CONTRACTOR COMPLIANCE AND MISCLASSIFICATION: Pitfalls and Potential Risks when Using - American Bar ...
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CONTRACTOR COMPLIANCE
ABA SECTION OF AND MISCLASSIFICATION:
LABOR & Pitfalls and Potential Risks when Using
EMPLOYMENT Freelancers and Agencies
LAW
May 6, 2021
International Labor & Employment Law
Committee Midyear Meeting
PRESENTERS
Sarah Chilton,
Partner, CM Murray, LLP
London, United Kingdom
Sandro Garofalo
Director Counsel, Labor Relations
Target Corporation
Minneapolis, Minnesota
Russell Hirschhorn
Partner, Proskauer
New York, New York
Catherine Ruckelshaus
General Counsel, National Employment
Law Project, Inc.
New York, New York
Worker Misclassification Issues in the UK Sarah Chilton Partner D/ + 44 (0)20 7933 9125 M/ + 44 (0)7964 343733 sarah.chilton@cm-murray.com CM MURRAY LLP FIRST FLOOR 36-38 CORNHILL LONDON EC3V 3NG PHONE +44 (0)20 7933 9133 FAX +44 (0)20 7933 9132 urldefense.com/v3/__http:/www. cm- murray.com/__;!!DUT_TFPxUQ!W Ur1UvoZytH3iTGXtVN- iv_BaKklIpf_aDD0sZtFDb9ip8mSK 83HkDsZ-IKH2o4$
Overview – UK position 1. The legal position: the Uber Judgment - Uber v Aslam & Ors [2021] UKSC 5 a) Background Facts b) The Court’s Findings c) Implications for the Future 2. Unions worker misclassification litigation
The Uber Judgment: Employment Status
– Background
In the UK, certain statutory employment rights are available only
to people who are classed as a worker (s.230 Employment Rights Act 1996)
A worker is an individual who either:
o works under a contract of employment; or
o undertakes to perform work for a party who is not a client or customer
Uber argued that its drivers were not workers
Uber said that it was merely a booking agent that enabled drivers to contract
directly with passengers
The Uber Judgment: The Court’s Findings
The Supreme Court unanimously found that Uber drivers are workers
The starting point when determining whether a person is a worker is:
o The purpose of the relevant employment legislation (to protect vulnerable
individuals)
o NOT what it says in the contract between the parties
The Court may consider the reality of the working arrangements (not just the
contract), particularly how much control is exercised by the putative employer
Drivers are “working” when they are logged-in to the Uber app within the
relevant territory and are ready and willing to accept trips (not, as Uber argued,
only when they are with a passenger)
The Uber Judgment: The Court’s Findings (2)
The Supreme Court emphasised 5 factors that justify its conclusion that Uber
drivers are workers, namely that Uber:
1. Dictates how much drivers are paid for their work
2. Dictates the contractual terms on which drivers perform their services
3. Constrains a driver’s choice whether to accept requests for rides
4. Exercises significant control over how drivers deliver services (e.g. through
the ratings system)
5. Restricts communications between driver and passenger and seeks to
prevent drivers establishing a relationship with passengers beyond the ride
The Future of Worker Classification
Companies cannot use contracts to reclassify a relationship as not that of an
employer and a worker – the starting point is the legislation
Companies face a trade-off - the greater the degree of control a putative
employer seeks to exercise over the work or services performed by an
individual, the more likely it is that the individual will be considered a worker
An individual may be classified as a worker even where they have a substantial
measure of autonomy and independence (Uber drivers are free to choose
when, how much, and where they work)
The Future of Worker Classification (2)
Gig economy workers will more likely be protected by the courts
(even in spite of their contractual arrangements)
We are likely to see more litigation from other gig economy industries and
more individuals in the gig economy successfully arguing that they are workers
Facing potentially thousands of claims, Uber has offered that all 70,000
of its drivers will be paid holiday time, automatically enrolled into a pension
plan, and will earn at least minimum wage.
The Role of Unions
Unions played an important role in the Uber case
There are, and will continue to be, growing calls for Uber to recognise unions
Uber and similar cases around the world underline the fact that major
companies such as Uber and Deliveroo have a global workforce with common
interests and concerns – fertile ground for international organisationThe Role of Unions (2)
Uber’s recent offer to workers was not met with universal approval
The power of unionisation will become ever clearer as companies such as
Uber (see also Hermes) seek to agree new terms with workers in response
to legal judgments
The Uber ruling may embolden trade unions in the UK to push for full
“employee status” for Uber’s workers in the futureWhat Is Happening Internationally
European Commission - Launched a consultation in February 2021
on improving working conditions for digital platform workers.
Denmark – Danish Chamber of Commerce and a prominent
trade union concluded a national agreement for food delivery services
in January 2021. Companies who sign up to the agreement guarantee
rights including regulated wages, pensions, and holiday pay for couriers.
Just Eat has signed up.
