The Delicate Case for Reclassification of Independent Contractors

From JDSupra, Richard Reibstein discusses two cases in which workers were reclassified from independent contractors to employees and Richard discusses the challenges and risks of reclassifying existing workers. Richard writes:

Two cases reported below in our review of legal developments in February 2024 address reclassification of independent contractors. The first case is one in which a state and county sought enforcement of California’s strict ABC test for independent contractor status and secured a settlement against a staffing company including its agreement to reclassify workers as employees whom it had previously classified as ICs. The second lawsuit involves a group of workers first engaged as independent contractors and then converted to employees. Many companies that use ICs question whether they should reclassify their contractors and begin to treat them as employees in the hope that they can avoid IC misclassification lawsuits. The act of reclassifying workers as W-2 employees after treating them as 1099 independent contractors can, however, not only prompt an IC misclassification lawsuit but, if not done in an appropriate manner, can also be used as evidence that the workers were initially misclassified. In contrast, especially in states like California and Massachusetts with their ultra-strict ABC tests for IC status, reclassifying workers from IC to employee status as part of a settlement of a lawsuit is an option some employers have considered. The approach taken by the overwhelming number of companies, however, is not to reclassify, which can create the impetus for an IC misclassification lawsuit and typically is not financially feasible. Rather, most prudent businesses seek to enhance compliance with laws governing the use of ICs. One process used by an increasing number of businesses is IC Diagnostics (TM), which enhances IC compliance by restructuring, re-documenting, and re-implementing IC relationships in a customized and sustainable manner consistent with the company’s business model. The only approach that makes little sense is to do nothing and instead risk a legal proceeding brought by a government agency or plaintiffs’ class action lawyer, as in the first two cases reported below.

In the Courts (4 cases)

GIG ECONOMY STAFFING COMPANY AGREES TO RECLASSIFY WORKERS AND PAY $2.1 MILLION IN IC MISCLASSIFICATION LAWSUIT. Staffing company Qwick Inc. has agreed to pay $2.1 million in a settlement with the City of San Francisco and the State of California for allegedly misclassifying as independent contractors the gig workers it referred to its hospitality clients.  The settlement provides that the on-demand staffing company will convert all of its 10,000 allegedly misclassified California workers to employees. According to a news release issued by San Francisco City David Attorney Chiu, the settlement ends an action brought in 2023 in a California state court by the State of California and City of San Francisco alleging that Qwick violated the state’s Labor Law and Unfair Competition Law by classifying its hospitality workers as independent contractors and not employees and by failing to provide them with meal and paid rest breaks. According to the news release, the company, through its mobile app, provides restaurants, caterers, and event production companies with on-demand workers to fill empty shifts. The workers are engaged in many different front-of-house and back-of-house roles, including shifts for servers, bussers, bartenders, baristas, dishwashers, cooks, barbacks, event staff, and concession workers. When the workers fill a shift, they work alongside and perform the same functions as hotel and restaurant employees. ‎‎Under the terms of the court-approved settlement, the company must pay its California workers $1.5 million in restitution and reclassify workers that stay on as employees and provide them with a bank of accrued sick leave hours valued at up to $350,000. The company must also pay $250,000 to the City in civil penalties. California v. Qwick Inc., No. CGC23608756 (Cal. Super. Ct. San Francisco County Feb. 22, 2024).

WASTE COMPANY’S TRASH SORTERS FIRST TREATED AS IC’S AND THEN CONVERTED TO EMPLOYEES ARE CERTIFIED AS A COLLECTIVE. A Maryland federal district court has granted collective action certification to group of 80 workers who sort recyclables and trash for a waste company in their independent contractor misclassification lawsuit. In their amended class and collective action complaint, the sorters allege that WB Waste Solutions LLC “hires employees to work the sorting line on a purported ‘temporary basis’ and treats them as independent contractors, despite the fact that [the company] controls all aspects of the work they do, including setting their schedules, assigning their tasks, and requiring them to follow policies established by [the company.” The sorters also claim that the company allegedly pays the “temporary” employees a daily rate below the legal minimum wage, does not account for how many hours they work in a workweek, fails to pay overtime compensation, and reduces the daily rate if the sorter starts work late or leaves early, all in violation of the Fair Labor Standards Act and Maryland wage and hour laws. Although the sorters claim that after a certain period of time they are reclassified as “full-time” employees, their pay is still allegedly reduced in violation of law by deductions made for meal breaks “that are not bona fide” under the FLSA and Maryland law. Lopez v. WB Waste Solutions LLC, No. 8:23-cv-00963 (D. Md. Feb. 1, 2024).

Read the full story at The Delicate Case for Reclassification of Independent Contractors: February 2024 IC ‎Legal News Update | Locke Lord LLP – JDSupra

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