what every employer needs to know about the gig economy ... … · hiring entity’s business •...
TRANSCRIPT
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What Every Employer Needs To Know About The Gig Economy
And Misclassification
Miranda [email protected]
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Today’s Agenda
• What is the gig economy and why should we care?
• The explosion of freelance/contractor work
• Misclassification: legal tests and solutions
• Joint Employment: state of flux, and where are we?
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Gig Economy
“A labor market characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs.”
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Gig Economyaka
Sharing Economyaka
Human Cloud
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Contingent workers…
…in a digital
marketplace
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Traditional, currentProject-based, current
86%19%
60% 66%
Traditional, in 10 yrs
Project-based, in 10 yrs
Employment Models
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The “Uber-ization” of corporate America
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Misclassification issues…
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Benefits of Independent Contractors
• Massive savings on labor costs • Unemployment, workers’ comp, taxes, benefits• No concerns over wage & hour law compliance• Avoid liability for most discrimination laws• Avoid issues under OSHA and immigration lawsMany workers prefer the freedom and financial incentives of
being classified as IC’s.
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Q: How much will it cost you if you
misclassify an employee as an IC?
A: More than you think.
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Risks of Misclassification
• Minimum wage, overtime, and other unpaid wages• Unpaid benefits• Back taxes and Social Security contributions• Unemployment audits• Employment law violations• Workers’ compensation coverage• Penalties and fines• Litigation costs and attorneys’ fees
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Who Cares?
• IRS: estimated loss of $3 to $5 Billion each year• US Dept. of Labor: works in tandem with IRS• State Income Tax Agencies• State Unemployment Tax Agencies• Workers’ Comp Insurance Carriers• Big Labor/Unions (dues-paying members)• Plaintiffs’ Attorneys
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Wage & Hour Litigation
“Why Should I Care?”
• Class actions equal huge penalties which reach into the seven figures for even relatively small employers
• Wage and hour class actions represent the single largest group of class action cases filed
• Attorneys’ fees can be substantial
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Wage & Hour Litigation
PAGA Claims
• Plaintiffs act as “private attorney generals”
• Aggrieved employees may recover civil penalties on behalf of other similarly situated employees for Labor Code violations
• Number of claims filed and amount of penalties on the rise• Penalties collected in 2014-2015 nearly doubled from
just four years prior
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What can employees recover?
•Penalties for Labor Code violations• Per pay period
• Default penalty is $100 for the first violation and $200 for subsequent
• 75% goes to the LWDA & 25% goes to the employees
•Underpaid wages
•Attorneys fees
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Class Action PAGA ActionClass certification rigorous analysis of numerosity, typicality, commonality, adequate representation
Class certification NOT REQUIRED
May be compelled to individual arbitration with class action waiver
Immune from arbitrationagreements
Class information protected until class certified
Discovery of other “aggrieved employees” permitted
4 year statutory liability period 1 year statutory liability period
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What can employees recover?
Example: 50 employees working 52 weeks per year, receiving approximately 26 pay checks (every two weeks)
**If each employee incurred 1 violation per pay period, PAGA penalties alone would be
$130,000!**
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What Rules Are Applied?
Difficult to provide definitive analysis, because different tests are applied in different jurisdictions and in different situations, and test often involves a “balancing” of factors
• Internal Revenue Service• State tax departments• US Department of Labor• Nat’l Labor Relations Board
• Unemployment depts.• Workers’ comp boards• State and federal courts• State enforcement agencies
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FLSA Standard
This Photo by Unknown Author is licensed under CC BY-NC-ND
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FLSA Standard – Economic Realities Test
• Economic realities test used to assess independent contractor status under federal law
• No single factor controls
• An individual’s specific work circumstances determine their employment status instead
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FLSA Standard – Economic Realities Test
Factors courts will look at:
1. Degree of control
2. Relative investment in facilities
3. Worker’s opportunity for profit and loss
4. Permanency of the parties’ relationship
5. Skill required
6. Whether worker’s services are integral to the company’s business
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FLSA Standard – Economic Realities Test
Degree of control involves examining:
1. Cost of the work to be performed
2. Hiring and firing workers to assist with the project
3. Delegating tasks
4. Responsibility for licenses, taxes, and other administrative obligations
5. Advertising
6. Preparing work schedules
7. Working without close supervision or frequent status reports
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FLSA Standard – Economic Realities Test
The DOL has stated the following factors are not determinative:
1. Independent contractor agreement
2. Time or mode of pay
3. Common industry practice
4. Whether worker receives a 1099, is classified as an IC under another law, works offsite or from home with some flexibility over hours, or has an EIN or established LLC/other business entity
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IRS Standard
This Photo by Unknown Author is licensed under CC BY-SA-NC
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IRS Standard – Control Test
• Takes a holistic approach
• Looks at 3 aspects of the worker’s control or independence:• Behavioral control (types of instructions, degree of instruction, how
work is evaluated, training needed/given)
• Financial control (level of investment in tools, training, office space; expenses, services offered to others; payment based on task and not by the hour)
• Type of relationship (written contract, benefits, length of commitment, whether services provided are a key activity of the business
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Common Law Test
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Common Law Darden Test
• Used regularly, but not exclusively, in the context of Title VII, ADA, ADEA, and ERISA
• Focuses on the common law principles of agency to determine the hiring party’s right to control the manner and means by which the work is performed and the worker’s status.
