FairWarining Reports

On the Warpath Against Independent Contractor Schemes

When National Consolidated Couriers, Inc., a Northern California delivery service, was under investigation by the U.S. Labor Department for possible wage violations, government officials told owner Tanweer Ahmed not to delete emails that could be evidence in the case.

At a deposition in February, Ahmed said he understood he was supposed to save his emails, according to the attorney who deposed him. But according to court records, during a lunch break that same day Ahmed called an aide and instructed him to delete his email accounts.


iStock photo

Five months later, Ahmed and NCCI have agreed to pay $5 million in back wages and damages to more than 300 workers allegedly cheated out of minimum wage and overtime pay. According to the government, NCCI had misclassified these workers as independent contractors to avoid wage standards that protect regular employees.

NCCI’s settlement is one of three recent legal victories in the Labor Department’s continuing battle against employers’ widespread use of contrived contracting arrangements to illegally underpay workers.

Government officials say the misclassification schemes also have deprived state and federal treasuries of billions of dollars in payroll tax revenues.

“These business models went on trial and they lost,” said Janet Herold, who oversaw the three recent cases in her role as the Labor Department’s West Coast regional solicitor.

Under the law, employees are entitled to minimum wages along with time and one-half pay for working more than 40 hours in a week; independent contractors are not. The federal minimum hourly wage is $7.25 an hour, although many states have higher standards. California, for instance, has a $9 hourly minimum.

Economists and labor advocates say the misclassification of workers has contributed to stagnant pay and a growing income gap.

David Weil, administrator of the Labor Department’s Wage and Hour Division, said the problem is spreading. “We’re seeing it in new places in the economy where we historically have had people classified as employees and, suddenly, businesses are deciding to reclassify them as independent contractors,” he said.

Amid the crackdown, the Labor Department last week announced Kentucky had become the 23rd state to partner with the Wage and Hour Division on misclassification enforcement.

U.S. Sen. Al Franken, D-Minnesota, who participated in a news conference call with Weil this week to discuss misclassification, pointed to an example that came up in a congressional hearing involving a carpenter. One day the carpenter was an employee, Franken said, “and the next day he’s told that he’s an independent contractor and that he does the same exact job, goes to the same exact place but suddenly … now the employer isn’t withholding [payroll taxes] for him, isn’t doing all the things an employer should be doing, isn’t paying overtime, etc.”

David Weil, administrator of the U.S. Labor Department’s Wage and Hour Division

David Weil, administrator of the U.S. Labor Department’s Wage and Hour Division

The issue also has become the focus of high-stakes litigation. Last month, Federal Express agreed to pay $228 million to settle a misclassification dispute in California. The class-action suit covered some 2,000 drivers who worked for the company from 2000 to 2007.

No bright line

In another high-profile decision in June, the California Labor Commission ruled that an Uber driver treated as a contractor, like other drivers of the ride hailing service, was actually an employee. Pivotal in the commission’s ruling, which is under appeal, was the finding that the driver would not have been able to work if not for Uber’s mobile app.

That could turn Uber into the target of a “continuing wave of employee misclassification lawsuits sweeping the nation,” blogged New Jersey employment lawyer Benjamin Widener.

To clarify the Labor Department’s rules for determining whether workers are independent contractors or employees, Weil last week released a 15-page guidance memo. It spells out the criteria his office uses to determine how to classify a worker. The key principle is “whether the worker is economically dependent on the employer or truly in business for him or herself,” the memo says.

The memo outlines a six-part “economic realities” test that assesses such things as whether the worker is performing a task integral to a company’s business. For instance, carpenters are integral to the business of a construction company and likely should be considered employees. But a software developer, hired to create software that tracks the company’s bids, could more likely qualify as an independent contractor.

Richard Reibstein, a New York attorney with Pepper Hamilton LLP and co-author of the Independent Contractor Compliance blog, said most businesses that misclassify their employees do so unintentionally, because the law is complex and confusing, and there sometimes is no bright line between legitimate and improper contracting arrangements. He cautioned against assuming that all companies misclassify workers to cheat them.

Fed Ex Ground, for example, has “cadres of lawyers advising them,’’ said Reibstein, who does not represent the company. “They have tried to abide by the law. But the courts have said, ‘not good enough.’ They are not intentionally trying to misclassify employees.”

Court documents tell a different story with Ahmed, the courier service owner. Two workers at the company told a federal investigator that Ahmed instructed them to lie to the labor department about his control of the business, according to a declaration filed by investigator Mary Pham in federal court in San Francisco. Workers said they were fearful of retaliation from Ahmed if they cooperated with federal authorities.

