noted that their “position is not novel; the vast majority of courts to have considered this issue have found exotic dancer/entertainers to be employees as a matter of law.”

Their theory was a willful misclassification had occurred and they were paid only through tips from the customers.  The class was granted conditional certification in December 2016, as the Court found that a sufficient evidentiary showing was made indicating 300 entertainers worked at the two clubs during the three years leading up to the lawsuit and all were similarly situated.

The owners asserted they were independent contractors who just paid a “modest fee” to the club as a licensee, in exchange for being allowed to perform, use the facilities and collect tips and fees from the clientele. They also asserted they exercised no control while they were dancing and performing.

An attorney for the plaintiffs said that notice was being sent to 4,500 prospective class members.  He opined that, in the end, these people would be considered employees under the law, as they have in many other cases.  He said that “there’s been very strong precedent over the last ten years or so, consistently, in nearly all courts, that has found entertainment dancers do qualify as employees. We believe the same will be found under the facts of this case.”

The Takeaway

These cases are very fact-sensitive, but I agree that the majority of them rule that these folks are employees.  This case is interesting in the sense that an ultimate decision on the merits has not been made, but the opt-in notices are being sent to prospective claimants.

This is an interesting case and a (possible) double victory for the employer.  A rarity.  An employer-defendant, Dynamex, Inc. has filed a motion to eliminate more than 30 opt-ins from a conditionally certified collective action under the FLSA seeking back due wages for overtime violations.  On that very day, the employer won the right to access some of the opt-in members’ tax records.  The case is entitled Juan Saravia v. Dynamex Inc. and was filed in federal court in the Northern District of California.

Tax returns
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The Company wanted some opt-ins eliminated because they failed to show up for their depositions and others because they withdrew their consent to participate in the suit.  The Company also challenged opt-ins because they were not part of the originally proposed class definition or they did not opt-in on time or they were contracted to work outside of California or were deceased.  The Company urged to the Court that “absent the requested dismissal, this court will be allowing the inclusion of eighteen (18) additional opt-ins at trial in a case where individualized determinations are a necessity and the interest and diligence of the opt-ins is at question.”

The theory of the case is that although the Company labeled the workers as independent contractors, the Company controlled the routes, schedules, customers and other details for thousands of U.S. drivers, which would show too much control, meaning that they were actually statutory employees.  At this time, 155 drivers have opted in.

On that same day, as luck would have it, the Judge ordered 36 collective action members to turn over their federal tax records relevant to their claims from 2008-present when they were contractors for the Company.  The class members had objected on invasion of privacy grounds and that the demand was a pretext for harassment.  The court disagreed, concluding that the plaintiffs’ privacy interests did not supersede the Company’s interest in preparing and advancing a fully formed defense on the merits of the case.

The Court aptly and cogently found that “the tax records that Dynamex seeks will provide probative information indicating the structure of each plaintiff’s businesses, the nature of their income and expenses, and the extent of their gross income, which will be useful in demonstrating whether each of the opt-ins was properly classified as an ‘independent contractor’ or not.”

The Takeaway

This is a great victory, securing the tax returns.  Moreover, and more importantly perhaps, it tilts the momentum of the case in favor of the employer.  Regretfully, most times, the employer is placed in the unenviable position of being reactive and always warding off the next attack by plaintiffs.  Maybe the plaintiffs do not want to open up their tax returns for scrutiny.  Maybe this will cause the plaintiffs to want to settle or be more reasonable in any settlement demands.

I applaud the tactic.  Let it be a signal to other defendant counsel out there.

One thing about FLSA collective actions—right or wrong, win or lose, the legal fees for both sides mount up quickly and almost relentlessly.  I often counsel clients to try to get out early of such a case (especially if I perceive there to be a problem, where there usually is).  Well, the parties in a recently filed collective action have asked a federal judge to stay the proceedings in their case so they could pursue mediation.  The case is entitled Barnett v. EQT Production Co., and was filed in federal court in Western District of Pennsylvania.  This is the correct tactic for the employer.

Oil pump jack and oil tank silhouette
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The workers claim that they were misclassified as exempt, thereby denying them overtime.  In a joint motion, the parties requested that discovery be stayed and that the action be conditionally certified so that notice could be sent to potential class members.  That notice would allow workers to opt in.  The conditionally certified class would be comprised of any person who performed completions work for the Company but who were treated as independent contractors; such people are not “employees” under the FLSA.  (The mediation is scheduled for October 17).

