Employment Law Issues for the Gig

Economy

Silicon Valley, San Francisco, Los Angeles

rroyse@rroyselaw.com

www.rroyselaw.com

Lisa Chapman is an experienced employment attorney and litigator. In her employment law practice she helps startup and mid-size companies navigate and comply with federal and state employment laws and regulations. This includes laws related to wage and hour requirements, sexual harassment and retaliation, worker classification (independent contractor vs. employee status) and overtime laws, among others.

Alan Haus focuses his practice on intellectual property protection, licensing and commercial transactions, and employment law. Mr. Haus represents clients ranging from start-ups to multinational companies, including food and other consumer products companies, and e-commerce, software and entertainment companies. Mr. Haus has been outside general counsel to many companies over the course of his career and has an unusually broad range of skills beyond his core practice areas.

Pamela Lambert is a transactional attorney practicing in the firm’s corporate and securities group. She assists and advises a wide variety of clients ranging from emerging growth to mid-market companies and the venture capital funds investing in those entities. Her practice focuses on matters including entity formation, corporate governance, securities compliance, private financings, M&A and general corporate compliance.

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OUTLINE

1. MISCLASSIFICATION: INDEPENDENT CONTRACTOR VS. EMPLOYEE

2. MANAGING RISK: WHAT ARE THE DIRECT & INDIRECT COSTS

3. STRATEGIES FOR AVOIDING MISCLASSIFICATION

4. CHANGES IN THE LEGAL LANDSCSAPE

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MISCLASSIFICATION: INDEPENDENT CONTRACTOR VS. EMPLOYEE

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EMPLOYMENT STATUS: THE LAW• The presumption is that the worker is an

Employee (Cal. Lab. Code §3357)• Different agencies/jurisdictions have different

tests– IRS– DOL/FLSA– CA Common Law and EDD– Statutory Employees

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EMPLOYMENT STATUS: THE LAW• IRS: The Control Test

– Behavioral Control– Financial Control– Type of Relationship

• DOL/FLSA: Economic Realities Test/Silk Factors– Focus is on the degree of control the Company has over the worker performing the service.

The key inquiry is the right to control not whether the Company actually exercises the control. – In July 2015 DOL issued administrative guidance and explained that the test focuses on

whether the worker is economically dependent on the hiring entity or is in business for herself/himself.

• CA Common Law/EDD: S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341

– This is a multi-factored test with the most significant factor considered is whether the principal has control or the right to control the worker as to the work done and the manner and means in which it is performed.

• Statutory Employees

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MANAGING RISK: WHAT ARE THE DIRECT & INDIRECT COSTS?

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DIRECT COSTS OF MISCLASSIFICATION FINDING• Unpaid back federal, state and local income tax withholdings

• Unpaid back Social Security and Medicare contributions• Unpaid federal and state unemployment insurance taxes• Unpaid workers’ compensation premiums • Unpaid back overtime compensation and/or minimum wages

– Overtime and Minimum Wage Penalties

• Unpaid work-related expenses • Unpaid sick and vacation pay• Waiting Time Penalties (Cal. Lab. Code §203)• Cal. Lab. Code §226.3 (Failure to Provide Accurate Wage Statements)

– $250 per employee per violation in an initial citation; $1,000 per employee for each subsequent violation

• SB 459 (Cal. Lab. Code §226.8 & §2753)– Willful misclassification – Penalties range from $5,000 - $15,000 PER violation. If an entity is in

engaged in a “pattern or practice” of misclassification fines increase to $10,000 - $25,000 per violation

– Joint and Several Liability with Employer for knowingly advising misclassification (exception for practicing attorneys and persons advising his/her employer)

– “Willful misclassification” means “voluntarily and knowingly misclassifying that individual as an independent contractor”. This has not yet been interpreted by a court.

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DIRECT COSTS OF MISCLASSIFICATION FINDING• Attorney Fee Shifting Statutes

– Minimum Wage/Overtime (Cal. Lab. Code §1194)– Nonpayment of Wages/Benefits (Cal. Lab. Code §218.5)– Enforcement of Public Interest (Cal. Lab. Code §1021.5)– Cal. FEHA Fees (Cal. Gov’t. Code §12965(b)

• Criminal Penalties– Failure to procure workers’ compensation insurance (Cal. Lab. Code §3700.5)– Knowingly and Intentionally Violating Cal. Lab. Code §226 (Failure to provide wage statements)– Potential Insurance Premium Fraud

• Intentionally underreporting payroll or misclassifying workers to avoid workers’ compensation premiums

– Example:• T.B. Concrete – charged with 15 felony counts of submitting false payroll reports and

misclassifying employees to avoid payroll taxes and workers’ compensation expenses. State claimed that 111 (85% of the Company’s payroll) were underreported.