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Common Law Darden Test
Considers the following:• Skill required
• Source of supplies and tools
• Location of work
• Duration of the relationship between the parties
• Hiring party’s right to assign additional projects
• Extend of hired party’s discretion over when and how long to work
• Method of payment
• Hired party’s role in hiring and paying assistants
• Regular business of the hiring party and if the work performed is part of that business
• Hiring party’s status as “in business”
• Provision of employee benefits
• Tax treatment of hired party
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NLRB Test
This Photo by Unknown Author is licensed under CC BY-SA
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NLRB Common Law Agency Test
• Involves application of non-exhaustive factors that gave rise to the common law Darden test including:• Control the company may exercise over the work• Whether worker has a distinct occupation or business• If work is done under the direction of the company • Skill required• Who supplies tools, place of work, etc.• Length of time engaged• Method of payment (time or by job)• Whether work is part of the regular business of the company• Whether the parties believe they are crafting an employment
relationship• Whether the company is in business
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State Law Tests
This Photo by Unknown Author is licensed under CC BY-SA
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State Law Tests
• Some states have adopted the “ABC” test (such as CA and NJ, MD, NH)
• Some do not have one specified test
• Some have different tests for different scenarios (worker’s comp, etc.)
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State Law Tests
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Other factors analyzed in balancing test
Does worker impact ability for profit or loss? Have their own distinct business or occupation? Are special skills needed to perform job? Can worker stop doing job any time they choose? Are workers paid per task (invoiced) or per hour? Did worker sign independent contractor agreement? Does worker provide own insurance? Does company provide benefits or bonuses?
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California Case Study
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The New ABC Test
Dynamex Operations West, Inc. v. Lee (4/30/18)
California Supreme Court adopted a new legal standard that will make it much more difficult for businesses to classify workers as contractors
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ABC Test - Classifying Independent Contractors
FACTS
• Dynamex - nationwide same-day courier and delivery service that offers on-demand, same-day pickup and delivery services to businesses and the public. Prior to 2004, Dynamex classified its CA drivers as employees. Starting in 2004, Dynamex converted all drivers to independent contractors to save costs.
• In January 2005, Plaintiff Charles Lee entered into a written independent contractor agreement with Dynamex to provide delivery services. Just three months after leaving, Lee filed on his own behalf and on behalf of similarly situated drivers, alleging that Dynamex’s alleged misclassification led to Dynamex’s violation of the provisions of IWC wage order No. 9, as well as various sections of the Labor Code, and, as a result, that Dynamex had engaged in unfair and unlawful business practices under Business and Professions Code section 17200.
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ABC Test - Classifying Independent Contractors
• Decision directly affects the trucking and
transportation industry with delivery drivers, but also
has the potential to affect nearly every other
industry—including the emerging gig economy.
• New standard for determining whether a company
“employs” or is the “employer” for purposes of the
California Wage Orders
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ABC Test - Classifying Independent Contractors
• Under the new “ABC” test, a worker is considered an
employee under the Wage Orders unless the hiring
entity establishes all three of these prongs:
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A. The worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact;
B. the worker performs work that is outside the usual course of the hiring entity’s business; AND
C. the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
A worker is considered an employee unless the hiring entity can affirmatively prove all three of the following elements:
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Part A of The ABC Test
A. The worker is free from the control and direction
of the hirer in connection with the performance of
the work, both under the contract for the
performance of such work and in fact.