South Africa – A class action seeking employment rights is being prepared
on behalf of all Uber drivers in the country, with assistance from a London
firm involved in the UK Uber case.
Preserving Careers, Protecting Reputations, Managing RiskWorker
Misclassification
Issues in California
Sandro Garofalo
Director Counsel, Labor
Relations
D: 612-304-9773
Sandro.Garofalo@target.com
Target Corporation
Minneapolis, MNCalifornia IC Law: First there was Borello
• IC status determined by a multi-factor test derived from the California
Supreme Court decision in Borello
• Primary factor: Right to control
• Secondary factors: Whether the worker supplies the equipment/tools; the
worker’s opportunity for profit or loss; the payment method; the permanence
of the relationship; parties’ intent
• Implications:
⎻ No single factor dispositive
⎻ Weight of factors was context-specific
⎻ Greater flexibility for employers
⎻ Outcome is less predictable
S.G. Borello & Sons Inc. v. Dept of Industrial Relations 48 Cal.3d 341 (1989)Then Came Dynamex/ABC Test
• In a unanimous ruling, the California Supreme Court rejected the
Borello economic realities test, and adopted a modified “ABC” test
applicable in the wage order setting.
• Under the new test, a worker is considered an employee, and
not an independent contractor, unless the hiring entity can
demonstrate that all three of the following conditions are met:
“A” — The worker performs the work free from the control
and direction of the hiring entity, both in contract and in fact.
“B” — The worker performs work that is outside the usual
course of the hiring entity’s business.
“C” — The worker is engaged in an independently established
trade or business of the same nature as the work performed.
Dynamex Operations West, Inc. v. Sup. Ct. 4 Cal 5th 903 (2018)Then Came AB 5
• Signed into law on September 18, 2019
• Codified the ABC test announced in Dynamex decision
• Expanded Scope: ABC test governs employee
determinations in California for purposes of the Labor
Code, the UI Code, IWC wage orders and Workers Comp
• AB 5 and subsequent amendments contain numerous
exemptions
• The Upshot: Makes it more difficult for businesses to
classify covered workers as independent contractorsAnd Then Came Prop. 22
• After Dynamex and AB-5 coalitions of gig economy
companies worked with state officials and other
stakeholders on a different approach to gig workers
• Those discussions did not produce a solution
• Ballot proposition drafted, signatures collected
• Measure qualified for the ballot in Spring 2020
• Campaigning ensues
• Voters approve by 58% - 42% margin
• Law became effective December 2020Proposition 22 – Covered Workers
App-based drivers are independent contractors and not
employees, if:
• No prescribed schedule or minimum number of hours
• Drivers free to reject any specific ride
• Drivers free to work for other network-based
companies or hold other jobsProposition 22 – Key Requirements
• Pay of no less than 120% of minimum wage for the
time engaged
• Reimbursement per mile driven
• Health care subsidies
• Anti-harassment policies
• Mandatory safety training
• Criminal background checksProposition 22 – Unsettled Issues
• What burden of proof must be carried to establish
Prop 22 compliance?
Attestations sufficient?
Or fully litigable issue?
• What are the legal consequences of non-compliance?
Is the app-based driver automatically treated as an
employee?
Or is their status governed by Borello? Dynamex/AB 5?
Does non-compliance give rise to other claims?What May Be Coming Next? The PRO Act
• Protecting the Right to Organize (PRO) Act
• Creates a federal ABC test for NLRA purposes
• Could influence application of ABC test in other
employment settings
• Provides for a host of other changes to federal labor
law
• Awaiting a hearing in the Senate after passing in the
House of RepresentativesWorker Misclassification Issues and ERISA Russell L. Hirschhorn Partner D: 212-969-3286 M: 516-509-9327 rhirschhorn@Proskauer.com Proskauer Eleven Times Square New York, NY 10036-8299
Background
The threshold question: Is the individual an employee?
Never?
Always?
Sometimes?
United States federal and state laws are not uniform in their approaches
to determining whether an individual is an “employee.”
Misclassification claims may present a variety of claims:
Wage and hour
Discrimination
Employee benefits
Context-specific independent contractor tests
Common law tests: ERISA, IRS, various state laws
Wage / Hour: FLSA, various state laws
EEOC
State Unemployment / Workers’ CompensationU.S. Federal Common Law Test
The U.S. Supreme Court applied traditional agency law criteria. The considerations,
include the hiring party's right to control the manner and means by which the
product is accomplished. Among the other factors relevant to this inquiry are the:
The skill required;
The source of the instrumentalities and tools;
The location of the work;
The duration of the relationship between the parties;
Whether the hiring party has the right to assign additional projects to the hired
party;
The extent of the hired party's discretion over when and how long to work;
The method of payment;
The hired party’s role in hiring and paying assistants;
Whether the work is part of the regular business of the hiring party;
Whether the hiring party is in business;
The provision of employee benefits; and
The tax treatment of the hired party.”
