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1
THE CONTINUING ASSAULT ON INDEPENDENT
CONTRACTORS AND HOW TO SURVIVE
Presented by:Gregory M. Feary • Managing Partner
Andrew J. Butcher • Attorney
2014 ITLC/NAFC CONFERENCE
“The Battlefield” &Legislative Case Law
“Recon”
2
Primary Areas of LawImpacted by IC Challenges
Workers’ compensation Unemployment tax State and federal labor laws State and federal wage and hour
laws State and federal tax laws Federal Affordable Care Act
3
Important Tests to Know Right to Control ABC Relative Nature of the Work Economic Realities Borello – CA specific IRS “20 Factor” Affordable Care Act
4
Right to Control Test Examines a series of factors to
determine which party has the right to control the means and manner of performance, and not merely the end result to be performed
Highly fact specific
[Paraphrased from Vermont Department of Labor website] 5
ABC Test In order to be an IC:
A. Worker is free from putative employer’s control;
B. Services are performed outside the putative employer’s place of business; and
C. Workers are customarily engaged in independently established trade or profession
[Black’s Law Dictionary, Sixth Edition]
6
Relative Nature of the Work Test
Is the work the type that normally could be carried out by an employee in the usual course of business?
Are the activities being performed by the workers an integral part of the employer’s regular business?
[Vermont Department of Labor website]
7
Economic Realities Test A factor test used to determine the “economic
reality” of the relationship. As articulated by the Supreme Court, it examines: Degree of control; Relative investments of the parties; Degree to which opportunity for profit or loss is
determined by the “employer”; Skill and initiative required; and Permanency of the relationship.
[United States v. Silk, 331 U.S. 704 (1947), as quoted on the Texas Workers’ Compensation website]
8
9
Borello Test Version of economic realities/multi-factor test used to
determine employment status in California Primary factor is right to control worker both as to work done and
the manner and means in which it is performed Other factors:
Distinct occupation or business; Is work part of regular business of employer; Who supplies the instruments, tools, and place to perform work; Investment in equipment or materials; Special skill required; Is the work typically done with supervision or by a specialist without
supervision; Opportunity for profit or loss; Length of time services performed; Degree of performance of relationship; Method of payment; and Whether parties believe creating IC relationship.
[S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341 (1989), as quoted on the California Department of Labor website]
IRS “20 Factor” Test Published by the IRS as a guideline to
apply the Right to Control Test Analytical tool, not legal test Technically replaced by refined 11 factor
test, but remains in common use Lists 20 factors falling in 3 basic
categories Behavioral Control Financial Control Type of Relationship
10
The IC ModelIRS Worker Classification Challenges
Section 530 Relief – What is it? Enacted in 1978 – response to IRS
reclassification aggression Provides retroactive and prospective relief Lower standard than common law defense
Three Part Test Reporting consistency Substantive consistency Reasonable basis
11
The IC ModelIRS Worker Classification Challenges
Reporting Consistency Timely filed 1099s reporting IC payments
Substantive Consistency No similarly-situated workers treated as employees
Reasonable Basis Judicial precedent/IRS ruling Prior IRS audit Longstanding practice of a significant segment of
the industry No more than 25% required
Burden Shifts to IRS
12
Workers’ Compensation by State
Favorable Statutory LawFavorable Case LawDifficult Statutory LawUnfavorable Case LawConflicting Case Law
WA
OR
CA
NV
ID
MT
WY
COUT
AZNM
ND
SD
NE
KS
OK
TX
MN
IA
MO
AR
LA
WI
IL
MI
MI
IN OH
NY
ME
PA
WV VA
NH
NCKY
TN
MS AL GA
SC
FL
MD
CT
NJ
DE
RI
MA
VT
13
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
14
General IC Misclassification Laws that Apply for WC Purposes
New York Commercial Goods Transp. Ind. Fair Play Act(Labor Law §§ 862-a to 862-c) Targets misclassification of commercial vehicle drivers who:
Possess a “state-issued” driver’s license; and Contractor of 10,001 lbs. or heavier vehicle
Applies for purposes of state labor, WC, and UET laws If Business Entity, then
11-factor test that is reasonable to meet Otherwise, revert to difficult to meet ABC Test
Enrolled June 21, 2013 Enacted by Gov. Cuomo on Jan. 20, 2014 Rules under Act include mandatory notice re right to challenge status Effective Date: April 10, 2014
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
15
General IC Misclassification Laws Massachusetts IC Law (M.G.L.A. 149 § 148B)
Imposes difficult ABC Test to demonstrate status as IC
May be misinterpreted as applying for purposes of workers’ compensation
One FAAA preemption decision but several that did not decide favorably
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
16
Proposed IC Misclassification Laws
New Jersey Proposed IC Law Drayage trucking or parcel delivery trucking
industry Would impose difficult ABC Test to demonstrate
status as IC May be misinterpreted as applying for purposes
of workers’ compensation Same bill vetoed last year by Gov. Chris Christie
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
17
Proposed IC Misclassification Lawsthat Would Apply for WC Purposes
Washington Employee Fair Classification Act (HB 2334) Passed House Rules Committee Feb. 18 51-45 Would presume employee status and establish
alternatives of “ABC” or 10 part test for IC status Civil penalties and damages for misclassification Opposed by WA trucking association and others
on basis it would classify most workers as employees, ignoring intent of contracting parties
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
18
New Owner-Operator Exemption
Ohio (HB 338) Would classify owner-operators as ICs if three
“essential factors” and three of six “non-essential factors” are met.
