Worker Misclassification

The California Supreme Court recently heard oral argument in a case—Dynamex Operations West, Inc. v. Superior Court of Los Angeles County—that may alter the long-standing test in California for independent contractor status and bring big changes to how the state defines independent contractors, who make up a growing body of workers in the gig-economy era. Companies like Uber, Grubhub and Amazon have faced suits over allegedly misclassifying workers as independent contractors instead of employees.

Why Is Missclassification of Employees An Important Issue?

Misclassification of employees as independent contractors has enormous implications for both workers and the economy. Misclassified employees often are denied access to critical benefits and protections they are entitled to by law, such as the minimum wage, overtime compensation, family and medical leave, unemployment insurance, and safe workplaces.

The Borello Test

California courts currently analyze misclassification cases under a multifactor test the state Supreme Court laid out in 1989 in S.G. Borello & Sons Inc. v. Department of Industrial Relations. The Borello test emphasizes an employer’s control over workers claiming employee status, and considers several secondary factors, including whether the work is part of the company’s regular business, the skill required, payment method and whether the work is done under supervision of a manager.

The issue in Dynamex is whether, in wage and hour cases in California, the Supreme Court should continue to apply the Borello test or whether state law should embody a test similar to the “ABC” test.

The ABC Test

The “ABC” test, as formulated by the Supreme Court of New Jersey in Hargrove v. Sleepy’s LLC, presumes an individual in question is an employee UNLESS and UNTIL the employer is able to demonstrate that all three prongs of the “ABC” test are met.

1. Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact;
2. Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
3. Such individual is customarily engaged in an independently established trade, occupation, profession or business.

Should the California Supreme Court adopt the “ABC” test, as it appears to be considering, this would make it significantly harder for Uber, Grubhub, Amazon and other employers to prove that its workers have been properly classified as independent contractors.

The named Plaintiff in a class action FLSA suit against the Penthouse Club in Philadelphia has asked a federal district court judge to sanction the club for failure to participate in the discovery process of the litigation.  According to the papers filed with the Court, the Penthouse Club did initially respond to written discovery requests from the Plaintiff; however, the answers were vague and incomplete.  The Court subsequently ordered the Penthouse Club to supplement and provide more complete answers, but that was never done.

The Plaintiff argues that the Penthouse Club’s failure to provide responses has resulted in prejudice to her case because they have withheld information that is needed for an upcoming arbitration hearing.  Plaintiff’s counsel argued that the “Defendant’s refusal to supplement or produce verified responses has severely prejudiced Plaintiff’s ability to engage in efforts to fully prepare to prosecute and presenter her case.”

Exotic Dancers are Employees Too

The basis of the wage and hour lawsuit is that the Club misclassified exotic dancers as independent contractors.  The lawsuit alleges that the Penthouse Club exercised a high level of control over the dancers, including: set schedules, disciplinary actions, instructions on uniform/outfits, and other factors that are typically present in an employer and employee relationship.  This theory of liability is very common in wage and hour lawsuits against strip clubs.  A number of strip clubs have paid multi-million dollar settlements in the past years for their misclassification of dancers as independent contractors.  If the dancer is determined to be an employee and not an independent contractor, then the club must pay the dancer a base hourly wage that is at least equal to the federally mandated minimum wage rate as set forth by the Fair Labor Standards Act. The lawsuit also alleges that the dancers were required to pay management unlawful kickbacks in the amount of $30 to $50 for every shift worked.

Angelique Diaz filed the case as a class action and seeks to represent all dancers who worked at the Northeast Philadelphia club and were subject to the same unlawful policies and practices. The case is pending in the U.S. District Court for the Eastern District of Pennsylvania.  It is titled Diaz v 3001 Castor, Inc., case number 2:16-cv-05645.

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In recent years, a new tech-driven sector of the US economy has emerged. That sector employs an estimated 1.2 to 1.9 million workers in the United States and is referred to as the GIG economy, and it is growing every day. However, as new employers spawn left and right from clever technological innovations, so too does the possibility for wage and hour violations.

