Employee vs Contractor Issues August 2017
This post of The Transportation Scene will look at issues involving the classification of drivers and owner operators as employees and contractors. For years there has been much debate as to the proper classification of workers in many industries, including trucking. Industries such as the construction trades, medical fields and the hotel industry use similar models with workers. The trucking industry depends highly on the use of “contractor” relationships between motor carriers and drivers. Goals of this individual blog are to help you better understand:
- any pros and cons of both job classifications as they apply to the transportation industry – with owner-operators and drivers;
- what the IRS and Workers Comp typically look for to define a driver’s status;
- update you on recent law suits which are changing or defining employment status occurring in the trucking industry;
- and some tips to protect your interests.
Advantages to Both Parties
Advantages to Motor Carriers with using independent contractors is no requirement to with- hold taxes, provide workers compensation benefits, pay Social Security, Medicare or any other insurances to the independent contractor. It also allows the Motor Carrier to be “asset-light” meaning the carrier can operate without owning any of the equipment (trucks and trailers) if they so choose.
Advantages to Independent Contractors include the ability to build their own business – making informed business decisions ultimately controlling their own business – the “American Dream”.
The IRS, Workers Compensation and the Department of Labor have been intensely scrutinizing the classification of employees and independent contractors. Unfortunately no clear definition of the word “independent contractor” is provided by either the IRS or Workers Compensation. Lack of a clear definition encourages and promotes misclassifications of workers. Misclassification of “contractors” as “employees” enables these government agencies to fill their coffers through additional premiums, taxes, penalties and awards. Determinations can also financially assist the contractor who as a plaintiff claims to be an employee. The issue of whether a worker is an employee or independent contractor depends upon the particular area of law to be applied. In a wage claim, for example, where employment status is an issue, Division of Labor Standards Enforcement will often use the five-prong economic realities test to decide the issue. However, in a separate matter before a different state agency with the same parties and same facts, and employment status again being an issue, that agency may be required to use a different test, for example, the “control test,” which may result in a different determination. Thus, it is possible that the same individual will be considered an employee for purposes of one law and an independent contractor under another. Motor Carriers and independent contractors should educate themselves on current topics to protect their interests if using the independent contractor business model.
The Owner-operator Model and Potential Fleet Owner Issues Within the Expedite Industry
Other issues – Lawsuits against major carriers on wage and hours issues. We – the Expedite Industry – need to look at and consider being proactive because the cargo vans under 10,000 lbs. GVW which we operate are not subject to the Hours of Service (HOS) rules and may not be exempt under some of the exemptions (Federal Preemption). We should ensure that any legislation pending applies to ALL of our “for-hire” carrier operations including the units under 10,000 lbs. GVW. This may be of particular interest to Fleet Owners operating multiple cargo or Sprinter type vans with contracted drivers operating their vehicles. Carriers using Owner-operated Cargo/Sprinter vans could also be affected with wage and hours issues.
Current Legal Cases
Burcham vs. Mercury Service Case
James Burcham and Grady Hill on behalf of themselves and those similarly situated, Plaintiffs, vs. Taubra Corp., an Ohio Corporation d/b/a Mercury Service. Case No. 2:17-CV-00115, United States District Court Southern District of Ohio, Eastern Division. This is an Ohio labor law case involving a courier service operating cargo vans less than 10,000 lbs. GVW. Case involves plaintiffs seeking “minimum wage” payments and damages in addition to lost “overtime wages”. The company also operated in states in addition to Ohio so the operations are “interstate” and subject to Federal laws.
In addition to the above case there have been recent cases involving several very large motor carriers that have been “settled” with the motor carrier paying large claims to plaintiffs over labor laws and misclassification.
It is important to have Pre-emption of the laws which apply to Interstate Motor Carrier Operations include those drivers (and vehicles) that have GVW less than 10,000 pounds.
FMCSA has been designated as the primary regulator of all interstate motor carriers. Regulatory issues such as the status of lease operators as independent contractors, the setting of the hours of service regulations, the establishment of cargo claim procedures, the operation of freight brokers and the protection of interstate household goods shippers, have all been delegated to the FMCSA with preemptive effect.
Express Pre-emption. Federal laws “trumping” state labor laws. Article VI of the Constitution makes federal law “the supreme law of the land,” notwithstanding the contrary law any state might have.
Preemption can be either express or implied. When Congress chooses to expressly preempt state law, the only question for courts becomes determining whether the challenged state law is one that the federal law is intended to preempt.
If the drivers and vehicles under 10,000 pounds are not to be included in preemption, then lawsuits and potential misclassification of contractor vs. employee status will continue to arise with these vehicles and drivers.
The “IRS Tests”
The IRS has established a 20-point checklist the can be used as a guideline in determining whether or not a contractor can legally be paid on a 1099. This checklist helps determine who has the “right of control.” Does the employer have control or the “right of control” over the individual’s performance of the job and how the individual accomplishes the job? The greater the control exercised over the terms and conditions of employment, the greater the chance that the controlling entity will be held to be the employer. The right to control (not the act itself) determines the status as an independent contractor or employee. The 20-point checklist is only a guideline, it does not guarantee that a person is correctly classified. There is no one single homogenous definition of the term “employee.” Most agencies and courts typically look to the totality of the circumstances and balance the factors to determine whether a worker is an employee. Following is the IRS 20-point checklist:
- Must the individual take instructions from your management staff regarding when, where, and how work is to be done?