Test is less difficult than most Would apply to Ohio's Overtime, Workers'
Compensation, and Unemployment Compensation Laws
Legislative and Case Law ForecastWorkers’ Compensation Case Law
19
Allied Van Lines v. Illinois Workers’ Comp. Comm’n (Ill. Ct. App. Sept. 2012)
Court of Appeals affirmed ALJ finding that household goods van line “employed” owner-operator driver
Court used Restatement test Employment with van line and not the agent
Agent essentially served as “accountant” for owner-operator in dealings with van line
Of note – Missouri employment, Illinois injury – Illinois asserted jurisdiction
Legislative and Case Law ForecastWorkers’ Compensation Case Law
Callahan v. Newby’s Auto Transport, LLC (ALJ Decision, Miss. Feb. 2013) ALJ applied right to control test and deemed driver to be
employee ALJ did not consider statutory exclusion for owner-operators
with occupational accident coverage Claimant neither owned truck nor paid for gas and
expenses Claimant received pay via Form 1099
20
Legislative and Case Law ForecastUnemployment Compensation Case Law
Western Logistics, Inc. v. Industrial Claims Appeals Office (Colo. May 12, 2014) Transportation-related IC case issued as a companion case
by Colorado Supreme Court ICAO v. Softrock Geological Servs. is non-transportation companion
case Prohibits use of “single factor” of whether worker provides
services for more than one employer to determine IC status for UET
Requires consideration of “totality of the circumstances” to determine IC status
21
Legislative and Case Law ForecastOther Case Law
Ruiz v. Affinity Logistics, Inc. (9th Cir. June 16, 2014) Court held last-mile delivery drivers to be employees
applying Borello test under various California labor laws Reversed district court finding of employment
22
continued
Legislative and Case Law ForecastOther Case Law
Ruiz v. Affinity Logistics, Inc. (9th Cir. June 16, 2014): Standard of Review Questionable standard of review
Court failed to establish basis for de novo review E.g., district court as being clearly erroneous
9th Circuit reweighed facts in the record but not considered by the district court
23
continued
Legislative and Case Law ForecastOther Case Law
Ruiz v. Affinity Logistics, Inc. (9th Cir. June 16, 2014): Oddities of the Case Customer requirements and compliance with law as evidence of
control Branding and appearance standards significant negative factor Load tracking = driver tracking = evidence of employment Charge backs for mobile phone as evidence of control despite option
to purchase elsewhere Stop-based pay = employment compensation Business entity formation by contractor as merely window dressing
required by the carrier Related entity lease ≠ ownership No recognition of Ruiz as multi-truck/multi-driver contractor
24
Legislative and Case Law ForecastWorkers’ Compensation Case Law
25
Watkins v. USA Trucking, Inc. (Ark. Ct. App. Aug. 2013) Court of Appeals upheld ALJ Decision finding owner-operator was
IC Ark. WC Commission also upheld ALJ Decision in interim
Good development of facts in case. Specifically, the owner-operator: Testified he could control profit and loss by business decisions Left prior motor carrier because it did not pass through fuel surcharges Had sophisticated understanding of ICA Independently purchased equipment (no purchase/lease-back)
Distinguished Hurricane Express case “Legitimate business deal between 2 competent parties”
Legislative and Case Law ForecastRelated Case Law
26
Western Home Transport, Inc. v. Idaho Dept. of Labor (Idaho Supreme Court Feb. 2014)
Operating under motor carrier’s DOT authority is not negative to IC status under unemployment compensation statute — meets “AB” Test, i.e., freedom from control and “independently established trade, occupation, profession or business.”