Fake records

Originally, Ahmed was subpoenaed to testify before the Labor Department in late January, near his home in Houston. Twice, he submitted travel itineraries indicating he’d be out of the country, but according to court records they were fakes.

Richard J. Reibstein, attorney with Pepper Hamilton LLP

Richard J. Reibstein, attorney with Pepper Hamilton LLP

Ahmed failed to appear in January, but testified under oath 10 days later in Los Angeles. That’s the same day when, court documents say, he instructed his aide to delete his emails. The Labor Department eventually got a court order compelling Ahmed and NCCI to release business records.

In the settlement, which became public last week, Ahmed and NCCI waived their opportunity to respond to the Labor Department’s charges. Their attorney, Ron Arena, however, told FairWarning in an email, “Although the Defendants deny any wrongdoing, they have agreed to voluntarily resolve the matter through a consent order to avoid costly and protracted litigation.”

Ahmed states in the settlement that NCCI is no longer operating. Labor Department officials said they were confident they could recover the funds. Under the settlement, Ahmed is required to turn over the deeds to homes in Nevada and Texas in which he indicated he has $2 million in equity, and agency officials said they believe that Ahmed’s other assets would cover the remaining $3 million.

In another recent Labor Department victory, a federal judge in San Jose, California ruled that Stanford Yellow Taxi Cab, Inc. and related companies, owned by Sayed Abbas and serving Silicon Valley, improperly classified its drivers as independent contractors.

Drivers testified that Abbas required to them work 12-hour shifts, six days a week, but only paid them when they transported passengers. Drivers said Abbas often made them wait around for fares for hours, without pay. One driver, Antonio Freslassie, testified: “I was going home with like $60, $70. That’s a good day.”

Another driver, Anthony Pelayo, testified that his firing in February 2014 came after the company learned he was a witness for the Labor Department.

The agency said in court filings that Abbas instructed drivers not to cooperate with federal investigators and coached them to say they were independent contractors.

“Sham” leases

The department also said Abbas had drivers sign and backdate “sham” agreements to lease cabs. Under a true lease, cabbies ordinarily would have been able to drive wherever they wanted, but, according to the Labor Department, Abbas gave instructions to wait for fares at hotels where the company had accounts.

The Labor Department said the ruling covers several hundred drivers, although it does not yet know exactly how much they are owed. Abbas’ attorney, Susan Bishop, however, said in an email that the court’s decision “likely impacts fewer than 50 drivers.”

She denied that the leases drivers signed were fraudulent or that Abbas discouraged them from talking to investigators. “My clients, advised the drivers that they were free to speak with investigators, but were also free to decline,” Bishop wrote. “The drivers were advised that meeting with investigators was voluntary after certain drivers expressed fear of meeting with the investigators.”

Bishop said Abbas would not appeal the court’s ruling, although she added that he ran his business “similar to larger, well-known transportation services, who also treated drivers as independent contractors.”

“This issue continues to develop, as courts are still evaluating the practices of other transportation services,” she said. “It is a very difficult area of the law for small businesses who are trying to balance the needs of their drivers with the increased competition with other transportation services.”

In the third case, the Labor Department won a ruling that allows its case against DirecTV to move forward. A federal judge found that DirecTV qualified as a joint employer of 82 satellite dish installers in Washington State who worked for a now-defunct subcontractor called Advanced Information Systems or AIS.

The Labor Department says the installers were paid piece rates for every job they did; they were not compensated for travel time between jobs or the amount of time a job took. The agency says this resulted in installers making less than the minimum wage and not receiving overtime.

Labor Department officials contended that DirecTV should be held responsible because the company dictated the installers’ work practices, making it a joint employer. For example, the installers were required to wear DirecTV uniforms and drive vehicles with DirecTV signs, while DirecTV also mandated the kind of equipment they could use.

Officials with the Labor Department said they believed this is the first case in which a court has ruled that DirecTV is a joint employer. The judge has yet to determine how much money, if any, the workers are owed.

DirecTV spokesman Robert Mercer said in an email that the company disagrees with the judge’s finding and added that “our appeal options would be post-trial, if necessary.”

