Impact of Proposed Joint Employer Rule on Independent Contractor Misclassification Claims

Companies that operate their businesses on an independent contractor model or supplement their workforce with ICs are likely to be asking, “Does the proposed new joint employer regulation issued by the U.S. Department of Labor have any impact on independent contractors?”  The answer is yes.

While the Labor Department’s proposed joint employer rule issued earlier today does not set forth a new test for independent contractor status under the FLSA, it will have an important impact on one aspect of IC law:  whether a business that contracts with another company, which is found to have engaged in IC misclassification, will also be liable under the joint employer doctrine.  Under the new proposed rule, the likelihood of such exposure will be considerably reduced.

Different Tests for IC Status and Joint Employer Status

The test for independent contractor status under the FLSA has been well established by U.S. Supreme Court decisions.  That test is commonly referred to as the “economic realities” test and it focuses on factors that bear on the workers’ economic dependence on the purported employer.  The proposed regulation makes it abundantly clear that that economic dependence has no relevance to joint employer status.  In one of the key pronouncements of the proposed rule, the Labor Department states that “joint employer status under the Act is not determined by the employee’s ‘economic dependence’…

The proposed rule explains that joint employer status focuses on the actions of the potential joint employer—not on the actions of the employee or his or her immediate employer.  The proposed rule then identifies three examples of economic dependence that are relevant to determining IC status but are  irrelevant in determining joint employer status:

(1) where the worker performs a specialty job or a job that otherwise requires special skill, initiative, judgment, or foresight;

(2) where the worker has the opportunity for profit or loss based on his or her managerial skill; and

(3) where the worker invests in the equipment or materials required to perform the work.

As the proposed regulation states:  “While courts have used these factors for determining whether a worker is an employee or independent contractor, they are not relevant for determining whether additional persons are jointly liable under the Act to a worker whose classification as an employee has already been established.”

Rather, as noted above, what are relevant are the actual actions of the potential joint employer.  The proposed new rule establishes a four-factor balancing test focusing on four types of actions:  whether the potential joint employer –

  • hires or fires the workers found to be employees;
  • supervises and controls their work schedules or conditions of employment;
  • determines their rates of pay and methods of payment; and
  • maintains their employment records.

Unlike IC tests that focus on the right to control – which can be established through contractual provisions, even those that are unexercised – the proposed joint employer test focuses on actions the second company actually undertakes in practice, not theoretically what it has a right to do.  This is one of the underlying principles of the proposed new rule – and would be a meaningful change in the law.

Many federal courts have determined joint employer status under the FLSA based not only on what the second company actually did in practice but also the rights it has reserved under contract to impact the first company’s employees – even if it never exercised such rights.

If the courts give weight to this proposed regulation, no longer will they consider unexercised rights under a contract.  This will likely result in fewer findings of joint employer status under the FLSA.

As the proposed rule states: “[A] person’s ability, power, or reserved contractual right to act with respect to the employee’s terms and conditions of employment would not be relevant to that person’s joint employer status under the Act. Only actions taken with respect to the employee’s terms and conditions of employment, rather than the theoretical ability to do so under a contract, are relevant to joint employer status under the Act.”

The proposed regulation also provides examples of conduct that indicates joint employer liability and conduct that does not.  One example refers to a business contract where one company requires the other to institute workplace safety measures, wage floors, sexual harassment policies, morality clauses, or requirements to comply with the law or promote other desired business practices.  According to the proposed rule, such contractual provisions do not make joint employer status more or less likely under the FLSA.

Types of Situations in Which Joint Employer Liability Can Arise in an IC Misclassification Case

As mentioned in many of our monthly blog posts about new and pending cases, it is commonplace for plaintiffs’ class action lawyers to sue multiple parties when filing class and collective actions asserting independent contractor misclassification.

For example, retailers have been sued as joint employers under the FLSA when they contract with delivery companies that in turn retain drivers and installers as ICs to deliver and/or install the retailer’s purchases.  Similarly, companies providing cable or telephone services have been sued as joint employers when they use a third party to engage personnel classified as 1099ers to sell services or install equipment.  Even the federal government has been sued as a joint employer, most recently by a dental hygienist retained as a 1099er by a government contractor that provides dental services at a federal prison.

In contrast, joint employer liability generally should not  be an issue where workers classified as ICs provide services directly to the business that engages them or to customers of the business. In that instance, there is generally no “second company” involved that may be jointly liable together with the company that has retained the workers.  For those businesses, the proposed new rule on joint employer liability would not be applicable.


The proposed joint employer regulation only applies to lawsuits brought under the FLSA; it has no impact on independent contractor misclassification liability under state wage and hour laws.  While this proposed rule, if adopted, will minimize the likelihood of joint employer liability for IC misclassification under the FLSA, companies would be wise to minimize their exposure under that law and state wage laws by enhancing their level of independent contractor compliance.

How can businesses do so? Many have resorted to a process such as IC Diagnostics™, whereby companies are able to restructure, re-document, and re-implement their IC and business relationships in a manner that considerably enhances their compliance with federal and state IC laws.  Those companies that have already undergone a process such as IC Diagnostics are likely to be safe from joint employer liability, as the process includes re-documenting contracts with any other company that engages ICs directly.

The comment period for the proposed new rule is 60 days from April 1, 2019.  There will likely be thousands of comments filed, requiring months of review by the Labor Department.  If the final rule maintains the thrust of the proposed regulation, it will most assuredly simplify joint employer issues under the FLSA, assuming the courts give deference to the new rule and apply it as drafted.

Written by Richard Reibstein

Posted in IC Compliance | Leave a comment

A Tale of Two $100-Million Independent Contractor Misclassification Settlements

Yesterday, the first $100-million settlement of an independent contractor misclassification case suddenly became a $20-million deal, but on the same day a nine-figure settlement in another case took its place.

As reported in our blog post on April 22, 2016, Uber Technologies had reached a $100-million proposed settlement with about 385,000 drivers in California and Massachusetts; $84 million was guaranteed and another $16 million would be added if Uber went public and achieved a certain valuation within its first year after an initial public offering. But that settlement proposal was rejected by a federal district court judge on August 18, 2016, as we reported in our post that day, because the amount allocated to the drivers’ Private Attorneys General Act (PAGA) claim was regarded by the judge as inadequate.

