Misclassification

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I have done a lot of independent contractor work in New Jersey, defended many such cases, from (numerous) unemployment audits to FLSA class actions. The New Jersey test, the A-B-C test, is well-established and one of the hardest for the putative employer to prevail upon. The test was, just a few years ago, reinforced by the NJ Supreme Court. Now, Governor. Phil Murphy has signed an Executive Order creating a task force to look into this issue of employee misclassification, as the Governor opines that millions and millions of dollars in taxes are being lost because of this practice. My question is—why do it?

New Jersey Silhouette in OrangeThe Task Force on Employee Misclassification will make recommendations on strategies the state will use to deal with the arguably widespread misclassification of employees as independent contractors. The Task Force will look at existing enforcement practices in and will seek to set out best practices to strengthen enforcement in this area, as well as making education outreach.

The Executive Order states that “with some audits suggesting that misclassification deprives New Jersey of over $500 million in tax revenue every year.” The Order is a product of a NJDOL report issued during the transition that contained a section on misclassifying workers. The report referenced a fairly new NJ Supreme Court case on misclassification and USDOL guidance which had “clarified the factors to be examined in determining a worker’s status.” The Report cited some benefits (UI insurance, family leave) that employees receive and independent contractors do not.

The NJDOL audits, in supposedly random fashion, approximately 2% of employers to gauge if these employers are correctly reporting all employees for unemployment and disability insurance purposes. I have handled perhaps fifty (50) such audits and can safely say that the tendency of the agency is to find that most individuals are, in fact, employees.

Under the IRS test, many factors are looked at, with a seeming emphasis on the control factors. Under the New Jersey A-B-C test, the most important factor is whether the individual is in an “independently established business.” This third factor is where, nine of ten times, the putative employer’s defense goes south. However, there has been a recent judicial development (the Garden State Fireworks decision) that might swing the pendulum a little back towards the middle.

The Takeaway

One commentator has said that the classification “disease” affects all industries but asserted that the problem is pervasive in the construction, trucking and landscaping spheres. That may be so but I know that the state of enforcement by the NJDOL is already fairly aggressive and I do not understand the point of the task force being created. If it is to advise that there is “a lot” of misclassification, well, we already know that. Maybe the Task Force will recommend stronger and more aggressive enforcement of the existing laws.

From my vantage point, I thought the agency was already doing that…

Employers are always trying to cut off the head of a class action, i.e. the named plaintiff, in order to bring the case to an end. What happens when the named plaintiff is gone from the case but some people have opted in? Do they become named plaintiffs, with the case continuing?  The Eleventh Circuit has seemingly answered that question in the affirmative. The court has just ruled that workers who opt into collective actions under the Fair Labor Standards Act only have to file that little piece of paper, the consent form, to then become a named party to the case,  The case is entitled Mickles et al. v. Country Club Inc.

The Elbert P. Tuttle U.S. Courthouse in Atlanta, Georgia, now home to the U.S. Court of Appeals for the Eleventh Circuit.
By Eoghanacht [Public domain], from Wikimedia Commons
Importantly, the ruling is a published one, meaning it is precedential. The panel reversed the lower court which held that the three opt-ins were not properly added to the case and should have been eliminated from the suit after the original plaintiff did not succeed in securing conditional certification and then settled. The Judge who wrote the decision stated that this was a case of first impression.

The Court noted that the FLSA, on its face, buttressed the conclusion that workers who opt into a collective “become party plaintiffs upon the filing of a consent and that nothing further, including conditional certification, is required.” The Court stated that “we conclude that filing a written consent pursuant to [FLSA] section 216(b) is sufficient to confer party-plaintiff status.”

The case was filed in 2014 by a single named plaintiff Andrea Mickles, a dancer at Goldrush. The suit alleged that the company (Country Club Inc.) had misclassified her and other dancers as independent contractors and thus they were denied proper minimum wages and overtime monies. She sought a class of current and former dancers; three other dancers then opted in by filing consents.

The lower court denied the motion to conditionally certify the class, as it was filed beyond the deadline set forth in local court rules for such a motion. There was no mention, however, of what would happen to the three opt-in plaintiffs. The Company then asked the court to specify which individuals would stay in the case. The company claimed the opt-ins had never become named party plaintiffs and thus were eliminated from the case when the conditional certification motion was denied.