How much control does the business
have over the worker?Little control = IC classification might be OK
A lot of control = IC classification is likely problematic
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Part A of The ABC Test
• Should have a written contract
• But a contract is not enough
• IC responsible for results, not how to get there
• You rely on the IC for expertise and don’t need to
train them
• IC can exercise independent judgment and discretion
over manner and means of performance
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Prong “B” of The ABC Test
B. the worker performs work that is outside the usual course of the hiring entity’s business
• Employees typically perform services that are integrated into an employer’s operations (a plumber for a plumbing company).
• IC’s perform ancillary services that are central to their business, not that of the employer (a plumber providing services to a retail operation).
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Part B of The ABC Test
B. the worker performs work that is outside the usual course of the hiring entity’s business
• Court used the example of a retailer that hires a plumber or electrician to perform maintenance at their establishment vs. a clothing manufacturer that hires a work-at-home seamstress, or a bakery hiring a cake decorator.
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Part B of The ABC Test
B. the worker performs work that is outside the usual course
of the hiring entity’s business
• Not an IC if the worker provides services within the usual course of the business and would ordinarily be viewed by others as working in the hiring entity’s business and not in his/her own business.
• Not an IC if the worker is operating as part of your business on a regular basis and everyone you work with including your employees and clients consider him/her to be part of your business.
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Part B of The ABC Test
What if you engage a business, not an individual worker as an IC?
• In MA, under the ABC Test, some courts have held that “legitimate B-to-B” relationships can qualify for IC status, even if the other “business” is a sole proprietor or one-person corporation.• E.g., Okeke v. Dynamex Ops. East, Inc. (Mass. Super.
Ct. 2013); Debnam v. FedEx Home Delivery (D. Mass. Sept. 27, 2013).
• But remains to be seen how CA courts apply this.
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Prong “B” of The ABC Test
• Entity should identify and document the specialization utilized by the contractor
• Also contract with business entities, not individuals
• Clients and employees should understand the IC is not part of the business but is a subcontractor
• Core business operations should not be outsourced
• Subcontractors should be audited to make sure they properly classify their workers as employees
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Prong “C” of The ABC Test
C. the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
• Worker must have taken steps to create independent business, making the decision on their own without collusion.
• Although a business does not necessarily have to prove that workers in question took steps such as incorporation, licensure, advertising, and the like to prove this prong, it is highly recommended.
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Hypothetical 1 – Swim Instructor at Health Club
• Health Club hires Swim Instructor to provide swimming lessons.
• Club hires Olympic gold medalist Shmikel Shelps as an independent contractor to teach kids how to swim.
• Shelps has been too busy winning gold medals and never obtained an official license to teach but signs contract with Club classifying him as IC / 1099.
• Works under little supervision but must follow the Club’s swimming instruction schedules and general swimming curriculum.
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Hypothetical 1 – Swim Instructor at Health Club
• Must use equipment of the Club when providing lessons, but free to wear his own bathing suit and swim cap
• Shelps works on average 10 hours per day, 6 days a week for 1 year, taking 2 weeks of vacation.
• Gets paid a flat fee of $600 per week.
WHAT DO YOU THINK? MISCLASSIFIED?
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Hypothetical 1 – Swim Instructor at Health Club
IF MISCLASSIFIED
• Unpaid Minimum Wage• Flat fee treated as a salary. (LC section 515(d))• Regular rate = $15 ($600 / 40 hrs.) Min. wage is $11/hr, but the salary
pays only for 40 hours, meaning 20 hours unpaid MW• Underpayment of $300/wk ($15 x 20 hours)• $15,000 for 50 weeks• Liquidated damages = $15,000• Total - $30,000 + interest• Assumes same hours every week; could be more, but regular rate
remains the same because of section 515(d).
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Hypothetical 1 – Swim Instructor at Health Club
IF MISCLASSIFIED
• Unpaid Overtime
• In addition to the $15,000 owed for minimum wage, an additional 50% overtime premium is owed.
• Greater of daily (12 hours) and weekly (20 hours) overtime is paid.
