Mega-Settlements in Independent Contractor Misclassification Lawsuits: September 2023 IC Legal News Update

Every so often a large settlement of a class action lawsuit reverberates in the independent contractor world – but last month there were two mega-settlements. The first was between Flowers Foods, a large nationwide baked goods company, and a class of distributors who sued for allegedly misclassifying them as independent contractors in violation of the California Labor Code. The $55 million settlement covering 475 distributors is a very high per plaintiff result. In addition, Flowers Foods reports that it will be incurring another $50 million to buy back about 350 distributor routes and then convert them to an employee distributor model. The other mega-settlement involves a large commercial cleaning company, JanPro, which was sued in California by over 2000 janitorial franchisees for misclassification under the state’s Labor Code and fair trade practices laws as well as breach of contract. JanPro is settling for $30 million. These two settlements demonstrate that California’s very strict test for IC status is extraordinarily unfavorable to many companies with IC relationships that are otherwise lawful under most other state and federal IC laws, assuming the IC relationships are structured, documented, and implemented in a compliant manner. Many businesses that seek to maintain their IC relationships across the U.S. but minimize misclassification exposure in California and other states have followed a process such as IC Diagnostics (TM), which offers companies a customized and sustainable approach to enhance IC compliance.

In the Courts (5 cases)

BAKED GOODS COMPANY TO PAY $55 MILLION IN IC MISCLASSIFICATION SETTLEMENT WITH DISTRIBUTORS.  Leading baked goods producer Flowers Foods Inc. along with two related business entities have reached a $55 million settlement with a class of delivery drivers in an independent contractor misclassification class and collective action under the FLSA and California state law. The distributors had made claims seeking overtime compensation under the FLSA and California state law as well as reimbursement of deductions and expenses, among other claims, due to the alleged misclassification of the distributors as independent contractors and not employees. Flowers Foods is the second-largest commercial bakery in the United States whose brands include Wonder Bread, Tastykake, Sunbeam, and Nature’s Own. The proposed settlement also resolves two companion cases against the company involving IC misclassification. In its filing with the United States Securities and Exchange Commission, Flowers Foods reported that, under the settlement, a $55 million fund would be established to cover payments to a class of about 475 plaintiffs and for service awards to the named plaintiffs as well as for attorneys’ fees and administrative expenses.

The SEC disclosure also notes that the settlement requires an additional expenditure by the company of $50 million to “repurchase … approximately 350 distribution territories” in California which, once completed, would be serviced by the company with its own employees and not through independent contractors. In settling the cases, the Company expressly states in its SEC filing that it does not admit any liability and is subject to approval by the court. This settlement is unlikely to be a precedent for the company in other jurisdictions because California has one of the most unfavorable laws in the country to maintain otherwise legitimate independent contractor relationships. Ludlow v. Flowers Foods Inc., No. 18-cv-01190 (S.D. Cal. Sep. 5, 2023); Maciel v. Flowers Foods, Inc., No. 3:20-cv-02059-JO-JLB (S.D. Cal.); and Maciel v. Flowers Foods, Inc., No. 20-CIV-02959 (Super. Ct. San Mateo County, California).

LARGE COMMERCIAL CLEANING FRANCHISOR TO PAY $30 MILLION TO SETTLE IC MISCLASSIFICATION CASE WITH 2,200 CLEANING FRANCHISEES. A nationwide cleaning services franchisor and class of janitorial franchisees have reached a $30 million proposed settlement in an independent contractor misclassification class action. The complaint alleged that Jan-Pro Franchising International, Inc. subjected the janitors to “systematic misrepresentations and breaches of contract in their relations with the company by “purport[ing] to sell cleaning ‘franchises” knowing it does not have sufficient business to satisfy its obligations,” and by misclassifying them as independent contractors and not employees in violation of the California minimum wage, overtime, expense reimbursement,‎ and unlawful deduction laws. A class was certified as to the franchisees’ minimum wage claim (but only regarding the issue of mandatory training), the franchisees’ expense reimbursement claim (but only regarding required uniforms, cleaning supplies, and equipment), and the franchisees’ unlawful deductions claim (but only regarding management, sales, and marketing fees). An order issued by the court in August 2023 stayed the action as to 125 class members and set a trial date for October 2023 for the remaining 2,100 class members. Roman v. Jan-Pro Franchising International, Inc., No. 3:16-cv-05961 (N.D. Cal. Sept. 22, 2023).