Overruled 2008 decision that such authority was enough by itself to find no independent business and thus employment status.
Good language may be helpful in other contexts Reaffirmed that government-imposed requirements do not affect
independent status
State Owner-OperatorExemption “Gotchas”
Workers’ Compensation
27
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Owner-Operator Exemptions
28
Arkansas Indiana Minnesota* North Dakota Tennessee
Alabama Iowa Mississippi* Oklahoma Texas
Colorado Kansas Missouri Oregon Utah
Florida Louisiana Nebraska*South Carolina
Washington
Georgia MarylandNorth Carolina* South Dakota Wyoming
*Statute Does Not Provide Pure Owner-Operator Exemption
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Arkansas Exempts owner-operators and drivers fleet-operators employ drivers
from definition of employee vis-à-vis the motor carrier Intended to rectify increasingly problematic “certificate of non-
coverage” Provides mechanism for owner-operator to obtain workers’
compensation coverage under motor carrier’s policy without otherwise affecting status as IC Requires written election in lease Allows chargeback of premium
Not clear whether failure to at least offer owner-operators opportunity to secure workers’ compensation coverage under motor carrier’s policy negates presumption of IC status.
Anticipate need for clarification on technical application29
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Colorado Owner-operator exemption only applies when an owner-operator,
among other things, has workers’ compensation or equivalent private coverage, and leases a vehicle it owns to a certified common carrier or contract carrier
Courts interpret requirements narrowly and will not apply exemption if coverage does not provide benefits mirroring coverage workers’ compensation insurance would provide. USF Distribution, Inc. v. Indus. Claim App. (Co. Ct. App. 2004)
30
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Louisiana Owner-operator exemption does not apply if a driver
purchases equipment from motor carrier and then leases that equipment back to the motor carrier with a driver
31
State Owner-Operator Exemption “Gotchas”
Workers’ Compensation Maryland
To secure determination that owner-operator exemption applies, motor carrier must demonstrate the owner-operator qualifies as an independent contractor for federal tax purposes, among other things
32
State Owner-Operator Exemption “Gotchas”
Workers’ Compensation Minnesota
Owner-operator exemption only applies when, among other requirements, owner-operator holds equipment under a bona fide lease arrangement
33
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
North Carolina Owner-operator exemption only applies when, among
other things, the owner-operator: Is an individual licensed by the United States
Department of Transportation; and Personally operates the vehicle solely pursuant to
that license
34
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Oklahoma Owner-operator exemption does not apply when motor
carrier leases equipment to owner-operator
35
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
South Carolina Owner-operator exemption applies to bona fide
lease-operators even if lease-operators lease equipment from motor carrier affiliate, but owner-operator exemption does not apply to lease-operators if lease-operators lease equipment from motor carrier.
36
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Texas Owner-operators and owner-operator employees
are not employees of a motor carrier if the owner-operator “assumes the responsibilities of an employer for the performance of work” pursuant to a written agreement. DWC Form-82, Agreement to Require Owner
Operator to Act as Employer
37
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
West Virginia To qualify for general IC exemption, an IC must
provide “his or her own” equipment Term “his or her own” equipment does not
include equipment leased from the principal
38
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Wisconsin Owner-operator exemption only applies to bona
fide lease-operators when lease arrangement is with any person other than the carrier.
39
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
Wyoming To qualify for owner-operator exemption,
independent contractor agreement must (among other things) provide that the owner-operator will not be treated as an employee for FICA, FUTA, or Social Security withholding purposes.
40
Strategies forAvoiding Litigation
41
42
IC Status – Challenge to Business Model
STRATEGIES FOR AVOIDING LITIGATION Lease-purchase programs
State statutes may prohibit Capital lease – IC equity Allow use of Equipment for other carriers
Trip leasing Shows IC serves more than one master Carrier approval Insurance; Leasing Regs.; safety regs. continued
43
IC Status – Challenge to Business Model
STRATEGIES FOR AVOIDING LITIGATION Opportunity for multiple trucks and drivers
Demonstrates entrepreneurship Substitute drivers help too Bolsters argument for separate business entity
Choice in charge-backs Avoid forced purchases and “free” services Present choices among competing vendors Discourage loans to cover charge-backs continued
44
IC Status – Challenge to Business Model
STRATEGIES FOR AVOIDING LITIGATION Method of compensation
Avoid time-based; consider %-of-AGR Build in ways for IC to increase its profitability
Operations – maintenance, fuel, routing, forced dispatch Promote selection/self-determination by IC Excessive limitations = improper control
Customer and government requirements Highlight role in limitations or req’ts on IC Cite to regs.; use customer letterhead
continued
45
IC Status – Challenge to Business Model
STRATEGIES FOR AVOIDING LITIGATION Business coaching
OK to convey customer requirements Facilitate third-party business-consulting svcs.
