Minimize the Risk of Costly Misclassification Suits

By Joanne Deschenaux Oct 8, 2015
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On Sept. 22, 2015, Uber was hit with a proposed class action in Pennsylvania state court alleging that drivers for the ride-hailing company had been cheated out of reimbursement for expenses and tips withheld by Uber as a result of being misclassified as independent contractors. Similar litigation was filed earlier in the year in California.

Uber isn’t the only on-demand firm facing litigation. One day after the Uber suit was filed in Pennsylvania, three food delivery companies—GrubHub, DoorDash and Caviar—were sued in a San Francisco Superior Court. Those suits also allege that the firms are improperly classifying workers as independent contractors. According to documents filed in the lawsuits, workers must pay for expenses like gas, parking fees and phone data, which would be illegal under California law if they were classified as employees.

“Misclassification class-action lawsuits are increasing, fact-intensive and very expensive to defend. But at the same time, as many companies are increasingly hiring more independent contractors for financial and organizational incentives, they must be aware of the complexity of misclassification claims in order to minimize their risk exposure,” said Jim Evans, an attorney with Alston & Bird’s labor and employment group in Los Angeles.

In addition, state and federal regulators have indicated that they intend to scrutinize independent contractor relationships to ensure that workers are being treated fairly and that companies are paying employment taxes and providing benefits required by law. The National Labor Relations Board, Department of Labor and Internal Revenue Service have all expressed concern over companies using contract labor, Evans added.

Employees Must Be Reimbursed for Expenses

Uber offers a mobile application that connects riders with drivers who provide transportation service using their personal vehicles. The drivers get paid a rate set by Uber. But Shannon Liss-Riordan, an attorney for the drivers in the California case, said Uber passes on a lot of costs. The drivers “have to pay for their own cars. They have to pay for their gas. They have to pay for the wear and tear on their vehicles. And basically Uber is able to shift all those expenses to its drivers and not have to pay it themselves,” she said.

According to Liss-Riordan, the drivers are arguing that they should be classified as employees—not contractors—and she said labor law supports their position, especially in California where the company is headquartered. “In California, those laws are particularly strict and say that employers have to reimburse their employees for expenses that are required to do the job,” she said.

An Uber spokeswoman defended the company’s employment practices. “Eighty-seven percent of drivers say the main reason to use Uber is because they love being their own boss,” spokeswoman Taylor Bennett said. “As employees, drivers would drive set shifts, earn a fixed hourly wage, and lose the ability to drive using other ride-sharing apps as well as the personal flexibility they most value. The reality is that drivers use Uber on their own terms: They control their use of the app.”

An ultimate finding that drivers are employees could raise Uber’s costs beyond the lawsuit’s scope and force it to pay for Social Security, workers’ compensation and unemployment insurance for the drivers.

Review Contract and Training Materials

There are several ways a company can safeguard against misclassification claims, Evans said. First, review your contract and training materials. If you are classifying workers as independent contractors:

  • Do not dictate job qualifications or manner of discharging duties, other than those mandated by law.

  • Do not retain the right to discipline in any way. Merely provide for the mutual right to terminate at will.

  • Do not set wage limitations for the contractor or its employees.

  • Do not impose employee policies, including safety policies, on the contractor other than those mandated by law.

Any materials provided by the company related to policies or procedures should be merely guidance and expressly optional. Limit printed materials.

Provide that the contractor is exclusively responsible for work schedule, meal and rest periods, hours worked, and manner and method of discharging duties.

Avoid Control by Management

In addition, once independent contractors are on board, do not get involved in managing, supervising or directing the contractor or assigning work other than giving a general description of duties, Evans said. For example:

  • Do not direct work hours, overtime or break times, other than stating the hours in which the contractor is to provide services.

  • Do not get involved in the manner or method by which the work is done.

Further, businesses should limit control over operations to ensuring standardized products or services, customer safety, and customer experience.

Rules regarding statutory or regulatory obligations are permissible and do not constitute control, Evans added.

To reduce exposure to classification lawsuits or regulatory actions, companies should carefully review their contractor relationships and be honest with themselves as to the accuracy of the classification. Is it truly an independent contractor relationship, or does it have the attributes of an employment relationship? If the company is exercising control over the manner or method by which a particular result is accomplished, it is likely to be characterized as an employment relationship. “Remember that the characterization contained in a written contract or other materials is not controlling on a court or a regulatory agency. Each will look through and consider the economic reality of the relationship,” Evans said.

Joanne Deschenaux, J.D., is SHRM’s senior legal editor.

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