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In an August 2016 interview, John S. Ho examines the increase in employee misclassification lawsuits, defense litigation strategies and the legal landscape post issuance of the Labor Department’s 2015 Administrator’s Interpretation on identifying employees who are misclassified as independent contractors.PDF version of report
John S. Ho (interviewed by Katherine C. Parris)
John S. Ho ( email@example.com)is a member in Cozen O’Connor’s New York office. Mr. Ho exclusively represents employers and regularly handles wage and hour matters involving federal and state regulations, as well as discrimination claims, workplace investigations and arbitrations. He also assists companies with internal wage and hour audits and Department of Labor audits, including those generated by independent contractor issues with New York unemployment filings. He has defended a wide range of employers against hybrid collective and class actions under the FLSA and the New York Labor Law. Mr. Ho is admitted to practice in New York and Connecticut, as well as New York federal district courts.
[Editor's note: Last year, the U.S. Department of Labor issued Administrator's Interpretation No. 2015-1 addressing how economic realities factors should be applied to determine whether a worker is an employee or an independent contractor under the Fair Labor Standards Act’s broad definition of employment. The DOL thus far has entered into partnerships and signed agreements with 32 states to support its employee misclassification enforcement initiative. Pennsylvania is the most recent state to enter into a three-year Memorandum of Understanding with the department.]
What do you attribute to the increase in employee misclassification lawsuits and has this increase changed wage and hour defense litigation?
Companies always have used independent contractors, but the increase in misclassification lawsuits is directly tied to targeted government enforcement action in recent years. For example, the DOL has a misclassification initiative where it teams up with various states to refer misclassification cases. The DOL also does this with the Internal Revenue Service, although the referrals there only go one way, from the DOL to the IRS.
In addition, many states have similar targeted enforcement efforts. For example, New York has a specific task force to combat misclassification, and its primary tool is also a cross referral system among various agencies, such as Unemployment and Workers’ Compensation.
New York also in recent years has passed legislation making it significantly more difficult in certain industries to classify a worker as an independent contractor, namely construction and commercial goods transportation. Many other states have passed similar legislation or increased statutory penalties for misclassification. Such government enforcement and legislation have put a spotlight on misclassification.
In terms of wage and hour auditing practices, a review of 1099 workers is usually at the top of the list.
What impact does the increase in the DOL’s use of partnership initiatives have on misclassification claim defense litigation?
These types of misclassification initiatives, which are sometimes described as “horizontal,” i.e., DOL to IRS, and “vertical,” i.e., DOL to individual states, will continue to highlight misclassification.
These initiatives also will continue to prompt states to take legislative action as New York did to pass laws that either create rebuttable presumptions of employment status or make penalties for misclassification greater.
The result may be (and should be) that companies need to be very careful when using independent contractors and to have such arrangements, particularly the written independent contractor agreements, reviewed by counsel.
Independent contractor agreements, although not dispositive, will either be Exhibit A in the plaintiff’s case or Exhibit A for defendant, depending on how they are written.
Many state agencies, like Unemployment, usually will cite to specific paragraphs in the independent contractor agreement when justifying a misclassification decision. These are tremendously important documents to defend against misclassification.
What general defenses are available to litigators defending misclassification claims?
Hopefully, the best defense is that the facts support a bona fide independent contractor relationship. Although the exact legal test that applies may vary to some degree depending on whether it’s a federal or state law claim or which circuit court you happen to be in, all tests look to the amount of control the entity exercises over the worker.
If the worker is paid a set amount per week, a common alternative argument is, even if the worker is deemed to be an employee, that he or she was an exempt employee under the relevant exemption—usually one of the “white-collar” exemptions.
What innovative litigation strategies and arguments have you witnessed and/or employed in defending against misclassification claims?
You sometimes see equitable defenses raised, such as in pari delicto, which basically says that relief should be denied because both parties (the worker and hiring entity) are in equal fault as they both agreed to the independent contractor relationship. Other versions of this defense include unclean hands because the worker often wants to be classified as an independent contractor, according to the company. That said, I don’t believe I’ve seen a court adopt in its entirety such an equitable defense that faults or blames the worker.
What types of approaches and strategies can litigators utilize when defending hybrid state/FLSA misclassification claims?
Similar to misclassification of exempt status, it’s important to separate the state law claim. The state law claim generally operates under a significantly higher threshold for class certification under Rule 23 of the Federal Rules of Civil Procedure than the more lenient two-step process for conditional certification/decertification under the FLSA.
Because Rule 23 class certification generally means that all class members are automatically in the class unless they affirmatively opt out, the damages are significantly higher than the usual result of the FLSA’s opt-in process where the class almost inevitably will be smaller.
For practical purposes, there are so few Rule 23 class certification cases that go to trial because cases almost always settle after the class certification decision.
Moreover, in states like New York that have a significantly longer statute of limitations than the FLSA, employers are much more likely to go to war on the state law certification motion.
Are there differences in strategies defense litigators utilize when defending hybrid state/FLSA misclassification claims versus non-hybrid claims?
In New York, hybrid claims are very common. In California, because the state labor code tends to be much more employee friendly, lawsuits often focus on the state law claims and may not even raise FLSA claims.
On the other hand, if the complaint raises only an FLSA claim, some employers may not even challenge conditional certification depending on the underlying facts because the standard for conditional certification is, as many courts say, “modest.”
Challenging conditional certification also may depend on the total number of putative collective action members. Generally speaking, it’s very uncommon to even come close to a 100 percent opt-in rate. If the entire putative class isn’t that large, then the opt-in class may be very manageable after the opt-in period closes, thus, making settlement more likely.
For this reason, I have found that in terms of settlement timing, a good time to discuss settlement is usually shortly after the opt-in period closes.
Do you believe there have been changes to the wage and hour litigation landscape since the DOL issued Administrator’s Interpretation No. 2015-1?
Not on a substantive level. In terms of the law, there is really nothing new in the Interpretation and it doesn’t really change the legal test.
Of course, by reading it, you might come away with the opinion that it’s virtually impossible to ever classify someone as an independent contractor, which isn’t true. But of course, the Interpretation was issued to continue to highlight the misclassification issue and the DOL’s targeted enforcement effort with respect to misclassification (or the “fissured” workforce, as the DOL often uses that term to describe the independent contractor relationship).
Are there any implications for litigators as a result of this Administrator’s Interpretation?
Misclassification remains to be a hot topic for government enforcement and private litigation. Without regard to the specific facts of a case, defending an independent contractor relationship tends to be an uphill battle. I find this particularly true if defending an independent contractor relationship at Unemployment hearings, where the judges may be generally inclined to provide benefits to someone who is out-of-work and there may be a certain emotional charge to doing so.
Are there any future changes you see occurring in wage and hour litigation regarding employee misclassification claims that litigators should anticipate?
Litigators should be aware of the legislative changes at both the federal and state level to address misclassification. There are a number of good resources out there that track such legislation and proposed legislation.
I think the clear trend is that the use of independent contractors particularly when the facts are “unclear” will continue to be a risky proposition. For companies that only utilize a few independent contractors and sporadically in such a “murky” factual setting, the safer option may be to simply hire them as employees.
On the other hand, if you utilize a business model like Uber that relies on the independent contractor relationship, you may have little choice but to defend it as aggressively as possible and the numerous lawsuits that may follow.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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