New Misclassification Settlement Leads to $800K Payout

Misclassification is front and center again after Minnesota’s attorney general secured an $800K settlement over tightly controlled delivery work that looked more like employment than independent contracting.

Every time managers lean on “1099s” who have set shifts, must follow company procedures, and perform critical daily work, HR absorbs the misclassification fallout if regulators come calling.

In the latest in a string of state misclassification settlements, the state secured an agreement with a same-day delivery service that treated tightly controlled drivers as contractors instead of employees.

This settlement follows the resolution of similar cases from California and New Jersey, a pattern that makes it harder for employers to assume contractor models are safe in one state just because they have not been challenged yet.

State Alleges Misclassification

The defendant employer in the Minnesota case was Shipt, a same-day delivery service owned by Target.

In the October 2022 lawsuit, Minnesota Attorney General Keith Ellison alleged that Shipt misclassified its delivery workers as independent contractors to avoid providing them with the employment protections afforded to employees under Minnesota law, exposing the company to back pay, benefit obligations and penalties.

The attorney general said the alleged misclassification deprived the delivery workers of multiple employment-law protections that most HR teams would associate with employee status, including:

• Minimum wage protections
• Local sick time and safe time protections
• Overtime protections
• Unemployment insurance benefits
• Workers’ compensation benefits, and
• State-law guarantees that enable workers to know what they will be paid.

Suit: Employer Strictly Controlled Workers

The state said Shipt tightly controlled the delivery workers’ schedules and banned them from starting their own businesses outside of its own mobile application. In fact, it said “Shipt exercises virtually total control over [delivery workers] while they do their work.”

For employers, that kind of control over when, how and where work gets done is exactly what pushes a contractor relationship toward employee status under federal and state tests.

The state said that Shipt did three things regulators often point to when they argue contractors are really employees. It allegedly:

• Monitored delivery workers’ performance “in granular detail”
• Set the markup for goods that were ordered using its service, and
• Limited how delivery workers could communicate with customers using the service.

The alleged misclassification allowed Shipt to artificially reduce its operating costs, the state’s suit asserted.

“Shipt has modeled its entire business on shifting its duties and obligations as an employer from itself onto its workers,” Ellison said when the suit was filed.

Settlement Reached in Misclassification Lawsuit

In late September of this year, Ellison announced that a settlement had been reached.

To end the lawsuit, Shipt agreed to pay the state $800,000 and accept several ongoing obligations that signal what regulators may expect from companies that rely heavily on contractors:

• Provide a written explanation to delivery workers when they lose access to Shipt’s app
• Allow delivery workers to appeal deactivation decisions
• Continue to provide delivery workers with occupational accident insurance at no cost to the workers
• Provide delivery workers with chat support through its app
• Remove mandatory training requirements for delivery workers unless a certification is required by law, and
• Maintain policies banning discrimination against delivery workers.

Minnesota is at the forefront in protecting against worker misclassification. Ellison formed an advisory task force in 2023 to study the issue, and in 2024, its recommendations helped drive new anti-misclassification legislation that created a statewide enforcement and education partnership.

Avoiding Misclassification Mistakes

The federal Department of Labor has issued guidance on the proper classification of workers and has advised that the question comes down to “looking at the economic realities of the worker’s relationship with the employer.”

In practice, that means HR should periodically pick a sample of contractors and walk through the DOL’s factors with legal or payroll support instead of relying on job titles or vendor labels.

The DOL identifies factors that should be considered in determining whether a worker is an independent contractor or an employee. These factors include:

• The worker’s opportunity for profit or loss
• Relative investments by the worker and employer
• The degree of permanence of the relationship
• The nature and degree of control exercised by the employer
• Whether the work is integral to the employer’s business, and
• The level of skill and initiative needed for the work.

Indicators of employee status focus on the degree of employer control and how integral the work is to the business. Here are some indicators of employee status:

• The worker maintains an ongoing relationship with the same employer
• Their work is “critical, necessary, or central to the company’s business”
• The employer oversees scheduling, performance and work methods, and
• The employer supplies tools, equipment and workspace.

Next steps for HR

Misclassification isn’t limited to gig platforms. Any role where the company sets schedules, directs day-to-day work, and relies on the output to run the core business deserves a closer look. HR can start by:

• Reviewing contractor roles that are central to daily operations, such as delivery, on-site technicians or long-term project staff
• Comparing those roles against the DOL factors and any state-level tests, with help from legal or outside counsel, and
• Updating contracts, manager guidance and pay practices where the level of control and integration looks more like employment than independent contracting.