U.S. Department of Labor WHD Issues Administrator’s Interpretation on Independent Contractors and Asserts that “Most Workers are Employees”
As promised earlier this summer, on July 15, 2015, the U.S. Department of Labor’s Wage and Hour Division (WHD) issued an “Administrator’s Interpretation” (AI) regarding when individuals are misclassified as independent contractors under the Fair Labor Standards Act (FLSA). The AI sends a signal to employers that the WHD has set a demanding standard for establishing when an individual is properly classified as an independent contractor and indicates that the agency views the issue as an enforcement priority. The AI states that, in the view of the WHD, “most workers are employees under the FLSA’s broad definitions.”
As background, unlike regulations, AIs are not subject to the rulemaking process such as that which is now underway for the proposed amendments to the white collar overtime rules. Rather, the AI provides the WHD’s view of the law, and that view is very unfriendly to those attempting to classify workers as independent contractors. In media interviews this week, the WHD’s Administrator David Weil stated that the AI was designed to give employer’s “fair notice” that they will run into the agency’s crosshairs if they misclassify individuals.
According to the AI, in order to determine whether an individual is an employee or independent contractor, the “economic realities” need to be examined to determine the true relationship. This test is to determine “whether an individual is economically dependent on the [putative] employer (and thus an employee) or is really in business for him or herself (and thus is an independent contractor).”
The AI uses a six-factor test commonly used by courts in determining status under the FLSA. The factors are (1) whether the work performed is integral to the employer’s business; (2) whether the worker has an opportunity for profit and loss based on his/her skills; (3) the relative investments of the employer and the worker; (4) whether the work requires special skills and initiative; (5) the permanency of the relationship; and (6) the degree of control exercised or retained by the employer. The AI emphasizes that no one factor is determinative.
While the factors discussed above are not new, the WHD’s application of them is more expansive than ever articulated by the federal government. In weighing the factors in the AI, the WHD clearly puts its thumb on the scale in favor of employee status. For example, in discussing the “control” factor — which many have viewed as the most indicative factor in determining status — the AI emphasizes that “it should not play an oversized role in the analysis” and states that an employer’s “lack of control over workers is not particularly telling if the workers work from home or offsite.” It also states that “workers’ control over the hours when they work is not indicative of independent contractor status.”
Importantly, the AI states it will give no weight to the parties’ understanding or agreement concerning the relationship. The AI states that “an agreement between an employer and a worker designating or labeling the worker as an independent contractor … is not relevant to the analysis of the worker’s status.”
Notably, the FLSA is only one of many laws governing worker classification. Many states, including Massachusetts, have set a high bar for establishing that an individual is an independent contractor. Given these trends, we expect to see litigation and enforcement action to increase.
Jonathan Keselenko
Foley Hoag
Boston, MA
Massachusetts Highest Court Rules that Taxicab Drivers Are Independent Contractors Under the Wage Act
The Massachusetts Independent Contractor statute is among the strictest in the country, and employers face an uphill battle in proving that individuals satisfy the three-prong test for correctly being classified as independent contractors. The test, however, is not impossible to surmount, as demonstrated by a decision issued earlier this week.
On April 21, 2015, the Massachusetts Supreme Judicial Court (SJC) held in Sebago, et al. v. Boston Cab Dispatch, Inc., et al., that taxicab companies may classify taxicab drivers as independent contractors. The plaintiffs in this case were taxicab drivers that leased taxis and medallions at a flat-rate from taxicab and medallion owners. The plaintiffs brought suit against three groups of defendants: taxicab and medallion owners, dispatch service companies and a taxicab garage. They claimed that the defendants jointly misclassified them as contractors rather than employees, entitling them to relief under Massachusetts’ minimum-wage and overtime laws.