• $15.00 x 0.5 x 20 hours overtime = $150 / week x 50 weeks
• OT liability = $7,500 + interest
• Liquidated damages (federal) = $7,500
• Total liability = $15,000 + interest
• Assumes same hours every day & week; could be more
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Hypothetical 1 – Swim Instructor at Health Club
IF MISCLASSIFIED
• Meal & Rest Period Violations
• 300 days without compliant meal & rest periods
• $15 per day for one or more violation per category
• Maximum possible = 2 hours per day at regular rate
• Meal period penalties = $4,500 (15x6x50)
• Rest period penalties = $4,500 (15x6x50)
• Pay Stub Violations
• $4,000 max
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Hypothetical 1 – Swim Instructor at Health Club
IF MISCLASSIFIED
• Expense Reimbursement
• PAGA penalties
• $5,000 - $25,000 penalty for willful misclassification under Labor Code 226.8
• Benefits (if Club provides benefits to ee’s)
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Hypothetical 1 – Swim Instructor at Health Club
IF MISCLASSIFIED
• Total exposure to single plaintiff ~ $75,000 - $100,000
• Plus plaintiff’s attorneys’ fees ~ $150,000 - $250,000
• Plus your defense costs ~ $150,000 - $250,000
• Unpaid taxes to EDD ~ 12-17% of all taxable wages + late payment penalties + interest
• Unpaid state and federal payroll taxes
• Workers’ Comp. premiums (up to 100% of wages)
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Hypothetical 1 – Swim Instructor at Health Club
What if Shelps has been working for Club for 4 years?
• Up to 3-4 times the liability
• Statute of limitations up to 4 years
• 1 year for pay stub claim
• 1 year for PAGA
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Post-Dynamex
• The ABC test does not apply to joint employer context (Curry v. Equilon Enterprises, LLC)
• Borello multi-factor test still proper standard for non-Wage Order claims (Garcia v. Border Transportation Group, LLC)
• Whether Dynamex has retroactive effect is still unresolved, but several courts have said “Yes” and it is likely the CA Supreme Court will too
• One court clarified the burden under part C – The critical inquiry is not whether the worker is “capable” of independent business operation, but whether there is an “existing” showing of such an independent business
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Post-Dynamex
• The ABC test only applied to Wage Order claims under Garcia v. Border Transportation Group, LLC
• But now the DLSE issued an opinion letter that concluded the ABC test applies to both IWC Wage Order Claims and certain Labor Code provisions…
YIKES!!!
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Post-Dynamex
• The DLSE concluded that Labor Code provisions that implicate or “derive” from employer obligations under the Wage Orders are also subject to the ABC test. The agency specifically mentioned the following:
• Minimum wage
• Overtime
• Liquidated damages
• Meal and rest periods
• Itemized wage statements
• Expense reimbursement claims
• *Waiting time penalties…”it depends”
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Dynamex - CA Legislative Buzz
•Labor attempts to codify (AB 5)
•Business attempts to revert back to Borello standard (AB 71)
• Insurance industry: agents and brokers not EE’s (AB 233)
•Expect a compromise (e.g., paid sick leave/benefits for IC’s)
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Dynamex - CA Legislative Buzz
• Recently, AB 5 passed the House after it was amended, indicating negotiations are advancing and to the benefit of some industries.
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Dynamex - CA Legislative Buzz
The bill now provides that the ABC test would not apply to the following persons:
1. Licensed by the CA Department of Insurance
2. Licensed physicians or surgeons
3. Registered/licensed securities broker-dealer or investment advisor or their agents/representatives
4. Direct salesperson under Unemployment Insurance Code section 650
5. Real estate licensees
6. Persons providing hairstyling or barbering services that meet certain conditions
7. Certain specified “professionals” (law, dentistry, architecture, engineering, accounting, marketing, and HR) that meet certain criteria
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Dynamex - CA Legislative Buzz
Business community continues to push for further amendments, including:
• Broader exemption for other professionals
• Broader exemption for individuals that prefer to make their own schedules and made their own decisions regarding to whom they perform services
• Exemption for business-to-business contracts
• Preservation of the ability to subcontract for short-term projects and unexpected, immediate demands for additional help
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What About Outside CA?
• Businesses have been lobbying hard to weaken or defang stronger standards for labor rights that threaten them in California and elsewhere.
• VT: Bernie Sanders calling for overhaul of federal standard
• WA, NY, NJ looking to implement Dynamex-like standards
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BUSINESS
• Both the USDOL (April 2019) and the NLRB (May 2019) issued opinion letters saying average gig economy worker is an independent contractor
• NLRB issued decision revising misclassification test, making it easier for contractor status (SuperShuttle DFW, January 2019)
LABOR• 9th Circuit Court of Appeals
ruled that Dynamex should be applied on a retroactive basis (Vazquez v. Jan-Pro, May 2, 2019)
• California state legislature close to passing a bill that would codify Dynamex and expand its scope – while other states sit and watch the developments
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What if a misclassification situation is identified after the fact?
