Trial Magazine

The story of America is inextricably intertwined with the history of labor relations—and businesses seeking to cut costs by exploiting workers. This is no different today, with the expanding “gig economy” bringing worker misclassification into sharp focus. When workers are improperly classified as independent contractors instead of employees, they are denied benefits and protections under federal and state laws, and companies avoid paying for benefits, workers’ compensation, taxes, and more. This has been especially true for transportation workers—from ride-hailing to delivery drivers.

Despite industry and government efforts to further restrict these workers’ labor rights, the problem of misclassification remains—so plaintiff attorneys must understand the different tests that govern these claims and what evidence to request in discovery.¹

Independent Contractor Status Under the FLSA

The Fair Labor Standards Act (FLSA) provides minimum wage and overtime pay protections to employees and defines “employ” as “suffer or permit to work.”² The U.S. Supreme Court has broadly interpreted this term.³

The Court has held multiple times that there is no single rule or test for determining whether an individual is an independent contractor or an employee under the FLSA and that no single factor is dispositive.⁴ Instead, it points to the circumstances of the total activity to analyze the economic reality of the situation and whether the worker is economically dependent on the supposed employer, referred to as the “economic realities test.”⁵

The Court considers seven factors to be significant, without assigning more weight to any particular one:

• the extent to which the services rendered are an integral part of the principal’s business
• the permanency of the relationship
• the amount of the alleged contractor’s investment in facilities and equipment
• the nature and degree of control by the principal
• the alleged contractor’s opportunities for profit and loss
• the amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor
• the degree of independent business organization and operation.⁶

The goal is to determine whether, as an economic reality, the worker is in business for herself or whether she is dependent on the alleged employer for work. However, given the Supreme Court’s lack of clear definitions and failure to provide weight to any factor over another, lower courts have inconsistently applied these factors to reach opposite conclusions as a matter of law in essentially the same fact patterns.⁷

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There is no single rule or test for determining whether an individual is an independent contractor or an employee under the FLSA.

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For example, in 2009 the Fifth Circuit held in Cromwell v. Driftwood Electric Contractor, Inc., that cable splicers hired as putative independent contractors by BellSouth to provide post-Hurricane Katrina repairs along the Gulf Coast were employees.⁸ The court asked whether “the worker is economically dependent upon the alleged employer or is instead in business for himself.”⁹ Less than a year later, in Thibault v. BellSouth Telecommunications, a different panel of that same circuit applied a second approach to economic dependence to find that another cable splicer hired under a very similar arrangement by the same company was an independent contractor.¹⁰

The Thibault court distinguished the result in Cromwell in part by highlighting the plaintiff’s other sources of income and wealth in the analysis of economic dependence.¹¹ However, Thibault’s reliance on income and wealth sources to analyze economic dependence is incompatible with previous Fifth Circuit case law that repeatedly explained that “economic dependence is not conditioned on reliance on an alleged employer for one’s primary source of income, for the necessities of life.”¹²

The regulatory landscape. During the Trump administration, the Department of Labor (DOL) issued a final rule that it claimed was intended to clarify the economic realities test and make its determination more predictable,¹³ but many viewed the changes as an effort to favor independent contractor status over employee classification.¹⁴ But the Biden administration’s DOL withdrew the Trump rule before it became effective.¹⁵

What did the Biden DOL withdrawal mean for the economic realities test? The DOL now stresses whether the worker is an “integral part of the business.”¹⁶ It also still recognizes the traditional seven factors described earlier and that “no single factor is determinative in the analysis.”¹⁷ Thus, for the foreseeable future, plaintiff attorneys will need to proceed under the FLSA using the traditional economic realities test.¹⁸

What to look for in discovery. It is vital to review the contract with the alleged employer. For example, companies such as DoorDash, Lyft, and Uber impose mandatory contracts on their workers containing provisions that no independent contractor would agree to, such as allowing the company to change the terms of the agreement, including how much the “contractor” is paid, and allowing the company to terminate the “contractor” at will.¹⁹

The terms of the contract and other “contractor” data—such as how the worker is paid, how much he or she is paid, and how many coworkers fall into the same category—are essential to prove that no opportunity for profit or loss based on initiative or investment exists. Look for language that shows the only difference in compensation is similar to piece-rate workers—paid for each activity such as a ride or by the mile rather than on an hourly basis—who can only work more efficiently or longer to increase their compensation.

