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US Employment Litigation Round-Up for February 2018

Recent Cases and New Laws Affecting Employers
6 March 2018
Mayer Brown Newsletter

District Court in California Rules that Grubhub Drivers are Independent Contractors, Not Employees

Decision: In a much anticipated decision following a bench trial, the Northern District of California has ruled that a Grubhub driver was properly classified as an independent contractor, rather than a Grubhub employee. (Lawson v. Grubhub, No. 3:15cv05128 (N.D Cal.)). The plaintiff alleged that, because he was improperly classified as an independent contractor under California law, he was not paid minimum wages or overtime, and was not reimbursed for expenses. He sued individually and in his representative capacity under the California Private Attorneys General Act. The Court analyzed whether the plaintiff was an employee or independent contractor using the factors set forth in the California Supreme Court’s 1989 decision in S.G. Borello & Sons v. Dept. of Indus. Relations, 48 Cal. 3rd 341 (1989).

The Court concluded that, “[w]hile some factors weigh in favor of an employment relationship, Grubhub’s lack of all necessary control over the plaintiff’s work persuaded the Court that the contractor classification was appropriate.” The Court determined that Grubhub did not control how or when the plaintiff made deliveries, when or for how long he worked, the vehicle he used to make deliveries, his appearance, or who could ride in his vehicle. Furthermore, Grubhub did not require the plaintiff to undergo any training or to participate in any orientation, nor did Grubhub evaluate his performance. The Court found that the mutual right to terminate the relationship “at will” weighed in favor of an employment relationship, and that some of the secondary Borello factors did as well, such as the degree of skill involved in the position, the fact that delivering meals was part of Grubhub’s business, the plaintiff’s lack of a distinct occupation or business, and the method of payment. However, given the lack of “necessary” control, which the Court described as the “most important or significant consideration,” the Court concluded that facts supported an independent contractor relationship.

Impact: The Court’s decision is one of the first to address misclassification claims against a “gig economy” company after a full trial. The decision is significant for gig economy companies who have been contending with misclassification allegations for a number of years. While the Court’s decision is fact-specific and based on Grubhub’s business relationship with its independent contractor drivers, the Court’s reasoning and analysis of the primary and secondary Borello factors may be helpful to employers in assessing classification questions.

Ninth Circuit Clarifies Scope of Insurer’s Duty to Defend in Employment Cases

Decision: In PHP Insurance Service Inc. v. Greenwich Insurance Co., the Ninth Circuit issued an opinion in a closely watched case regarding an insurer’s duty to defend, even when the primary claims, in this case wage and hour claims, are excluded from coverage. Employees of PHP filed suit against the company and its CEO in 2012. Although the employees primarily pled wage and hour violations—specifically misclassification and failure to pay overtime—they also alleged facts of discrimination and harassment related to those claims, without pleading specific claims for relief therefor. In particular, they alleged that the company hired the mostly Vietnamese-speaking putative class members to take advantage of them and forced the employees to change their names to sound more “American.” PHP tendered the action to its insurance company, Greenwich, under its employment practices liability insurance policy. Greenwich denied coverage on the ground that the wage and hour claims were specifically excluded under the policy, and PHP sued for a declaration that it was entitled to coverage. PHP prevailed on summary judgment, and the Ninth Circuit affirmed, explaining that an insurer’s duty to defend arises when facts stated in the complaint, or fair inferences drawn therefrom, imply that a covered claim potentially exists. To deny coverage, the insurer must prove that the claim cannot fall within the policy’s coverage. Here, because the allegations of the complaint included harassment and discrimination claims, which were covered under the policy, the Ninth Circuit ruled that the insurer had a duty to defend.

Impact: The Ninth Circuit opinion reaffirms that an insurer’s duty to defend is broad under California law. As a result, employers should consider tendering complaints to insurers if the facts alleged therein reasonably implicate coverage, even when the specific claims for relief pled in the complaint would be excluded.

DOL Scraps Six-Factor Test in Favor of Primary Beneficiary Test for Evaluating Whether Interns are Employees Under the FLSA

Decision: On January 5, 2018, the U.S. Department of Labor (“DOL”) announced that it was adopting the “primary beneficiary” test favored by four U.S. Courts of Appeals (Second, Sixth, Ninth, and Elevenths Circuits) in assessing whether interns are employees under the Fair Labor Standards Act (“FLSA”) in lieu of the six-factor test it had previously utilized. The DOL’s six-factor test presumes that an intern is an employee unless the employer can establish that six factors suggest otherwise. The “primary beneficiary” test is a more flexible standard that looks to the “economic reality” of an intern’s relationship with the employer, i.e., which is the “primary beneficiary” in determining whether the intern should be classified as an employee. In connection with its announcement, the DOL revised its Wage and Hour Division Fact Sheet #71, which governs internship programs under the FLSA, to reflect its adoption of the “primary beneficiary” test.

