BY MATT DAUS, PATRICIA GATLING, AND OPHÉLIE GARNIER-WADEWorker classification is an issue that is continuing to keep many livery operators awake at night. Having independent contractor status for chauffeurs is critical for many of this industry’s business models, but achieving it can be tricky under federal, state, and local tax and labor laws.
Improperly applied statuses can lead to criminal and civil actions initiated by government agencies such as federal and state departments of taxation and labor. There are also private causes of action that can be instituted under the Fair Labor Standards Act (FLSA) and equivalent state laws for overtime back-pay resulting from improper worker classification. These lawsuits can be and have been commenced by groups of workers in the form of a class action involving significant liability exposure.
The essence of these government investigations and private lawsuits centers around the degree of “control” exerted by the transportation company business owner over an employee/independent contractor, as viewed from the “economic realities” test. The factors that affect control range from mostly clear to confusingly vague, depending on the particular statute, jurisdiction, and case law at play. Now more than ever, it is important that for-hire ground transportation providers understand the implications of laws that could make or break their businesses in this highly litigious, disruptive, and competitive environment. As you already know, the associated costs of employee classification are significant: Minimum wage, unemployment insurance, health care, overtime pay, and state and federal employment taxes all increase the cost of doing business, curbing a company’s profitability.
With the advent of TNCs, these pitfalls have become even more prevalent. At press time, Uber was still fighting four class action lawsuits—the O’Connor, Yucesoy, Mohamed, and Del Rio cases—in a consolidated appeal in California. Uber is fending off claims from its drivers alleging they were misclassified as independent contractors, depriving them of benefits typically afforded to employees, such as overtime and expense reimbursements.
“Now more than ever, it is important that for-hire ground transportation providers understand the implications of laws that could make or break their businesses...”
Uber had originally agreed to settle the O’Connor and Yucesoy cases, which involve drivers in California and Massachusetts, for approximately $100 million. However, a California federal judge rejected the proposed deal in August 2016, describing the settlement as unfair and unreasonable, considering the potential value of the claims in play. A California federal judge recently approved a $27 million settlement in a class action lawsuit against Lyft that challenged the independent contractor status of the company’s drivers. In New York, the State Department of Labor issued a series of rulings in the past few months that found former Uber drivers to be eligible for unemployment benefits.
Uber and Lyft have been alleged to have extra levels of control exerted by their companies on affiliated drivers that have included prohibitions on tipping and driver rating systems. The deep pockets of the TNCs have attracted an army of plaintiffs’ lawyers who are organizing class action lawsuits on behalf of drivers around the United States. This is a double-edged sword for the incumbent industry, as these suits against TNCs could lead to court rulings that cause collateral damage to the independent contractor model of for-hire vehicle operations as well as a renewed interest in commencing class actions against limousine, black car, and livery bases and taxicab fleets.
Now more than ever, with the unfair and lopsided laws giving TNCs an advantage over the incumbent industry, where private equity subsidies leave the industry fighting for market share and razor-thin margins, one bad ruling and adverse lawsuit or settlement can be deleterious to a company.
But there is some good news. On April 12, 2017—in a case our firm was involved with—the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of claims by New York City area black-car drivers alleging that they were misclassified as independent contractors and unfairly denied unpaid overtime and other wages by their dispatchers. In this case, black-car drivers who owned or operated black-car franchises originally brought an action in the U.S. District Court for the Southern District of New York, asserting claims against owners of black-car bases and certain companies belonging to the Corporate Transportation Group (CTG), pursuant to the FLSA and the New York State Labor Law (NYLL).
“The deep pockets of the TNCs have attracted an army of plaintiffs’ lawyers who are organizing class action lawsuits on behalf of drivers around the United States.”
One of this articles co-authors, former NYC TLC Commissioner/Chair Matt Daus, submitted an expert witness Affidavit to the District Court explaining how black car drivers typically own or lease their own vehicles through LLCs or other corporate entities; determine which hours and how many hours they work per week; have the ability to accept or reject potential assignments; choose which geographical areas of the city and surrounding areas in which they wish to receive calls or dispatches; are responsible for their own expenses; are issued 1099s from their affiliate bases; and file tax returns as independent contractors. This expert witness opinion helped to secure a decision by the District Court in favor of the defendants, which was upheld on appeal.
The drivers argued that they should be classified as employees because CTG exerted control over all significant aspects of their black car businesses; however, the Court of Appeals found that the District Court correctly held the black car drivers to be independent contractors because they were able to determine: (1) the manner and extent of their affiliation with CTG; (2) whether to work exclusively for CTG accounts or provide rides for CTG’s rivals’ clients and/or develop business of their own; (3) the degree to which they would invest in their driving businesses; and (4) when, where, and how to provide rides for CTG clients.
The Court of Appeals held that while none of these factors alone would determine whether the drivers were independent contractors, taken together, they support a finding that they were independent contractors. The Court of Appeals did warn that this decision was a narrow one based on the specific facts in the case and that a case with different facts could easily result in a finding that the drivers are employees.
CTG planned ahead, was careful in managing its operations, and aggressively committed resources to a high stakes legal battle—and won. Not every company is in a position to afford litigation fees, and an ounce of prevention is worth a ton of cure. Despite the favorable CTG ruling, which applies to black car franchise operations, it is important for all chauffeured transportation companies to proactively review their policies governing their employment practices. Working with your Department of Labor and an attorney who specializes in transportation can help.
TNCs are gearing up to take one big push in the next year or so to put competitors out of business and gather market share by cutting fares and expanding significantly. In order to stay in business, incumbent providers must take a top-to-bottom look at all of their operations to reduce the risks of labor litigation, by auditing their policies and procedures, reviewing agreements with driving staff, and putting into place a system of compliance to guard against such lawsuits. [CD1117] Disclaimer: The foregoing is provided solely as general information, is not intended as legal advice, and may not be applicable within your jurisdiction or to your specific situation. You are advised to consult with your attorneys for guidance before relying upon any of the information presented herein.
Matt Daus is a partner with the law firm Windels Marx, president of IATR, and a leading authority on ridesharing apps. He can be reached at email@example.com. Patricia Gatling and OphÉlie Garnier-Wade are also attorneys with Windels Marx, specializing in transportation. They can be reached at firstname.lastname@example.org and email@example.com, respectively.