SUPREME COURT TO HEAR ARBITRATION CASE INVOLVING DRIVER WHO DISTRIBUTES BAKED FOODS PRODUCTS.  The U.S. Supreme Court has decided to review whether drivers that distribute Flowers Foods baked goods are interstate transportation workers and therefore exempt from arbitration under the Federal Arbitration Act. In granting the drivers’ petition for a writ of certiorari, the high court will consider the purported split within the circuits about whether the drivers fall within the FAA’s transportation worker exemption from arbitration. The distributors argue in their court papers that although their “job was to haul goods to market for Flowers Foods,” they were “actively engaged” in transporting goods through the channels of interstate commerce and, therefore, the Second Circuit incorrectly held that they were not “transportation workers” exempt from arbitration under the FAA. The distributors claim that the First and Seventh Circuits have held that this FAA exemption applies to any member of a class of workers that is “actively engaged” in the interstate transportation of goods. They argue that the Second and Eleventh Circuits have improperly added the additional requirement that the worker’s employer must also be in the “transportation industry.” Flowers Foods had argued that there is no split in the circuits, that the Supreme Court in Southwest Airlines v. Saxon has further  clarified  that  “transportation workers”  include  only  those  classes  of  workers  who “play  a  direct  and  ‘necessary  role  in  the  free  flow  of  goods’  across  borders,” and that, “[p]roperly framed, the question presented [to the Supreme Court] is whether § 1 [of the FAA] applies to a business-to-business franchise agreement in which one business purchases from the other  the  rights to market, sell, and distribute baked goods within a defined intrastate territory.” Bissonnette v. LePage Bakeries Park St. LLC, No. 23-51 (U.S. Sup. Ct. Sept. 29, 2023).

BAKING COMPANY CANNOT COMPEL ARBITRATION OF DISTRIBUTORS’ IC MISCLASSIFICATION LAWSUIT. A California federal court has denied a baking company’s motion to compel arbitration in a proposed class ‎action brought by independent baked goods distributors who have alleged wage and hour violations ‎under California state law. Each of the ‎distributors that alleged they were misclassified as independent contractors entered into Distribution Agreements with Earthgrains Distribution, LLC, a ‎subsidiary of Bimbo Bakeries, that contained a Dispute Resolution Provision (“DRP”).  The DRP provided, ‎among other things, that all parties arbitrate all covered disputes. The company’s motion to compel arbitration, however, was contested by the distributors who questioned the ‎validity of the arbitration provisions. In denying the motion, the court concluded that there was ‎no meeting of the minds between the parties on mandatory arbitration so the “DRP is not a valid agreement to arbitrate in this case.”

The court ‎concluded further that, even if the DRP had been validly formed, it was unenforceable on ‎grounds of unconscionability. The court reasoned that the Distribution Agreement containing the DRP was procedurally ‎unconscionable because it was an adhesion contract based on the imbalance of bargaining power ‎between the parties, the presentation of the Agreement was as a standardized, preprinted, non-‎negotiable form, the DRP was “buried towards the latter half of the 34-page Agreement” causing ‎‎“surprise” to the distributors, and the companies did not clarify their intention to enforce the ‎arbitration agreement through a table listing important provisions in the parties’ Distribution Agreement. ‎The court also held that it was substantively unconscionable because the DRP provided only a 60-day limitations ‎period in which disputes must be brought, imposed a liquidated damages charge only against the ‎weaker party to prevent them from challenging the arbitration agreement, and unfairly excluded ‎from arbitrability claims likely to be ‎brought by the companies. ‎This case demonstrates the importance of updating arbitration provisions to maximize the likelihood that they will be enforced, as we have often commented upon in this blog, most recently in our August 15, 2023 post. Munoz v. Earthgrains Distrib. LLC, No. 22-cv-01269 (S.D.Cal. Sep. 13, 2023). ‎

