Workers who allege that they are “employees” but were improperly treated as independent contractors continued to be a steady source of litigation in 2019, in part due to the explosive growth of the “gig” or sharing economy. These cases typically arise in the wage and hour context, with plaintiffs suing under the Fair Labor Standards Act (FLSA) or state wage laws and seeking minimum wage, overtime pay, or expense reimbursements. However, independent contractor misclassification lawsuits increasingly assert causes of action under the Employee Retirement Income Security Act (ERISA), with plaintiffs claiming they are entitled to health insurance coverage and other employment benefits that independent contractor status seldom affords. Moreover, these cases are commonly filed as putative class and collective actions.

To a lesser degree, the related, but distinct question of “joint employer” liability arose as well in 2019. The law on joint employment is critical to the growing franchise industry, as the joint employment cases this past year reflect.Transportation workers. A unanimous U.S. Supreme Court in January held, in Oliveira v. New Prime, Inc.,that the Federal Arbitration Act’s (FAA) exemption for transportation workers applies regardless of whether those workers are employees or independent contractors. Section 1 of the FAA excludes from coverage “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” This language, including the broad term “workers,” the Supreme Court stated, encompasses transportation workers who labor on an independent contractor basis, meaning that the federal statute favoring private arbitration of disputes as a matter of national policy does not apply to workers, be they employees or independent contractors, who are engaged in transportation.

At first glance, New Prime would seem to have a narrow reach. However, since the decision, plaintiffs’ attorneys are arguing that “transportation workers” are far broader than “seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” Plaintiffs’ attorneys are arguing that “transportation workers” comprise much of the “gig” workforce including local, last-mile delivery drivers. Many “gig” economy workers sign onto arbitration provisions in their operating agreements, and disputes over whether they must resolve their claims through individual arbitration are exploding. Consequently, the decision is having a broader affect than initially anticipated. In a September decision, the U.S. Court of Appeals for the Third Circuit vacated a district court’s decision compelling New Jersey rideshare drivers to arbitrate their claims, citing the Supreme Court ruling. Thus, the Supreme Court decision is threatening to upend the arbitration agreements of rideshare drivers and the growing class of gig workers transporting goods, and humans despite the apparent narrow definition of “transportation worker.”

The result: gig workers are attempting to proceed in court, on a classwide basis, with the threat of far greater liability. For example, a rideshare company had struck a $20-million settlement in 2019 in a landmark misclassification suit brought by drivers claiming they were incorrectly classified as independent contractors under the FLSA and California and Massachusetts laws. The deal is considerably less than the $100-million settlement proposal rejected by a federal court, largely because the number of potential class members had been whittled from nearly 400,000 to about 13,600 after a federal appeals court ruled that most drivers signed arbitration provisions and must individually arbitrate their claims.

The settlement did not address the merits of the question of whether the drivers were in fact statutory employees under the statutes in question. That issue, the parties acknowledged, would “undoubtedly continue to be litigated in other cases and other fora.”

California’s A.B. 5. The employment status of rideshare drivers and other gig workers gained greater urgency in 2019 with the passage of a California law that codifiedthe “ABC test” of employment status adopted by the California Supreme Court in Dynamex v. Superior Court of Los Angeles County. In that 2018 decision, the state’s high court held that to lawfully classify someone as an “independent contractor,” a company must prove that the worker is largely free from control and direction in the performance of their work; perform work that is outside the usual course of the company’s business — a particular sticking point in the case of gig workers; and customarily engage in “an independently established trade, occupation, or business of the same nature as that involved in the work performed.” Unless an employer can establish all three criteria, the workers in question are employees. This makes it harder for companies with business models that rely on gig workers and other industries that routinely use contingent workers to manage their operations accordingly.

While Dynamex addressed employment status under California’s Industrial Welfare Commission (IWC) Wage Orders, A.B. 5 extends the standard to the California Labor Code and the state Unemployment Insurance Code. As such, it changes how an “employee” is defined in California.Lobbying on A.B. 5 was fast and furious, however, and the law contains several exemptions for certain occupations, including state-licensed professionals (physicians, attorneys, engineers, insurance and real estate professionals), registered broker dealers and investment advisors, individuals performing “professional services” in marketing, human resources, and freelance writing and photography, among others, and business relationships (such as “bona-fide business-to-business contracting relationships,”construction contractors and subcontractors). For those, the determination of employee or independent contractor status will not be assessed under the ABC test, but rather, will be determined under the application of California’s longstanding (and more flexible and employer-friendly)“Borello” test or other existing standards under California law.

California Governor Gavin Newsom signed A.B. 5 on September 18; it will take effect January 1, 2020. Meanwhile, California companies must grapple with the prospect that the 2018 Dynamex ruling applies retroactively, leaving them potentially liable for misclassification under a standardthat did not exist when the determination was made. The U.S. Court of Appeals for the Ninth Circuit has asked the California Supreme Court to address the question (and vacated its own holding on this point); the state high court announced November 20 that it would do so.

Companies outside of California must take heed as well, as California often proves to be a bellwether of what is to come elsewhere in the country. In New York, Senate Bill S6699A, introduced in September, would codify the ABC test into that state’s labor law. And the passage of A.B. 5 likely will breathe new life into prior legislative attempts in Oregon and Washington. (The ABC test is already in place in several other states.)

Joint employment: common-law test applies. In a February decision, the Ninth Circuit adopted the common-law agency test in discrimination cases under Title VII of the Civil Rights Act. It had not previously adopted a test for joint-employer status under Title VII. When the statutory definition of “employer” iscircular, the U.S. Supreme Court has turned to common-law agency principles to analyze the existence of an employer-employee relationship, the appeals court explained, in concluding that this test should be applied in the Title VII context as well. Under this standard, the “principal guidepost” would be the extent of control exercised over the details of the work. And while other elements of the common-law agency test did not fitreadily to the circumstances here — a lawsuit brought by the Equal Employment OpportunityCommission (EEOC) against twoagricultural employers who allegedly, jointly, subjected H2A farm workers to appalling work conditions—the appeals court found the defendants had sufficient controlover the workers for this factor to be determinative, and to find they were joint employers.

Franchisor is in the clear. In a closely watched case for the franchise industry — in the federal circuit court (and state) perhaps most likely to have been amenable to finding liability — the Ninth Circuit held that a national fast-food franchise is not a joint employer of some 1,400 employees of a franchise operator. The appeals court affirmed a summary judgment decision in favor of the national corporate entities against the workers’ state-law wage claims. The franchisor did not meet the “suffer or permit to work” definition of employer, nor did it satisfy the “control” definition because it did not retain any general right of control over the franchisees’ workforce. Any control that it did exercise was related to quality control and brand integrity, not employment terms and conditions. This exercise of control, the appeals court said, “is central to modern franchising and to the company’s ability to maintain brand standards, but does not represent control over wages, hours, or working conditions.” More is needed, in the franchise context, to establish liability under a common-law definition of employer.