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2014 ITLC / NAFC CONFERENCE. THE CONTINUING ASSAULT ON INDEPENDENT CONTRACTORS AND HOW TO SURVIVE. Presented by: Gregory M. Feary • Managing Partner Andrew J. Butcher • Attorney . “The Battlefield” & Legislative Case Law “Recon”. Primary Areas of Law Impacted by IC Challenges.

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the continuing assault on independent contractors and how to survive

2014 ITLC/NAFC CONFERENCE

THE CONTINUING ASSAULT ON INDEPENDENT CONTRACTORS AND HOW TO SURVIVE

Presented by:

Gregory M. Feary • Managing Partner

Andrew J. Butcher • Attorney

slide2

“The Battlefield” &

Legislative Case Law “Recon”

primary areas of law impacted by ic challenges
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
important tests to know
Important Tests to Know
  • Right to Control
  • ABC
  • Relative Nature of the Work
  • Economic Realities
  • Borello – CA specific
  • IRS “20 Factor”
  • Affordable Care Act
right to control test
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]

abc test
ABC Test
  • In order to be an IC:
  • Worker is free from putative employer’s control;
  • Services are performed outside the putative employer’s place of business; and
  • Workers are customarily engaged in independently established trade or profession

[Black’s Law Dictionary, Sixth Edition]

relative nature of the work test
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]

economic realities test
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]

borello test
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
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
the ic model irs worker classification challenges
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
the ic model irs worker classification challenges1
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
slide13

Workers’ Compensation by State

ME

VT

WA

MT

ND

MN

MI

NH

MA

NY

OR

WI

CT

MI

RI

SD

ID

PA

NJ

WY

IA

MD

OH

NE

IN

DE

NV

IL

WV

VA

UT

CO

KY

KS

MO

NC

CA

TN

OK

AR

SC

AZ

NM

GA

MS

AL

TX

LA

Favorable Statutory Law

Favorable Case Law

Difficult Statutory Law

Unfavorable Case Law

Conflicting Case Law

FL

legislative and case law forecast workers compensation legislation amendments
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
  • 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)
    • Targetsmisclassificationofcommercialvehicledriverswho:
      • Possess a “state-issued” driver’s license; and
      • Contractor of 10,001 lbs. or heavier vehicle
    • Appliesfor 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 forecast workers compensation legislation amendments1
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
  • 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 forecast workers compensation legislation amendments2
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
  • 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 forecast workers compensation legislation amendments3
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
  • Proposed IC Misclassification Laws
  • that Would Apply for WC Purposes
  • Washington EmployeeFairClassification 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 forecast workers compensation legislation amendments4
Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments
  • 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 forecast workers compensation case law
Legislative and Case Law ForecastWorkers’ Compensation Case Law
  • 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 forecast workers compensation case law1
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
legislative and case law forecast unemployment compensation case law
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
      • ICAOv. 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
legislative and case law forecast other case law
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

continued

legislative and case law forecast other case law1
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

continued

legislative and case law forecast other case law2
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
legislative and case law forecast workers compensation case law2
Legislative and Case Law ForecastWorkers’ Compensation Case Law
  • 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 forecast related case law
Legislative and Case Law ForecastRelated Case Law
  • 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 operator exemption gotchas workers compensation
State Owner-Operator Exemption “Gotchas”Workers’ Compensation

Owner-Operator Exemptions

state owner operator exemption gotchas workers compensation1
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 application
state owner operator exemption gotchas workers compensation2
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
  • Colorado
    • Owner-operator exemption only applieswhen 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)
state owner operator exemption gotchas workers compensation3
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
state owner operator exemption gotchas workers compensation4
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
state owner operator exemption gotchas workers compensation5
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
state owner operator exemption gotchas workers compensation6
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
state owner operator exemption gotchas workers compensation7
State Owner-Operator Exemption “Gotchas”Workers’ Compensation
  • Oklahoma
    • Owner-operator exemption does not apply when motor carrier leases equipment to owner-operator
state owner operator exemption gotchas workers compensation8
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.
state owner operator exemption gotchas workers compensation9
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
state owner operator exemption gotchas workers compensation10
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
state owner operator exemption gotchas workers compensation11
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.
state owner operator exemption gotchas workers compensation12
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.
slide41

Strategies for

Avoiding Litigation

ic status challenge to business model
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

ic status challenge to business model1
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

ic status challenge to business model2
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

ic status challenge to business model3
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
ic status challenge to business model4
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).
ic status challenge to business model5
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.
ic status challenge to business model6
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
ic status challenge to business model7
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
ic status challenge to business model8
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).
overview of conversion
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
driving objectives behind the model
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
10 reasons why the settlement carrier model passes the abc test
10 Reasons Why the Settlement Carrier Model Passes the ABC Test

(SC = Settlement Carrier; PB = Property Broker/ Incumbent Motor Carrier)

  • Possession of a license and operating authority by SC
  • Satisfies different trade, occupation, or profession prong
    • SC: For hire motor carrier
    • PB: Property broker
  • Satisfies exclusive work relationship prong
    • SC is for hire carrier that may haul without legal limitation
  • Compliance with federal motor carrier law no longer creates control

continued

10 reasons why the settlement carrier model passes the abc test1
10 Reasons Why the Settlement Carrier Model Passes the ABC Test

(SC = Settlement Carrier; PB = Property Broker/ Incumbent Motor Carrier)

  • PB requirements more easily identified as customer requirements
  • Less legal and historical precedent for finding motor carriers the employees of brokers/ freight forwarders
  • Expense of becoming a motor carrier creates favorable fact of investment in tools of trade
  • SC must make independent business decisions regarding motor carrier compliance
  • Placards identifying SC as the motor carrier equate to holding out as independent business
  • Easily misapplied Federal Leasing Regulations no longer relevant