Yesterday, Uber and a much smaller class of 13,600 drivers who had opted out of the arbitration provisions in the Uber driver agreement reached a proposed settlement in the same case for $20 million along with certain non-economic benefits to drivers. O’Connor v. Uber Technologies, Inc., No. 15-cv-262 (N.D. Cal. Mar. 11, 2019).  This seems like a rather large reduction, and it is, but the amount per class member rose exponentially.

But on the same day this former $100 million settlement was replaced by a lower amount, another $100 million IC misclassification settlement was reached between Swift Transportation Co. and approximately 20,000 owner-operator drivers who entered into independent contractor agreements with Swift. Van Dusen v. Swift Transportation Co., Inc., No. CV 10-899 (D. Ariz. Mar. 11, 2019).

The Swift lawsuit was commenced in the federal district court for Arizona over nine years ago.  The class action complaint claimed that the drivers were employees of Swift who had been misclassified as ICs and were paid below the federal minimum wage level when taking into account their lease payments and costs of maintaining their trucks and paying for fuel, tolls, and insurance. The lawsuit against Swift was brought under the Fair Labor Standards Act as well as state wage and contract laws.

Uber was able to trim the number of potential class members in the lawsuit from 385,000 to a small fraction of that number by including in an updated driver contract an arbitration clause with a class action waiver.  Drivers were given a set period of time to opt out of the arbitration provisions, but less then 4% of the original number of drivers in the class (only 13,600 drivers) did so.  The arbitration provision was was later challenged in court, but Uber was able to ultimately succeed in compelling arbitration on an individualized basis for all drivers other than the relatively small percentage who had opted out. Those drivers remained class members, and only that group is covered by the new $20 million settlement.

In stark contrast, Swift was unsuccessful in seeking to compel arbitration on an individualized basis under the arbitration provisions in the drivers’ IC agreements.  Swift’s arbitration clause was found unenforceable when it was held by a district court judge to be part of a “contract of employment” that is exempt from arbitration under the Federal Arbitration Act (FAA) and the Arizona Arbitration Act.  This court ruling eventually led Swift to agree to the proposed settlement, even though it has vigorously denied misclassifying any owner-operators.

Analysis and Takeaways

Few would have anticipated that there would ever be a second nine-figure settlement in an IC misclassification class action.  Nor would many have anticipated a few years ago that arbitration clauses would have such a major impact on the amount of the settlements in these types of cases.

But in the past few years, the law of arbitration has been evolving in a manner that few could predict with certainty.  In the past year alone, the U.S. Supreme Court has issued major decisions addressing arbitration clauses.

Last May, the Supreme Court decided Epic Systems Corp., which upheld mandatory arbitration agreements imposed by companies.  Uber used that decision to its advantage. And only two months ago the Supreme Court decided New Prime Inc. v. Oliveira, which held that the FAA’s exemption of “contracts of employment” applied not only to employees but also to independent contractors where the workers are involved in interstate transportation. The drivers in the Swift Transportation used that recent decision to their advantage.

While there are both pros and cons associated with arbitration clauses, most companies have concluded that the benefits usually outweigh the detriments, and more and more businesses have implemented arbitration clauses with class action waivers in their IC agreements.

But, merely having an arbitration clause with a class action waiver in an IC agreement is not a guarantee that a company will be able to forestall a class action in court by obtaining a court order compelling individual arbitrations.  Plaintiffs’ class action lawyers have been successful at times in obtaining court decisions that certain arbitration agreements are unenforceable – whether because of the FAA exemption, or because the arbitration clause is found to be unconscionable, or because it has been drafted ineffectively.

As we noted in our November 14, 2018 blog post entitled “How to Effectively Draft Arbitration Clauses with Class Action Waivers in IC Agreements,” there are an abundance of issues that should be considered when creating or updating arbitration agreements in independent contractor agreements (or, for that matter, in employment agreements).

  • Does it require individual arbitrations and eliminate class arbitrations from the authority of the arbitrator?
  • Does the arbitration agreement cover third-party beneficiaries?
  • Does the arbitration clause’s choice of law select a state with a favorable arbitration law and an IC-friendly test?
  • Does the agreement avoid the types of unconscionability arguments that plaintiffs’ class action lawyers routinely advance to try to invalidate an arbitration clause?
  • Is the arbitration provision buried in the IC agreement or is it conspicuous?
  • Is the jury trial waiver drafted in a way that will likely withstand judicial scrutiny?
  • Is the provision that sets forth the authority of the arbitrator (sometimes referred to as the “delegation clause)” drafted in an effective and favorable manner?
  • Are there certain types of disputes that need to be carved out of an arbitration clause by virtue of state law?
  • Are there any disputes that are better suited for judicial resolution?
  • Has federal or state arbitration law changed since the last time the arbitration provision with class action waiver was drafted?
  • Should the arbitration agreement take into account any legislative bills being proposed in Congress or the state legislatures limiting or expanding arbitration?

While arbitration clauses with class action waivers are being increasingly deployed by companies, they are merely a procedural defense to IC misclassification lawsuits, and do not cover proceedings by regulatory and administrative agencies, which are not bound by arbitration agreements.  Substantive defenses to the merits of an IC misclassification claim are far more important.

For example, as we reported in our January and February 2019 news updates, federal appellate courts have ruled on the substantive merits that insurance agents and oilfield consultants were properly classified as ICs.

By elevating compliance with federal and state IC laws, companies can substantially lessen the likelihood of an IC misclassification lawsuit being filed in the first place.  And, if filed, an enhanced level of compliance not only increases the likelihood of a successful defense on the merits but also leads to a less costly settlement.

One way in which companies have sought to elevate their compliance with IC laws is by the use of a process such as IC Diagnostics™, which examines whether a group of workers being treated as ICs would pass the applicable tests for independent contractor status under governing state and federal laws.  Such a process then offers a number of practical, alternative solutions to enhance compliance with those laws. Those alternatives include restructuring, re-documenting, and re-implementing IC relationships in a customizable and sustainable manner consistent with a company’s existing business model.

Elements of this process can also be used to create a more effective defense of an IC misclassification class action.

Written by Richard Reibstein

Edited by Janet Barsky

Posted in IC Compliance

February 2019 Independent Contractor Misclassification and Compliance News Update

One need only glance at the court cases we report on below to understand why some businesses choose to settle independent contractor misclassification cases.  Three of these cases highlight the unpredictable approaches appellate courts have taken in deciding IC misclassification cases.