Also look for indications that the true employer has prohibited the worker from using any information gathered on the job for his or her own purposes. Trade secret and confidentiality provisions are typical, and they show that the platform is not a service the worker uses to attract customers, but rather that the customers are the property of the platform and the worker is not allowed to even have customer contact information.

Finally, the contract typically requires personal performance of the service and does not allow the worker to hire others to perform the work. This factor alone should indicate that the worker is an employee and not truly running a business of his or her own.

Discovery should focus on evidence showing that these workers are essential to the company making money, make up the majority of the company’s workforce, and could not perform the same job on their own. Some ride-hailing workers, for example, must have transportation licenses and are driving under the license of the company—so they couldn’t operate independently.

Gig companies often employ tens or even hundreds of thousands of similar workers over time, and without them the company simply would not make money. Also look for evidence of the low qualifications and quick and easy process to become a worker, such as the company’s ads to attract new drivers. This is important to show that the employer was not contracting with a business but hiring employees instead.

The ‘ABC Test’

The majority of states follow the so-called “ABC test” in some form for at least some purposes,²⁰ so it is imperative for employment law practitioners to understand it. Because the FLSA is the minimum standard, most state laws have additional protections—thus, most cases will proceed on state law claims.²¹

Generally, the ABC test requires that

• the worker “is free from the control and direction of the hirer in connection with the performance of the work”
• the worker “performs work that is outside the usual course of the hiring entity’s business”
• the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.²²

California switches to the ABC test. In 2018, California became the largest state to adopt a version of the ABC test in Dynamex Operations West, Inc. v. Superior Court. Under its test, a worker is presumed to be an employee unless the hiring entity can establish all three parts of the test.²³ This has had major implications for Big Tech and gig economy transportation workers, especially since the ruling applied retroactively.²⁴

The California Supreme Court established this standard to properly interpret the “suffer or permit to work” definition of employment under state law—the same wording as in the FLSA—which was intended “to be broader and more inclusive than the preexisting common law test for distinguishing employees from independent contractors.”²⁵ The “expansive suffer or permit to work standard is reasonably interpreted as placing the burden on a hiring business to prove that a worker the business has retained is not an employee . . . but rather an independent contractor.”²⁶ Dynamex identified the misclassification of workers as independent contractors rather than employees as a “very serious problem depriving federal and state governments of billions of dollars in tax revenue and millions of workers of the labor law protections to which they are entitled.”²⁷

As a result of California’s adoption of the clear and precise ABC test, a San Francisco trial court found that drivers from Uber and Lyft were employees as a matter of law and entered an injunction against the companies that a state appellate court upheld.²⁸ The appellate court noted that pertinent evidence supporting the drivers’ classification as employees included that their employers solicit riders, screen drivers, set standards for the vehicles the drivers can use, control the ride request and payment process through their apps, and track and collect driver data through the apps.²⁹

Noting that courts in other states often focus on just part B or part C of the test, the California court found part B alone—whether the work is outside the usual course of the defendant’s business—to be determinative.³⁰ Many app-based drivers would not be considered independent contractors because they perform work that is essential and in the usual course of these businesses, and they would ordinarily be viewed by others as working in the hiring entity’s business.

What to look for in discovery. When applying the ABC test, focus your analysis and discovery on the integration of the worker into the everyday business of the employer. Typically, these workers have no business license or entity, have none of their own employees or customers, and can be fired at will.

Conversely, the company’s revenue depends directly on these workers doing their jobs. The company has thousands of these workers and typically has all of the required licenses to operate the business. Also obtain the communications between customers and the business to show that these companies are not merely matching workers with customers but are handling every aspect of the customer service experience.