The SJC ruled against the taxicab drivers. In reaching this conclusion, the court first addressed the issue of whether the defendants were joint employers. It held that the defendants should not be considered “as a single employer exercising monolithic control over the taxicab industry.” Instead, entities can formulate legitimate business-to-business arrangements to secure services, and this, on its own, does not render the entities joint employers. Thus, when analyzing claims under the independent contractor statute, the SJC explained that courts must look separately at each defendant’s relationship with the plaintiffs to assess potential liability.
Before determining whether the taxicab drivers were employees, the court assessed the threshold question of whether the taxicab drivers provided services to the defendants. The court held that the drivers provided no services to the garage, but that the drivers did provide services to the dispatch companies and the taxicab and medallion owners.
Next, the court turned its analysis to whether the dispatch companies and taxicab and medallion owners could lawfully classify the drivers as independent contractors under Massachusetts’ independent contractor statute. The SJC explained that all three of the following elements must be met in order for the defendants to prevail: (1) the drivers must be “free from control and direction in connection with the performance of the service,” both under their contracts and in fact; (2) the service being performed must be “outside the usual course of the business of the employer”; and (3) the drivers must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”
Under the first prong, freedom from direction and control, the SJC determined that the drivers were mostly independent. The drivers selected their own shifts and which passengers to pick up or refuse. The court also found that the defendants satisfied the second prong because the drivers’ services were outside the usual course of the defendants’ businesses. The court reasoned that the medallion owners’ leasing businesses were not dependent on the success of the drivers’ operations. Rather, a driver paid a daily flat-rate to lease a taxicab, and the taxicab and medallion owner retained this fee regardless of how much money the driver earned on a given day. The court similarly found that the dispatch companies were not in the business of giving rides; instead, they were in the business of selling dispatch services to medallion owners.
Finally, under the last prong, the court found that the drivers engaged in an independent trade or business. Specifically, the drivers had the freedom to lease from whomever they wanted on whatever days they wanted. The drivers were not tied to particular medallion owners, and they were free to advertise their services as they wished. Because the defendants carried their burdens under all three prongs of the statute, the SJC ruled that the drivers were properly classified as independent contractors. A significant component of the court’s rationale was that regulations governing the taxicab industry recognized that drivers could be independent contractors as well as employees. Under this regulatory scheme, the entities–be it the taxicab and medallion owners, dispatch companies or the drivers themselves–are free to plan an arrangement that provides for either result.
Sebago is important because it reiterates that legitimate business-to-business relationships are outside of the stringent Massachusetts independent contractor statute. The plaintiffs’ bar will likely claim that the unique regulatory scheme covering the taxicab industry makes this case inapposite to misclassification disputes arising in other industries. However, the decision suggests that businesses in any industry will not be treated as employers for purposes of state wage laws when the services they provide are legitimately different from those provided by a contractor.
Massachusetts SJC Decides that Managers at LLCs Can Individually Liable For Wage Act Violations
Yesterday, the Massachusetts Supreme Judicial Court held that managers of limited liability companies can be individually liable under the Massachusetts Wage Act for unpaid wages due to employees. Historically, the Wage Act has been interpreted to impose individual liability on officers of corporations, but not on managers of LLCs. In Cook v. Patient Edu, the SJC dramatically departed from past interpretations of the Act and determined that managers of LLCs may have to personally pay the price for wage and hour violations affecting employees.
The decision arises out of a lawsuit originally brought in Massachusetts Superior Court, against Patient Edu, LLC and two of its managers by Cook, a former employee, for unpaid wages. Cook claimed that he accepted a position as Patient Edu’s business development director, for which he was to be paid a sizable base salary and bonuses, but was not paid during the first six months of his employment and then only sporadically thereafter. The Superior Court dismissed the claim against the two managers, concluding that the Wage Act “does not, by its plain language, impose individual liability on the managers of an LLC.”
