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For companies doing business with independent contractors on a multistate basis that operate with arbitration provisions in their independent contractor agreements, California has presented a vexing challenge by its Labor Code Private Attorneys General Act of 2004 (“PAGA”), Cal. Lab. Code § 2698 et seq.

California’s PAGA empowers an employee (including an individual classified as an independent contractor but claims to be a misclassified employee) – who alleges that the employee’s employer violated specified California Labor Code provisions – to file a lawsuit against the employer and use the violation as a gateway to assert claims alleging a potentially limitless number of other Labor Code violations sustained by other employees of the employer.  California courts have interpreted PAGA claims as Labor Code claims that an employee brings on behalf of California’s Labor and Workforce Development Agency (“LWDA”) to recover civil penalties that are otherwise recoverable only by the state in a LWDA enforcement action.

An employee who institutes a PAGA lawsuit asserts two types of claims on behalf of the LWDA, namely, (i) claims alleging specified Labor Code violations sustained by the employee, and (ii) claims alleging specified Labor Code violations sustained by other employees. In a successful PAGA action, the LWDA is entitled to 75% of the award and the remaining 25% is distributed among the affected employees. 

What makes PAGA claims especially vexing for companies that operate with arbitration provisions is that California courts have held that an arbitration provision does not protect a company against having to litigate in court any PAGA claims. But this outcome was recently changed.

A June 15, 2020, decision by the U.S. Supreme Court in Viking River Cruises, Inc. v. Moriana, 2022 WL 2135491 (June 15, 2022), created a new opportunity for a company to protect itself against having to litigate in court any PAGA claims. The specific issue before the Court was whether the Federal Arbitration Act (“FAA”), 9 U.S.C. § 1 et seq., preempts a rule of California law that invalidates contractual waivers of the right to assert representative claims under PAGA.

Through a complex analysis of federal civil procedure, the FAA, and the PAGA statute, the U.S. Supreme Court in Viking River Cruises, Inc. held that a pre-dispute arbitration provision governing a PAGA claim that an individual asserts on the individual’s own behalf with respect to Labor Code violations sustained by that individual (and “individual PAGA claim”) is protected by the FAA and can be enforced. The Court also held that an “individual PAGA claim” can be split off from, and arbitrated separate and apart from, the representative PAGA claims the individual brings with respect to other employees. Finally, the Court held that once the “individual PAGA claim” is dismissed from litigation and resolved through arbitration, the individual loses the standing required to assert representative PAGA claims in court on behalf of other employees for Labor Code violations they sustained. This means that a carefully drafted arbitration provision can insulate a company against having to litigate in court any PAGA claims.

In light of the Viking River Cruises, Inc. decision, any company that operates with independent contractors in California and has arbitration provisions in its independent contractor agreements should consider consulting with a litigation attorney to ensure that its arbitration provisions are drafted in a manner that will allow it to avoid having to litigate in court any PAGA claims asserted against it.

Importantly, the U.S. Supreme Court acknowledges in its analysis that the California Legislature could amend the PAGA statute to change this outcome.

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If you have any questions or comments concerning the foregoing, please let me know, at rhollrah@hollrahllc.com or (202) 659-0878.

The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

The final regulations on Independent Contractor Status under the Fair Labor Standards Act (“FLSA”), which the U.S. Department of Labor (“DOL”) issued on January 6, 2021, are in substance a restatement and refinement of the law, based on court decisions interpreting the term “employee” for purposes of the FLSA. These regulations, scheduled to become effective March 8, 2021, bring new clarity and predictability to the application of the “economic realities” test that courts traditionally have used in determining an individual’s status as an employee or independent contractor under the FLSA.

The current state of the law governing courts’ interpretation of the “economic realities” test is in need of clarification.  Beyond the fact that different federal circuits apply different iterations of the test,[1] the Preamble accompanying the final regulations identifies examples of courts reaching contradictory decisions concerning individuals in substantially similar work relationships.[2]  The Preamble also documents how courts have strayed from the U.S. Supreme Court’s initial formulation of the “economic realities” test.[3]

A clarification of the “economic realities” test is certainly helpful to independent entrepreneurs and their clients in structuring an independent-contractor relationship. But it also is helpful in exposing those companies that engage in worker misclassification.  