To illustrate, in February, one federal appellate court reversed a federal district court judge, who had held that off-duty police officers were ICs, while another reversed a district court judge who held that oilfield consultants were not ICs.  A third federal appellate court this past month reversed a decision by a district court that granted a motion for judgment on the pleadings finding convenience store franchisees were ICs.

The lack of certainty in the outcomes of IC misclassification lawsuits has led many companies that make use of independent contractors to embark on programs to enhance their level of IC compliance with federal and state laws.  Programs such as IC Diagnostics™ offer a process to elevate compliance with IC laws by restructuring, re-documenting, and re-implementing independent contractor relationships without altering a company’s underlying business model.  Not all IC relationships are sustainable under applicable IC laws, but most are – and can be adjusted in a customized manner to comply with federal and almost all state laws.

In past monthly news updates, we reported on a number of cases that involved arbitrations of IC misclassification class actions.  Surprisingly, none of the eight cases that came to our attention in February deal with arbitration issues. While arbitration clauses with class action waivers are not a panacea for companies utilizing ICs, part of the IC Diagnostics process includes adding a state-of-the art arbitration clause that is likely to be effective in overcoming anticipated challenges by plaintiffs’ class action lawyers.

In the Courts (8 cases)

OFF-DUTY POLICE OFFICERS MOONLIGHTING AS SECURITY GUARDS HELD TO BE EMPLOYEES AND NOT IC’S IN MISCLASSIFICATION CLASS ACTION.  The U.S. Court of Appeals for the Sixth Circuit held that police officers moonlighting as private security and traffic control personnel for customers of Off Duty Police Services, Inc. (ODPS) were misclassified as independent contractors instead of being classified as employees.  ODPS offers private security and traffic control services in Kentucky, engaging both sworn officers (those currently working for law-enforcement entities) and nonsworn workers (those who typically have no law enforcement background). Customers contact ODPS specifying the profiles of the workers they are seeking; ODPS then offers the assignment to those in its network matching the specific qualifications requested. The Department of Labor initiated this FLSA suit alleging that all of ODPS’s workers are employees entitled to overtime compensation and that ODPS violated the FLSA’s recordkeeping requirements by failing to keep accurate employment records. The district court determined that ODPS’s nonsworn workers were employees entitled to overtime wages, but that the sworn workers were independent contractors because they “simply were not economically dependent on ODPS and instead used ODPS to supplement their incomes.”

On appeal, the Sixth Circuit applied the six-factor “economic reality” test and concluded with respect to the first five factors that the services offered by ODPS’s workers are integral to the company; the services do not require the skill or training of a licensed police officer; there is limited investment in specialized equipment; the length and consistency of the relationship between ODPS and the workers suggests permanence; and there was no opportunity for profit because the workers earned set wages to perform low-skilled jobs for fixed periods of time and could not make earn more profit by managing different commitments. Those five factors favored employee status for both the sworn and nonsworn officers. The court held that the sixth factor, ODPS’s right to control the manner of the worker’s performance, favored employee status for the nonsworn officers but did not favor either IC or employee status for the sworn officers. Considering all of the six factors “with an eye on the ultimate question of economic dependence,” the court decided that all of the officers were employees entitled to overtime wages under the FLSA.    Acosta v. Off Duty Police Services, Inc., Nos. 17-5995/6071 (6th Cir. Feb. 12, 2019).

OILFIELD CONSULTANTS HELD TO BE INDEPENDENT CONTRACTORS BY FIFTH CIRCUIT.  Directional drilling consultants filed a Fair Labor Standards Act overtime claim against Premier Directional Drilling L.P. based on their claim that the company had misclassified them as independent contractors instead of employees. The district court granted summary judgment in favor of the consultants, concluding they were employees under the FLSA.  On appeal, however, the U.S. Court of Appeals for the Fifth Circuit reversed and held as a matter of law that the consultants had been properly classified by the company as independent contractors. The Fifth Circuit closely examined the undisputed facts in the record and disagreed with the district court with regard to which factors support the independent contractor classification and which favor employee status.

The Fifth Circuit took issue with the district court’s evaluation of five key factors considered by the court in determining employee / independent contractor status.  As to the first factor – degree of control – the Fifth Circuit found it favored IC status because, although the directional drilling consultant was required to work prescribed shifts and coordinate drilling projects with the company’s personnel, the consultant’s right to accept or reject a project, was more meaningful and demonstrated an overall lack of control. Regarding the second factor – the relative investments of the consultant and the company – the court found that factor “merits little weight in light of the other summary-judgment record evidence supporting IC-status.” The appellate court next considered the worker’s opportunity for profit and risk of loss, and concluded that the consultant’s work on his goat farm when not providing services to Premier favored IC status and was more persuasive than the restriction on subcontracting imposed by Premier.  With regard to the fourth factor, skill and initiative, the Fifth Circuit found the consultant was highly skilled, thereby favoring IC status. The final factor considered – the permanency of the relationship – also favored IC status because the work was contracted on a project-by-project basis, even though the consultant chose to provide services only to Premier. Finally, the Fifth Circuit considered other factors bearing on IC status, including the presence of an express IC agreement and industry standards that demonstrated that the consultants were regarded as ICs in the industry, even though Premier also employed directional drilling employees doing similar work.  The appellate court thus concluded the applicable factors supported independent contractor status.  Parrish v. Premier Directional Drilling, L.P., No. 17-51089 (5th Cir. Feb. 28, 2019).

FRANCHISEE’S IC MISCLASSIFICATION CLASS ACTION RETURNED TO TRIAL COURT ON APPEAL.  A three-judge panel of the U.S. Court of Appeals for the Ninth Circuit issued a decision involving a nationwide convenience store franchise case where four franchisees alleged that they were employees of the franchisor and not independent contractors.  The appellate court vacated and remanded to the district court the franchisees’ claims under the Fair Labor Standards Act and California Labor Code after the district court had dismissed on a motion to dismiss on the pleadings.  The Ninth Circuit ruled the district court erroneously “considered the persuasiveness of the plaintiffs’ factual allegations rather than the plausibility of the plaintiffs’ legal claims,” but it did not provide any detail to explain the semantic differentiation of the words we italicized above. It also criticized the district court for having “focused on the franchise agreement without considering the plaintiffs’ allegations regarding [the franchisor’s] actual control,” but chose not to explain which allegations of control it regarded as warranting reversal.