Don’t Overlook Forced Arbitration

Regardless of the test that applies or how strong your client’s legal rights appear, none of that matters much if they are forced into arbitration. Section 1 of the Federal Arbitration Act (FAA) exempts from its coverage “contracts of employment of seamen, railroad employees, and any other class of workers engaged in foreign or interstate commerce.”³¹ The Supreme Court has defined the language “any other class of workers engaged in foreign or interstate commerce” to include modern day “transportation workers.”³²

In 2019, the Supreme Court upheld the transportation worker exemption and ruled that to properly assert its power to compel arbitration, a court must first determine whether the FAA applies to the contract at issue.³³ Simply stating that the contract is subject to the FAA does not override the exemption; if the worker falls within the exemption for interstate transportation workers, the FAA does not apply.³⁴

Even if you show that your client is a worker engaged in interstate commerce and is exempt from the FAA, you still must show that the arbitration agreement cannot be enforced under state law. Typically, you do this by bringing a claim of unconscionability under your state’s common law of contracts.³⁵ Check whether your jurisdiction’s labor regulations may prohibit arbitration—in California, for example, Labor Code §229 exempts wage claims from arbitration, and several cases lay out the bases for invalidating the arbitration clause altogether when it would prohibit class actions.³⁶

While the interstate worker exemption seems simple enough, defining who is an interstate transportation worker is now heavily litigated, especially since defendants can appeal the denial of a motion to compel arbitration. The main controversy concerns workers who are participating in the interstate transportation of goods but do not cross state lines themselves—such as a “last mile” delivery driver who brings a package from the warehouse to your house.

The Supreme Court has interpreted the phrase “engaged in commerce” as meaning “engaged in the flow of interstate commerce.”³⁷ Some courts have even held that employees simply monitoring the intrastate deliveries of packages without physically transporting any goods themselves are exempt from the FAA.³⁸

Recently, the First Circuit held that Amazon delivery drivers fell within the FAA’s exemption.³⁹ The court also held that because the arbitration agreement prohibited class actions, it was not enforceable under state law.⁴⁰ And the Ninth Circuit similarly found that Amazon delivery drivers qualified as transportation workers under the FAA because even though they transported packages only for the last leg of the journey, the “packages they carry are goods that remain in the stream of interstate commerce until they are delivered.”⁴¹

To demonstrate that your client qualifies for this exception, send interrogatories or conduct a Federal Rule of Civil Procedure 30(b)(6) deposition of a defendant representative who will likely provide substantial evidence describing how the business is engaged in interstate commerce. Ask about which states the company operates in, where the goods or passengers that it transports originate, and how many employees cross state lines as part of their jobs.

You also likely will need testimony on the issue of enforcing the arbitration clause under state law. Establish that it was a mandatory condition of employment that a plaintiff could not opt out of. Most defendants will readily admit that these contracts are a mandatory condition of employment and not negotiable.

Millions of workers have been impacted by unfair labor practices, and plaintiff attorneys play a crucial role in ensuring that corporations cannot skirt their responsibility to the people who make their businesses possible.

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Mark Burton is of counsel to Audet & Partners in San Francisco and can be reached at mburton@audetlaw.com.