On appeal, the SJC reversed the lower court, holding that “a manager who ‘controls, directs, and participates to a substantial degree in formulating and determining’ the financial policy of a business entity . . . may be a ‘person having employees in his service’ . . . and thus may be subject to liability for violations of the Wage Act.” The court recognized that the Wage Act does not, by its plain language, impose liability on managers at LLC’s (but rather only on individuals involved in the management of a “corporation”), but explained that this was in part because when the individual liability language was added to the statute, limited liability companies did not exist as a form of business association. The court concluded that a more expansive interpretation of the Wage Act was justified because “the legislative intent of the Wage Act, to hold individual managers liable for violations, is clear.”
The SJC’s decision greatly expands the potential liability of managers of LLCs, making clear that they cannot use that form of business entity to avoid personal liability. In a civil action under the Wage Act, a successful plaintiff is entitled to treble damages as well as attorneys’ fees. Massachusetts-based LLCs, as well as other LLCs with employees working in Massachusetts, should be aware of the expanded potential liability.
Out-of-State Workers May Bring Suit under Massachusetts Independent Contractor Statute
In a decision issued in late May 2013, the Massachusetts Supreme Judicial Court (SJC) held that plaintiffs who live and work outside of Massachusetts for Massachusetts-based companies can sue for purported violations of Massachusetts’ independent contractor law. In Taylor v. Eastern Connection Operating, Inc., the SJC held that out-of-state plaintiffs may bring suit where a written contract between the parties contains an enforceable Massachusetts choice of law and forum selection provision, and where Massachusetts law is not contrary to a fundamental policy of the state where the plaintiffs live and work. This ruling is particularly important because the Massachusetts independent contractor law sets more stringent criteria for engaging a worker as an independent contractor than many other states’ laws.
The SJC’s ruling arises out of a case brought by three individuals who live in New York but work for a courier company headquartered in Massachusetts. Under their contracts, they were classified as “independent contractors” who were to perform pickup and deliveries exclusively in New York. The contracts further provided that the contract and all rights and obligations of the parties were to be construed under Massachusetts law and that any lawsuits between the parties were to be brought in a court in that jurisdiction. In 2010, the plaintiffs brought a class-action lawsuit in Massachusetts Superior Court against the courier company, alleging that they were misclassified as independent contractors rather than employees in violation the Massachusetts independent contractor statute and that they were not paid wages and overtime in violation of the Massachusetts wage statute and overtime statute. The Superior Court dismissed the lawsuit, concluding that the Massachusetts independent contractor statute did not apply to non-Massachusetts residents working outside of Massachusetts and that, as independent contractors, the wage and overtime statutes did not apply to the plaintiffs.
On appeal, the SJC held that the choice-of-law provision in the contracts was enforceable, finding both that Massachusetts has a “substantial relationship” to the transaction between the plaintiffs and defendant given the defendant’s Massachusetts headquarters, and that the application of Massachusetts law would not contravene a fundamental policy of New York. Given the parties’ agreement, the Court concluded that the plaintiffs could assert a claim under the Massachusetts independent contractor statute. Furthermore, because the plaintiffs could ultimately be deemed employees rather than independent contractors under the statute, the plaintiffs may also be able to assert claims under the Massachusetts wage and overtime statutes.
The SJC’s decision greatly expands the potential liability of Massachusetts companies that have independent contractors and employees who live and work outside of Massachusetts. The decision makes clear that Massachusetts companies are not immune from claims under Massachusetts wage-and-hour statutes simply because their workers live and work outside of the Commonwealth. In light of the SJC’s decision, Massachusetts-based companies that have independent contractors or employees living and working outside of Massachusetts should carefully review their contracts and employee handbooks to assess whether those documents leave them exposed to potential liability under Massachusetts law.
Massachusetts Supreme Judicial Court Rules That A Release Must Specifically Reference The Massachusetts Wage Act In Order Be Binding Under That Statute
In Crocker v. Townsend Oil Company, Inc., the Massachusetts Supreme Judicial Court (SJC) ruled this week that in order to release potential past claim under the Massachusetts Wage Act, the release must be plainly worded and understandable to the average person and must contain express language that Wage Act claims are being released.
