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Foreign manufacturer misclassifies Mass. sales rep as contractor

A Massachusetts resident who provided outside sales services to a Taiwanese manufacturer was misclassified as an independent contractor and entitled to Wage Act protections, a U.S. District Court judge has found.

In a 2002 contract, defendant Powertech Industrial Co. agreed to pay plaintiff William Valle on a commission-only basis to generate orders for its products from U.S. companies.

They entered a new contract in 2009 that did not specify Valle’s commission rates. Instead, Powertech informally relied on a spreadsheet of commission rates from the prior contract, and Valle generally accepted payment at those rates.

schwab-hillary“This is how the independent contractor statute is supposed to work.”

— Hillary Schwab, plaintiffs’ lawyer

A dispute later arose over Powertech’s attempt to lower Valle’s rates unilaterally and he brought a misclassification claim, alleging that he was an employee entitled to Wage Act protections for commissions he claimed had not been paid in full.

Powertech argued that Valle was not an employee because his sales services fell outside the usual course of the company’s manufacturing business.

Judge Denise J. Casper disagreed.

“Although Powertech’s ‘Core Competence’ as described on its website does not include ‘sales,’ Powertech has a sales division with seven employees that makes direct sales to customers or commercial resellers,” Casper wrote, denying the defendant’s motion for summary judgment. “[T]he differences between Valle and the employees in the sales division are that Valle, unlike the others, could not provide quotations to customers, could choose which customers to pursue …, was expected to work ‘quicker’ in forming customer relationships and sometimes travelled with customers. … He was also paid through commissions.”

jacobs-travis“Unfortunately, the Massachusetts [independent contractor] statute has taken on a life of its own and [the judge was] boxed in, literally, by the letter of the law and precedent that gets ever-broader in scope.”

— Travis J. Jacobs, defense lawyer

Casper also rejected Powertech’s argument that the 2009 contract was unenforceable to begin with because it was missing a material term — namely Valle’s commission rates.

“The Massachusetts Uniform Commercial Code … permits a court to consider the course of dealings between parties to the extent such dealings explain or supplement existing contractual terms,” Casper wrote. “Although Powertech did not formally incorporate the spreadsheets as an addendum to the [2009] agreement, it is undisputed that both parties continuously relied on the rates listed in the spreadsheets for at least six years.”

The 28-page decision is Valle v. Powertech Industrial Co. Ltd., et al.

‘No surprise’

The plaintiff’s attorney David Himelfarb of Boston, declined to comment, citing ongoing litigation in the case. Suzanne Elovecky of Boston, who represented defendant Powertech, could not be reached for comment prior to deadline.

Boston attorney Hillary Schwab, who represents plaintiffs in misclassification cases, said she agreed with Casper’s analysis.

“The court properly considered the fact that the company itself had represented sales as being central to its business on its own website and also looked at what the company actually does and the nature of the work provided by the plaintiff,” Schwab said. “This is how the independent contractor statute is supposed to work. The company has products to sell and hires people to sell those products, so those people are the company’s employees and have to be paid consistent with the requirements of the wage laws.”

Nicholas F. Ortiz of Boston, who also handles misclassification cases, agreed. Specifically, he referenced Ruggiero v. Am. United Life Ins. Co., a 2005 decision from the federal District Court, which Casper distinguished in the instant case.

In Ruggiero, the judge found that a pair of insurance agencies had not misclassified an agent who sold insurance products because the agencies themselves were not in the business of selling insurance; they were in the business of determining which products to make available, the structuring and drafting of policies, and investing policy premiums.

“Defendants have often cited Ruggiero as a sword in trying to oppose a misclassification claim, but I don’t think it makes sense because you need to sell your product in order to have a business,” he said. “The fact that [Powertech] had its own internal sales operation was a fact that allowed [Casper] not to make the formalistic distinction that the Ruggiero court made.”

Ortiz also said it would be interesting to see what will happen in future cases in which a company with no internal sales operation — but that relies on sales to be a viable business — tries to classify outside sales reps as independent contractors.

Travis J. Jacobs, a Boston attorney who defends misclassification cases, called the ruling a “disheartening” development in Massachusetts independent contractor jurisprudence.

First, he said, the plaintiff, Valle, contacted Powertech first, offering up a business opportunity with a potential client, and signed his contract with Powertech as an authorized representative of his own presumably pre-existing, pre-registered company.

Additionally, Valle performed sales work, however minimal, for other clients too, through that entity and others.

“By any reasonable ‘smell test’ type of non-legal assessment, Valle was an independent operation seeking independent opportunities and operating independent of any supervision and control,” he said. “Unfortunately, the Massachusetts [independent contractor] statute has taken on a life of its own and [the judge was] boxed in, literally, by the letter of the law and precedent that gets ever-broader in scope.”

Meanwhile, Schwab found Casper’s ruling on enforceability of the contract significant in that it allowed for gaps to be filled in with evidence of prior dealings.

“Workers should be able to rely on their previous compensation rates and count on being compensated in that same manner going forward,” she said. “Hopefully this decision will make employers think twice before unilaterally lowering employees’ pay rates.”

Course of dealings

In September 2002, Valle approached Powertech and its president, defendant Jonie Chou, with an opportunity for the company to manufacture surge protectors and similar products for American Power Conversion, a U.S. company in the power products space.

The parties negotiated a contract that Valle signed in the name of his own corporate entity, United Power Products. The agreement called for Valle to receive a 5-percent commission on all products sold to APC. Valle also brought other customers to Powertech for which he was paid a 5-percent commission.

In 2008, Valle agreed to lower his commission to 3.5 percent for APC sales.

A year later, Powertech and Valle negotiated a new agreement. The 2009 agreement did not specify a commission rate, only that all payments would be made to an entity called William Valle Associates, Inc.

For each sale, Powertech would send an invoice for Valle to sign, identifying the proposed commission. The amount was typically based on a spreadsheet of commissions for particular customers and products paid under the 2002 contract. Valle generally signed the invoices and sent them back.

However in 2015, tensions grew as Powertech allegedly began changing Valle’s commission rates. In late 2016, Valle signed his name to an invoice and, for the first time, wrote “accepted as partial payment” to indicate a dispute over its amount.

Over the next year, he and Powertech were unable to resolve their dispute over the amount of commissions owed. Meanwhile, Powertech made no further payments. During that time, Valle sued Powertech and Chou in U.S. District Court alleging Wage Act violations and breach of contract.

Powertech moved for summary judgment on grounds that the 2009 contract was unenforceable because it was missing material terms and that, as an independent contractor, Valle was not entitled to Wage Act violations.

Core business?

Casper found that under the Massachusetts independent contractor statute, G.L.c. 149, §148B, Valle was, in fact, an employee.

The judge noted that the statute requires an employer that has classified a worker as an independent contractor to show that the worker is free from control over the performance of the service; that the service falls outside the “usual course” of its business; and that the worker is engaged in an independently established trade of the same nature as that service.

Specifically, Casper determined that Powertech could not show that Valle’s sales services fell outside its usual course of business. For example, she noted, the “Customer Care” section of its website and its sales catalog touted its “prompt replies” to customer requests.

Additionally, she said, Powertech had an internal sales division responsible for most of its sales, and Valle’s role did not significantly differ from that division’s employees.

“Here … Powertech’s sales were not merely incidental to its business,” Casper said, finding that because Valle was an employee, he was eligible for Wage Act protection.

Regarding the breach-of-contract claim, Casper concluded that the parties’ own conduct rendered the contract enforceable despite the absence of a specific commission rate.

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