OIL & GAS COMPANY SUED BY GEOLOGIST CLAIMING TO BE MISCLASSIFIED AS INDEPENDENT CONTRACTOR AND IMPROPERLY PAID A DAY RATE.  A former day rate geologist providing services to a Colorado oil and gas exploration and production company has filed a collective action complaint on behalf of himself and others similarly situated for overtime compensation under the FLSA due to the alleged misclassification of day rate workers as independent contractors and not employees. According to the complaint, SM Energy Company allegedly misclassified its day rate workers and paid them a flat amount for each day worked, regardless of the total number of hours they worked in a workweek. The complaint alleged that the day rate workers typically work 12-hour shifts, 7 days a week for “two-week hitches,” yet do not receive overtime compensation as required for employees under the FLSA. The geologist claims that the oil and gas exploration company uniformly controls the workers’ schedules and assignments; requires the workers to follow company policies, procedures, protocols and drilling specifications; supervises the workers; and expects the workers to take direction. Additionally, the plaintiff claims that day rate workers are not required to possess any unique or specialized skills, are integral to the company’s core business, cannot subcontract the work they are assigned by the company, do not substantially invest in the tools required to complete their work, do not market their services while engaged by the company, and are prohibited from working other jobs while working for the company due to the schedule that the company sets for them.  Garvey v. SM Energy Co., No. 1:23-cv-02508 (D. Colo. Sept. 26, 2023).

Regulatory and Administrative Action (1 item)

FTC AND LABOR DEPARTMENT ENTER INTO AGREEMENT TO COLLABORATE ON IC MISCLASSIFICATION MATTERS.  The Federal Trade Commission and the U.S. Department of Labor have signed a new agreement outlining ways in which the two agencies say they will work together on key issues such as “labor developments in the gig economy.” In a September 21, 2023 press release issued by the FTC, it was reported that the Memorandum of Understanding (MOU) builds on the FTC’s recent efforts to increase collaboration on issues facing workers, including the FTC’s recent MOU with the National Labor Relations Board as well as the FTC’s enforcement policy statement related to gig work. The new agreement enables the FTC and DOL to closely collaborate by sharing information, ‎conducting cross-training for staff at each agency, and partnering on investigative efforts within ‎each agency’s authority. ‎In addition, the press release notes that the MOU identifies areas of mutual interest for the two agencies: collusive behavior; the use of ‎business models designed to evade legal accountability (which the agencies say includes the misclassification of ‎employees); the ‎imposition of one-sided and restrictive contract provisions, such as non-compete and training ‎repayment agreement provisions; and the ‎impact of algorithmic decision-making on workers.‎ Solicitor of Labor Seema Nanda stated in the press release: “Protecting workers on the job and promoting fair markets requires a level playing field. What’s unfair for workers is also unfair for law-abiding employers, and this partnership will help both of our agencies combat unlawful behavior, such as misclassification and contract provisions that restrict accessible opportunities to our growing workforce.” ‎ The press release further stated that the FTC will continue to take action to stop deceptive and unfair acts and practices aimed at ‎workers, particularly those in the “gig economy” who often don’t enjoy the full protections of ‎traditional employment relationships. ‎It is unknown whether any of these MOUs entered into by the Labor Department over the years have ever contributed to any enforcement actions against any businesses using independent contractors.

Legislative Developments (1 item)

NEW YORK MAKES WAGE THEFT A FELONY; WHETHER IT APPLIES TO IC MISCLASSIFICATION IS AN OPEN QUESTION.  Governor Kathy Hochul signed a package of legislation on September 6, 2023 to support, protect, and expand benefits for New York workers, including legislation (S2832-A/A154-A) making “wage theft” a form of felony larceny and allowing prosecutors to seek stronger criminal penalties against companies believed to be “stealing” wages from workers. The wage theft bill (S2832-A/A154-A) amends section 155.05 of the New York Penal Law to now state as follows: “Larceny includes a wrongful taking, obtaining or withholding of another’s property, with the intent prescribed in subdivision one of this section, committed in any of the following ways: … (f) By wage theft. A person obtains property by wage theft when he agrees to hire a person to perform services and the person perform such services and the defendant withholds such wages from said person.” The law also added the following language: “In a prosecution for wage theft, … it is permissible to … aggregate takings from a workforce into one larceny count.” It is unclear if this new law will apply to companies that misclassify workers as independent contractors and fail to pay them, for example, overtime pay for hours worked over 40 in a workweek to which the workers may be eligible to receive as employees, if they are found to have been misclassified. It is also unclear if this law will apply to independent contractors that are properly classified but who have not been paid for their services. In any event, it is unlikely this new law will be applied by prosecutors to businesses that have a good faith belief that they have classified workers as independent contractors or who have failed to pay a contractor for services based on a legitimate dispute over the quality of services provided.‎

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