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Notes

1. See, e.g., Faiz Siddiqui, Uber, Other Gig Companies Spend Nearly $200 Million to Knock Down an Employment Law They Don’t Like—and It Might Work, Wash. Post, Oct. 26, 2020, https://tinyurl.com/4fdb4m6a (discussing California’s Proposition 22 to exempt app-based drivers from being classified as employees); U.S. Dep’t of Labor, U.S. Department of Labor Proposes Rule to Clarify Employee and Independent Contractor Status Under the Fair Labor Standards Act, Sept. 22, 2020, https://tinyurl.com/3x4svhkh (the Biden administration quickly withdrew this Trump-era rule).
2. 29 U.S.C. §203(g) (2018). For more on misclassification under other statutes, see Vincent Cheng, A Jigsaw of Worker Classifications, Trial, Sept. 2018, at 20.
3. See, e.g., Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 326 (1992) (“[T]he FLSA . . . defines the verb ‘employ’ expansively to mean ‘suffer or permit to work.’ [] This . . . definition, whose striking breadth we have previously noted, stretches the meaning of ‘employee’ to cover some parties who might not qualify as such under a strict application of traditional agency law principles.”); Tony & Susan Alamo Found. v. Sec’y of Labor, 471 U.S. 290, 295–96 (1985); United States v. Rosenwasser, 323 U.S. 360, 362–63 (1945).
4. See, e.g., Nationwide Mut. Ins. Co., 503 U.S. at 326; United States v. Silk, 331 U.S. 704, 716 (1947); Rutherford Food Corp. v. McComb, 331 U.S. 722, 729 (1947); Nat’l Labor Relations Bd. v. Hearst Publ’ns, Inc., 322 U.S. 111, 120 (1945). See also Keller v. Miri Microsystems LLC, 781 F.3d 799, 807 (6th Cir. 2015); Baker v. Flint Eng’g & Constr. Co., 137 F.3d 1436, 1440 (10th Cir. 1998); Martin v. Selker Bros. Inc., 949 F.2d 1286, 1293 (3d Cir. 1991).
5. See id.
6. U.S. Dep’t of Labor, Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA), 2008, https://tinyurl.com/8bcrw4ke.
7. See, e.g., Parrish v. Premier Directional Drilling, L.P., 917 F.3d 369, 380 (5th Cir. 2019); Chao v. Mid-Atl. Installation Servs., Inc., 16 F. App’x 104, 108 (4th Cir. 2001); Dole v. Snell, 875 F.2d 802, 812 (10th Cir. 1989). This is so even when many facts and factors support both sides of the classification inquiry. See, e.g., Acosta v. Paragon Contractors Corp., 884 F.3d 1225, 1238 (10th Cir. 2018) (concluding, without explanation as to weighing of the factors, that workers were employees when two factors favored independent contractor status and four factors favored employee status); Iontchev v. AAA Cab Servs., 685 F. App’x 548, 550 (9th Cir. 2017) (concluding, without explanation as to weighing of the factors, that the workers were independent contractors when two factors favored independent contractor status, one factor was neutral, and three factors favored employee status).
8. See Cromwell v. Driftwood Elec. Contractor, Inc., 348 F. App’x 57, 60–61 (5th Cir. 2009).
9. Id. at 59.
10. See Thibault v. BellSouth Telecomms. Inc., 612 F.3d 843, 846 (5th Cir. 2010).
11. Id. at 848–49.
12. Brock v. Mr. W Fireworks, Inc., 814 F.2d 1042, 1054 (5th Cir. 1987) (emphasis in original); see also Acosta v. Off Duty Police Servs., Inc., 915 F.3d 1050, 1058 (6th Cir. 2019); Donovan v. DialAmerica Marketing, Inc., 757 F.2d 1376, 1385 (3d Cir. 1985).
13. Independent Contractor Status Under the Fair Labor Standards Act, 85 Fed. Reg. 60,600, 60,600–01 (Sept. 25, 2020).
14. Bloomberg Law, DOL Debuts Rule Easing Business Use of Independent Contractors (1), Sept. 22, 2020, https://tinyurl.com/3rmauczs.
15. See Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Withdrawal, 86 Fed. Reg. 24,303 (May 6, 2021); Independent Contractor Status Under the Fair Labor Standards Act; Withdrawal, 86 Fed. Reg. 14,027 (Mar. 12, 2021).
16. Independent Contractor Status Under the Fair Labor Standards Act (FLSA): Withdrawal, 86 Fed. Reg. at 24,304.
17. Id. at 24,311.
18. In March, the U.S. House of Representatives passed H.R. 842, The Protecting the Right to Organize (PRO) Act, which would adopt the ABC test. At the time of writing, the bill was before the Senate.