The three additional workers claimed they could not be dropped from the case because the conditional certification motion was denied. The lower court held that the three had not been ruled similarly situated to the original plaintiff and had not been joined to the collective action. Then, the original plaintiff settled with the company and the three opt-ins appealed to the Eleventh Circuit.

That appellate court noted that there was no determination made as to the “similarly situated” element for the three workers, as needed to be done. Although opt-ins must be similarly situated to the original plaintiff, as no ruling on this issue had been made, the three employees stayed as parties until that ruling was made; if they were not ruled to be similarly situated, then they would be dismissed from the case.

The Eleventh Circuit therefore ordered that the opt-in cases be dismissed without prejudice so they were free to refile their claims, or proceed with their own suits. The court stated that “the “appellants were parties to the litigation upon filing consents and, absent a dismissal from the case, remained parties in the litigation, Thus, the district court erred in deeming appellants non-parties in the clarification order, which had the effect of dismissing their claims with prejudice.”

The Takeaway

This is a major change in the FLSA litigation landscape and makes it harder for an employer to get a case dismissed or to even settle a case. Yes, it is only one circuit, but the reasoning and rationale may spread to other circuits.

I hope not…

Exemption class actions, i.e. lawsuits alleging misclassification, continue to pop up in different contexts and concerning different classifications. A bank has just agreed to settle a case by paying more than $2 million to put a close to a Fair Labor Standards Act (FLSA) collective action based on a theory that the bank misclassified certain computer/IT workers. The case is entitled Schaefer Jr. v. M&T Bank Corporation, and was filed in federal court in the Southern District of New York.

Network switch and ethernet cables,data center conceptThe settlement will pay almost $2.5 million to more than two hundred IT workers across the country. The parties have filed a joint motion asking that the settlement be approved. The motion notes that the employer denied liability as well as that it even was the employer of the workers. The motion then asserts that the settlement was “reasonable in light of the considerable risk that Plaintiffs face.” Naturally, the motion seeks money for attorney’s fees that would amount to 33% of the gross settlement funds and money for a settlement claims administrator.

The motion provides the rationale for the settlement by stating that “first, although plaintiffs obtained conditional certification, maintaining the collective and certifying a class through trial may be difficult. Defendant would likely argue that the differences among various job titles, departments and other individualized questions preclude class certification and would warrant decertification of the collective. Moreover, defendant could argue that the computer exemption applies to plaintiffs and ultimately convince the court that plaintiffs were properly classified as exempt from overtime pay. Although Plaintiffs disagree, other defendants have prevailed on such arguments in similar cases.”

The theory of the suit was that the bank did not properly pay overtime to technology department network computing analysts and staff specialists. The lead plaintiff, James Schaefer Jr., alleged that he was such an IT worker for several years and was not paid overtime because he was misclassified as exempt.

The Takeaway

These exemption cases prove difficult to win, often times. On the computer exemption issue, numerous titles abound which may or may not connote an exempt classification. A lot of gray here. With that said, the need-for-individualized-scrutiny defense sometimes works. Sometimes it does not and then the stakes for the employer-defendant are dramatically escalated.

Much better to settle…

Classification issues are annoying ones, to state the obvious. Especially decisions and issues as to who is and who is not an independent contractor. And, it does not matter whether the defending entity is a mom-and-pop candy store or one of our most elite educational institutions, such as Harvard University. That august institution has just recently agreed to revise its university-wide worker classification system as part of a settlement of a class action involving allegations of misclassification. The case is entitled Donahue v. Harvard University and was filed in state court in Massachusetts.

A massage therapist treating a female client on a table in an apartmentThe settlement included a class of approximately 20 acupuncturists and massage therapists who worked at the University’s Center for Wellness from January 2013 to December 2017. These workers will now be re-classified as employees and receive up to $30,000 each in back pay. When the University re-classifies other workers, the side “benefit” will be that they will be eligible to join unions.

The plaintiff’s attorney complimented the university. She stated, “from the outset of this case, I have said that Harvard should be a role model for other employers. I am very proud of this settlement and hope that it sets an example of how other employers should respond when a concern is raised that its workers have been misclassified.”

The named plaintiff, Kara Donohoe, a massage therapist, sued the University in January 2016, alleging it misclassified her and others as independent contractors. They were, consequently, denied certain employee-related benefits. She will receive $30,000 in back pay and an extra $30,000 for being the named plaintiff, a so-called “incentive award.” Other workers will receive up to $30,000 in back pay. Harvard has now tasked a group of people (e.g. HR) with revising its policies concerning classification of individuals as independent contractors. This study will be guided by federal and state law principles.

