The California Court of Appeal, affirming a 2013 Supreme Court ruling, ruled on July 7, 2017 that newspaper carriers at the San Diego Union-Tribune from January 2005 through June 2007 were employees for purposes of California’s state labor laws. The lower court had certified the case as a class action. This case has had wide publicity and I have received many questions about it.
These independent contractor cases all rise and fall on particular facts. I will share with you some of the facts found by the Court, upon which it relied to make its “employee” ruling:
1. Entrepreneurship – Entrepreneurship was restricted. The carriers could not directly or indirectly engage in the delivery, sale, or distribution of any other daily or Sunday newspaper in the San Diego area without the Union-Tribune’s consent.
2. Distribution Centers – The Agreements required the carriers to assemble their papers at Company’s distribution centers.
3. Negotiations – The Court found that the carriers were required to enter into Agreements on a “take it or leave it” basis. There was no negotiation of rates, which were “filled in” when the carrier was provided a contract. Management witnesses testified that they were unaware of any prospective carrier asking for a higher rate.
4. Unilateral Change of Contracts – The Union-Tribune unilaterally revised the contract multiple times. One unilateral decision was to have the carriers pay others to insert the Sunday edition of the newspaper for them.
5. Customer Complaints – The Court stated that the carriers were prohibited from communicating directly with subscribers and that the Union-Tribune discouraged such communication.
6. Substitutes – The Court ruled that the Union-Tribune limited the carriers’ right to use substitutes. The Court cited evidence that, if a non-family member substituted for a carrier, the Union-Tribune had to know who the substitute was and when the substitute would be there.
7. Dress Code – The carriers had to be “properly attired” and wear “close-toed shoes” while in the distribution center.
8. Training – The Court ruled that the newspaper trained the carriers.
9. Supervision – The Court noted substantial testimony regarding Union-Tribune employees “training, mentoring, and coaching carriers”:
- The newspaper had a checklist that covered every aspect of the carrier’s work, including warehouse safety; double bagging and rainy days; procedures at the distribution center; how Sunday procedures differ from weekday procedures; customer complaint procedures; and procedures for using substitutes.
- Carriers had to comply with subscriber demands or risk being charged for a customer complaint.
- Union-Tribune Management employees were evaluated on their “training, mentoring, and supervision of carriers.
- Carriers used RouteSmart software, which “provided specific instructions on delivering papers according to customer demands.
- Union-Tribune employees at the distribution centers watched over the carriers to make sure they were assembling their papers correctly and would “counsel, mentor, and supervise the carriers.” Another employee testified that he would walk around his distribution center and make sure the carriers were assembling papers properly.
- The Court also noted unrefuted evidence that if carriers failed to arrive at the distribution centers in a timely fashion, Union-Tribune employees would call them and sometimes even go to their residences to wake them up.
10. Delivery Deadline – The Court found that the end result delivery deadline was evidence of employee status. This is just wrong and goes against other court cases, as well as the EDD guidelines for independent contractor status for newspaper carriers in California.
11. Delivery Areas – The Company unilaterally changed carrier routes to satisfy advertisers who wanted their advertisements delivered to specific subscribers.
12. Alternate Publications – The newspaper carriers delivered alternate titles such as New York Times and Wall Street Journal, in addition to the Union-Tribune. The Court noted that there was no evidence that a carrier did not want to deliver any or all of the alternate publications could have chosen to do so. There was no negotiation on the alternate publications.
13. Supplies – Witnesses testified that they were required to buy their supplies from the Union-Tribune. Witnesses also testified that they were unaware of any carrier who bought supplies from any other source than Union-Tribune.
14. Carrier Accident Insurance and Bonds – The Union-Tribune required the newspaper carriers to purchase Independent Contractor Accident Insurance and required them to purchase bonds.
15. Independent Newspaper Delivery Businesses – The Court found there was no evidence that the carriers operated independent delivery businesses with fictitious business names or business licenses. That is just irrelevant. There is nothing in the common law requiring that.
The Court discounted carrier vehicle ownership because they could also use the vehicles their personal needs. This is also wrong. Vehicle ownership is a hallmark of independent contractor status, and the fact that the carriers were not restricted in the use of the vehicles is also evidence of independent contractor status.