By clarifying the test, the DOL made it easier to identify instances of worker misclassification as well as to confirm legitimate independent-contractor relationships. The only stakeholders whose interests are harmed by clarification are the trial attorneys who otherwise would litigate the ambiguous and uncertain cases. Reducing the number of these ambiguous and uncertain cases should reduce the amount of litigation concerning an individual’s status under the FLSA, as neither plaintiffs nor defendants typically choose to litigate a case that they know they will lose. The clearer and more predictable a test, the fewer cases there will be in which the outcome under the test is uncertain and that require litigation to ascertain the answer.  

Even DOL will benefit, as the newly clarified test will enable it to make determinations in worker-classification investigations with greater certainty and, in those cases in which it determines a company to have misclassified individuals, the violating company would more likely acquiesce to the determination rather than litigate a case it would not likely win under the clarified test.

As to whether the final regulations articulate a test that privileges either employee status or independent contractor status, DOL made clear in its Preamble accompanying the final regulations that it endeavored to articulate a test that fairly reflects the decided court decisions interpreting the test.[4] In this regard, DOL officials presumably were mindful when developing these regulations that they would be effective during a Biden Administration and that this was no opportunity to develop a clarified test that privileges independent-contractor status.  A fair reading of the final regulations and accompanying Preamble confirms this.

As a threshold matter, the final regulations categorically adopt the “economic realities” test for determining worker status under the FLSA. But this is no trivial concession. While there is no question that courts have nearly unanimously (but not always[5]) applied an economic realities test for determining worker status under the FLSA, there is a compelling argument to be made that the proper test that courts should apply is the common-law test.[6]  The final regulations’ adoption of the economic realities test will make it more difficult to convince a court to apply a common-law test for determining worker status under the FLSA.

Another evidence of DOL’s objectivity in this undertaking, and its effort to develop a restated test that accurately reflects the decided court cases – without privileging either status – is provided by DOL’s criticism of the reasoning of court decisions that upheld the independent-contractor status of plaintiffs[7] or vacated trial court decisions holding plaintiffs to be independent contractors.[8] In addition, the Preamble, and text of the final regulations, explicitly reject an arguably pro-independent-contractor analysis of “economic dependence” as including consideration of an individual’s investment in business ventures unrelated to the specific services at issue.[9]

These regulations represent perhaps one of the clearer examples of a regulatory process free of capture by interested stakeholders. Employer groups submitted numerous comments urging DOL to modify its proposed test in ways that would narrow the definition of employee, but such comments are were nearly unanimously rejected. Likewise, worker advocates and organized labor submitted comments urging DOL to modify its proposed test in ways that would expand the definition of employee, but they too were generally, but not always,[10] rejected.

The two “core” factors[11] in the newly articulated test is a novel feature. But the Preamble indicates that DOL attorneys who reviewed the reported court decisions interpreting the “economic realities” test discovered that when these two core factors point in the same direction with respect to a work relationship – whether toward employee status or independent-contractor status – courts consistently have determined the work relationship to be the status to which those two core factors point.[12]   And this feature cuts both ways. It creates as much new certainty for exposing worker misclassification as for confirming legitimate independent-contractor relationships. 

Finally, by elevating the importance of the actual practice of the parties involved over what may be contractually or theoretically possible,[13] the final regulations vitiate a company’s ability to convert an employment relationship into one of independent-contractor status through its contracts and other arguably artificial means.[14]

The final regulations represent a vast improvement in the state of the law governing the determination of an individual’s status for purposes of the FLSA. This guidance will promote the development of a unified test for all federal circuits and substantially reduce the probability of similarly situated relationships being classified differently.  The regulated community deserves the clarity these regulations provide, to both protect the good actors and more readily expose those engaged in worker misclassification.