The Takeaway

A wholesale classification of any group of individuals as independent contractors is dangerous. As I have harped on many times, the starting point for any such analysis, whether under FLSA principles or state law, any state’s law, is to ascertain if the individual has other customers or clients or works solely/mostly for the putative employer.  In this case, if these Therapists worked only for Harvard, they were not engaged in an “independently established business” and that is the death knell for any employer defense in an independent contractor case.

Sorry, but, on this one, Harvard gets an “F.”

I have blogged many times about the rash of intern cases that have popped up over the last few years. Now maybe there will be a consistent, uniform test for determining whether interns are really statutory “employees.” The US Department of Labor has endorsed such a test. The agency is approving the so-called “primary beneficiary” standard.

Students/interns sitting at a table with laptops talking
Copyright: bialasiewicz / 123RF Stock Photo

The agency has endorsed a seven-part test for determining intern status. This was set forth in the Second Circuit decision in the 2015 ruling in Glatt v. Fox Searchlight Pictures Inc. That test analyzes the “economic reality” of interns’ relationship with the putative employer to ascertain who is the primary beneficiary of the relationship. This test has been applied in a number of cases and industries of industries, where courts have found that, as the primary beneficiaries of these internships, the individuals are not employees under the FLSA and therefore cannot file claims for misclassification and wage violations.

The agency noted that four federal appellate courts have rejected the six-part DOL test set forth almost a decade ago. The agency issued a statement asserting that the “Department of Labor today clarified that going forward, the department will conform to these appellate court rulings by using the same ‘primary beneficiary’ test that these courts use to determine whether interns are employees under the FLSA. The Wage and Hour Division will update its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the division’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.”

Under the “old” test, an intern is an employee unless all of the six factors were satisfied. These included whether the intern displaced a regular employee and whether the employer derived any “immediate advantage” from the intern’s work. The updated test now restates the seven non-exhaustive factors that constituted the Glatt test. Those include: 1) whether there’ exists a clear understanding that no expectation of compensation exists; 2) whether interns receive training similar to what they would receive in an educational environment; and, 3) to what extent the internship is tied to a formal education program. The agency specifically noted that the primary beneficiary standard is “flexible,” and that determinations on intern-employee status hinge upon the unique circumstances of each case.

The Takeaway

I believe this is a better, fairer, more realistic test. Is it, as I postulated, “definitive guidance?”We will see…

I have written a number of times about law firms that have been sued in FLSA actions. Another example. Employees have sued two Florida personal injury law firms, alleging that they were misclassified and not properly paid proper overtime wages in violation of the Fair Labor Standards Act. In fact, there are two class actions filed. The cases are entitled Durrett v. Disparti Law Group PA et al and Hinkle v. Jodat Law Group PA. et al. Both cases were filed in federal court in the Middle District of Florida.

Law books and justice scales
Copyright: phartisan / 123RF Stock Photo

The employees at issue in the Disparti suit are case managers; these are the same kind of employees whose status is at issue in the Jodat case.  The employees claim that their duties are non-exempt. The Durrett plaintiff alleged, “in most if not all work-weeks, plaintiff was paid for 40 hours but was not compensated time and half for hours worked over 40.” She alleged that the “defendant would pay plaintiff straight time by personal check for all hours over 40 in a workweek. This disguised method of compensation was implemented to circumvent the FLSA’s requirement for overtime compensation.”

The plaintiffs claim that the founders of the firm knew of these illegal payment practices and have named both of them as individual defendants. The suit also alleges that sometimes the defendant gave Durrett compensatory time and failed to pay Hinkle for her time spent delivering mail between the offices, although she asserted this was a routine part of her duties.  Hinkle claimed that the “defendants were able to avoid paying overtime by not paying plaintiff travel time when she would transport firm mail between office locations.

The women employees claim all they did was manage cases, keep clients informed of status of their cases, order supplies and organize files.  Ms. Durrett made a very (potentially) damaging allegation, i.e., that she was ordered to clock out and then keep working, many times in excess of fifty (50) hours per week. Naturally, the employees claim the violations were willful and that there are many other workers at these two firms with similar claims.

