How to Evaluate Portfolio Companies for Independent Contractor Misclassification Liability

Independent contractor (IC) misclassification issues have been front-page news for several years. Lawsuits against Postmates, Grubhub, Instacart, Uber and Lyft by drivers classified as ICs have received ample media coverage, with Lyft and Uber flagging this as a major legal issue in their recent initial public offerings. Traditional companies beyond the “gig economy,” however, have also experienced similar legal and regulatory challenges. Despite this, few PE firms have sufficiently focused on this risk when evaluating potential investments. Fewer still have considered it with the necessary insight to make well-informed decisions about whether to proceed with an investment, how to value a potential acquisition with IC misclassification issues and what actions can be taken post-closing to enhance compliance with IC laws. In a guest article, Matthew D. Kane, general counsel and chief compliance officer of Z Capital Group, L.L.C., and Richard J. Reibstein, partner at Locke Lord, alert readers to the types of IC misclassification risks PE firms should look for, along with how to assess those hidden risks; what steps can be taken in negotiations to address them; and what can be done post-closing to maximize compliance with IC laws and minimize this risk exposure. For more on IC issues from a sponsor’s personnel arrangements, see “Compliance Considerations for PE Firms Engaging Operating Partners” (May 14, 2019); and “Independent Contractors vs. Employees: What Private Fund Managers Must Know About Classifying Staff and Protecting Proprietary Secrets” (Jun. 2, 2016).

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