$46.5 million question: Employee or independent contractor?

The grocery delivery company Instacart has agreed to pay $46.5 million to settle a lawsuit that accused it of wrongfully classifying employees as independent contractors.

San Diego City Attorney Mara Elliott sued Instacart in September of 2019, just three days after a state-law bill regulating so-called gig economy employers cleared the California Legislature. That bill, which has since become law, makes it harder for employers like Instacart, Uber and Lyft to classify workers as independent contractors rather than employees.

“We are pleased to get justice for these delivery workers, who, at the height of COVID-19, provided an invaluable service to California households,” Elliott said in a statement.

Employee or not?

Instacart is a grocery delivery service. Instacart “shoppers” buy groceries at local stores and deliver them to customers’ homes.

Elliott said Instacart workers maintained and fueled their own vehicles, used their own phones, and paid for other equipment.

But under a 2018 California Supreme Court decision that was codified into state law in 2020, the workers are employees and not independent contractors, Elliott maintained.

Under that court decision, workers are employees unless:

• They can perform services without the company’s control or direction
• They perform tasks outside the company’s usual course of business activities, and
• They are “customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.”

Importantly, the test presumes all workers are employees and not independent contractors, and employers bear the burden of showing they are the latter rather than the former.

Key developments

Two key developments in the case led to the settlement, which Elliott announced on October 10.

First, the state court hearing the case issued a preliminary injunction in the city’s favor in February of 2020, ruling that Instacart did not comply with the worker classification standard set by the high court’s decision. That ruling essentially paved the way for an ultimate resolution in the city’s favor.

Then, in May of this year, a state appeals court ruled in the case that private agreements to arbitrate between Instacart and its workers did not prevent the city from pursuing its own case against the employer. That ruling put a nail in the coffin for Instacart, which agreed to provide restitution to about 308,000 people who worked for it between September of 2015 and the end of 2020. The settlement also includes more than $6 million in civil penalties. That amount will go to a Consumer Protection Trust Fund, Elliott said.

The announcement of the settlement came just one day before the federal Department of Labor (DOL) announced plans to make it harder for employers to classify workers as independent contractors under the federal Fair Labor Standards Act.

The DOL announced a proposed rule on classifying workers as independent contractors or employees that would rely heavily on six factors to make the call on whether a particular worker is an independent contractor or an employee.

Those factors are:

• Whether the worker has an opportunity to make a profit or sustain a loss
• The investments made by the employer and the worker
• The degree of permanence of the work relationship between the parties
• The nature as well as the degree of control exercised by the employer over the worker
• The extent to which the work is integral to the employer’s business, and
• The level of skill and initiative that is involved with the work.

The ultimate inquiry, the DOL explains, is whether the worker is economically dependent on the employer or is in business for themself.

The proposed federal rule seeks a return to a more worker-friendly test that the Trump administration tried to usher out.

Biden’s DOL considered adopting the even more worker-friendly test that has now been put into place in California, saying in this new proposal that doing so might “establish a simpler and clearer standard.” But its hands are tied, it explains in the proposal: “[T]he Department believes it is legally constrained from adopting [the California] test because the [U.S.] Supreme Court has held that the economic reality test is the applicable standard for determining workers’ classification under the FLSA as an employee or independent contractor.”

The DOL is accepting public comments on the new proposed federal rule until November 28.