[1] For example, courts in the First and Fifth Circuits have applied a four-factor version of the “economic realities” test, e.g., Baystate Alternative Staffing v. Herman, 163 F.3d 666 (1st Cir. 1998), Orozco v. Plackis, 757 F.3d 445 (5th Cir. 2014); whereas courts in the Second and Fifth (which is split on this issue) Circuits have applied a five-factor version of the test, e.g.,  Brock v. Superior Care, Inc., 840 F2d 1054 (2d Cir. 1988), Thibault v. BellSouth Telcoms, Inc., 2010 U.S. App. LEXIS 15267 (5th Cr. 2010); and courts in the Third, Fourth, Sixth, Seventh and Ninth Circuits have applied a six-factor version of the test, e.g., Martin v. Seker Bros., Inc., 949 F.2d 1286 (3d Cir. 1991), Schultz v. Capital Int’l Sec., Inc., 466 F.3d 298 (4th Cir. 2006), Imars v. Contractors Mfg. Servs. Inc., 165 F.3d 27 (6th Cir. 1998), Secretary of Labor v. Lauritzen, 835 F.2d 1529 (7th Cir. 1987), Donovan v. Sureway Cleaners, 656 F.2d 1368 (9th Cir. 1982).

[2] E.g., 86 Fed. Reg. 1168, 1170 (Jan. 7, 2021), wherein the Preamble compares “Sec’y of Labor v. Lauritzen, 835 F.2d 1529, 1534–35 (7th Cir. 1987) (applying six-factor economic reality test to hold that pickle pickers were employees under the FLSA), with Donovan v. Brandel, 736 F.2d 1114, 1117 (6th Cir. 1984) (applying the same six-factor economic reality test to hold that pickle pickers were not employees under the FLSA).” Similarly, at 96 Fed. Reg. 1168 at 1173, the Preamble compares “Cromwell v. Driftwood Elec. Contractor, Inc., 348 F. App’x 57 (5th Cir. 2009) (holding that cable splicers hired by Bellsouth to perform post-Katrina repairs were employees), and Thibault v. BellSouth Telecommunication, 612 F.3d 843 (5th Cir. 2010) (holding that cable splicer hired by same company under a very similar arrangement was an independent contractor)…. The Thibault court distinguished its result from Cromwell in part by highlighting Mr. Thibault’s significant income from (1) his own sales company that had profits of approximately $500,000, (2) ‘eight drag-race cars [that] generated $1,478 in income from racing professionally[,]’  and (3) ‘commercial rental property that generated some income.’ Thibault, 612 F.3d at 849.”

[3] E.g., 86 Fed. Reg. 1168 at 1170, wherein the Preamble observes that “Silk analyzed workers’ investments, 331 U.S. at 717–19. However, the Fifth Circuit has revised the ‘investment’ factor to instead consider ‘the extent of the relative investments of the worker and the alleged employer.’ Hopkins, 545 F.3d at 343. Some other circuits have adopted this ‘relative investment’ approach but continue to use the phrase ‘worker’s investment’ to describe the factor. See, e.g., Keller v. Miri Microsystems LLC, 781 F.3d 799, 810 (6th Cir. 2015); Dole v. Snell, 875 F.2d 802, 805 (10th Cir. 1989),” and that “Rutherford Food’s consideration of whether work is ‘part of an integrated unit of production,’ 331 U.S. at 729, has now been replaced by many courts of appeals by consideration of whether the service rendered is ‘integral,’ which those courts have applied as meaning important or central to the potential employer’s business. See, e.g., Verma v. 3001 Castor, Inc., 937 F.3d 221, 229 (3rd Cir. 2019) (concluding that workers’ services were integral because they were the providers of the business’s ‘primary offering’).”