The named plaintiff alleged that he and other employees on rigs routinely performed non-exempt work in excess of forty per week and were never paid overtime.  To evade this obligation, the plaintiff charges that the Company classified the workers as independent contractors.

The plaintiff charges also that the Company exercised sufficient control to label the workers as “employees” and therefore subject to the FLSA.  They allegedly took direction from the company as well as being managed and supervised by Company supervisors.  They provided regular reports to supervisors; they wore EQT uniforms, attended EQT training/orientation and lived in company-provided housing.  Those are several indicia of control, undermining the defense that the people are true independent contractors.

The Takeaway

This could be bad for the Employer.  By putting all your eggs in the basket of independent contractor status, the battle will be totally lost if the workers are not found to be independent contractors.  This is because if a worker is covered by the FLSA and is non-exempt and if they work beyond forty hours, they must get paid overtime.  End of story.  Then, all there is to quibble about is the number of hours worked and computation issues.

I applaud the action here, especially by the employer.  Get out of it early and save the escalating legal fees (on both sides, as this is a fee-shifting statute).  If there is something to be fixed or ameliorated, then do it.

And move on…

I blogged about this case a few weeks ago and opined that the employer would have an uphill fight.  Maybe they heard me.  The case has now been put in abeyance as the parties seek to work out a settlement.  This initiative follows my thinking in many of these cases—try to get out early and as cheap as you can (especially if, as the employer, you perceive you have exposure).  The case is entitled Werman et al. v. Rotonda Golf Partners LLC and was filed in federal court in the Middle District of Florida.

Golf course
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The proposed collective action was based on the theory that employees were forced to work off the clock and were therefore not paid proper overtime.  The lawyers filed a joint motion last week asking for a stay so they could discuss settlement.  The case is now in abeyance until October 7.

The joint motion noted that “the parties respectfully submit that it would be most efficient for the parties to spend their time and limited resources working toward a mutually agreeable settlement rather than responding to the amended complaint, filing a case management report, engaging in discovery and engaging in motion practice relating to, among other things, the overtime exemption asserted by defendants.”

The protocol agreed on will include letters being sent to the employees so they can opt in if they choose.  The defendants then have to provide the payroll records to the plaintiffs’ lawyers so they can “reasonably necessary to determine whether, as plaintiffs allege but which defendants deny, compensation is owed to the opt-in.”

The suit alleges that employees were directed not to punch in when they got to work and to keep working after they punched out.  The employees allege that they received two paychecks that showed only a portion of their hours worked.  They also received part of their monies as “employees” and then received the rest of their pay through a 1099, i.e. as independent contractors.  The workers contend that they were intentionally misclassified so the employers could avoid paying overtime.

The Takeaway

This is a big step forward in resolving this litigation and it will dramatically cut down the litigation fees which the employer would have to spend and avoid inflating the adversary’s fee petition/demand.

It appears to me, as a management side practitioner, that this is the right strategy.  The most crucial thing is to fix what was broken—treating people as W2 employees and 1099 independent contractors in the same work week(s) smacks of deception and an intent to avoid payment of overtime.  Off-the-clock cases are very bothersome, especially when the evidence suggests that there was a focused, management effort to order people to work off-the-clock.

A sand trap, but there is a way out…

No industry or business is immune to FLSA collective actions.  What better proof of this than the fact that a Florida resort and golf course management company were sued in a proposed collective action in federal court.  The theory is that the caddies were really employees, not independent contractors and that the employers deprived the caddies of overtime pay and minimum wages in violation of the Fair Labor Standards Act/Florida law.  The case is entitled Stapleton et al. v. Kemper Sports Management Inc. and was filed in federal court in the Middle District of Florida.

Golf course
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The Complaint alleges that the employer failed to pay the caddies their wages.  This process became the responsibility of the guests and players, who paid minimum rates established by the resort plus tips.  The named plaintiff alleges he and the others worked 1-2 rounds of golf per day, which could take, due to weather and other issues, up to six hours to play.  A two round day meant a work day of twelve hours, according to the plaintiff.  Thus, the worker claimed he typically worked 50-60 hours a week.  Guests paid the caddies $80-100 per bag carried.  The worker claims the caddies were also expected to act as guides for players and maintain the grounds.

The Complaint alleges that Kemper set caddy schedules and assigned them to guests; they also allegedly could be disciplined or fired for not showing up and were compelled to request time off, all characteristics of an employee, not a contractor, according to the Complaint.  Notwithstanding these indicia of employment, the putative employers did not pay any wages to the caddies.