• Stop Orders and Penalty Assessments under Cal. Lab. Code §3710.1• PAGA Claims

– Allows plaintiffs’ attorneys to bring suit on behalf of individuals as a stand-in for the attorney general in order to seek any civil penalty that the LWDA or its departments could seek for a violation of the Labor Code. There is a “default penalty” of $100.00 per violation.

– They must give the employer 33 days to “cure” the “violation” before bringing a PAGA claim.

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INDIRECT COSTS OF MISCLASSIFICATION FINDINGSHORT TERM COSTS & BENEFITS

– Employers save around 30% on payroll and related taxes by utilizing Independent Contractors

• Do not need to provide:– Health Benefits– Retirement Benefits– Paid Time Off

– Employees have:• Flexible Work Schedules• Supplemental Income• No Benefits

– PTO, Health or Retirement• No Legal Protection

– No workers’ compensation or wage and hour law protection• No Job Security

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INDIRECT COSTS OF MISCLASSIFICATION FINDINGLONG TERM COSTS & BENEFITS

• How is this new labor market impacting Company culture?• Potential Impact on Hiring – Who will join your Company?• Limited to No Training of Workers Classified as Independent Contractors

– Affects Quality Control• Employee Loyalty

– Independent Contractors will work for competitors– Risk of Trade Secret Theft

• Impact on Investor Funding– Red flag in due diligence, concern with litigation risk VS– Focused on financial benefits; want startups to keep costs low

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INDIRECT COSTS OF MISCLASSIFICATION FINDING• LITIGATION COSTS

– Statute of Limitations• Varies upon jurisdiction, generally 2-3 years

– No Waiver of Wage and Hour Law Claims in a Release

• Many Releases include language directly asserting that wage and hour law claims are not waived

• Can include language preventing collection of monetary relief from wage and hour claims

– Attorney’s Fees• Fee Shifting Statutes make litigating potentially

extremely expensive– Liquidated Damages

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STRATEGIES FOR AVOIDING MISCLASSIFICATION

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STRATEGIES FOR AVOIDING MISCLASSIFICATION• If the Company desires to utilize independent contractors:

– Re-evaluate current independent contractors to ensure status is still applicable.

• Remember status can change over time– Draft an independent contractor agreement that establishes real

independence– Structure the day to day work relationships to follow the

independent contractor agreement and be sure that the daily activities reflect actual independence

– If status of a worker or group of workers looks like a “close call” or falls into the “legal grey area” consider classifying as an employee (part-time, temporary, etc.)

– Consider using a Staffing Agency or Workforce management firm• CAUTION – recent case law has held joint and several liability

for Company with staffing agency/workforce management firm for indirect control over worker– NLRB v. Browning-Ferris Industries of California, Inc., 362 NLRB No. 186 (Aug. 27, 2015)

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CHANGES IN THE LEGAL LANDSCAPE

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RECENT CASE LAW

• Uber

• There are couple of different Uber decisions. A trend that has appeared from these cases is “the modern tendency is to find employment when the work being done is an integral part of the regular business of the employer, and when the worker, relative to the employer, does not furnish an independent business or professional service”. The rulings have stated that because Uber’s business would not exist without the drivers they are integral to Uber’s business and when the worker is integral to the business, there is a tendency to find employment status.

• Recent $100 million settlement rejected by San Francisco federal judge

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RECENT CASE LAW

• Lyft• Lawsuit settles 2013 misclassification lawsuit for $12.25

million• Change Terms of Service to comply with California law

• No longer deactivated without warning.• Deactivation must be for a specific reason listed in

the TOS• Drivers must be given opportunity to fix the problem

before deactivation• Amazon

• Filed in U.S. District Court in Washington State on October 4, 2016

• Alleges Amazon has misclassified delivery drivers as independent contractors when they are actually employees, thereby violating the FLSA.

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HYBRID WORKER CLASSIFICATION• “Dependent Contractor”

– Receives some but not all employee protections– Canada

• Employers are required to provide the worker with reasonable notice upon termination - Keenan (c.o.b. Keenan Cabinetry) v. Canac Kitchens, a Division of Kohler Ltd (“Canac”)

• Ultimate factors are: exclusivity and economic dependence

– 80% or more of income from a single source– Germany

• Worker that is economically dependent on his or her job and has been working with one entity for several years

• 50% of income from a single source• “Minijobs” are permitted for part-time workers

where the worker earns no more than €450 per month and the income is tax free

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NEW ADMINISTRATION

• Hillary Clinton– Spoken out against employers who misclassify

independent contractors by promising to crack down on the “bosses misclassifying workers as contractors”

– Believes the on-demand or gig economy is “creating exciting opportunities and unleashing innovation, but is raising hard questions about workplace protection”

• Donald Trump– No direct statements on gig economy but has proposed a

federal tax plan that would be favorable to independent contractors by lowering the corporate tax rate to 15%. He includes independent contractors among the business entities that would benefit from the reduced corporate tax rate.

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