The Ninth Circuit specifically noted that its decision was “without prejudice to [the franchisor] seeking judgment as a matter of law at a later stage in the proceedings.”  This decision highlights the difficulty in succeeding not only before a district court but also an appellate forum when seeking to dismiss an IC misclassification case on the pleadings; unless it is implausible, even an otherwise unfounded allegation must be construed in “the light most favorable to [the non-moving party].”.  Haitayan v. 7-Eleven, Inc., No. 18-55462 (9th Cir. Feb. 27, 2019).

LOGISTICS COMPANY UNABLE TO DISMISS DRIVER’S LAWSUIT FOR DISCRIMINATION; COURT FINDS ALLEGATIONS DO NOT FAVOR IC STATUS.  A former driver for logistics services provider, RR Donnelley Logistics Services, may continue his discriminatory discharge action against the company under Title VII of the Civil Rights Act and the Age Discrimination in Employment Act despite being classified by the company as an IC. An Alabama federal court denied the company’s motion to dismiss and summary judgment motions, rejecting the company’s argument that the driver was an independent contractor and not an employee. The court found that the driver established facts that would allow him to prove that he was an employee for purposes of Title VII and the ADEA, including that his work was supervised; delivery routes were selected for and assigned to him; he was required to use a company-furnished “Real Time Delivery Program” on his phone; and a supervisor had the power to discharge him.

The court also denied the company’s motion for summary judgment because of disputed issues of fact concerning the degree of control the company exercised over the driver’s work, such as copies of e-mails and text messages referring to “payday” being on certain days of the month, a request by his supervisor for his photo on an ID badge, and a demand that the driver appear for a drug test. In denying the motion for summary judgment, the court also concluded that although the IC agreement signed by the driver contained independent contractor-centric terms, the driver provided information that, in practice, business operations may not have transpired consistent with the contract. Nemo v. RR Donnelley Logistics Services, No. 17-cv-02130 (N.D. Ala. Feb. 8, 2019).

COURT APPROVES $9 MILLION IC MISCLASSIFICATION CLASS ACTION SETTLEMENT BY BAKED GOODS COMPANY WITH ITS DISTRIBUTORS.  A Tennessee federal judge has approved a settlement of $9 million between baked goods company, Flowers Foods Inc., and about 900 distributors of their bakery products in resolution of a Fair Labor Standards Act collective action alleging the distributors had been misclassified as independent contractors. Flowers Foods is one of the largest producers of packaged bakery foods in the United States, including brands such as Wonder Bread, Tastykake, Sunbeam and Nature’s Own. Following mediation that encompassed 12 different misclassification lawsuits involving the company (and its related entities) and distributors in Alabama, Kentucky, Texas, Mississippi, North Carolina, Tennessee, Virginia and Missouri, the parties entered into a Global Settlement Agreement and Release. The $9 million settlement provides $3.6 million in attorney’s fees and $5.4 million for the named plaintiffs and settlement class members, depending on the amount of time they worked for the company. Green v. Flowers Foods Inc., No. 19-cv-01021 (W. D. Tenn. Feb. 27, 2019).

WELL AND DRILL SITE MANAGERS REACH $3.2 MILLION SETTLEMENT WITH OIL GIANT IN IC MISCLASSIFICATION CLASS ACTION.  Well and drill site managers providing services in states including California, Texas, New Mexico and Oklahoma, have reached a $3.2 million settlement with Chevron Corporation in a proposed class and collective action alleging FLSA and state wage and hour violations due to the managers’ misclassification as independent contractors and not employees. According to the amended class and collective action complaint, Chevron directed the work of the site managers through the company’s policies, practices, supervision, and ability to discipline the managers; the managers worked exclusively for Chevron on a full-time and continuing basis; the managers did not sell or advertise their services to the general public and were required to follow Chevron’s instructions and processes regarding the method by which work was to be performed; and Chevron set the managers’ work schedules, determined the their rates of pay, provided the equipment needed to perform the work (including laptops, uniforms and email addresses), and required daily reports and attendance at meetings.

Plaintiffs’ motion papers requesting approval of the settlement note that the site managers were not directly employed by Chevron, but rather were paid through a variety of third-party staffing companies, and that they worked 12-hour shifts, sometimes for fourteen consecutive days. They claimed to have been paid a day rate, but did not receive overtime compensation. Under the terms of the settlement, in which Chevron denied any liability, each member of the class group will receive an average of over $29,000, and attorneys’ fees are earmarked for 25% of the of the settlement amount.  McQueen v. Chevron Corp., 16-cv-02089 (N.D. Cal. Feb. 8, 2019).

DIRECTV INSTALLATION PROVIDER SUED BY TECHNICIANS IN IC MISCLASSIFICATION CLASS ACTION.  Installation technicians have filed a collective and class action complaint against Synergies3 TEC Services, LLC, a satellite television installation provider for DirecTV, alleging violations of state (Illinois and Missouri) and federal (FLSA) overtime laws due to their alleged misclassification as independent contractors and not employees. According to the complaint, the installation technicians were subject to direction and control by the company as they were required to follow the company’s instructions, processes, and policies regarding the methods by which work was to be completed; were supervised and required to use specific apps to open and close orders; could not sell or advertise their services to the general public or work for other companies; were required to attend meetings and communicate any changes in their work schedule/hours to the company in advance ; were subject to discipline by the company for failure to follow the company’s standards, policies and procedures; and were not permitted to negotiate rates of pay or determine or set their own schedules. Jackson v. Synergies3 TEC Services, LLC, No. 4:19-cv-00178 (E.D. Mo. Feb. 4, 2019).

DENTAL CARE COMPANY SUED FOR IC MISCLASSIFICATION BY DENTIST.  An Illinois dentist has reportedly sued Bright Dental Care P.C. d/b/a Smile Dental Care and others in state court alleging breach of contract and violations of the Illinois Wage Payment and Collection Act due to his alleged misclassification as an independent contractor and not an employee. According to the Cook County Record published on February 20, 2019, the dentist claims he is owed over $65,000 plus 45 percent of the fees collected by the defendants for work he performed. Despite that parties’ agreement, the dentist reportedly alleges that the defendants failed to pay him for all of his work, including his final compensation and wages required by the Illinois statute. Salem v. Bright Dental Care P.C., No. 2019L001584 (Cook County Cir. Ct. Ill. Feb. 13, 2019).