16. Right to Discharge At-Will – The Court viewed the fact that the contract could be terminated without cause, with 30 days’ advance written notice, as evidence of employee status – and as having the right to terminate at-will. This is just wrong. The right to terminate at-will would be the right to terminate immediately. The fact that carriers had to get 30 days’ advance written notice is, in other jurisdictions, viewed as evidence of independent contractor status.
17. EDD Guidelines – California’s Administrative Code has newspaper carrier-specific guidelines that were passed and designed to guide the EDD and Publishers on how to structure a bona fide independent contractor relationship. The lower court ignored these guidelines. The Court of Appeal held that the lower court did not err in not specifically applying those guidelines. Note: In other California cases, lower courts have found the guidelines to be very relevant evidence.
With this employee ruling, the Court applied to the carrier class Section 2802 of the California Labor Code, which requires Employers to reimburse employees for reasonable business expenses.
The Court awarded plaintiff’s restitution in the total amount of $3,188,445.00 for business expenses: $2,280,059.00 for mileage reimbursement; $618,569.00 for polybags and rubber bands; $74,014 for insurance premiums; $29,577.00 for bond premiums; $116,430.00 for warehouse rent; and $69,796.00 insert charges. The Court denied recovery for carrier collect charges and complaint charges. The Court also awarded pre-judgment interest of $1,765,350.27, for a total class award of $4,953,795.27.
The Court awarded attorneys’ fees to the plaintiffs of $6,160,416.00, of which $1,250,000.00 was to be paid from the common fund – i.e. the class award.
The most unfair part of the Court of Appeal decision is how it handled the expenses of the newspaper carriers. When contracting, the Union-Tribune, in good faith, believed it was establishing independent contractor relationships. It was explained during the contracting process that the carriers were responsible for all of their expenses.
However, once the Court found that the carriers were employees and not independent contractors, it then applied an employee standard with respect to the expenses. The Court determined that Section 2802 of the California Labor Code, which applies to employees, requires that the Employer “communicate to employees the method or means of identifying the portion of compensation that is intended to provide expense reimbursement at or near the time of compensation.” Obviously, this was not done during the contracting process with an independent contractor. Furthermore, it would be very difficult to do this with precision because the expenses of each carrier would be different.
The Court of Appeal then ruled that the lower court erred by failing to take into account clearly specified credits, reversals, and payments to carriers in the business expense categories at issue in determining the amount of restitution to award plaintiffs. The Union-Tribune presented evidence showing credits and reversals in every non-mileage expense category, including bags and rubber bands, insurance, bonds, warehouse rent, insert charges, carrier collect, and complaint charges. The Court ruled that the restitution award must be recalculated to account for these credits and reversals.
The Court of Appeal ruled that the lower court did not abuse its discretion in adopting the IRS mileage rate to arrive at a reasonably approximate estimation of vehicle expenses. This is particularly outrageous. The IRS published mileage rate is the maximum figure that the IRS will allow as a tax-deductible expense.
The Court did rule that the mileage amount must be recalculated to take into account any documented credits or payments for gasoline, including any service incentive credits that the Union-Tribune can show were given to the carriers as compensation for gas.
The Court of Appeal reversed the lower court on the insert charge award of $69,796.00. The Court ruled that it was not supported by substantial evidence because it was based on charges and credits for a single week, on a single monthly invoice of a single carrier.
The Court of Appeal did not disturb the trial court’s decision to award pre-judgment interest from January 1, 2006. However, the court will have to recalculate the amount of pre-judgment interest based on the re-determined amount of the class award.
With respect to the attorney fee award, the Court of Appeal remanded that decision to the trial court for reconsideration, in light of the possible reduction of plaintiff’s monetary recovery and to determine whether plaintiff’s limited success requires reduction of the fee award.
In reading this full 81-page opinion, the Court seemed very hostile to independent contractor status. Awarding the newspaper carriers all of these expenses, with no offset whatsoever, seems manifestly unfair. The contract rates for the carriers certainly would have been lower if the Union-Tribune knew it was going to be required to reimburse reasonable business expenses. There is nothing reasonable about this double dip on expenses. Let us hope that this case is appealed to the California Supreme Court.
As I write this article, Union-Tribune Management has under consideration an appeal to the California Supreme Court.