The Takeaway

Law firms, or doctor offices, are not immune to FLSA lawsuits, particularly on misclassification grounds. It is always the employer’s obligation to classify employees properly. It sounds like the employees at issue do mainly ministerial tasks, run-of-the-mill tasks that do not smack of exemption. Unless the plaintiffs (and possible opt-ins), supervise workers so they might possibly fit within the executive exemption, the only realistic possibility is the administrative exemption.

The grayest and toughest of the white-collar exemptions for the employer to prove…

I have blogged (somewhat incessantly, I admit) about manager FLSA class actions and what the line(s) of defense are for the employer in these cases, and how to defeat these cases. Another case in point. A federal judge has now decertified a collective class, following the Magistrate Judge’s recommendation against the class continuing in this overtime action. The case is entitled McEarchen et al. v. Urban Outfitters Inc., and was filed in federal court in the Eastern District of New York.

Retail clothing storeJudge Roslynn R. Mauskopf adopted the Magistrate Judge’s report and recommendations, concluding that there was no plain error in the Report. Moreover, the Managers had not lodged objections to the Report/Recommendations. Magistrate Judge James Orenstein had ruled that there were too many differences in duties, responsibilities and authority among the members of the class to allow the claims to proceed as a collective action.

The Managers stated that they agreed not to object to the Report if the Company gave the Managers more time to file, perhaps, individual lawsuits. The original lawsuit alleged misclassification, i.e. that the Managers did not fit the executive exemption, they were not true managers and therefore were non-exempt under the FLSA. The plaintiffs moved to certify a class of all current/former department Managers at the Company’s 179 stores. The plaintiffs argued that all of the Managers had similar job duties and lacked meaningful discretion. There were notices sent to 1,500 potential opt-ins, following the granting of conditional certification. More than two hundred opted in and several were deposed.

The Magistrate Judge found that there were major differences between the duties and experiences of the opt-in plaintiff and the named plaintiffs. The Judge found that the opt-ins seemed to be exempt, as opposed to the named plaintiffs. The named plaintiffs asserted that they had little say in hiring and firing decisions. To the contrary, many opt-ins “described being active participants in the hiring and firing process,” Judge Orenstein wrote. The named plaintiffs posited that they spent but little time training hourly workers, but many opt-ins testified to a broad range of training responsibilities.

The Takeaway

This is another lesson for employers, not only in these Manager type cases but also for all employers defending almost any kind of FLSA (or state) class/collective action.  Bang away at individual differences in the class. It sure helps if the opt-ins to the class give favorable testimony at the expense of their own self-interest (and wallet). The interesting twist is that the plaintiffs extracted more time for possible plaintiffs to file their own individual cases.

Maybe they know something…

No industry is immune to FLSA collective actions and the energy industry is seeing a significant uptick in these actions. In this regard, a class of workers employed by an oil field services company has just agreed to a $2.1 million deal to settle a Fair Labor Standards Act collective action alleging that the company did not pay them proper overtime wages. The case is entitled Meals v. Keane Frac GP LLC et al., and was filed in federal court in the Western District of Pennsylvania.

Oil pump jack and oil tank silhouette
Copyright: crstrbrt / 123RF Stock Photo

The employer advised the Court that a settlement had been reached with a class of “frac supervisor I’s” to settle a FLSA collective action, seeking overtime, on a misclassification theory. The agreement recited that both counsel believed the settlement was in the best interests of all the parties, given the costs to be incurred, the risks inherent in litigation, as well as the delays, when placed up against the benefits of the settlement.

The defendant, however, made sure to secure non-admissions language. The papers stated that the “defendant denies and continues to deny all of plaintiff’s allegations in the action. Defendant enters into this agreement expressly disavowing any fault, liability and/or wrongdoing.”

Importantly, there had been a grant of conditional certification in June to a class of current and former “frac supervisor I’s” and other like employees who were employed by the Company in the last three years. The plaintiffs alleged that these alleged supervisors performed primarily manual work, which precluded the application of the exemption. The plaintiffs also claimed that the Company has a policy of deliberately misclassifying these supervisors to save overtime costs (even though they received bonuses). The Complaint alleged that all of these supervisors were similarly situated because they shared common job duties, were all classified as exempt and all performed uncompensated work.

The Takeaway

This was the right move by the employer. Exemption cases are always tough to win—often, the entire class is held to be exempt, or, heaven forbid, non-exempt, especially if common policies apply to the affected workers. The issue now becomes whether to re-classify these workers, i.e. pay them hourly, or enhance their duties so they “evolve” into exempt employees.