The Fair Labor Standards Act, 29 USC. 201, et seq. provides employees with the right to a federal minimum wage of $7.25 per hour and to overtime premiums for non-exempt employees at one and one half times their regular hourly rate for all hours worked in excess of 40 in a single workweek. Additionally, a number of state laws provide non-exempt employees with added protections and benefits.  For example, in California, a non-exempt employee must be paid overtime premiums of one and one half times their regular hourly rate for all hours worked over 8 hours in a single day.  They must be paid double time for any hours worked over 12 hours in a single day.  Other state law laws prohibit certain deductions from employees’ paychecks.  In short, there are a number of pitfalls for employers in the GIG economy if they utilize employees in their business model.

Getting the GIG

In order for GIG economy workers to avail themselves to the benefits and protections of the FLSA, the workers must establish themselves as “employees.” Many companies require individuals to sign agreements at the onset of the employment relationship that acknowledges the new worker is an independent contractor and not an employee.  These agreements do not decide whether an individual will be an employee or independent contractor for purposes of the FLSA.  The determination of whether a worker is an independent contractor or employee is based on the reality of the relationship, not the label of the relationship, and not something written into a contract by a party to a contract.

In O’Connor v Uber Technologies, Inc., Case No. 3:13-cv-03826 (N.D. Cal.), the Court denied a motion for summary judgment filed by Uber, which sought to have the plaintiff-drivers classified as independent contractors.  The Court denied the motion and noted that enough evidence had been presented for a jury to weigh whether Uber exercised sufficient control over the drivers for them to be classified as employees, rather than independent contractors.  The case was set for trial in June 2016, but Uber settled the case in April 2016 for $84 million dollars.

Rethinking Employee Classification

Cases like O’Connor have persuaded employers in the GIG economy to rethink how they classify their employees.  For example, Zirtual, a company that provides virtual assistants to professionals, reclassified all of its independent contractors to employees. Other companies continue to fight the legal battle of whether their business models properly utilize independent contractors or if they use employees.  For example, GrubHub is currently in litigation over that precise issue in a lawsuit filed in 2015 in California.  The company is currently awaiting a ruling from the court on whether their drivers are employees or independent contractors.

For now, the decision of independent contractor or employee isn’t one-size-fits-all; it is based on a number of factors that analyze the totality of the relationship between the parties and the control exercised by the alleged employer.  However, if the factors favor employee status, the putative employer could be facing a very expensive lawsuit for their misclassification of the workers.

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A group of mortgage underwriters received an early holiday present this year on November 27, 2017, as the United States Supreme Court declined to hear an appeal by their employer Provident Savings Bank FSB. The Bank had appealed a decision by the Ninth Circuit Court of Appeals ruling that the mortgage underwriters were improperly paid a fixed salary for all hours worked, without any overtime pay. Now the Ninth Circuit’s decision will stand, and the underwriters’ case will proceed to trial.

Salary Misclassification in the Mortgage Industry

Like many banks, Provident Savings claimed its classification of its mortgage underwriters as salaried employees was permitted under the “administrative exemption” to the Fair Labor Standards Act. The administrative exemption is intended to apply only to employees whose primary job duties relate to the management of the employer’s business and its general operations.

The Department of Labor and several Courts of Appeals, including most recently the Ninth Circuit in the Provident Savings case, recognize that mortgage underwriters’ core duty of reviewing loan applications using guidelines established by the bank and investors does not count as “administrative.” When mortgage underwriters review loan applications, they are not managing the bank’s internal business affairs. Rather, this service goes to the heart of the service the bank provides to its customers.

The Bank’s Appeal Falls Short

Provident Savings appealed to the Supreme Court, backed by the Chamber of Commerce and all of the other major titans of the banking industry. The banks claimed that mortgage underwriters qualify as “administrative” employees because they have the authority to commit the bank to loans. The lower court rejected this argument, finding that the underwriters’ authority was tightly regulated by the bank’s labyrinthine system of guidelines and checklists regarding the issuance of loans.

The Supreme Court has the discretion to decline to hear an appeal (or to decline certiorari in lawyer-talk). It did so in this case; and as a result, mortgage underwriters and other improperly salaried employees will have the chance to challenge their employers’ use of the “administrative” exemption.

Don’t be fooled by the name. The administrative exemption does not refer to employees whose work is routine or administrative. Quite the opposite. Only employees engaged in the employer’s general business operations can be salaried under the administrative exemption.  On the other hand, employees who are directly involved in the core service their employer provides to customers, like the mortgage underwriters in the Provident Bank case, should receive 1.5 their regular rate of pay for all of their overtime hours.

If you have further questions, the Wage Authority Group is awaiting your call.

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