Written by Richard Reibstein


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Posted in IC Compliance

January 2019 Independent Contractor Misclassification and Compliance News Update

This past month may well be regarded as one of the more legally satisfying for businesses using independent contractors.  Courts issued three decisions in favor of companies on the issue as to whether certain workers are ICs or employees: the U.S. Court of Appeals for the Sixth Circuit found insurance agents to be ICs in an ERISA case; the Indiana Supreme Court held that a referral company met the state’s “ABC” test for IC status under the state’s unemployment compensation law; and the National Labor Relations Board reversed an Obama-era test for IC status and promulgated a new, more IC-friendly standard to be used when unions seek to represent workers classified as 1099ers or franchisees.

At the same time, however, two major decisions favored workers in class action IC misclassification cases arising in the transportation industry: one where the U.S. Court of Appeals for the Third Circuit held that the federal transportation deregulation law did not preempt New Jersey’s “ABC” test for wage and hour claims; and the other where the U.S. Supreme Court ruled that the federal arbitration statute, which exempts interstate transportation workers from arbitration under that law, applies not only to employees but also to ICs engaged in interstate transportation, and a court, not an arbitrator, is the appropriate decision-maker for determining if a worker is covered by the exemption – even in the face of an arbitration agreement between the business and the worker delegating all disputes to an arbitrator.

The news last month also provided a financial impetus to class action lawyers who represent workers in IC misclassification cases.  Two high-profile class action cases settlements were approved: one for $9.25 million and another for $1.3 million.

These cases, as more fully discussed below, send a clear message to companies using ICs:  while courts and administrative agencies are more willing to accept company arguments that certain workers have been properly classified as independent contractors, class action lawyers are unlikely to be deterred from challenging companies’ classification of workers as ICs because these types of cases often lead to sizable settlements, including payment of considerable legal fees.

Are companies nonetheless able to minimize their legal exposure to these types of class and collective action lawsuits, including the substantial costs associated with defending and settling them?  Yes.  As we noted in our blog post this past month about the Supreme Court case involving ICs, there are two actions businesses can take: (1) maximizing their level of compliance with IC laws, thereby reducing the likelihood they will be subject to a judicial or regulatory challenge to their IC relationships, using a process such as IC Diagnostics™; and (2) entering into IC agreements containing state-of-the-art arbitration provisions with class and collective action waivers, using the tips discussed in that blog post. Prudent businesses that use ICs to supplement their workforce or as part of a business model have taken these very types of steps to enhance the structure, documentation, and implementation of their IC relationships and upgrade the effectiveness of their arbitration agreements.

In the Courts (7 cases)

INSURANCE AGENTS ARE INDEPENDENT CONTRACTORS, NOT EMPLOYEES, FOR ERISA PURPOSES.  Many insurance companies have utilized independent contractor agents to sell policies to prospective and existing policyholders. So, it came as a shock to most insurance companies when a federal district court held in mid-2017, in an employee misclassification class action case brought under ERISA, that American Family Insurance had misclassified thousands of agents as ICs and consequently may owe hundreds of million dollars in allegedly unpaid pension, life, disability, and health insurance benefits. On January 29, 2019, the U.S. Court of Appeals for the Sixth Circuit reversed, holding that, under ERISA, some 7,200 current and former agents selling American Family policies has been properly classified by the company as independent contractors.

As more fully detailed in our comprehensive blog post published that day, the appellate court reviewed 12 factors under ERISA’s “common law” test for IC status, as set forth in the U.S. Supreme Court’s Nationwide Insurance Co. v. Darden, and found that “the district court incorrectly applied the standards relating to (1) the skill required of an agent and (2) the hiring and paying of assistants.”  The Sixth Circuit concluded that “[h]ad the court applied those standards properly, it would have found that those factors actually favored independent-contractor status” and tipped the balance in favor of an independent contractor determination.  In addition, the Sixth Circuit held that the district court failed to give sufficient weight to the parties’ written agreement, which expressly stated the parties’ intent was to create an independent contractor relationship and that the agent was “not an employee of the Company for any purpose” – and if it had done so, it “would have further swung the balance in favor of independent-contractor status.”   A dissenting judge submitted a dissent emphasizing American Family’s own internal writings characterizing its agents as employees and instructing managers to exercise direction and control over them.  Jammal v. American Family Insurance Co., No. 17-4125 (6th Cir. Jan. 29, 2019).

We note in our January 29 blog post that this is the type of internal documentation that insurance companies should eliminate in an undertaking to re-document and re-implement their IC relationships in a state-of-the-art manner. We also noted in our blog post that this decision, while important, is limited only to claims under ERISA, which has a far less challenging test for IC status than other federal and most state laws.

NEW JERSEY “ABC” TEST FOR IC STATUS NOT PREEMPTED BY FEDERAL TRANSPORTATION DEREGULATION LAW. The U.S. Court of Appeals for the Third Circuit has held that the Federal Aviation Authorization Administration Act of 1994 (FAAAA) does not pre-empt New Jersey’s “ABC” test for determining independent contractor/employee  status under the New Jersey wage and hour wage payment laws. In that case, three drivers filed a proposed class action against American Eagle Express (AEX), a logistics company providing delivery services to various medical organizations.  The drivers sought a judgment declaring them to be employees of AEX, rather than ICs, under those New Jersey laws.  AEX made a motion for judgment on the pleadings arguing the FAAAA pre-empted the “ABC” test because B prong impermissibly impacted the company’s rates, routes, and services.  On appeal, the Third Circuit affirmed the district court’s decision that FAAAA preemption does not preempt laws “where a law’s impact on carrier process, routes, or services is so indirect that the law affects them ‘in only a tenuous, remote, or peripheral … manner.’”  The court added, “preemption only occurs where a state law has a significant impact on carrier rates, routes, or services.”

In assessing the “ABC” test’s impact on prices, routes, or services, the court recognized the test does not mention carrier prices, routes, or services; does not single out carriers as opposed to all businesses; and does not regulate carrier-customer interactions or other product outputs; rather, it only concerns employer-worker relationships.  The opinion of the Third Circuit follows decisions by other federal appellate courts and distinguishes a contrary holding involving the “ABC” test in Massachusetts that is different than New Jersey’s “ABC” test.  As noted in a January 30, 2019 article by Linda Chiem in Law 360 entitled “3rd Circ. NJ Classification Ruling Curbs Scope of Preemption,” quoting the publisher of this legal blog, “the decision in this case is “not groundbreaking,” but by limiting the applicability of the FAAAA as has been done in similar cases, it “may nonetheless bury most arguments by transportation companies that state ABC independent contractor tests are preempted by the federal transportation deregulation laws.” Bedoya v. American Eagle Express Inc., No. 18-1641 (3d Cir. Jan. 29, 2019).