The SJC’s ruling arises out of a case involving alleged misclassification of employees as independent contractors. The defendant, Townsend, is a home heating oil delivery business. The plaintiffs, Edward Crocker and Joseph Barrasso, worked for Townsend delivering oil as independent contractors pursuant to contract carrier agreements. Eventually, Townsend terminated its relationship with both plaintiffs using contract carrier termination agreements that contained a mutual general release of claims. The plaintiffs subsequently sued Townsend for unpaid wages under the Wage Act, asserting that they were in fact employees and were entitled to unpaid wages (including overtime pay). A Superior Court judge initially granted summary judgment in favor of Townsend, but a second judge vacated that decision, concluding that the general releases executed by the plaintiffs were insufficient to release the plaintiffs’ claims under the Wage Act. The SJC ultimately transferred the case on its own motion to address the validity of the general release.
In concluding that the general releases executed by the plaintiffs were insufficient to waive Wage Act claims, the Court addressed the tension between its own policy of giving broad effect to general releases and specific language in the Wage Act prohibiting “special contracts” between employers and employees that would exempt employers from Wage Act liability. (This language has been cited in the past to invalidate employee agreements to defer wages that are otherwise due.) Citing important public policy considerations underlying the Wage Act, the SJC held that a release can effectively cover Wage Act claims, but only if the release of the Wage Act claims is stated in “clear and unmistakable terms.” The Court further explained that the release must be “plainly worded and understandable to the average individual” and must “specifically refer to the rights and claims under the Wage Act that the employee is waiving.” The Court’s logic is that such clear wording will ensure that employees are not unwittingly waiving rights.
The take away from this decision is that employers should make a special effort to ensure that its release agreements meet the SJC’s new standard, including that the Massachusetts Wage Act is specifically referenced as a statute under which claims are being released.
Jonathan Keselenko and Chris Feudo
Foley Hoag LLP
Boston, Massachusetts
Paid Sick Leave Bill May be on Move in Massachusetts
The Massachusetts Legislature’s Joint Committee on Labor and Workforce Development is considering a bill that would require all employers in the Commonwealth to provide sick time to their employees and employers with more than six employees to compensate their employees for this sick time. While passage by the Legislature in the remaining months of the session is uncertain, employers may want to consider the bill’s potential effects on their operations.
Currently in Massachusetts, there is no requirement that employers provide any sick time (paid or unpaid) to employees (although laws such as the Family and Medical Leave Act provide employees with a right to unpaid leave under certain circumstances). Under the bill, workers would be eligible for an hour of sick time for every 30 hours worked. Whether the sick time is paid would depend on the employer’s size. Businesses with fewer than six employees would be required to provide 40 hours of unpaid sick time in a year to employees. Businesses with six to 10 employees would need to provide 40 hours of paid sick time, and businesses with more than 10 employees would be required to provide 56 hours of paid sick time.
The revised bill would allow businesses that offer other forms of paid time off – including vacation or other leave policies – to meet the mandate as long as they provide an equal or greater number of hours. The bill would give the Attorney General authority to enforce the paid sick time provisions; however, similar to other wage and hour provisions, an employee could bring his own suit after providing the Attorney General with 90 days notice. Prevailing employees would be eligible for treble damages, lost wages, the costs of litigation and attorneys’ fees.
The release of the revised bill mirrors efforts in other states and municipalities to mandate paid sick leave time. As mentioned in this blog previously, Connecticut passed legislation last year to mandate paid sick leave days; however, businesses with less than 50 employees are exempted from that law. Seattle, San Francisco and the District of Columbia also require certain employers to provide paid sick time.
If the bill is reported favorably from the Labor and Workforce Development Committee, it is likely headed to the Senate Ways and Means Committee before reaching the Senate floor. The legislative session ends on July 31.
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