As the business of artificial intelligence is expanding, it seemed it was only a matter of time before the AI industry became the subject of an independent contractor misclassification lawsuit. Last month, one of the leading generative AI modeling companies was sued in a proposed class action in California by a worker who claims that he and similarly situated AI workers were misclassified as independent contractors instead of employees. As described below, the AI worker’s lawsuit alleges that the company for whom he provided generative AI services directed and controlled how and when he performed his tasks. While the complaint alleges a high degree of direction and control by the company over the manner and means by which the named plaintiff and other AI workers performed their services, there is nothing in particular about the AI industry that should derail AI businesses from structuring, documenting, and implementing their IC relationships in a manner that complies with federal and almost all state laws governing ICs. Like companies in many other industries, companies in the AI industry can use a process such as IC Diagnostics (TM) to maximize their IC compliance in a customized and sustainable manner consistent with their business models.

In the Courts (3 cases)

ARTIFICIAL INTELLIGENCE COMPANY SUED BY AI WORKER IN IC MISCLASSIFICATION CLASS ACTION. A class action complaint was filed against Scale AI, a $13.8 billion company that accelerates the development of artificial intelligence applications, by a worker engaged to render AI tasks, who alleges that the company has misclassified him and other similarly situated workers as independent contractors and not employees. Scale AI provides end-to-end solutions to manage the entire “machine learning” lifecycle, a subfield of artificial intelligence involving the capability ‎of a machine to imitate intelligent human behavior.

The plaintiff’s complaint alleges that ‎Scale AI engages workers called “Taskers,” who perform AI large language model (LLM) tasks to mimic human expression by engaging in data labeling, content creation, and responding to prompts, and that it misclassifies Taskers as ICs instead of employees in violation of California labor and employment laws. Among other things, the plaintiff claims that Taskers have no control over work they are assigned, the payments they receive, the subject matter of the tasks, or the deadlines for completion. Additionally, the plaintiff contends that Taskers are not compensated for required training and project familiarization; face termination of their services for voicing concerns about working conditions or pay; are prohibited from taking breaks; must follow company policies and download specific software; have no special experience, skills, license, or educational level; and are provided with the instrumentalities that the company requires the Taskers to use to provide services. It is anticipated that the company will make a motion to compel individual arbitration of the plaintiff’s claims, assuming it included an arbitration provision with a class action waiver in the IC agreements with its AI workers. McKinney v. Scale AI, Inc., No. CGC-24-620481 (Super. Ct. San Francisco County, Cal. Dec. 10, 2024).

GIG STAFFING COMPANY ENTERS INTO MILLION DOLLAR SETTLEMENT WITH SAN FRANCISCO FOR MISCLASSIFYING SERVICE WORKERS. The San Francisco City Attorney has announced that WorkWhile, a gig ‎staffing company, has entered into a settlement with the City in an IC misclassification lawsuit, requiring the company to pay $1 million in restitution to thousands of its ‎workers and convert them from ICs to employees. According to ‎the City Attorney’s December 17, 2024 news release, the City of San Francisco sued WorkWhile ‎in June 2024 for allegedly misclassifying as ICs several thousand gig workers performing ‎hospitality, food service, warehouse, and food production work. The news release notes that WorkWhile operated through an app that provides client businesses with ‎workers who were hired and paid by ‎WorkWhile to fill shifts for its clients. The City ‎claimed that WorkWhile’s gig workers often worked alongside of, and performed the same ‎functions as, ‎employees of the client businesses.‎ The lawsuit alleged that by misclassifying those workers, WorkWhile ‎violated state and ‎local labor laws and denied workers the protections, wages, and ‎benefits guaranteed by California law.‎ ‎

The parties entered into a stipulated partial judgment and injunction that requires WorkWhile to pay those workers $1 million in restitution for unlawful wage ‎deductions and the failure to pay them ‎overtime premiums and provide them with paid sick leave. It also requires WorkWhile to re-classify the workers as employees. The ‎agreement resolves the case with respect to up to 7,500 gig workers who were not engaged in making deliveries; as to delivery workers, the City’s lawsuit will continue to be litigated. State of California v. Workforce as a Service, Inc., No. CGC-24-615401 ‎(Super. Ct. San Francisco County, Cal. Dec. 4, 2024).