INDIANA SUPREME COURT HOLDS “ABC” INDEPENDENT CONTRACTOR TEST MET BY REFERRAL COMPANY. The Indiana Supreme Court has ruled that a driver for Q.D.-A., a company that matches drivers with businesses needing vehicles like RVs delivered to them, is an independent contractor and not an employee under the state’s unemployment insurance laws.  After filing for unemployment benefits, the state’s Department of Workforce Development concluded the driver was an employee.  After that decision was affirmed by an Administrative Law Judge, an intermediate appellate court reversed.  On further review, the Indiana Supreme Court affirmed, holding that all three prongs of the state’s ABC test for IC status under Indiana’s unemployment laws had been satisfied.  Under Prong A, the court found that the driver was not under the company’s control or direction, under either his contract or in fact. Under Prong B, the court determined that the driver performed a service outside of the company’s usual course of business: the driver provided “drive-away” services, while the company did not “regularly or continually provide such services.”  The court found that Prong C was satisfied because neither party disputed the agency’s initial finding that the company “provided sufficient evidence to demonstrate that [the driver] was customarily engaged in an independently established trade, occupation, profession, or business of transporting commodities.”  Q.D.-A. v. Indiana Department of Workforce Development, No. 19S-EX-43 (Sup. Ct. Ind. Jan. 23, 2019).

TRANSPORTATION COMPANY SETTLES IC MISCLASSIFICATION CLASS ACTION FOR $9.25 MILLION. A California federal court has granted final approval of a $9.25 million settlement between drayage transportation company, Roadrunner Intermodal Services LLC, and a class of 896 truck drivers claiming violations of state wage and hour laws due to their alleged misclassification by the company as independent contractors. The drivers also sought reimbursement of expenses including fuel, liability and property damage insurance, maintenance, and equipment repair. In approving the settlement, the court stated that “while plaintiffs potentially have meritorious claims, it is far from certain that they would have prevailed on those claims, given the uncertain nature of relevant case law.” The court also stated that, given the plaintiffs’ serious concerns regarding the impact of protracted class action litigation on the company’s financial condition and its related ability to pay a settlement, the proposed settlement “provides compensation that is available now, without the additional time and risk of a decision that would likely be subject to a lengthy appeals process.” The settlement provides for $5.8 million to the drivers (or approximately $6,550 on average to each class member), slightly over $3 million (one-third of the total) for class counsel, and $75,000 in payments under the California Private Attorneys General Act.  Singh v. Roadrunner Intermodal Services LLC, No. 15-cv-1497 (E.D. Cal. Jan. 24, 2019).

RIDE-SHARING COMPANY’S $1.3 MILLION SETTLEMENT APPROVED BY COURT IN IC MISCLASSIFICATION CASE.  A North Carolina federal district court has granted final approval of a $1.3 million settlement between Uber Technologies Inc. and class of 5,200 drivers who claim they were misclassified as independent contractors and not employees. The drivers, each of whom had opted out of their arbitration agreements, claimed that they were owed minimum wage and overtime compensation under the Fair Labor Standards Act because, they alleged, they were employees, not independent contractors. In approving the settlement, which reportedly is the first FLSA lawsuit the company has settled, the court concluded that in this collective action, the named plaintiff and class counsel had “authority to settle the case on behalf of the opt-in class and that the settlement was a fair and reasonable resolution of a bona fide dispute of FLSA provisions.”

Under the agreement, the company will pay a maximum gross settlement amount of $1,304,250 of which $734,294 will be paid to class plaintiffs who have opted in (or on average, under $150 per driver).  One-third of the settlement proceeds will be paid in attorneys’ fees and the remainder is earmarked for legal expenses, service awards, and the fees of the settlement administrator.  In their submission in support of settlement, the drivers acknowledged that the company had a “‘significant chance’ of either prevailing on the merits, by a finding that the drivers are independent contractors, or of achieving a reduction of liability if not required to compensate for drivers’ wait time.”  Hood v. Uber Techs., Inc., No. 1:16-cv-00998 (M.D.N.C. Jan. 3, 2019).

FEDERAL ARBITRATION ACT EXEMPTION FOR INTERSTATE TRANSPORTATION WORKERS COVERS INDEPENDENT CONTRACTORS AND BARS COMPANY’S MOTION TO COMPEL ARBITRATION. After an intermodal trucking company, New Prime Inc., was sued in a proposed class action by a truck driver whom New Prime classified as an independent contractor, the company filed a motion to compel arbitration under its independent contractor agreement containing a mandatory arbitration provision.  The district court denied the motion, holding it lacked authority to compel arbitration because Section 1 of the Federal Arbitration Act (FAA) exempts from arbitration all disputes involving “contracts of employment” with interstate transportation workers.  The U.S. Court of Appeals for the First Circuit affirmed.  The U. S. Supreme Court reviewed the decision and held that a court, not an arbitrator, should decide whether the transportation worker is excluded from the provisions of the FAA. In rejecting New Prime’s argument that the question should be determined by an arbitrator, the Supreme Court determined that the parties could not, by agreement, bypass the interstate transportation worker exclusion of Section 1 of the FAA.

The Court then addressed the question of whether the Section 1 exclusion refers only to contracts between employers and employees or also covers contracts between businesses and independent contractors.  In finding that “contracts of employment” extended to independent contractor agreements, the court considered, among other things, that “[a]t the time of the Act’s adoption in 1925, the phrase “contract of employment” was not a term of art and dictionaries tended to treat “employment” more or less as a synonym for “work.”

As more fully discussed in our blog post of January 15, 2019, the Supreme Court decision is of limited value because it only applies to the federal arbitration statute.  State arbitration laws generally do not include an exception for transportation workers.  As noted in a January 16, 2019 article entitled “Supreme Court Gives Truckers a Victory” by Margot Roosevelt in the Los Angeles Times, quoting the publisher of this legal blog:  “An argument can be made that this decision will have little or no effect on the right of employers to compel arbitration of any worker’s dispute. Those who suggest that this decision is momentous … may wish to reconsider their exuberance.”  New Prime Inc. v. Oliveira, No. 17-340 (U.S. Sup. Ct. Jan. 15, 2019).