A lot easier to re-classify.  A lot less (future) worry and aggravation…

I have blogged on this topic many times but I never tire of it. What is the way to defeat a class action? The magic bullet? The answer? Too much individual scrutiny is needed! Another Judge has proven me right on this. A federal judge has denied a motion to certify a class of distributors who distributed products for a bakery with brands such as Wonder Bread and Nature’s Own. The drivers alleged that they were misclassified as independent contractors and should have been overtime-eligible employees. The case is entitled Soares et al. v. Flowers Foods Inc. et al. and was filed in federal court in the Northern District of California.

Bakery
Copyright: maxsheb / 123RF Stock Photo

The judge acknowledged that there were common questions as to the drivers’ substantive claims. However, it was the varying nature of their businesses, such as differences in operations, whether they hired their own “employees” and whether they did business with other entities that would have necessitated the individual evaluation(s). The Judge noted that “individualized issues over how to determine which distributors personally serviced their routes and whether the distributors operated distinct businesses prevents common questions of fact or law from predominating, and class wide treatment is not superior to individual actions.”

The class members bought exclusive rights to sell products in designated geographic territories and were responsible for delivering, displaying and selling the products in their chosen territories. The agreements designated the distributor as “an independent contractor with the resources, expertise and capability to act as a distributor.” The documents also specifically stated that the distributors would not be subject to Company control “as to the specific details or manner” of their business. In October 2015, they filed suit alleging that the Company misclassified them as independent contractors.

The Judge noted that although the class was confined to distributors who “personally serviced” their routes, the sorting out of those distributors that actually did that and when they did that “cannot be answered in one fell swoop.” The Court indicated that some distributors did engage their own employees who performed the routes some of the time and neither party could show through evidence, which distributors “personally serviced” their routes and which did not or how many days they did or did not personally service the routes.

The Court stated that “there would need to be mini-trials into these distributors’ recollections of how often they personally serviced their routes, and when and how often, if at all, they provided distribution services for other companies. Thus, some distributors might be found to operate businesses distinct from Flowers’ operation, while for others this factor would weigh in favor of an employment relationship, and thus this factor is not subject to common proof.”

The Takeaway

This is the object lesson for employer-defendants. I believe these independent contractor cases are peculiarly susceptible to these defenses. The employer must always look at and focus upon the “individual scrutiny” defense because it could be a single stroke method of making the whole thing go away.

It is difficult to defend a class action based on exemption, which explains why many of these cases (as herein) settle. This is because the employer-defendant is (usually) going to be completely right, or totally wrong. Either the class of workers (especially if the exemption at issue is professional or administrative) will meet the regulatory tests or they will fall short. That is the reason these cases often settle, because the employer does not want to test its theory at an expensive trial.

Artist at computer
Copyright: maximkostenko / 123RF Stock Photo

Case in point. A judge in California just gave final approval to a 1.5 million settlement to resolve class action allegations that a group of senior artists for a video game giant company were wrongly classified. The case is entitled Lee et al. v. Activision Blizzard Inc. et al., and was filed in Superior Court of the State of California, County of Los Angeles.

The Judge approved a settlement in this case, more than two years after the named plaintiff, John Lee, filed a suit alleging that the Company had misclassified the senior artists as exempt, salaried employees to avoid paying overtime. The Court approved the sum of $1.5 million for the class of 128 artists, as well as legal fees of $500,000.

The lawyer for the plaintiffs claimed they had a strong case on the classification issue. The Company maintained that the senior artists were properly classified and it had a basis for potentially wiping out all damages in the case. The Company had garnered several Affidavits from the class members themselves who asserted that they were properly classified. The Company asserted in the motion that “given that the makeup of the 128 member putative class consisted of approximately 80 percent individuals, who continue to be employed by the defendant, it was possible that at trial, any if not all of the currently employed class members might testify that they were properly classified during the class period or that they worked no overtime hours at all.”

The Takeaway

The exemptions at issue were the professional and possibly the administrative. The Company might have been well advised to settle, however, because the professional exemption virtually mandates a long, prolonged course of study in a field recognized as “professional.” The administrative exemption, as I have preached many times, is the most difficult of the white collar exemptions to defend, especially on the issue of discretion vs skills and experience, which may well have been the stumbling block in this case for the Employer.