[4] E.g., 86 Fed. Reg. 1168 at 1194, wherein the Preamble recounts that “The Department’s review of appellate cases since 1975 involving independent contractor disputes under the FLSA supports this criticism. The Department generally found that, in cases where the ‘‘integral part’’ factor was addressed, the factor aligned with the ultimate classification when the ultimate classification was employee.”  Also, at 86 Fed. Reg. 1168 at 1196, the Preamble notes that “The NPRM further explained that focusing on the two core factors is also supported by the Department’s review of case law. The NPRM presented a remarkably consistent trend based on the Department’s review of the results of appellate decisions since 1975 applying the economic reality test. Among those cases, the classification favored by the control factor aligned with the worker’s ultimate classification in all except a handful where the opportunity factor pointed in the opposite direction.” And, the Preamble, at 86 Fed. Reg. 1168 at 1198, states that “Among the appellate decisions since 1975 that the Department reviewed, whenever the control factor and the opportunity factor both pointed towards the same classification— whether employee or independent contractor—that was the worker’s ultimate classification.”  Moreover, at 86 Fed. Reg. 1168 at 1206, the Preamble states that “The final rule takes into account facts and factors that have historically been part of the economic reality test, and decades of appellate decisions indicating that the two core factors frequently align with the ultimate determination of economic dependence or lack thereof.”  Finally, at 86 Fed. Reg. 1168 at 1240, the Preamble observed that “because the Department’s analysis of appellate case law since 1975 has found workers’ control and opportunity for profit or loss to be most predictive of a worker’s classification status, the finalized standard provides more accurate guidance.”

[5] E.g., Tetzlaff v. United States, No. 15-161C, 2015 U.S. Claims LEXIS 1577 (Fed. Cl. Nov. 25, 2015), wherein the U.S. Court of Federal claims reasoned in a lawsuit involving worker status under the FLSA that “’the existence or absence of an employment relationship is to be ascertained . . . by applying the common-law rules realistically, [namely, by] looking to the substance of the arrangement and giving weight to all relevant factors.’ Ill. Tri-Seal Prods., Inc. v. United States, 353 F.2d 216, 173 Ct. Cl. 499, 518 (1965).”

[6] As the Preamble acknowledges, at 86 Fed. Reg. 1168 at 1169, the first federal statute for which the U.S. Supreme Court adopted an “economic realities” test is the National Labor Relations act (“NLRA”) in NLRB v. Hearst Publications, Inc., 322 U.S.111 (1944), and the next federal statute for which the Court adopted an “economic realities” test is the Social Security Act (“SSA”), in United States v. Silk, 331U.S. 704 (1947), and Bartels v. Birmingham,332 U.S. 126 (1947).  Congress subsequently repudiated the Court’s adoption of an “economic realities” test for purposes of these two statutes. Building on these decisions, the Court adopted an “economic realities” test for purposes of the FLSA, in Rutherford Food Corp. v. McComb, 331 U.S. 722, 728 (1947).  To justify the application of an “economic realities” test to determine an individual’s status, as an employee or independent contractor, under the FLSA, courts commonly make much of the fact that the FLSA defines the term “employ,” at 29 U.S.C. §203(g), to include “to suffer or permit to work.” What such court decisions typically do not mention is the fact that neither the NLRA nor the SSA — which, as noted are the statutes for which the Court initially adopted an “economic realities” test — do not statutorily define the term “employ.”  Thus, it seems incongruous that courts rely on the statutory definition given the term “employ” in the FLSA to justify their application of an “economic realities” test for purposes of the FLSA when the Court initially developed the “economic realities” test in the context of two different federal statutes that do not statutorily define the term “employ.” Added to this incongruity is the fact that Congress statutorily defined the term “employee” with identical language in the FLSA and the Employee Retirement Income Security Act of 1974 (“ERISA”), but courts routinely apply a common-law test when interpreting the term employee in the context of ERISA but the quite different “economic realities” test when interpreting the term employee – with the identical statutory definition – in the context of the FLSA.

[7] E.g., 86 Fed. Reg. 1168, 1173, wherein the Preamble “highlighted the decision in Parrish v. Premier Directional Drilling, 917 F.3d 369, as an example of inconsistent articulation of economic dependence,” and at 96 Fed. Reg. 1168, 1174, “highlighted a case in which a court found that workers exercised enough on-the-job initiative for the control and opportunity factors to point towards independent contractor status, but nonetheless found the ‘skill and initiative factor points towards employee status’ due to ‘the key missing ingredient . . . of initiative.’ ’’ 85 FR 60607 (quoting Express Sixty-Minutes Delivery, 161 F.3d at 303).”