BAKED GOODS COMPANY UNABLE TO DECERTIFY CLASS AND COLLECTION IC MISCLASSIFICATION LAWSUIT. Distributor/drivers in Maine have gained class certification in a class and collective IC misclassification lawsuit against Flowers Foods, Inc., one of the largest producers of packaged bakery foods in the United States.  The distributor/drivers allege violations of various state wage/hour and the federal Fair Labor Standards Act. Flowers Foods claimed that individual questions of fact preclude maintenance of the lawsuit as a class and collective action, but the court disagreed.  It held that questions of fact or law common to class members predominate over questions affecting only individual members and that a class action is superior to other available methods for fairly and efficiently adjudicating the misclassification controversy.  In addition, the court denied the company’s motion to decertify the FLSA collective action, concluding that the distributors are similarly situated to the named plaintiff and the maintenance of a collective action is preferable to potentially conducting many individual trials.  Noll v. Flowers Foods, Inc., No. 1-cv-493 (D. Me. Jan. 15, 2019).

Administrative Decisions (1 case)

NLRB REVERSES OBAMA-BOARD’S UNION-FRIENDLY TEST FOR INDEPENDENT CONTRACTOR STATUS IN FRANCHISEE CASE. The National Labor Relations Board has revived the “common law” test for determining independent contractor status and overturned the union-friendly test adopted during the Obama Administration.  An NLRB Regional Office found that shuttle drivers who owned and operated franchises of SuperShuttle DFW, Inc. were independent contractors and not employees eligible to be represented by a union under the National Labor Relations Act. In reaching its decision finding IC status, the NLRB Regional Office had applied the Board’s traditional common law agency test. That decision was reviewed at the behest of the union.  But instead of simply affirming the decision, the NLRB (in a 3-1 decision) overruled an earlier union-friendly NLRB decision issued during the Obama Administration. The NLRB reviewed eight factors under the common law test and found that five factors supported IC status; two factors supported employee status; and one factor was neutral. In concluding that the franchisees were ICs, the Board majority discounted the importance of two factors favoring employee status, finding them to be “relatively less significant” than those favoring IC status.

As discussed in our blog post of January 25, 2019, this decision, while perhaps noteworthy politically, has limited application to most companies for two reasons:  First, it is only applicable to union efforts to organize and represent workers classified as independent contractors.  It has no application under any other laws, including federal and state wage and hour laws, state wage payment laws, unemployment insurance and workers’ compensation laws, and the federal law governing retirement and employee welfare benefits.  Second, the NLRB adopted the common law test used by the U.S. Court of Appeals for the District of Columbia, which had rejected the NLRB’s prior test.  As noted in a January 25, 2019 article in the Los Angeles Times by Margot Roosevelt entitled “NLRB Empowers Companies to Treat More Workers as Independent Contractors,” quoting the publisher of this legal blog, “The NLRB’s decision is . . . limited to determining only if certain individuals are employees that can be represented by a union. It has no application to state or federal wage and hour laws.”  SuperShuttle  DFW, Inc., 367 NLRB No. 75 (Jan. 25, 2019).

Written by Richard Reibstein

Posted in IC Compliance

Insurance Agents Not Misclassified As Independent Contractors; Sixth Circuit Rules in Favor of Insurance Company in ERISA Class Action Seeking Pension, Life, and Health Benefits

For the past 18 months, insurance companies have been holding their collective breath to see if an appellate court would affirm or reverse an Ohio federal district court decision concluding that thousands of current and former agents for American Family Insurance Company were employees and not independent contractors under ERISA, the federal law governing pensions and other employee benefits.  Historically, agents have been treated by most insurance companies as independent contractors and have not been covered under their employee pension and welfare benefit plans.  The plaintiffs’ lawyers had estimated that if the district court’s decision was upheld on appeal, the company’s liability would exceed a billion dollars.

Insurance companies are now breathing easier because earlier today the U.S. Court of Appeals for the Sixth Circuit, based in Cincinnati, Ohio, reversed the district court and held that insurance agents serving American Family policyholders were properly classified as independent contractors under ERISA and are not eligible for pension and other employee benefits.

In many ways, this is a monumental independent contractor misclassification decision for the insurance industry, at least for the moment, allowing insurance companies to be confident that their business models had not been up-ended by the federal courts.

Most insurance companies, though, will not likely be tempted to regard this decision as a conclusive determination that insurance agents are independent contractors under all federal and state laws.

As noted above, the federal law – ERISA – that was in question in this case only covers pension and employee benefits.  It is not a determination that insurance agents are independent contractors under all other federal laws, including the federal wage and hour and discrimination laws.  It is also not a determination that agents are independent contractors under a host of state labor and employment laws, including wage payment, unemployment, and workers’ compensation laws.

The test under ERISA for IC status is the so-called “common law” test, which is regarded as considerably more friendly to independent contractor status than the tests for IC status under the federal Fair Labor Standards Act and almost all state wage and hour and unemployment laws.  Current or former agents may well bring new class actions alleging independent contractor misclassification under such laws.  Their lawyers will undoubtedly argue that the decision in the American Family Insurance case is inapplicable under those laws, which have more employee-friendly tests for IC status.

Some class action lawyers may also take another shot under ERISA.  The Sixth Circuit’s opinion recognized that the independent contractor status of American Family agents was a close question.  It pointed out the district court had concluded that the common law factors were “almost evenly split between favoring employee status and favoring independent contractor status.”

The Sixth Circuit chose to reverse in large measure because, in its view, the district court had mistakenly regarded one of the 12 common law factors as favoring employee status instead of independent contractor status and another factor as “neutral” when it should have treated that factor as favoring independent contractor status.  This view of the facts and law suggests that a slight change in some of the key facts might influence another court as a matter of law to side with agents in a future “close case” brought under ERISA against a different insurance company – either in a stand-alone ERISA lawsuit or one brought, for example, alongside a claim under the federal wage and hour law for unpaid overtime or minimum wages.

In reaching its decision, the Sixth Circuit also gave great weight to the agreement between American Family and the agents, finding that it fully supported the parties’ independent contractor relationship. The appellate court concluded that the district court “apparently did not weigh this important component when reaching its conclusion” and, had it done so, “it would have further swung the balance in favor of independent-contractor status.”

