Who says Labor & Employment Law isn’t sexy? Richard J. Reibstein of Pepper Hamilton doesn”t think so. In a recent post at the National Law Review, Richard provides some good insight on how businesses can effectively navigate the possible pitfalls of using Independent Contractors. 
Within the past month, a federal court in Manhattan granted a motion for class action certification to a group of adult dancers who have worked at the Penthouse Executive Club in New York City. They alleged, among other things, that the Club violated the federal Fair Labor Standards Act (FLSA) by failing to pay them overtime for hours worked in excess of 40 per week, requiring them to pay a “house fee” that sometimes exceeded $100 per night, deducting service charges for tips paid in scrip issued by the Club, and requiring that the dancers share their tips with other Club personnel. Penthouse asserted as a defense that the adult dancers were independent contractors.
Judge Naomi Reice Buchwald found unpersuasive all five of Penthouse’s arguments, including that class certification would be improper because the issue of whether the dancers were independent contractors was unsuitable for class action treatment. Penthouse argued that this type of inquiry regarding their status as employees or independent contractors required an individualized, fact intensive inquiry into the nature of the dancer’s relationships with the Club.
In a 16-page opinion, the New York federal district court judge rejected that argument. As Judge Buchwald stated, a plaintiff’s burden in seeking a preliminary class action certification is “simply to make a ‘modest factual showing sufficient to demonstrate that [plaintiffs] and potential plaintiffs together were victims of a common policy or plan that violated the law.’ ” In dismissing this argument, the judge noted that members of the proposed class “all hold the same job title, have the same job responsibilities, work at the same location, and, by extension, are subject to the same ownership and management.” She concluded that “[i]f such a group does not merit at least preliminary class treatment, one would expect that class treatment would rarely be granted in FLSA actions, a proposition that is plainly incorrect as an empirical matter.”
This is by no means the first adult club class action misclassification case. Other class action cases involving claims by adult dancers that they were improperly classified as independent contractors include an exotic dancer case in Massachusetts, an adult entertainment dancer case in Georgia, and another New York City adult dancer case.
A Couple of Takeaways:
1. Where a business uses a relatively large number of independent contractors or is built on an independent contractor model, it faces misclassification liability not only for unpaid overtime but also for unpaid:
- unemployment taxes,
- workers compensation premiums,
- payroll taxes, and
- employee benefits,
just to name some of the many types of claims made by workers who claim they were misclassified as independent contractors.
2. Businesses that use many independent contractors or pay workers on a 1099 basis are well advised to address the issue of their independent contractor compliance before receiving a notice from a state unemployment or workers compensation office, before receiving notice from the IRS or state revenue department that it will be conducting a tax audit, or before being served with a summons and complaint (which can lead to class action certification if the case involves a substantial number of similarly situated workers).
Regardless of any business’s current state of compliance with such laws, there are a number of ways by which organizations can enhance their future compliance and minimize their exposure to future misclassification liabilities, including the costs of defending class actions by workers who receive 1099s instead of W-2s. See “Independent Contractor Misclassification: How Companies Can Minimize the Risks,” Pepper Hamilton LLP, Apr. 26, 2010. Indeed, some of these class actions seek damages for unpaid employee benefits – an area of exposurethat can often be avoided simply by properly amending the language of a company’s benefit plans, as explained in the above article.
While efforts today to enhance independent contractor compliance cannot eliminate past exposure to misclassification liability, any changes that enhance compliance with the independent contractor laws will not only minimize or avoidfuture liability but also lessen the likelihood that the business will become a target for class action lawyers and government agencies.
Copyright © 2010 Pepper Hamilton LLP