“Employee” terminology Guard against this in paperwork, website, blogs,
customer communications Other business models – Settlement carrier
May carry their own risks
46
IC Status – Challenge to Business Model
STRATEGIES IN LITIGATION Federal Preemption – IC Laws
FAAAA preempts state laws that is directly or indirectly “related the price, route, or service of any motor carrier . . . with respect to the transportation of property.” 49 U.S.C. § 14501(c).
E.D. Virginia found FAAAA preempted Massachusetts IC Law (M.G.L.A. 149 § 148B) because it “dictates an end to independent contractor carriers in Massachusetts.”Sanchez v. Lasership, Inc., 937 F. Supp. 2d 730 (E.D. Va. 2013).
47
IC Status – Challenge to Business Model
STRATEGIES IN LITIGATION Federal Preemption – IC Laws (cont.)
Lasership settled before ruling from 4th Cir. D. Mass and D.N.H. have found that FAAAA does not
preempt 148B because the Statute “has nothing to do with the regulation of the ‘carriage of property.’” Schwann v. FedEx Ground Pkg. Sys., Inc., 2013 WL 3353776.
48
IC Status – Challenge to Business Model
STRATEGIES IN LITIGATION (cont.) Federal Preemption – State laws
Preemption of common law claims: ADA (nearly parallel preemption provision to FAAAA) preempted common law breach of duty of good faith and fair dealing claim because it sought “to enlarge the contractual obligations that the parties voluntarily adopt[ed].” Northwest, Inc. v. Ginsberg, 2014 WL 1301865
49
IC Status – Challenge to Business Model
STRATEGIES IN LITIGATION (cont.) Preemption of break claims
FAAAA preempts California meal and rest break rules impacting “price, route, or service.” Dilts v. Penske Logistics LLC, 819 F. Supp. 2d 1109 (S.D. Cal. 2011), on appeal, 12-55705 (9th Cir.)
FAAAA does not preempt “claims to be compensated for shortened or restricted break time” under Massachusetts law. Raposo v. Garelick Farms, LLC, 2014 WL 2468815 (D. Mass. June 2, 2014)
HOS Preemption
50
IC Status – Challenge to Business Model
STRATEGIES IN LITIGATION (cont.) Federal Preemption – State laws (cont.)
Preemption of state minimum wage laws California: FAAAA preempts California minimum wage
law requiring motor carrier to change piece-rate compensation system to include hourly pay for non-driving activity. Ortega v. J.B. Hunt, 07-08336 (C.D. Cal. June 3, 2014).
Settlement Carrier Model
51
Overview of Conversion Traditional Model: authorized Motor Carrier
utilizes independent contractor owner-operators operating under Motor Carrier’s authorities and DOT number
Settlement Carrier Model: Motor Carrier converts operations into third party logistics (3PL) operations using owner-operators that are authorized motor carriers
52
Driving Objectives Behind the Model
Response/defense against reclassification of owner-operators as employees rather than independent contractors of existing Motor Carrier
Minimization/elimination of standard motor carrier accident liability – though shippers may require
Minimization/elimination of motor carrier safety regulation by the Federal Motor Carrier Safety Administration (“FMCSA”) – though shippers may require
53
10 Reasons Why the Settlement Carrier Model Passes the ABC Test
(SC = Settlement Carrier; PB = Property Broker/ Incumbent Motor Carrier)
1. Possession of a license and operating authority by SC2. Satisfies different trade, occupation, or profession
pronga) SC: For hire motor carrierb) PB: Property broker
3. Satisfies exclusive work relationship pronga) SC is for hire carrier that may haul without legal
limitation
4. Compliance with federal motor carrier law no longer creates control
54
continued
10 Reasons Why the Settlement Carrier Model Passes the ABC Test
(SC = Settlement Carrier; PB = Property Broker/ Incumbent Motor Carrier)
5. PB requirements more easily identified as customer requirements6. Less legal and historical precedent for finding motor carriers the
employees of brokers/ freight forwarders7. Expense of becoming a motor carrier creates favorable fact of
investment in tools of trade8. SC must make independent business decisions regarding motor
carrier compliance9. Placards identifying SC as the motor carrier equate to holding out
as independent business10. Easily misapplied Federal Leasing Regulations no longer relevant
55