If an employment law audit identifies a possible misclassification situation, the hiring entity has three basic options:
1. Do nothing and hope for the best.
2. Reclassify their ICs as employees.
3. Retain as ICs but restructure the working relationship to comply with the applicable test(s).
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Avoid Exposure for Misclassification
• Procure short-term or temporary employees from a
staffing firm.
• Have a written agreement with contractors containing
arbitration agreement with class waiver (but not the same
you use for employees).
• Require contractor to have EIN and a separate identity for
his or her business (business card, website, DBA name).
• Allow contractor to work independently with only minimal
supervision.
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Avoid Exposure for Misclassification
• Require contractor to provide own equipment (computer,
phone, etc.); do not reimburse business expenses.
• Require contractor to show proof of liability and work
comp insurance.
• Tailor confidentiality agreements for use by contractors.
• Pay contractor by job or phases of job if feasible.
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Avoid Exposure for Misclassification
• Do not provide vacation, sick days or paid holidays to
contractors.
• Do not provide bonuses to contractor that are not
specified in contract.
• File Form 542 with EDD if contractor is individual or sole
proprietorship and contractor will be paid $600 or more.
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Avoid Exposure for Misclassification
• Contractors may sue for unlawful harassment under
FEHA, so cover them in your Policy Against Harassment
and give them a copy of the policy.
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What you need to do
•Ensure Correct Wage/Hour Practices• Track hours properly
• Pay all wages and overtime
• Meal/rest period policies and practices
• Expense reimbursements (including cell phones)
• Wage statements complete
• Proper classification of employees
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What you need to do
•Arbitration agreements with class action waiver
•Train managers• Identify issues, monitor meals, manage
timekeeping records
•Employee handbook that is compliant
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?
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What Happened?
August 2015: NLRB decision creates broad new standardJoint employment exists even where one company only has the right to exert indirect or potential control over the terms and conditions of another company’s employees (Browning-Ferris Industries of California, Inc.).
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What Happened?
January 2016: USDOL issues Joint Employment GuidanceExpansive interpretation of the principles governing joint employment standards for wage and hour matters, along with a new and aggressive agency enforcement posture.
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September 2018 Proposed Rule
Joint employment only found if companies share or co-determine essential terms and conditions of employment, such as hiring, firing, discipline, and direction.
The company in question must possess and actually exercise substantial direct and immediate control over terms and conditions in a manner not limited and routine.
April 2019 Proposed Rule
Joint employment only found for wage and hour matters through a four-factor balancing test examining whether company:1. Hires or fires employee;2. Supervises and controls work schedule or
conditions of employment3. Determines rate and method of payment4. Maintains the employee’s employment
records
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Wage and Hour Audit
•Ensure Correct Wage/Hour Practices• Track hours properly
• Pay all wages and overtime
• Meal/rest period policies and practices
• Expense reimbursements (including cell phones)
• Wage statements complete
• Proper classification of employees
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Misclassification Audit
• Review all job duties/job descriptions for current
independent contractors against the ABC test
• Procure short-term or temporary employees from a
staffing firm.
• Have a written agreement with contractors containing
arbitration agreement with class waiver (but not the same
you use for employees).
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Misclassification Audit
• Require contractor to provide own equipment (computer,
phone, etc.); do not reimburse business expenses.
• Require contractor to show proof of liability and work
comp insurance.
• Tailor confidentiality agreements for use by contractors.
• Pay contractor by job or phases of job if feasible.
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Misclassification Audit
• Do not provide vacation, sick days or paid holidays to
contractors.
• Do not provide bonuses to contractor that are not
specified in contract.
• File Form 542 with EDD if contractor is individual or sole
proprietorship and contractor will be paid $600 or more.
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Misclassification Audit
• Require contractor to have EIN and a separate identity for
his or her business (business card, website, DBA name).
• Allow contractor to work independently with only minimal
supervision.
• Contractors may sue for unlawful harassment under
FEHA, so cover them in your Policy Against Harassment
and give them a copy of the policy.
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Miscellaneous Tips
•Arbitration agreements with class action waiver
•Train managers• Identify issues, monitor meals, manage
timekeeping records
•Employee handbook that is compliant
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Thank You!
Contact us at 1-855-XPERTHR or [email protected] more at:
http://www.xperthr.com
Additional Resources:• DOL Opinion Letter May Shield Gig Companies• Podcast: Is the Gig Economy More Myth Than Reality• What’s Your Strategy for Leveraging the Gig Economy?
Do You Have One?