Analysis: Following the Second Circuit’s rejection of the DOL’s six-factor test in favor of the “primary beneficiary” test in 2015, a number of federal circuit courts, including the Sixth, Ninth, and Eleventh Circuits, have followed the Second Circuit’s lead in concluding that interns were not employees and therefore could not collectively pursue misclassification or other wage-related claims. Given the uniformity among the Courts of Appeals, the DOL reconsidered its enforcement policies to align with recent case law, eliminate unnecessary confusion among the regulated community, and provide the DOL’s investigators with increased flexibility to holistically analyze internships on a case-by-case basis.” Given the DOL’s new alignment with the Courts of Appeals, employers who use interns should ensure that the interns, rather than the employer, are the “primary beneficiaries” of the relationship.

U.S.-Based Employee Can Sue Foreign Parent of Employer for Discrimination

Decision: In Middlebrooks v. Teva Pharmaceuticals, USA, Inc., a former employee of Teva Pharmaceuticals USA sued both Teva USA and its Israeli parent company, Teva Pharmaceutical Industries, Ltd. (“Teva Israel”) for age discrimination and retaliation under the ADEA, Title VII, and Pennsylvania law. Teva Israel moved to dismiss for failure to exhaust administrative remedies because plaintiff had failed to name Teva Israel in his administrative charge with the U.S. Equal Employment Opportunity Commission.

The District Court for the Eastern District of Pennsylvania denied Teva Israel’s motion, holding that Teva Israel was on notice of the claim and had a “shared commonality of interest” with Teva USA, despite the fact that the two companies had separate corporate structures. The court based it’s surprising decision on the fact that the Israeli parent exercised “significant control” over Teva USA’s employment practices, including the fact that plaintiff himself was supervised by a Teva Israel employee. The court also noted that the body of the discrimination charge, which alleged various claims of discrimination against the Teva Israel supervisor and his team members, was provided to the Teva Israel employees, thereby putting Teva Israel on notice of the claim. The court did not purport to pierce the corporate veil, but instead determined that Teva Israel was a joint employer with Teva USA and could itself be held directly liable. (The court ruled out single employer liability, finding that Teva Israel and Teva USA are not “operationally or financial entangled” enough for the doctrine to apply in light of the fact that the two entities maintain separate corporate forms, keep separate books and records, have separate headquarters and hold separate board meetings.)

Impact: There is generally a strong presumption that a parent company is not the employer of a subsidiary’s employees. As a result, businesses commonly rely on separate corporate entities and the difficulty of piercing the corporate veil, as a way of limiting liabilities between different aspects of their businesses. In most cases, that is an effective strategy, but as this case demonstrates, it is not a certainty. There are circumstances where, even if corporate formalities are properly maintained, a parent or affiliate corporation may exercise a level of control or supervision over the affiliate’s employees sufficient to expose them to single employer or joint employer liability. In assessing this issue, courts analyze various factors, including the parent entity’s authority to set work conditions, promulgate work rules, supervise day-to-day work activities, make hiring, firing, and promotion decisions, as well as involvement in employee discipline.

Ninth Circuit Rules That Police Officer Cannot Be Terminated for Extramarital Affair

Decision: In Perez v. City of Roseville, No. 15-16430, the U.S. Court of Appeals for the Ninth Circuit concluded that constitutional rights to privacy and free association prohibited a police department from terminating an officer based on her off-duty romantic relationship with another officer. The police department had conducted an investigation and found no evidence of sexual activity between the officers while they were on duty. The plaintiff officer was nonetheless terminated several weeks after the investigation was complete, with the department citing other performance issues as the reason for termination. The Ninth Circuit suggested that these reasons may have been pretextual given: (a) the timing of the termination; (b) the department’s initial failure to provide a reason for the termination; and (c) the investigating officer’s moral disapproval of the officers’ relationship. The Ninth Circuit held that “the Constitution is violated when a public employee is terminated at least in part on the basis of protected conduct, such as her private, off-duty sexual activity” and found that plaintiff’s termination may have violated her constitutional rights. The Court expressly rejected decisions from the Fifth Circuit and the Tenth Circuit, both of which had found that police officers could be terminated based on extramarital relationships, finding, inter alia, that those courts did not apply heightened scrutiny to the termination decision and gave too little weight to private individuals’ rights to sexual autonomy under the Supreme Court’s 2003 decision in Lawrence v. Texas.

Impact: The Ninth Circuit’s decision in Perez reaffirms government employers’ need for caution when making employment decisions based on an employee’s private conduct. Although the Court acknowledged that “private citizens often must sacrifice some individual freedom as a condition of their employment by the State,” the government could not use that authority to “encroach excessively or unnecessarily upon the areas of private life, such as family relationships, procreation, and sexual conduct.” Accordingly, public employers should avoid considering these types of private activities when hiring, disciplining, or terminating employees, unless they can demonstrate that those activities would significantly interfere with on-the-job performance. Perez also highlights the need for both public and private employers to exercise caution when disciplining and terminating employees, including by preparing thorough documentation of employee performance issues.


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