Nationwide Mutual Insur. Co. v. Darden, 112 S. Ct. 1344 (1992)The Interplay Between Classification Tests
There are overarching differences between the ABC test and the
various federal classification tests.
Unlike the ABC test, federal classification tests:
Do not presume that a worker is an employee.
Allow for a holistic multi-factor inquiry where no single factor
is dispositive.The Interplay Between Classification Tests
Under ERISA, where employee benefit plans are structured
to only provide benefits to common-law employees and not
to independent contractors, there is potentially an issue of
duality in worker classification standards.
Due to ERISA preemption, the federal standards for
employee classification continue to apply for employee
benefit plan purposes, despite the passage of AB 5, AB 2257
and other similar state laws.The Interplay Between Classification Tests
Companies must be prepared to evaluate worker classification
under separate tests:
The ABC test for purposes of California state law.
The Darden common law test for purposes of employee
benefit plan participation under ERISA.
Even if a worker is an employee under AB 2257, the worker may
not qualify as an employee under the federal common law test (as
reflected in a plan’s eligibility provisions).Implications Of Duality In Worker
Classification Standards
401(k) and other retirement plans, or equity incentive
plans
Adverse tax consequences for the worker or a fine for
the company
Plan qualification
Health and welfare plans
Affordable Care Act considerations
Incentive stock optionsCost and Effect of Worker Misclassification Issues Catherine K. Ruckelshaus General Counsel D: 646-693-8221 Cruckelshaus@nelp.org National Employment Law Project, Inc. 90 Broad Street, 11th Floor New York, NY 10004
Who is NELP?
Costs to the Government:
NATIONAL
2009 USGAO report: cost $2.72 billion in 2006.
2000 report to USDOL: found 10 – 30% of employers misclassify
some employees.
Cost to the UI trust fund: $198 million per year.Costs to Public Coffers and Other Businesses in Lost Revenue
(selected states)
CO 2018 - $167 mil lost in income tax,
WA $755K UI premiums
80%
audited GA 2015 - Senate study estimates avg 2.8
K workers misclassified
firms
misclassify IN 2010 - $147.5 mil lost income taxes
CA IA 2016 - $16.4 mil unreported wages
90% LA 2015 - $50 mil unreported taxable
misclassify wages, $1.5 mil UI taxes
MO 2016 - $2.1 mil taxes due
NC 2017-18- $1.7 mil UI taxes
OH 2015 - $2.6 mil UI taxes
TN 2017 - $3 mil workers comp taxes
• Task Force/audits TX – Austin 2012 - $2.3 mil UI taxes due
• Legislative Committee/Attorney General study 33
• Academic study VA 2018 - $28 mil unpaid taxesPassing on Costs to Other Businesses
This kind of work…is in direct competition with
my HVAC company… I can assure you, you
can’t …pay workers’ comp, pay Medicare
match, pay Social Security match, and health
insurance match, and do all the things that I do
with what you’re doing.
- North Carolina State Senator
Source: NELP Policy Brief “Independent Contractor vs Employee: Why
Misclassification Matters and What We Can Do To Stop It,”
https://www.nelp.org/publication/independent-contractor-vs-employee/.BEWARE New/Old Definitions: Why Should the Contract Not Govern?
Independent Contractor Contract
I agree that I am an premises, but my
independent contractor. employer will allow me to
work on its premises;
I agree that I will not
receive unemployment I agree that my employer
compensation or workers has allowed me to have a
compensation; second job;
I agree to pay all taxes I agree that my employer
associated with my work; has allowed me to hire
my employer will not pay helpers;
Social Security or take
withholding; I agree to get whatever
license I need to do the
I agree to provide all of work;
my own supplies and tools
to do the job; I can control my time, but Employment statutes
(I have to work Mon-Sat
I agree that I can work off- from 10 until 10). were meant to “upset the
Sign here: _________________________ freedom of contract.”
-Judge Learned HandState Task Forces
State Task Forces – cont’d
Federal Action on Independent
Contractor and Joint Employment
April 2021 Congressional Research Service report:
https://crsreports.congress.gov/product/pdf/R/R46765/1
March 2021 USDOL NPRM on independent contractor proposing to
rescind 2020 rule:
https://www.federalregister.gov/documents/2021/03/12/2021-
05256/independent-contractor-status-under-the-fair-labor-
standards-act-withdrawal
March 2021 USDOL NPRM on joint employment rescission:
https://www.federalregister.gov/documents/2021/03/12/2021-
04867/rescission-of-joint-employer-status-under-the-fair-labor-
standards-act-rulePRESENTERS
Sarah Chilton,
Partner, CM Murray, LLP
London, United Kingdom
Sandro Garofalo
Director Counsel, Labor Relations,
Target Corporation
Minneapolis, Minnesota
Russell Hirschhorn
Partner, Proskauer
New York, New York
Catherine Ruckelshaus
General Counsel, National Employment
Law Project, Inc.
New York, New YorkYou can also read
