Classifying “staff appraisers” as independent contractors, rather than as employees, is a very common business practice among real estate appraisal firms. And, of course, appraisal management companies (AMCs) use a business model that depends entirely on panels of independent contractor appraisers who fulfill orders for appraisals that managed by the AMCs. Then, there are also the companies/firms that not only manage the delivery of appraisals by independent contractor appraisers but also employ appraisers, as employees, who perform some of the appraisals managed by the AMC — these AMCs are what I would call “hybrid” AMCs because they are functioning both as AMCs and appraisal firms.
Today, on April 30, 2018, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court. The decision could have a big legal impact on the California operations of both true appraisal firms with “1099” staff appraisers and on hybrid AMCs — and possibly also on “true” AMCs. In its opinion, the Court held that for purposes of California’s Industrial Wage Orders, which specify overtime requirements for employees (among other things), a firm classifying a worker as an independent contractor bears the burden of establishing that such a classification is proper under the so-called “A-B-C test” used in a few other states. To meet this burden, the firm must establish all three of the following factors to justify treating workers as independent contractors:
(A) that the worker is free from the control and direction of the hiring firm in connection with the performance of the work, both under the contract for the performance of the work and in fact; and
(B) that the worker performs work that is outside the usual course of the firm’s business; and
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
This is a significantly different and tougher test than has been applied under prior California precedent.
The underlying case in Dynamex involved a delivery driver named Charles Lee, who claimed that he and his fellow workers were misclassified as independent contractors. The California Supreme Court determined that the appropriate legal test to be used in California courts is the straightforward, simplistic A-B-C test, rather than more complicated tests that primarily weigh a long list of factors about the degree of control that the firm exercises over the worker. As such, the Supreme Court upheld the trial court’s certification of a class action against the defendant company.
While the full effect of the decision may take some time to settle in, and while the decision also doesn’t resolve employee/contractor determination for every purpose (such as reimbursement of expenses under the California Labor Code), I expect that we will soon see increased litigation against appraisal firms and AMCs that treat staff appraisers as independent contractors in California. Firms should carefully look at their current practices and risk. Meeting any of the three parts of the test may be a challenge for many appraisal firms and AMCs, but among the three factors, the hardest one that they will have to grapple with may be part (B) relating to whether a staff appraiser’s work falls outside the regular course of business of the firm. When an appraisal firm’s business is providing appraisals under its own name, rather than acting as a true AMC that solely manages appraisals performed by third party vendor appraisers, it will be very difficult for the firm to argue credibly that the work of the appraiser wasn’t the regular business of the firm. Making it even harder, the Court clarified that unlike in some other states, part (B) of the A-B-C test can’t be satisfied by showing that the worker performs his or her work outside the firm’s regular place of business — that won’t fly in California.
The monetary risk, however, may be much bigger for “hybrid” AMC/Firms with workers in California. Some of these kinds of business operations will be targets for potential class actions. Such firms need to look closely at their litigation risk when they are delivering appraisals that are performed both by independent contractor panelists and staff appraisers. These firms tend to be larger and most often actually do treat their true “staff appraisers” as employees, but they still have significant risk. Since they are now combining staff employee appraisal services with offering appraisals managed from third party vendor appraisers, their risk is that the independent contractors on their panels (often numbering in the hundreds or thousands) could be reclassified as employees — since those independent contractors are now performing work that is within the regular course of the hybrid AMC’s business.
The risk to hybrid AMCs is not far fetched ad is very serious. In a case that went to trial in California last summer, a “field services” vendor management firm (which happened to be affiliated with an AMC under ownership of Assurant) was found liable to field service workers it had classified as independent contractors. The case is Bowerman v. Field Asset Services. The federal district court found that Field Asset Services should have treated these workers as employees and that it was now liable to them for unpaid overtime and unpaid business expenses.
I previously recapped the Bowerman case in a longer article entitled “Independent Minded” in the 4th Quarter 2017 edition of the Appraisal Institute’s Valuation magazine, covering the appraiser/contractor issue on the broader national level. That article addressed the legal tests that apply to appraisers with respect to employee or contractor status under the other more common, flexible tests followed in most states (and in California until this new decision in Dynamex). The following summary paraphrases my recap of the Bowermancase:
To prove the key point that the company’s vendor panelists should be classified as employees, rather than contractors, plaintiff’s counsel offered evidence that the company “tells vendors where to go, when to go, what to do, when to get it done and how much and when they will be paid for their efforts.” The evidence included:
- As part of being approved for Field Asset Service’ panel, vendors signed an agreement which, although referring to vendors as independent contractors, set forth detailed requirements for accepting assignments, scheduling property access, timely performance, photo requirements, status updating and quality control.
- Panelists were not given a meaningful opportunity to negotiate the agreement.
- Panelists authorized Field Asset Services to perform background checks.
- Field Asset Services offered assignments to panelists through its proprietary software platform and panelists were required to use this platform to upload their status reports, photos and invoices.
- Panelists were required to respond to assignment requests within 24 hours and complete assignments within a stated time period, sometimes just three days.
- Declining too many assignments or cherry picking the best could result in fewer assignments being offered.
- Field Asset Services “score carded” panelists on their acceptance/declination of assignments, status communications, timeliness of completion and quality. A low rating could result in a warning, reduction of work or ineligibility.
- Field Asset Services tracked its panelists’ performance and recorded warnings, counseling and eligibility suspensions in “vendor profiles.”
At trial, Field Asset Services’ panelists testified that they worked long hours, often 10 hours per day six days a week. And, of course, since the panelists were classified as independent contractors, they did not receive overtime. Nor did Field Asset Services reimburse them for expenses such as mileage, insurance, equipment, cell phones, internet use or computers.
What happened? After four years of litigation, the court ruled on summary judgment that any vendor who derived more than 70% of his or her income from Field Asset Services should be classified as an employee and was thus entitled to overtime and payment of expenses. The essential reasoning was that Field Asset Services had the right to so closely control the work of its contractors (and also exercised that right) and the contractors were so dependent on Field Asset Services that the contractors were employees under California law.
With liability established, the issue was then how much did Field Asset Services owe its reclassified contractors? Last summer, the damages claimed by the named plaintiff and 10 class members went to trial. The jury awarded a total of $2,060,237 to those 11 individuals for unpaid overtime, unpaid expenses, penalties and interest. The award to the named plaintiff was a striking example: the jury determined that he worked 4,845 hours of overtime from 2010 through 2016 for which he should recover $98,615 in overtime payments (on top of the payments he actually received for doing the work) and that he should be awarded $168,746 for his unpaid expenses ($95,247 for mileage alone). It’s estimated that there are 100+ remaining class members potentially entitled to the same types of damages.
Because of the high stakes, the potential risk for AMCs needs to be considered very carefully by such companies.