- Does the individual receive training from your company?
- Is the success or continuation of your business somewhat dependent on the type of service provided by the individual?
- Must the individual personally perform the contracted services?
- Have you hired, supervised, or paid individuals to assist the worker in completing the project stated in the contract?
- Is there a continuing relationship between your company and the individual?
- Must the individual work set hours?
- Is the individual required to work full time at your company?
- Is the work performed on company premises?
- Is the individual required to follow a set sequence or routine in the performance of his work?
- Must the individual give you reports regarding his/her work?
- Is the individual paid by the hour, week, or month?
- Do you reimburse the individual for business/travel expenses?
- Do you supply the individual with needed tools or materials?
- Have you made a significant investment in facilities used by the individual to perform services?
- Is the individual free from suffering a loss or realizing a profit based on his work?
- Does the individual only perform services for your company?
- Does the individual limit the availability of his services to the general public?
- Do you have the right to discharge the individual?
- May the individual terminate his services at any time?
Worker’s Compensation and Independent Contractors
Independent contractors are not eligible for workers’ compensation coverage; employers are not required by state law to purchase coverage for independent contractors. However, some employers misclassify employees as independent contractors to avoid paying payroll taxes and workers’ comp premiums for them.
There is no set definition of the term “independent contractor” and as such, one must look to the interpretations of the courts and enforcement agencies to decide if in a particular situation a worker is an employee or independent contractor. In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE starts with the presumption that the worker is an employee. Labor Code Section 3357. This is a rebuttable presumption however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself. Consequently, it is necessary to closely examine the facts of each service relationship and then apply the law to those facts. For most matters before the Division of Labor Standards Enforcement (DLSE), depending on the remedial nature of the legislation at issue, this means applying the “multi-factor” or the “economic realities” test adopted by the California Supreme Court in the case of S. G. Borello & Sons, Inc. v Dept. of Industrial Relations (1989) 48 Cal.3d 341. In applying the economic realities test, the most significant factor to be considered is whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed.
- Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
- Whether or not the work is a part of the regular business of the principal or alleged employer;
- Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
- The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
- Whether the service rendered requires a special skill;
- The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
- The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
- The length of time for which the services are to be performed;
- The degree of permanence of the working relationship;
- The method of payment, whether by time or by the job; and
- Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.
“Build Higher Walls and Deeper Moats” – Hank Seaton’s 10 content points critical to independent contractor lease agreements:
- Lease-to-own is toxic/third party providers should provide lease-to-own equipment
- Require lessor to incorporate and warrant compliance with all labor laws
- Add indemnification language and require personal guarantee
- Add arbitration to avoid class action
- Choose your forum if possible
- Require worker’s compensation or occ/acc in contracts and purchase contingent worker’s compensation
- Based on your home state consider:
- Modified trip leases. Modified trip lease so that contractor is only working for carrier while load is being transported. Once delivered cannot be considered working.
- Freight forwarder model
- Avoid any indicia of control – make control a required safety or customer requirement (e.g. ELD)
- Be absolutely sure you identify every deduction and all compensation required by 49 CFR 376
- Add language of Mervyn v. Atlas Van Lines, Mervyn v. Atlas Van Lines, 2017 WL 1437159 (ND Ill. 2017) requiring contractor to contest settlement within 30 days or waive right to subsequently contest. This prevents contractor seeking back pay of 3 years.
- Add Section 14101(b) waiver of the parties’ regulatory duties or obligations with the exception of safety to the extent inconsistent with agreement
- Include an integration clause in the agreement and any job–specific addenda as specified by customer
Additional thoughts and tips that may be beneficial for Fleet Owners using contracted drivers:
- Lease your vehicle to the independently contracted driver for a set amount of money (rather than a percentage) per week -just as you would long term lease a vehicle from one of the major truck leasing operations. This guarantees your income and encourages the contracted driver to work.
- Do a “business to business” agreement with the contractor being a true business entity – such as an LLC, or Incorporated.
- Have your contractor agreement reviewed by a knowledgeable attorney.
- Do not “fund” the contractor’s business in any way.
- Keep up to date on changes within the industry by visiting and participating on MCRR.net
MCRR.net and the TEANA Mission and Purpose Statement
Motor Carriers for Regulatory Reform is a source of news, information and commentary about pending legislation, actions by the FMCSA and other federal and state regulations which affect the motor carrier industry and privately owned for-hire carriers. Its supporters are trade associations composed largely of small and medium sized motor carriers concerned with continuing proposed changes in state and federal regulations which show little interest or concern for advancing the National Transportation Policy. Our member associations encourage a competitively, privately owned interstate motor carrier marketplace and promote the ability of small carriers to compete.
AEMCA, TEANA, Auto Hauler Association of America support this website to provide administrative or legislative updates to provide:
• Current regulatory and legislative update
• A call for action and commentary forum
• A simplified communication procedure for carrier comment and correspondence to congressional leaders and regulators on topics of concern; and
• A searchable archive and blog of topics.
Participation in this forum and the use of its communication tools is open to non-members of the supporters and other trade associations who share common interests and goals.
Disclaimer: This blog is NOT intended to give legal advice, nor be a substitute for any training required by the Regulations.
Till the next blog, Thank you Transportation Professionals for all you do!. Please be safe!
©John Mueller, CDS, CDT, COSS