SUPREME COURT ARBITRATION CASE REMANDED TO DISTRICT COURT TO DECIDE IF DISTRIBUTORS ARE “ACTIVELY ENGAGED” IN INTERSTATE TRANSPORTATION OF GOODS. The U.S. Court of Appeals for the Second Circuit has vacated its 2022 decision that had compelled arbitration of the IC misclassification claims of distributors of baked foods distributors, remanding the case to the federal district court in Connecticut. The Second Circuit’s order compelling arbitration under the Federal Arbitration Act (FAA) was reversed in May 2024 by the U.S. Supreme Court, which held that a transportation worker need not work for a company in the transportation industry to be exempt from arbitration under Section 1 of the FAA. That exemption, sometimes referred to as the “interstate transportation worker exemption,” ‎carves out arbitration of all “contracts of employment of…any other class of workers ‎engaged in foreign or ‎interstate commerce.”‎ ‎Our discussion of that Supreme Court decision can be found in our May 7, 2024 blog post.

The case involves two distributors for Flowers Foods, Inc., a nationwide producer and marketer of baked goods. The underlying class action complaint claims that Flowers and an affiliate had misclassified them as ‎independent contractors instead of employees. The district court entered an order compelling arbitration of the claims under the FAA. On appeal, the Second Circuit affirmed, concluding that the distributors were in the ‎baking industry, not the transportation industry, and therefore they did not qualify for the arbitration ‎exemption in Section 1 of the FAA.‎ The Supreme Court disagreed, concluding that there is no ‎requirement in the FAA exemption that a transportation worker must only work for a company in the transportation ‎industry. It ruled that the Section 1 exemption ‎depends on “what [the workers] do, not for whom they do it.” The Supreme Court continued: “[A] transportation ‎worker is one who is “actively … ‘engaged in transportation’ of … goods across borders via the ‎channels of foreign or interstate commerce.”‎

But the Court expressly chose not to reach the merits of the Section 1 exemption as applied to the facts in the case. Once the case returned to the Second Circuit, it remanded the case to the district court with directions for the lower court to consider “the actual work that the members of the class, as a whole, typically carry out,” and to consider a number of factors including whether and when the goods “come to a permanent rest within the state.” The latter factor may turn out to be pivotal in determining whether the types of distributors in this case are akin to last mile delivery workers completing interstate customer orders placed with manufacturers, as opposed to whether the distributors themselves order products for their own inventory to then distribute on an intrastate basis to customers. Bissonnette v. LePage Bakeries Park St., LLC, No. 20-1681 (2d Cir. Dec. 12, 2024). ‎

Regulatory and Administrative Developments (3 matters)

TV REALITY SERIES ACCUSED OF MISCLASSIFYING CONTESTANTS AS IC’S INSTEAD OF EMPLOYEES. The National Labor Relations Board has filed a complaint against the producers of the television reality series “Love is Blind,” alleging the Netflix reality show misclassified contestants as independent contractors and not employees. As discussed in detail in our blog post of December 14, 2024, unfair labor practice charges were filed with the NLRB’s Minneapolis regional office by two contestants against production companies, Delirium TV, LLC and Kinetic Content, LLC. The Regional Director for that NLRB office contends that the contestants are employees covered under the National Labor Relations Act and that the companies interfered with and restrained the contestants after they asserted rights under the NLRA, including the right to a safe workplace.

The complaint issued by the Regional Director set forth two sets of allegations. First, the production companies required the contestants to enter into a Participant Release Agreement that contained many clauses that the Regional Director regarded as (a) discouraging contestants from engaging in protected “concerted activities” guaranteed under the NLRA to individuals who qualify as “employees” under that law, and (b) depriving them of “employee” rights under the NLRA. Second, the production companies, among other things, allegedly (a) threatened the contestants with legal action for engaging in protected activities such as complaining about their working conditions; (b) directed them to maintain the confidentiality of their complaints including those about their safety; and (c) filed arbitration proceedings against the contestants for breach of the Participant Agreement. The NLRB complaint does not articulate the basis for the Regional Director’s assertion that the two contestants are “employees” under the NLRA. Instead, it cites to 42 lengthy provisions in the Participant Agreement, including a number that presumably direct and control the manner by which the contestants perform their services. Under the NLRB’s 2023 decision in The Atlantic Opera case, the presence or absence of direction and control over the way in which workers perform their services, viewed in the context of an entrepreneurial opportunity for profit and loss, is key as to determining whether the workers are employees or ICs under the NLRA. Delirium TV LLC and Kinetic Content LLC, Nos. 18-CA-322098 and 18-CA-329487 (Dec. 11, 2024).

