Discussion on misclassification of employment, managing risks of employment, strategies for avoiding misclassification, and changes in the legal landscape with regards to employment

1. Employment Law Issues
for the Gig Economy
Silicon Valley, San Francisco, Los Angeles
rroyse@rroyselaw.com
www.rroyselaw.com

2. Lisa Chapman is an experienced employment attorney
and litigator. In her employment law practice she helps
startup and mid-size companies navigate and comply with
federal and state employment laws and regulations. This
includes laws related to wage and hour requirements,
sexual harassment and retaliation, worker classification
(independent contractor vs. employee status) and overtime
laws, among others.
Alan Haus focuses his practice on intellectual property
protection, licensing and commercial transactions, and
employment law. Mr. Haus represents clients ranging from
start-ups to multinational companies, including food and
other consumer products companies, and e-commerce,
software and entertainment companies. Mr. Haus has been
outside general counsel to many companies over the
course of his career and has an unusually broad range of
skills beyond his core practice areas.
Pamela Lambert is a transactional attorney practicing in
the firm’s corporate and securities group. She assists and
advises a wide variety of clients ranging from emerging
growth to mid-market companies and the venture capital
funds investing in those entities. Her practice focuses on
matters including entity formation, corporate governance,
securities compliance, private financings, M&A and
general corporate compliance.

3. 3
OUTLINE
1. MISCLASSIFICATION: INDEPENDENT CONTRACTOR VS.
EMPLOYEE
2. MANAGING RISK: WHAT ARE THE DIRECT & INDIRECT
COSTS
3. STRATEGIES FOR AVOIDING MISCLASSIFICATION
4. CHANGES IN THE LEGAL LANDSCSAPE

4. 4
MISCLASSIFICATION: INDEPENDENT CONTRACTOR
VS. EMPLOYEE

5. 5
EMPLOYMENT STATUS: THE LAW
• The presumption is that the worker is an
Employee (Cal. Lab. Code §3357)
• Different agencies/jurisdictions have different
tests
– IRS
– DOL/FLSA
– CA Common Law and EDD
– Statutory Employees

6. 6
EMPLOYMENT STATUS: THE LAW
• IRS: The Control Test
– Behavioral Control
– Financial Control
– Type of Relationship
• DOL/FLSA: Economic Realities Test/Silk Factors
– Focus is on the degree of control the Company has over the worker performing the service.
The key inquiry is the right to control not whether the Company actually exercises the control.
– In July 2015 DOL issued administrative guidance and explained that the test focuses on
whether the worker is economically dependent on the hiring entity or is in business for
herself/himself.
• CA Common Law/EDD: S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989)
48 Cal.3d 341
– This is a multi-factored test with the most significant factor considered is whether the
principal has control or the right to control the worker as to the work done and the manner
and means in which it is performed.
• Statutory Employees

7. 7
MANAGING RISK: WHAT ARE THE DIRECT &
INDIRECT COSTS?

8. 8
DIRECT COSTS OF MISCLASSIFICATION FINDING
• Unpaid back federal, state and local income tax withholdings
• Unpaid back Social Security and Medicare contributions
• Unpaid federal and state unemployment insurance taxes
• Unpaid workers’ compensation premiums
• Unpaid back overtime compensation and/or minimum wages
– Overtime and Minimum Wage Penalties
• Unpaid work-related expenses
• Unpaid sick and vacation pay
• Waiting Time Penalties (Cal. Lab. Code §203)
• Cal. Lab. Code §226.3 (Failure to Provide Accurate Wage Statements)
– $250 per employee per violation in an initial citation; $1,000 per employee for each subsequent
violation
• SB 459 (Cal. Lab. Code §226.8 & §2753)
– Willful misclassification – Penalties range from $5,000 - $15,000 PER violation. If an entity is in
engaged in a “pattern or practice” of misclassification fines increase to $10,000 - $25,000 per
violation
– Joint and Several Liability with Employer for knowingly advising misclassification (exception for
practicing attorneys and persons advising his/her employer)
– “Willful misclassification” means “voluntarily and knowingly misclassifying that individual as an
independent contractor”. This has not yet been interpreted by a court.

9. 9
DIRECT COSTS OF MISCLASSIFICATION FINDING
• Attorney Fee Shifting Statutes
– Minimum Wage/Overtime (Cal. Lab. Code §1194)
– Nonpayment of Wages/Benefits (Cal. Lab. Code §218.5)
– Enforcement of Public Interest (Cal. Lab. Code §1021.5)
– Cal. FEHA Fees (Cal. Gov’t. Code §12965(b)
• Criminal Penalties
– Failure to procure workers’ compensation insurance (Cal. Lab. Code §3700.5)
– Knowingly and Intentionally Violating Cal. Lab. Code §226 (Failure to provide wage statements)
– Potential Insurance Premium Fraud
• Intentionally underreporting payroll or misclassifying workers to avoid workers’ compensation
premiums
– Example:
• T.B. Concrete – charged with 15 felony counts of submitting false payroll reports and
misclassifying employees to avoid payroll taxes and workers’ compensation expenses. State
claimed that 111 (85% of the Company’s payroll) were underreported.
• Stop Orders and Penalty Assessments under Cal. Lab. Code §3710.1
• PAGA Claims
– Allows plaintiffs’ attorneys to bring suit on behalf of individuals as a stand-in for the attorney general
in order to seek any civil penalty that the LWDA or its departments could seek for a violation of the
Labor Code. There is a “default penalty” of $100.00 per violation.
– They must give the employer 33 days to “cure” the “violation” before bringing a PAGA claim.

