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Compliance Facts You Need to Know
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Compliance Facts You Need to Know

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An Independent Contractor Compliance Update You Should Know

Background

 

Grubhub Misclassification Case

 

On September 20, 2021, the 9th Circuit, led by a 3-judge panel (1 appointed by a Republican U.S. President, and other 2 appointed by a Democrat), issued an important ruling in an independent contractor misclassification case.  The case involves Grubhub, a popular, nationwide online and mobile prepared food ordering and delivery platform, and an app-based driver who worked for Grubhub for a period of 4 months over 5 years ago, in the 2015-16 time period.  Grubhub classified that driver as an independent contractor, thus rendering him ineligible for employee benefits like healthcare, overtime pay, etc., and the driver claims he was misclassified and thus should have been an employee and paid overtime (and other claims).

 

Proposition 22

 

In short, the 9th Circuit ruled that Proposition 22 – the law which California voters in late 2020 approved (Proposition 22 formally went into effect in December 2020) and which exempts app-based drivers from California’s difficult-to-pass “ABC” independent contractor misclassification test – does not apply retroactively.  In laymen’s terms, that means that events occurring prior to the date Proposition 22 went into effect are still actionable, i.e., app-based drivers can still pursue claims for misclassification with regard to events occurring prior to the Proposition 22 effective date.  

 

As a reminder and to put the context of the 9th Circuit’s decision into focus, app-based driving companies literally spent hundreds of millions of dollars in support of Proposition 22.  The campaign worked.  Nearly 60% of voters in California voted in favor of it, thus exempting app-based drivers from the aforementioned “ABC” misclassification test.  Had Proposition 22 not been approved, many app-based drivers – as in, untold hundreds of thousands of such drivers, if not millions – would become employees instead of independent contractors, thus substantially increasing the costs to deliver app-based driving services.  Hence, Uber and others desperately wanted Proposition 22 to be approved, and unions and other pro-employee groups desperately wanted to the measure to fail.

 

The ABC Test

 

After initially losing the lawsuit under the prior misclassification test rules in California, a California judge ruled that the “ABC” test – which came into effect via judicial decision in May 2018 and then in 2019 was codified into California law – was retroactive, thus reviving the driver’s lawsuit in the Grubhub case.  In December 2020, Proposition 22 then went into effect which, on the surface, favored Grubhub.  But, no such luck for Grubhub: the 9th Circuit has now ruled that Proposition 22 is not retroactive (but the “ABC” test is retroactive!).  In sum, the driver’s independent contractor misclassification claims against Grubhub have been restored and are once again viable.  This is bad news for Grubhub, who will be required to incur substantially more costs to defend and/or settle the case.  If the plaintiff wins outright, Grubhub is looking at serious financial penalties and payments under California law.

 

Procedurally, the case is now back at the lower federal district court in California, and the judge will determine whether the ABC test requires the plaintiff to be reclassified as an employee.

 

Note: Proposition 22 itself is under intense attack on constitutional grounds, despite the people of California voting in favor of it, and ultimately may be invalidated.  Such analysis is more appropriate for a different article, but suffice it to say that at least one court has already ruled against Proposition 22.

 

Opinion

 

Impact on the Staffing and Contingent Labor Industry

 

  1. Staffing companies need to be extraordinarily careful when staffing app-based companies for positions other than app-based drivers because regulatory investigations and lawsuits relating to misclassification in one area of a company, such as the area of app-based drivers, often times bleed into other areas of the same company. In other words, every staffing and agent of record/independent contractor compliance company with app-based driving clients in California ought to take extra care and precaution before they place independent contractors at those clients. For example, placing a highly-paid IT worker at any app-based company in California is higher risk than placing that same worker, under the same working conditions, at a non-app-based driving company, because of the intense scrutiny placed on app-based driving companies generally.

 

A fair word of caution: I cannot emphasize it strongly enough that it does not matter that the worker wants to be an independent contractor because neither a regulator nor a judge will care.  Either the worker is properly classified based on the actual working relationship, or not.  Intent has almost no meaning at all.

 

  1. Hopefully no staffing company is sourcing and placing any app-based drivers in California as independent contractors. Without a doubt, most judges and legislators in California do not like app-based drivers classified as independent contractors. Period.  It is hard to think of a more dangerous and risky business, in terms of exposure to legal and regulatory misclassification risk.

 

  1. Hopefully courts will start to define the “B” factor in the “ABC” test in a meaningful way, starting with the judge at the district court level where the Grubhub case now sits. The guidance on the definition of the “B” factor is scarce and confusing, leaving significant room for judges and regulators to decide what it may mean. That is not good news for staffing companies and agent of record/independent contractor compliance companies.  In other words, it can be a roll of the dice when classifying a worker that otherwise seems like a bona fide independent contractor. 

 

As a reminder, the “B” factor is concerned with whether the independent contractor is performing services within the usual course of the hiring entity’s business/service recipient’s business.  If a worker is performing services within the usual course of the business, then that worker cannot be classified as an independent contractor regardless of any other fact or circumstance.  But, what is the “usual course”?  Few can discuss the meaning of that term with any degree of meaningful depth, and of those few I gather not one can say with any degree of confidence what it really means.

 

  1. The federal government is currently looking at implementing the “ABC” test, or some form of it, at the national level. It appears to be at the NLRB (National Labor Relations Board) level for now, but we shall see. Hence, it is very important that the “B” factor be fleshed out so that companies can make classification decisions with greater confidence and less risk.

 

Quick Reminder: the 9th Circuit is a federal appeals court with jurisdiction over federal cases arising out of California and other Western states, including Hawaii.  If a case is appealed from the 9th Circuit, the only place left to go is the U.S. Supreme Court (and, the U.S. Supreme Court only hears around 100 to 150 cases a year, so the chances of successfully appealing a Circuit court decision are very low).

 

The California “ABC” Test

 

What constitutes an independent contractor under the ABC test?

Under the ABC test in California, a worker is considered an employee and not an independent contractor, unless the hiring entity independently satisfies each of the 3 following conditions:

(1) The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

(2) The worker performs work that is outside the usual course of the hiring entity’s business; and

(3) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

ICON and ICONpliance

 

Defer to the Experts

 

Each major step in the lifecycle of a full-service independent contractor management company, such as a company that provides “agency of record” services* – including recruitment, engagement, onboarding, management, retention, offboarding, passive engagement, and re-engagement – implicates compliance.  Understanding the compliance matrix in the face of uncertain and ever changing political, regulatory, and technology winds is a daunting task.  In fact, it’s a full-time endeavor.

 

* “Agency of record” is a term frequently used in the staffing industry to denote a company that manages independent contractors on behalf of another person or entity.  For example, a payrolling company may become an “agency of record” with respect to a group of independent contractors that have been engaged to work on a project for the payrolling company’s client.  In that example, both the agency of record company and its client face important compliance risks because applicable law – and the regulatory agencies that oversee contractor compliance – look at both the administrative partner (agency of record provider) and the company that receives the services of the contractors (client).  Thus, it is vital that a competent, experienced agency of record provider be chosen for the job to protect itself and its client.     

 

Compliance Technology

 

ICONpliance is a proprietary technology that vets independent contractors for compliance with applicable law in the United States and Canada and is fully owned and controlled by ICON Information Consultants.  ICONplianceautomates the independent contractor compliance process from onboarding through off boarding.  It’s fast, consistent, and reliable.  For more information about ICONpliance, contact Patrick Aubry at paubry@iconconsultants.com or Robert Dixon at robert.dixon@vendorpass.com.

 

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