NEWSPAPER SETTLES WITH NEW JERSEY AND AGREES TO PAY $300,000 AND RECLASSIFY NEWSPAPER DELIVERY AND WAREHOUSE WORKERS. New Jersey Attorney General Matthew Platkin and Labor Commissioner Robert Asaro-Angelo obtained a settlement of nearly $300,000 with a newspaper delivery company for back pay and other penalties arising from the company’s alleged misclassification of at least 105 newspaper delivery, warehouse, and other workers as independent contractors ‎instead of employees. According to December 17, 2024 news release issued by the New Jersey Attorney General’s office, NJ Penn Logistics, LLC, a wholesale distributor of newspapers and magazines, was the subject of a New Jersey Department of Labor investigation examining whether the company had misclassified various categories of workers as independent contractors between 2018 and 2022.

The news release noted that the settlement resolved contentions that the company had violated New Jersey wage and hour laws by allegedly failing to pay wages due to employees; withholding or diverting employee wages; failing to provide employees earned sick leave; and hindering the NJDOL in its investigation.‎ The settlement terms include an agreement to re-classify all current and future newspaper delivery and warehouse workers as employees. In addition, the company agreed to pay a penalty of up to $557,000 in the event it fails to comply with the settlement terms.‎

AMAZON FILES UNFAIR LABOR CHARGES WITH NLRB OVER TEAMSTERS’ CALL FOR DELIVERY DRIVERS TO STRIKE. Amazon’s use of third party companies to make deliveries prompted a call by the Teamsters Union for delivery workers to strike Amazon and the delivery companies used by the online retailer. The Teamsters claim that Amazon, along with its 1,700 “delivery service partners” (DSPs), are joint employers of delivery workers. Reportedly, at least two Regional Directors of the NLRB have issued complaints against Amazon, also alleging it is a joint employer. Amazon, on the other hand, contends that the workers are independent contractors of the DSPs and reportedly has filed nine unfair labor practice charges under the National Labor Relations Act against the Teamsters in California, Illinois, New York, Pennsylvania, and Texas.

Amazon contends, among other things, that the union has engaged in, and promoted, unlawful strike behavior. Some commentators anticipate that Amazon ultimately may assert that the union’s efforts to strike Amazon violate the NLRA’s secondary boycott prohibitions. ‎If the strike results in limited damage to Amazon, however, the company may have little reason to file secondary boycott charges or a secondary boycott lawsuit against the Teamsters at this time.

Legislative Activity (1 item)

NEW YORK ENACTS LAW PROTECTING INDEPENDENT CONTRACTOR MODELS AND REGULATING FASHION MODEL MANAGEMENT COMPANIES. New York enacted a first of its kind law when on December 21, 2024, Governor Kathy Hochul signed the New York State Fashion Workers Act (S.B. 9832) providing protections for fashion models by addressing fee collections, payment deductions, contract renewals, retaliatory actions, and protections from discrimination and harassment, regardless of whether the models provide services as either independent contractors or employees. The law becomes effective 180 days after the Governor signed the bill on December 21, 2024.

The bill summary describes New York as “the center of the American fashion industry,” employing 180,000 people, accounting for 6% of the city’s workforce, and generating wages totaling $10.9 billion. The summary goes on to state that “the creative workforce behind the industry’s success – namely, models, influencers, and performing artists – are not afforded basic labor protections in New York.” The legislature viewed this concern as a consequence of model management companies engaging models as independent contractors, leaving them unprotected outside the terms of their individual contracts, which the legislature found were often exploitative and one-sided, without financial transparency and accountability especially regarding payment issues and sexual abuse. This new statute is but the latest in a series of laws in New York protecting independent contractors, including the Freelance Isn’t Fee Act and the expansion of the state’s employment discrimination and sexual harassment law to cover independent contractors.