There have, of late, been similar lawsuits based on misclassification in this industry.  For example, groundsmen and other employees filed a suit against Rotonda Golf Partners LLC, alleging that the operators of a handful of golf courses located on Florida’s west coast misclassified workers in order to avoid paying overtime premiums.

The Takeaway

The element of control or, better put, the lack thereof, is the first hurdle in showing that individuals are independent contractors.  From these few initial facts, it appears that the golf course may have exerted (or had the potential to exert) control, i.e. hiring, firing, setting schedules.  The next element, often the toughest one to prove for a putative employer, is to show that the workers are in an independently established business.  Therefore, if these caddies do not work for any other golf course or do not have other indicia of working for themselves (e.g. a website), they will likely not be found to be in their own business.

Could be a big bogey for the defendants…

There exists already a doctrine of joint employer law under the Fair Labor Standards Act,  Now, the USDOL wants to make it easier for two (or more) entities to be found as joint employers.  The head of the Wage Hour Division, David Weil, stated that the new policy is required because of increasingly varied employment arrangements in today’s workplace.

This guidance follows on the heels of a recent NLRB decision holding that a company (Browning Ferris) and its contractor can be a joint employer (or a single employer) even if the company had not exercised control over employee terms and conditions of employment.

Mr. Weil observed that companies are increasingly sharing employees or using third-party management companies, independent contractors, staffing agencies or labor providers.  Significantly, the Interpretation also applies to franchise operations, which are abundant on today’s employer/employment landscape.  He observed that “through its enforcement efforts, the Wage Hour Division regularly encounters situations where more than one business is involved in the work being performed and where workers may have two or more employers.”

U.S. Department of Labor headquarters
By AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons
There are two types of joint-employment arrangements that are being targeted, or, more delicately put, examined.  One of these is the “vertical joint employment,” which occurs when an employee has an employment relationship with one employer, e.g. a staffing agency or a subcontractor, but that employee remains economically dependent on, i.e. actually employed, by the other entity involved.  The other entity, usually a company that has contracted to use workers sent by the staffing agency, would be looked to/at as the potential joint employer.  The other scenario is “horizontal joint-employment.” Under that rubric, the employee has employment relationships with two or more employers that are only perhaps, on paper, separate, but that is the only difference, such as in the case of sister companies or affiliated companies.

The Takeaway

When the DOL can go after two employers for the same liability, its chances of securing all the wages due the workers is greatly enhanced.  Although there have been FLSA regulations in existence for decades on what is a “joint employer,” this new initiative, similar to the exemption and independent contractor “action” going on shows a greater enforcement posture and attitude by the agency.

As Mr. Weil so eloquently stated “where joint employment exists, one employer may also be larger and more established, with a greater ability to implement policy or systemic changes to ensure compliance.”  This is, to me, another pro-employee endeavor by the agency, maybe before the election is held.

There is, as we all know, an insane amount of litigation on independent contractor issues.  These controversies can emanate from any industry and there is no business that is immune to these allegations.  Case in point.  A judge in New York State has just granted class certification to a class of cheerleaders for the Buffalo Bills of the NFL who are claiming that the misclassification deprived them of overtime pay.  Although they may be out of the playoffs, the team may yet be in the limelight, but for the wrong reasons.  The case is entitled Caitlin Ferrari, et a. vs. Stephanie Mateczun, et al, and was filed in the Supreme Court of New York in Erie County.

American football
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The Judge ruled that the plaintiffs, known as the Buffalo Jills, are entitled to class certification because (under New York law) the statute of limitations is six years so the proposed class can extend back six seasons.  There were approximately forty (40) cheer leaders engaged during this time, so the Judge deemed it impracticable to try their cases separately.  The Court also found sufficient commonality in the claims as to warrant class certification.

The lead plaintiff Buffalo Jill, Caitlin Ferrari, alleges that the Jills were required to attend all Buffalo Bills home games, attend biweekly practices, conduct dance clinics as well as make several public appearances from April-December.  She alleged that a small component of this “work” was paid over, making the wages of the Jills less than the State minimum wage.  She also alleges that, although the Jills can, on their own, sell the Buffalo Jills swimsuit calendars at $5/calendar, if they do not sell the calendars they are stuck with what they do not sell.  The parties have been expanded, with the team and the League now being added in.  The Jills want unpaid wages, unreimbursed expenses and attorneys’ fees.

The suit is the latest of several clashes over fair pay between NFL cheerleaders and their respective teams in recent years.  The Oakland Raiders and Tampa Bay Buccaneers have settled similar cases.  Indeed, there is a similar case in which a group of cheerleaders is seeking unpaid wages from these defendants.   Three of those plaintiffs joined the Ferrari lawsuit in January 2015, saying they “wish to stand in solidarity with their fellow cheerleaders” and believe that “a class action is the best way to do so.”

