Direct sellers and door-to-door salespersons are frequently classified as independent contractors – and that classification is increasingly under attack, both by class action lawyers and the U.S. Department of Labor, as reflected in two key case developments from May 2021. It is undeniable that many door-to-door salespersons legitimately can be classified as independent contractors under federal and most state laws, yet at the same time some undoubtedly are misclassified. That determination depends entirely on how the IC relationship is structured, documented, and implemented. Direct sellers, on the other hand, are regarded as ICs under federal and most state tax laws and many state unemployment insurance laws by virtue of statutory provisions essentially excluding them from the definition of employee. Yet, those direct seller laws have typically not been applied to claims arising under laws governing overtime pay, minimum wage, expense reimbursement, and other labor and employment laws – and the U.S. Department of Labor has adopted that position as described below. Direct selling companies and businesses using door-to-door salespersons can minimize IC misclassification risk by enhancing compliance with IC laws. Many companies use a process such as IC Diagnostics (TM) to restructure, re-document, and re-implement their IC relationships in a customized manner, consistent with their existing business model.
Among the other cases on which we report below is a key federal appellate court decision holding that the U.S. Department of Labor is not bound to arbitrate an IC misclassification enforcement action brought on behalf of a group of workers who had signed arbitration agreements. This decision confirms our oft-repeated observation that even an effectively drafted arbitration agreement with a class action waiver is not enough protection for businesses that engage a large number of ICs. Rather, an enhanced level of compliance with applicable IC laws remains a company’s best deterrent and defense to legal challenges alleging IC misclassification.
In the Courts (6 cases)
DOOR-TO-DOOR SALES REP FILES CLASS ACTION FOR INDEPENDENT CONTRACTOR MISCLASSIFICATION. A door-to-door sales representative selling home energy contracts has brought a proposed class and collective complaint in Pennsylvania federal court against Platinum Advertising LLC and its related entities alleging minimum wage and overtime violations under the FLSA and state law due to the alleged misclassification of the sales reps as independent contractors. The company offers marketing and sales expertise to both telecom and energy service companies. According to the complaint, the sales representatives typically worked six days per week, a minimum of eight hours per day and often more than ten, are required to make sales calls on personal time, and are paid solely on a commission basis, subject to the company’s approval, regardless of how many hours they work. In support of the misclassification claims, the plaintiff alleges that significant control was exercised by the company by requiring the sales reps to routinely work in excess of 60 hours per week, wear a company uniform, and follow a sales script. The plaintiff further asserts that the sales reps are not required to have any specialized skills to perform their jobs, do not have their own enterprise or separate business structure, are not permitted by the company to assign or delegate their responsibilities, and have no opportunity for profit and loss. McWilliams v. Platinum Advertising LLC, No. 2:21-cv-00607 (W.D. Pa. May 10, 2021).
DIRECT SELLING COMPANIES UNDER LITIGATION ATTACK BY THE U.S. DEPARTMENT OF LABOR FOR IC MISCLASSIFICATION. The publisher of this blog was quoted in a May 9, 2021 article in Law360 Employment Authority by Jon Steingart, commenting on an appellate brief submitted by the U.S. Department of Labor. The DOL alleges that over 1,500 call center workers are owed $1.5 million in back wages due to their misclassification as independent contractors and not employees. In its brief, the DOL stated that the lower court had properly concluded that an Internal Revenue Code provision designating “direct sellers” as nonemployees did not apply to the FLSA’s exemptions and that, “The IRS provision, by its terms, plainly limits its applicability to federal tax law.” The publisher commented that the case is a reminder that independent contractor classification comes into play under a variety of laws that use different tests to pursue different purposes, noting: “A large number of direct selling companies mistakenly believe that an IRS rule, which says that direct sellers are not employees if paid on a commission-only basis, also applies to the federal and state wage and hour laws. Because of this misconception, direct selling companies often don’t give independent contractor classification the attention it deserves. Businesses in this industry should do just the opposite — enhance their level of contractor compliance.” Walsh v. Wellfleet Communications, No. 20-16385 (9th Cir. May 12, 2021). We first proposed that suggestion for direct selling companies over five years ago in an earlier blog post, and it remains our view today.