10. 10
INDIRECT COSTS OF MISCLASSIFICATION FINDING
SHORT TERM COSTS & BENEFITS
– Employers save around 30% on payroll and related taxes by utilizing
Independent Contractors
• Do not need to provide:
– Health Benefits
– Retirement Benefits
– Paid Time Off
– Employees have:
• Flexible Work Schedules
• Supplemental Income
• No Benefits
– PTO, Health or Retirement
• No Legal Protection
– No workers’ compensation or wage and hour law protection
• No Job Security

11. 11
INDIRECT COSTS OF MISCLASSIFICATION FINDING
LONG TERM COSTS & BENEFITS
• How is this new labor market impacting Company culture?
• Potential Impact on Hiring – Who will join your Company?
• Limited to No Training of Workers Classified as Independent Contractors
–  Affects Quality Control
• Employee Loyalty
– Independent Contractors will work for competitors
– Risk of Trade Secret Theft
• Impact on Investor Funding
– Red flag in due diligence, concern with litigation risk
VS
– Focused on financial benefits; want startups to keep costs low

12. 12
INDIRECT COSTS OF MISCLASSIFICATION FINDING
• LITIGATION COSTS
– Statute of Limitations
• Varies upon jurisdiction, generally 2-3 years
– No Waiver of Wage and Hour Law Claims in a
Release
• Many Releases include language directly asserting
that wage and hour law claims are not waived
• Can include language preventing collection of
monetary relief from wage and hour claims
– Attorney’s Fees
• Fee Shifting Statutes make litigating potentially
extremely expensive
– Liquidated Damages

13. 13
STRATEGIES FOR AVOIDING MISCLASSIFICATION

14. 14
STRATEGIES FOR AVOIDING MISCLASSIFICATION
• If the Company desires to utilize independent contractors:
– Re-evaluate current independent contractors to ensure status is
still applicable.
• Remember status can change over time
– Draft an independent contractor agreement that establishes real
independence
– Structure the day to day work relationships to follow the
independent contractor agreement and be sure that the daily
activities reflect actual independence
– If status of a worker or group of workers looks like a “close call” or
falls into the “legal grey area” consider classifying as an employee
(part-time, temporary, etc.)
– Consider using a Staffing Agency or Workforce management firm
• CAUTION – recent case law has held joint and several liability
for Company with staffing agency/workforce management
firm for indirect control over worker– NLRB v. Browning-Ferris
Industries of California, Inc., 362 NLRB No. 186 (Aug. 27,
2015)

15. 15
CHANGES IN THE LEGAL LANDSCAPE

16. 16
RECENT CASE LAW
• Uber
• There are couple of different Uber decisions. A trend that
has appeared from these cases is “the modern tendency
is to find employment when the work being done is an
integral part of the regular business of the employer,
and when the worker, relative to the employer, does not
furnish an independent business or professional
service”. The rulings have stated that because Uber’s
business would not exist without the drivers they are
integral to Uber’s business and when the worker is
integral to the business, there is a tendency to find
employment status.
• Recent $100 million settlement rejected by San
Francisco federal judge

17. 17
RECENT CASE LAW
• Lyft
• Lawsuit settles 2013 misclassification lawsuit for $12.25
million
• Change Terms of Service to comply with California law
• No longer deactivated without warning.
• Deactivation must be for a specific reason listed in
the TOS
• Drivers must be given opportunity to fix the problem
before deactivation
• Amazon
• Filed in U.S. District Court in Washington State on
October 4, 2016
• Alleges Amazon has misclassified delivery drivers as
independent contractors when they are actually
employees, thereby violating the FLSA.

18. 18
HYBRID WORKER CLASSIFICATION
• “Dependent Contractor”
– Receives some but not all employee protections
– Canada
• Employers are required to provide the worker with
reasonable notice upon termination - Keenan (c.o.b.
Keenan Cabinetry) v. Canac Kitchens, a Division of
Kohler Ltd (“Canac”)
• Ultimate factors are: exclusivity and economic
dependence
– 80% or more of income from a single source
– Germany
• Worker that is economically dependent on his or her
job and has been working with one entity for several
years
• 50% of income from a single source
• “Minijobs” are permitted for part-time workers
where the worker earns no more than €450 per
month and the income is tax free

19. 19
NEW ADMINISTRATION
• Hillary Clinton
– Spoken out against employers who misclassify
independent contractors by promising to crack down on
the “bosses misclassifying workers as contractors”
– Believes the on-demand or gig economy is “creating
exciting opportunities and unleashing innovation, but is
raising hard questions about workplace protection”
• Donald Trump
– No direct statements on gig economy but has proposed a
federal tax plan that would be favorable to independent
contractors by lowering the corporate tax rate to 15%. He
includes independent contractors among the business
entities that would benefit from the reduced corporate
tax rate.

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21. 21
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