[8] E.g., 86 Fed. Reg. 1168 at 1198, wherein the Preamble cited with approval “Agerbrink v. Model Service LLC, 787 F. App’x 22, 25–27 (2d Cir. 2019) (denying summary judgement based solely on disputed facts regarding plaintiff’s ‘control over her work schedule, whether she had the ability to negotiate her pay rate, and, relatedly, her ability to accept or decline work’). The Third Circuit in Razak v. Uber Technologies took a similar approach [emphasizing facts and factors that are more probative of the economic dependence inquiry] by emphasizing disputed facts regarding ‘whether Uber exercises control over drivers’  and had ‘the opportunity for profit or loss depending on managerial skill’ to deny summary judgment. 951 F.3d at 145–47.”

[9] E.g., 86 Fed. Reg. 1168 at 1173, wherein the Preamble rejected the reasoning in Thibault v. BellSouth Telecommunication, 612 F.3d 843 (5^th Cir. 2010) (holding that cable splicer hired by same company under a very similar arrangement was an independent contractor)… The Thibault court distinguished its result from Cromwell in part by highlighting Mr. Thibault’s significant income from (1) his own sales company that had profits of approximately $500,000, (2) ‘eight drag-race cars [that] generated $1,478 in income from racing professionally[,]’ and (3) ‘commercial rental property that generated some income.’ Thibault, 612 F.3d at 849.”

[10]  E.g., 86 Fed. Reg. 1168, 1199, wherein the Preamble states that “The Department therefore revises § 795.105(c) to more clearly distinguish between a core factor’s probative value as a general matter and its’ weight in a specific case and to clarify that the core factors’ greater probative value means that they typically (but not necessarily) carry greater weight.”

[11] 29 CFR 795.105(d)(1).

[12]  The Preamble at 86 Fed. Reg. 1168 at 1197, reports that “the Department did not uncover a single court decision where the combined weight of the control and opportunity factors was outweighed by the other economic reality factors. The Preamble, at 86 Fed. Reg. 1168 at 1196, recounts that “The NPRM further explained that focusing on the two core factors is also supported by the Department’s review of case law. The NPRM presented a remarkably consistent trend based on the Department’s review of the results of appellate decisions since 1975 applying the economic reality test. Among those cases, the classification favored by the control factor aligned with the worker’s ultimate classification in all except a handful where the opportunity factor pointed in the opposite direction.”  Moreover, at 86 Fed. Reg. 1168 at 1198, the Preamble reported that “Among the appellate decisions since 1975 that the Department reviewed, whenever the control factor and the opportunity factor both pointed towards the same classification— whether employee or independent contractor—that was the worker’s ultimate classification. Put another way: In those cases where the control factor and opportunity factor aligned, had the courts hypothetically limited their analysis to just those two factors, it appears to the Department that the overall results would have been the same.   And at 86 Fed. Reg. 1168 at 1206, the Preamble affirms that “The final rule takes into account facts and factors that have historically been part of the economic reality test, and decades of appellate decisions indicating that the two core factors frequently align with the ultimate determination of economic dependence or lack thereof.” Finally, at  86 Fed. Reg. 1168 at 1240, the Preamble states that “because the Department’s analysis of appellate case law since 1975 has found workers’ control and opportunity for profit or loss to be most predictive of a worker’s classification status, the finalized standard provides more accurate guidance.”

[13] 29 CFR 795.110.

[14] The Preamble expressed this intention at 86 Fed. Reg. 1168 at 1204, wherein DOL observed that “In many instances, the actual practices of the parties will establish the existence of an employment relationship despite what a ‘‘skillfully devised’’ contract might suggest on paper. Silk, 331 U.S. at 715; see, e.g., Scantland, 721 F.3d at 1313– 14 (‘‘Though plaintiffs’ ‘Independent Contractor Service Agreements’ provided that they could ‘decline any work assignments,’ plaintiffs testified that they could not reject a route or a work order within their route without threat of termination or being refused work in the following days.’’).”