19. See, e.g., DoorDash, Independent Contractor Agreement, United States, Dec. 16, 2020, https://tinyurl.com/2sk4tx6n; Lyft, Lyft Driver Addendum, Dec. 9, 2020, https://www.lyft.com/terms/driver-addendum.
20. See Ted Boettner, Classifying More Workers as “Independent Contractors” Can Take Away Rights and Benefits, W. Va. Ctr. on Budget & Policy, Jan. 30, 2020, https://tinyurl.com/c36hvmnj. Some states use only two prongs of the ABC test. See id. Several states use the common law control test, which considers many of the same factors as those identified in the economic realities test, but it is more permissive of independent contracting arrangements than the economic realities test, which more broadly examines the economic dependence of the worker. See, e.g., Diggs v. Harris Hosp.-Methodist, Inc., 847 F.2d 270, 272, n.1 (5th Cir. 1988).
21. For examples of differing state requirements, see U.S. Dep’t of Labor, State Minimum Wage Laws, https://tinyurl.com/uxyxfuu7; U.S. Dep’t of Labor, Minimum Paid Rest Period Requirements Under State Law for Adult Employees in Private Sector, https://tinyurl.com/2tm387wf.
22. Dynamex Operations West, Inc. v. Superior Ct., 232 Cal. Rptr. 3d 1, 7 (Cal. 2018) (drivers working for package delivery company are employees since delivery company failed to satisfy prongs B and C); see also E. Bay Drywall, LLC v. Dep’t of Labor & Workforce Dev., 249 A.3d 872, 878 (N.J. Super. Ct. App. Div. 2021) (noting that for part C, for a person to be customarily engaged in an independently established business, there must be “an enterprise that exists and can continue to exist independently of and apart from the particular service relationship. The enterprise must be one that is stable and lasting—one that will survive the termination of the relationship.” (internal quotations omitted)).
23. Dynamex, 232 Cal. Rptr. 3d at 30, n.20.
24. Vazquez v. Jan-Pro Franchising, Inc., 478 P.3d 1207, 1208 (Cal. 2021).
25. Dynamex, 232 Cal. Rptr. 3d at 36.
26. Id. at 35, n.24.
27. Id. at 5.
28. People v. Uber Techs., Inc., 270 Cal. Rptr. 3d 290, 302–03 (Cal. App. Ct. 2020).
29. Id. at 313–14. California’s Proposition 22 is tailored to fit drivers for DoorDash, Lyft, and Uber. Unless adopted federally, the ABC test will not apply to specified app-based drivers. And Proposition 22 is not retroactive, companies such as Amazon will not fall within it, and the FLSA could preempt this state law.
30. Dynamex, 232 Cal. Rptr. 3d at 39–40, n.25, n.30.
31. 9 U.S.C. §1 (1947).
32. Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 109 (2001).
33. New Prime Inc. v. Oliveira, 139 S. Ct. 532, 537–38 (2019).
34. Id. See also Rogers v. Lyft, Inc., 452 F. Supp. 3d 904, 913 (N.D. Cal. 2020); Garrido v. Air Liquide Indus., 194 Cal. Rptr. 3d 297, 302 (Cal. App. Ct. 2015) (“By stating that it is subject to and governed by the FAA, the agreement necessarily incorporates Section 1 of the FAA, which includes the exemption for transportation workers.”).
35. For more, see Menaka N. Fernando & Jennifer S. Schwartz, Chipping Away at Workers’ Rights: Tackling Forced Arbitration, Trial, Sept. 2018, at 31.
36. See Garcia v. Superior Ct., 187 Cal. Rptr. 3d 312, 318 (Cal. App. Ct. 2015); see also, e.g., In re Am. Express Merchs. Litig., 554 F.3d 300, 315–316, 320 (2d Cir. 2009); Kristian v. Comcast Corp., 446 F.3d 25, 55, 59 (1st Cir. 2006); Leonard v. Terminix Int’l Co., 854 So. 2d 529, 539 (Ala. 2002); Discover Bank v. Superior Ct., 30 Cal. Rptr. 3d 76, 87 (Cal. 2005).
37. Circuit City Stores, Inc., 532 U.S. at 117.
38. Palcko v. Airborne Express, Inc., 372 F.3d 588, 590, 594 (3d Cir. 2004); see also Klitzke v. Steiner Corp., 110 F.3d 1465, 1467, 1470 (9th Cir. 1997); Merchs. Fast Motor Lines, Inc. v. I.C.C., 528 F.2d 1042, 1044 (5th Cir. 1976).
39. Waithaka v. Amazon.com, Inc., 966 F.3d 10, 26 (1st Cir. 2020).
40. Id. at 35.
41. Rittmann v. Amazon.com, Inc., 971 F.3d 904, 915 (9th Cir. 2020). Compare with Capriole v. Uber Techs., Inc., 2021 WL 3282092 (9th Cir. Aug. 2, 2021) (drivers not exempt since very few cross state lines).