by Matthew W. Daus, Esq.
Patricia L. Gatling, Esq.
Ophélie Garnier-Wade, Esq.
Worker classification is an issue that can keep operators of taxicab, black car, limousine and other for-hire vehicle bases awake at night. Having independent contractor status for drivers is critical for the business models of many taxi and for-hire vehicle operators.
Achieving this status can be tricky under federal, state, and local tax and labor laws. Criminal and civil actions can be 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 and equivalent state laws for overtime back pay resulting from improper worker classification.
These lawsuits can be 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 (base or fleet), as viewed from the "economic realities" test, over drivers. The goal is to compel a finding that the driver is an employee and not an independent contractor.
The factors that affect control are sometimes clear, and sometimes vague, depending on the particular statute, jurisdiction and case law at play.
It is important, now more than ever, that taxicab and for-hire ground transportation providers understand the implications of these laws as they may make or break their businesses in this highly litigious, disruptive and competitive environment.
The associated costs of employee classification are significant:
They all increase the cost of doing business curbing a company's profitability.
With the advent of Transportation Network Companies ("TNCs"), like Uber and Lyft, these pitfalls have become even more prevalent. Uber is currently fighting four class action lawsuits -- the O'Connor, Yucesoy, Mohamed and Del Rio cases -- in a consolidated appeal in the state of California.
Uber is fending off claims from its drivers alleging Uber misclassified them as independent contractors, depriving them of benefits typically afforded to employees, such as overtime and expense reimbursements.
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 last 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 these 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. These suits against TNCs could lead to court rulings that cause collateral damage to the independent contractor model of taxicab and for-hire vehicle operations. It could lead, as well, to a renewed interest in commencing class actions against limousine, black car and livery bases and taxicab fleets.
Also, now more than ever, unfair and lopsided laws give 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 for worker classification of drivers as employees could lead to bankruptcy, downsizing and adverse economic effects from which recovery will be more challenging.
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. The claims alleged 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. The action asserted claims against owners of black-car bases and certain companies belonging to the Corporate Transportation Group ("CTG"), pursuant to the Fair Labor Standards Act ("FLSA") and the New York State Labor Law ("NYLL").
Former TLC Commissioner/Chair Daus submitted an expert witness Affidavit to the District Court concerning the history of the black car industry, together with relevant regulatory customs and practices. More specifically, this affidavit explained how black car drivers:
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:
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.
Despite the favorable CTG ruling which applies to black car franchise operations, it is important for all taxicab and for-hire vehicle companies to proactively review their policies governing their independent contractors.
Our firm handles worker classification lawsuits involving transportation companies, exclusively representing management, and has seen far too many scenarios where preemptive advice can prevent high litigation costs and settlement or verdicts.
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 this position to afford the litigation fees, and an ounce of prevention is worth a ton of cure.
TNCs are gearing up to take one big push over 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 drivers and putting into place a system of compliance to guard against such lawsuits.