On September 18, 2019, California’s Governor Gavin Newsom signed into law Assembly Bill 5, which launched California into a grand experiment that restricts an individual’s right to work in that state as an independent contractor.

Click Here for a copy of our analysis of California AB 5.

If you have any questions or comments concerning our analysis, please contact us at (202) 659-0878.

The Tax Cuts and Jobs Act created a new tax deduction – of up to 20% – for pass-through entities, which include certain independent contractors. The provision, codified as new Internal Revenue Code section 199A, applies for tax years beginning after December 31, 2017, but before January 1, 2026.

CLICK HERE for an article we wrote for Tax Notes that analyzes the new Code section 199A deduction as it applies to independent contractors.

At a recent hearing before the U.S. House of Representatives Committee on Small Business, certain Members and witnesses expressed concern that current tax laws are outdated and burdensome to companies in the “sharing economy.” The hearing, titled, “The Sharing Economy: A Taxing Experience for New Entrepreneurs, Part I” was held on May 24, 2016.

Committee Chairman Steve Chabot (R-OH) observed that “sharing economy” companies are running into an outdated tax law that is working against this segment of the economy. Similarly, Committee Ranking Member Nydia Velazquez (D-NY) characterized the common law test, used to determine worker status, as difficult to administer in the context of the “sharing economy.”

Testifying before the Committee were representatives from TaskRabbit, ACT/The App Association, the Information Technology and Innovation Foundation, and a professor at American University.

The witnesses made similar assessments during their testimony, characterizing current tax laws as having been developed in a different time, being ill-suited to the modern on-demand economy and hindering economic growth.

One witness recommended increasing the consistency between state and federal laws that determine worker status, but also suggested establishing a new third worker classification to better reflect work relationships in the “sharing economy.”

Interestingly, a couple witnesses asserted that current laws make it difficult for “sharing economy” companies to interact with and train independent contractors, and thought the laws should be changed to permit this.

If you have any questions or comments regarding the foregoing, please let us know.

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The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

By Russell A. Hollrah

The National Labor Relations Board (“NLRB”) appears to be creating a new source of regulatory risk to companies doing business with independent contractors. On April 18, 2016, the Regional Director of the NLRB’s Los Angeles office issued a Complaint against a transportation company alleging, among other things, that it is an unfair labor practice in violation of the National Labor Relations Act (“NLRA”) to misclassify an individual as an independent contractor.

By way of background, the International Brotherhood of Teamsters on August 10, 2015, filed with the NLRB’s Los Angeles regional office an unfair labor practice charge against that same transportation company, premised in part on an allegation that the company misclassified individuals as independent contractors.[1] The regional office conducted an investigation and determined that the charge has merit. Subsequently, the Regional Director issued the aforementioned Complaint.

The Complaint alleges that because the transportation company misclassified individuals as independent contractors,[2] it has “inhibit[ed] them from engaging in Section 7 activity[3] and depriv[ed] them of the protections of the [NLRA].” A hearing before an NLRB administrative law judge is scheduled for June 13, 2016.[4]

In the month prior to the Regional Director filing the Complaint in this matter, the NLRB’s General Counsel issued General Counsel Memorandum 16-01, regarding Mandatory Submissions to the Division of Advice, which identifies matters that involve General Counsel initiatives and/or priority areas. Two salient matters the memorandum identifies are (i) “Cases involving the employment status of workers in the on-demand economy,” and (ii) “Cases involving the question of whether the misclassification of employees as independent contractors violates Section 8(a)(1).”[5] The memorandum directs Regional Directors to contact NLRB Headquarters for guidance and centralized consideration when investigating these matters.

The recent General Counsel Memorandum and Complaint suggest that the NLRB is making worker misclassification a higher priority. The Complaint might well portend the aggressiveness with which Regional Directors intend to pursue this priority. Firms that do business with independent contractors need to be aware of this new emerging regulatory threat.