Print Print  

4 comments to “On the Warpath Against Independent Contractor Schemes”

  1. jerry

    i was an independent contractor for a company called Winnesota, they are based in Minnesota but run warehouses in Madison and Milwaukee. my job was to deliver kitchen supplies to restaurants all over southeast Wisconsin. I started on 01/17/2015, signed a 1 year contract to be an IC . They terminated my contract on 10/30/2015 (we get paid bi monthly) The reason was because I refused to take some stops that were out of the area, not close to my other stops. My contract states I have a right to refuse stops. Also, I was forced to drive their truck at their rate of $786.52 bi monthly for my ford e350 box truck. plus, I had to pay $100 security deposit bi monthly which was for emergencies or to pay off the truck early. It was scheduled to be paid off in July of 2016.. Now this is a 2010 truck, kind of old. So I put all this money into the truck and I don’t get the truck at all. They did mention they would pay me back the security deposit of $100 x 17 payments. so I put all this money into the truck and don’t get anything out of it. I told them I wanted to get my own truck because theyre payments were to high and they said no. Excuse me but aren’t we IC’s? Also had to pay for log books which they never sent me and their insurance too. Their are other IC’s there in Milwaukee and they can back my statements too.
    This is totally a misclassification here. We also had to sort packages in the warehouse and audit them which we did for free. ive never seen a company that forces IC’s to drive their vehicles at their prices and claim that we are IC’s. The company is Winnesota formerly known as Edina Courriers. They are contractors themselves that hire contractors like us to deliver Edward donn supplies (kitchen supplies for restaurants) Any advice would be appreciated, thanks

  2. CJ

    Please do a story about TISA, which promises to turn the world of employment upside down with its cross border data flows and trade based visa low wage high skill employment schemes.

    The use and abuse of H1B visa programs although widespread, has at least in theory, endorsed the idea that wages paid to H1B workers should be some portion of prevailing wages in an industry. However, TISA likely will legalize a new form of global temping that wont even require employees be paid US minimum wages because their pay is between them and their globalized employers. They may even be paid in other countries where wages are completely unknown. Also, numerous US labor regulations – for example, basically everything the US labor movements fought for in the 20th century will likely fall one by one in the name of facilitaing free trade. After all, you cannot tell the low bidder on a contract, entitled as they will be by the WTO GPA to do the job, what kind of employees they must hire at their headquarters in – wherever, say East Africa, since they are likely to be major players in the staffing side of the equation.

    Discriminatory measures if they are allowed to exist will only be permitted to least developed countries, not advanced nations who are assumed to have already dealt with these issues. Suddenly the ladders up for poor working Americans will vanish and they will be framed as pampered high wage workers angry that their low and high skill jobs both are going to “real” poor people (often with MAs and PhDs) who will work for lower than our minimum wage.

    The concept of equal rights for women, minimum wages and non discrimination against minority groups will all become “technical barriers to trade” that must be eliminated.

    Get ready for the race to the bottom. Where did we go wrong? GATS was where this concept was introduced but it was framed as only being for the most skilled workers and left out of the picture by the media. However the quiet use of trade visas, almost totally unrecognized by the US media has been growing. Now industry is salivating at this new “Mode Four” employment option. Its all gradually led to a abandonment of the idea that US companies should or could train and promote their own employees, and instead they want more and cheaper labor from abroad. Nobody wins out in these arrangements except the middlemen.

  3. Doug Baldwin

    Super timing on this story FairWarning.org, following Hilary Clinton’s comments on this topic recently, and then the Republican unified response attacking her for her concerns. All of that has raised the issue of the new independent contractor “gig economy” more into the consciousness of America. Stories like this one are no longer just about holding employers responsible to some regulatory legal standard of an employer-hired worker relationship, but increasingly more about the future soul and spirit of the workplace in the USA.

    Clinton said “This on-demand, or so-called ‘gig economy,’ is creating exciting opportunities and unleashing innovation. But it’s also raising hard questions about workplace protections and what a good job will look like in the future.” The Republican counter attack on Clinton focused on alleging she didn’t appreciate business entrepreneurship realities and personal job innovation desires.

    The debate in your story here and in all stories concerning the new “gig economy” and the future of workers in the USA centers over where to draw the line between the need of employers to control their employees and businesses to control their product and methods, and the need of independent contractors to truly be free (aka independent) and independent in regard to their time and work product and tools. And that debate is the beating working heart of the USA. Control is responsibility, freedom is responsibility, and responsibility is all about the money.

    Hilary got it right, and Jeb Bush in his response to her got it wrong. Over and over and over again, stories like this one find that employers abuse the concept of independent contractors by substantially limiting their employment freedoms by imposing “workplace” requirements and duties. Thus, for employers it is not about freedom at all: it is about having their cake and eating it too — saving on worker overhead while maintaining reliable worker control and discipline. And for the worker? Well, not so much cake. For the worker, it is about increasingly limited and unattractive employment choices and the struggle to avoid unemployment.

    Once upon a time the soul of our country was that we were all in this together. We were the melting pot. We were the United. Increasingly, for the standard worker, its all about being on one/s own, alone. Well, not entirely alone. The standard worker will have creditors for company, and anxieties, and two jobs to keep one from dwelling on it too much.

  4. Priscilla Garcia

    Excellent story….glad you were able to work with our Office of Public Affairs to get this very important message to the country!

Leave a comment