Thus, perhaps the biggest takeaway from the American Family Insurance decision is that insurance companies, like businesses in virtually every industry, can and should re-document their independent contractor agreements in a state-of-the-art manner, ensuring that their agreements reflect the actual practices of the parties.  We provide insights to our readers as to how they can accomplish this objective in the final paragraphs of this blog post.

The Sixth Circuit Decision

The appellate court first traced the history of this case, including the 12-day jury trial, the jury’s “advisory” verdict that the agents were employees and not independent contractors, and the district court’s adoption of the jury’s verdict.

The Sixth Circuit decision noted that the U.S. Supreme Court had issued a decision in 1992 in Nationwide Mutual Insurance Co. v. Darden stating:  “In determining whether [an individual] is an employee [or independent contractor] under the general common law of agency, we consider the hiring party’s right to control the manner and means by which the [performance of services] is accomplished.”  The Sixth Circuit then set forth a dozen factors that the Darden court stated are among those that are relevant, noting that “all of the incidents of the relationship must be assessed and weighed with no one factor being decisive.”

The key portion of the Sixth Circuit decision was brief: “Here, the district court incorrectly applied the legal standards in determining the existence of the Darden factors relating to (1) the skill required of an agent and (2) the hiring and paying of assistants. Had the court applied those standards properly, it would have found that those factors actually favored independent-contractor status. We analyze each of those [two] factors below.”

In analyzing the skill factor, the Sixth Circuit rejected the district court’s conclusion that the amount of skill under Darden weighs “slightly in favor of employee status” because American Family “sought out agents who were unskilled” and then trained them. Instead, the appellate court found the sale of insurance is a “highly specialized field” that requires “considerable training, education, and skill.”  Accordingly, the Sixth Circuit concluded that the district court should have weighed the skill factor in favor or independent contractor status.

As to the factor involving the hiring and paying of assistants, the Sixth Circuit concluded that the district court mistakenly weighed this factor as “neutral” because American Family provided “pre-approved” candidates whom the agents could select as their staff, even though the agents could hire their own staff.  The appellate court rejected that analysis, holding that where an agent has the “primary authority over hiring and paying assistants,” this factor weighs in favor of independent contractor status.

Finally, the Sixth Circuit held that the district court failed to give sufficient weight to the parties’ written agreement, which expressly stated that their intent was to create an independent contractor relationship and that the agent was “not an employee of the Company for any purpose.” Although the district court had recognized the agreement favored IC status, the Sixth Circuit said the lower court should have given the contract even greater weight, which “would have further swung the balance in favor of independent-contractor status.”

The Dissenting Opinion

The Sixth Circuit decision was issued by a three-member panel of judges, with one judge filing a dissent – Judge Eric Clay. He concluded that the district court judge had properly analyzed the skill factor and correctly concluded that it favored employee status – noting that American Family “almost always hired untrained, and often unlicensed, agents and provided all the training they needed to be an American Family agent.”

Judge Clay then addressed the factor involving the agents’ role in hiring and paying assistants. Rather than finding that factor was “neutral,” as the district court judge had held, the dissent concluded this factor actually favored employee status. In support of his view, Judge Clay relied on evidence that American Family imposed qualification standards on the agents’ assistants, required assistants to sign non-solicitation agreements, and retained the right to approve or disapprove of agency staff selections above and beyond the setting of qualification standards.

Finally, the dissent took issue with the majority’s reliance on the agents’ agreements with American Family.  Judge Clay referred to court decisions holding that agreements labeling agents as ICs, “while certainly relevant,” are “less important.”  He also highlighted other internal American Family documents, one of which “indicate[d] that [American Family] expected [their] sales managers to exercise control over agents’ methods and manner of performing their services,” and another of which referred to agents as “employees.”

The dissenting opinion may propel the plaintiffs to request a re-hearing of the appeal by the all of the judges in the Sixth Circuit sitting en banc.  Such en banc re-hearings are generally “not favored” and will not ordinarily be ordered unless the proceeding involves a “question of exceptional importance.” Any such request must be filed within 14 days from the date the appellate court’s opinion is entered as a judgment.

The full name of the case and a link to the opinion is:  Jammal v. American Family Insurance Co., No. 17-4125 (6th Cir. January 29, 2019).


The majority’s focus on the importance of the independent contractor agreement between the agents and American Family Insurance is hardly surprising.  Independent contractor misclassification cases have been decided – both for and against employee status – on the basis of such agreements, which often set forth the company’s right, if any, to control the manner and means of the other party’s performance of services.

Perhaps the most well-known case in which the courts have relied on the language of an independent contractor agreement involves two opinions regarding FedEx Ground that were the subject of prior blog posts – one dealing with a decision by the Seventh Circuit located in Chicago, and the other addressing a decision by the Ninth Circuit located in San Francisco. The courts in both cases found that the drivers were employees as a matter of law, holding they were misclassified as ICs based on language in the FedEx Ground operating agreements with the drivers. In the Ninth Circuit case, the appellate court found that, under the agreement drafted by FedEx for use with the drivers, FedEx:

  • had the right to control the drivers’ appearance,
  • retained the right to control the type of vehicle used by the drivers,
  • reserved the right to control the times the drivers could work,
  • had the right to control aspects of how and when the drivers delivered their packages, and
  • required drivers to conduct all business activities in compliance with FedEx Ground’s “standard of service” requirements.

Like most Fortune 500 companies, FedEx has and retains talented lawyers, but drafting independent contractor agreements that promote IC status is a process that can be counter-intuitive and, if not drafted in a state-of-the-art manner, can result in decisions where the courts use a company’s own contract language against it to support a finding of employee status.

For that  reason, many companies resort to a process such as IC Diagnostics™ to re-document and re-implement their IC relationships in a customized and sustainable manner that maximizes compliance with IC laws and minimizes IC misclassification liability. Companies that have opted for one-size-fits-all agreements have often  concluded that such form agreements are ill-fitting and cannot be reconciled with a business’s actual practices.  Further, many companies still rely on IC agreements that may have sufficed years ago but have not been updated to conform to the holdings in hundreds of newly reported independent contractor cases.

This case involving American Family agents also highlights the importance of implementing the IC relationship in a manner consistent with the terms of an IC agreement. Careless wording in internal documentation, such as the types noted by the dissent, should be eliminated, and internal documentation should instead be drafted with a keen eye on IC compliance.

Written by Richard Reibstein


Posted in IC Compliance