The Takeaway

I have handled many independent contractor litigations and DOL audits.  Many of these cases have been unemployment audits, where the exposure may not be that much because the DOL there is only seeking back due contributions (and interest) for unemployment insurance.  The FLSA scares me a lot more.  There are liquidated damages, a three year possible statute of limitations and fee shifting.  Overtime claims by a class of misclassified independent contractors and/or minimum wage claims are the much bigger danger.

So, don’t let any independent contractor work more than forty hours…

Guess what?  Wage suits are increasing.  Hardly a surprise.  A recent study shows that wage-hour lawsuits were up about 8 percent over last year, which may stem (in part) from the recent USDOL initiatives on revising the FLSA exemption regulations and its “white paper” on independent contractor issues.  There is also the problem with applying a law born of the Great Depression to the modern workplace and all the new technology issues.

Increase in wage hour lawsuits
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The study, with data derived from the Federal Judicial Center, shows that (as of the end of September), almost 9000 wage-hour suits had been filed, up from the 8000 filed the previous year.  The data included FLSA cases filed in federal courts and similar-type state-law suits removed to federal court.

There has been a lot of publicity about raising the minimum wage in many areas, such as the $15 per hour minimum wage in Seattle and the directive from Governor Andrew Cuomo to raise the minimum wage for fast-food workers to $15 per hour.  The President has called for the federal minimum wage to rise to $10.10.  It is also an issue in presidential politics.

The USDOL has also proposed changing the exemption rules, in favor of more employees getting overtime.  The agency has also issued a formal Interpretation in July 2015 that greatly limited the kinds and numbers of people that can be validly deemed “independent contractors.”  There is a march of technology and it is difficult to meld the law with the technology.  Commentators have noted that “trying to fit a law designed at a very different time to address different problems and a different type of economy and workplace is difficult, and raises issues.”

There has also been a geometric rise in “off the clock” working time cases.  The issues of preliminary and postliminary “work” generate many controversies.  The email/PDA cases persist and flourish; they are another example of the clash of law and technology.  It is really the general “theme” of what constitutes “work” in today’s world that skews the number of suits upwards.

The Takeaway

I have always preached that an employer cannot prevent lawsuits being filed against it.  If you fire someone, that disgruntled employee may seek out a lawyer or file a DOL complaint and then the litigation wheel starts spinning.  The best defense is to be proactive and undertake an objective examination (an internal audit) of all a company’s compensation practices, e.g. classification issues, working time policies, bonus, commission, vacation policies.

Fix what is broken and start eroding away, softly, the statutes of limitation.

I recently read a posting by Julie Badel on the Wage & Hour Defense Blog and felt so moved that I am compelled to comment on it.  She wrote about a Fifth Circuit case in which the USDOL was sanctioned because “the government here chose to defend the indefensible in an indefensible manner.”  The employer was awarded attorneys’ fees because of the Department of Labor’s bad faith.  I find this a teachable moment, not only for the government, but for all parties engaged in any FLSA litigation.  The case is entitled Gate Guard Services, L.P. v. Perez, 792 F.3d 554 (5th Cir. 2015).

Hitting the nail on the head
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As Julie notes, this case was off the wall.  A drinking buddy of a DOL investigator told his friend that he had been misclassified as an independent contractor.  The investigator conducted a superficial, quickie investigation and then destroyed his original notes.  He assessed six million dollars in wages against the Company, notwithstanding that he had violated several internal guidelines.  Then, the agency learned that courts, in very similar cases, had held that these kinds of workers were, in fact, independent contractors.

The Fifth Circuit was less than pleased with this pattern of behavior.  It observed that the “government’s intransigence in spite of its legally deteriorating case, combined with extreme penalty demands and outrageous tactics, together support a bad faith finding.”

The Takeaway

My numerous dealings with the Departments of Labor (both federal and state) have been marked by cordiality and professionalism, 99% of the time. The agencies have always acted in a reasonable manner and have, in general, been willing to listen to what I say, as an employer’s advocate.  That is why I believe that this case is aberrational and the conduct at issue herein is probably unlikely to be repeated.

With that said, an employer-defendant should be on the lookout for what might seem to be excessive behavior, especially in the course of litigation.   If the DOL actively and intensely pursues a case it should not, for motives that may be problematic, defense counsel should not hesitate in seeking to vindicate its position on these fronts, at the same time maybe sending a message of deterrence to the government.