The hearing scheduled for June 13 concerning the transportation company could provide important insight into the legal and factual arguments that will be used to support the contention that worker misclassification is an unfair labor practice, and as to whether this contention has merit.

If you have any questions or would like to discuss this development, please let us know.

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The foregoing is intended solely as general information and may not be considered tax or legal advice; nor can it be used or relied upon for the purpose of (i) avoiding penalties under any taxing statute or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should not take any action based upon any information contained herein without first consulting legal counsel familiar with your particular circumstances.

[1] The test generally used for determining whether an individual is an employee or independent contractor for purposes of the NLRA is the common-law, right-of-control test. See, e.g., Corporate Express Delivery Sys. v. NLRB, 292 F.3d 777 (D.C. Cir. 2002).

[2] Independent contractors are not covered by the NLRA. See, NLRA section 2(3).

[3] NLRA section 7 provides:

Sec. 7. [§ 157.] Employees shall have the right to self-organization, to form, join, or assist labor organizations, to bargain collectively through representatives of their own choosing, and to engage in other concerted activities for the purpose of collective bargaining or other mutual aid or protection, and shall also have the right to refrain from any or all of such activities except to the extent that such right may be affected by an agreement requiring membership in a labor organization as a condition of employment as authorized in section 8(a)(3) [section 158(a)(3) of this title].

[4] Case number 21-CA-157647.

[5] NLRA section 8(a)(1) provides:

(a) [Unfair labor practices by employer] It shall be an unfair labor practice for an employer—

(1) to interfere with, restrain, or coerce employees in the exercise of the rights guaranteed in section 7 [section 157 of this title];

By Patrick A. Hollrah

State agencies in North Carolina will be permitted to share information and work collaboratively to bring enforcement actions against suspected worker misclassification – in spite of the defeat of proposed legislation, H.B. 482, which would have permitted these activities.

North Carolina Governor Pat McCrory (R) resurrected the information sharing elements of the failed bill by issuing Executive Order No. 83 (Dec. 18, 2015), the Employee and Employer Fairness Initiative.

By way of background, H.B. 482, which died in the state legislature in September 2015, would have established a division within the Department of Revenue to target worker misclassification, and created a new $1,000 penalty for each instance of willful worker misclassification. To target worker misclassification, the new division would have been empowered to investigate reports of worker misclassification; assist and coordinate with other state agencies to recover monies owed as a result of worker misclassification; assess administrative penalties; and share information concerning worker misclassification with the Department of Labor, Division of Employment Security, and Industrial Commission to facilitate investigations of potential violations of tax, wage and hour, unemployment security, and workers’ compensation law.

E.O. 83 establishes the Employee Classification Section (“Section”) within the Industrial Commission to address worker misclassification. The Section’s duties and responsibilities include receiving and referring complaints of worker misclassification to the appropriate agency liaison to be investigated; coordinating with state agencies, the Office of the Governor, and legislative staff to create comprehensive measures to combat worker misclassification practices; working with agency liaisons and the Department of Information Technology to develop methods to facilitate information sharing between state agencies to proactively identify possible instances of worker misclassification; and developing strategies to educate employers, employees, and the public about worker classification.

Additionally, the new Section will annually provide a report to the Governor containing proposed legislative changes to address worker misclassification and a summary of the Section’s activities, including the number of complaints of worker misclassification received; the number and amount of back taxes, wages, benefits, penalties or other monies assessed and collected; and the number of cases referred to each state agency.

On January 11, 2016, Gov. McCrory announced that he appointed Bradley Hicks to lead the Section. Mr. Hicks previously served as the deputy director of the Department of Administration’s Office for Historically Underutilized Businesses.

The practical effect of the new information sharing among state agencies that E.O. 83 will permit is that affected firms could bear additional costs associated with being the subject of multiple investigations. Additionally, the executive order increases the likelihood that a firm will receive conflicting determinations on whether the independent contractors with whom it does business are classified properly, in light of the different tests for determining worker status that commonly apply for purposes of different laws.

If you have any questions or comments concerning the foregoing, please let us know.