THE CONTINUING ASSAULT ON INDEPENDENT CONTRACTORS AND HOW TO SURVIVE Presented by: Gregory M. Feary Managing Partner Andrew J. Butcher Attorney 2014 ITLC/NAFC

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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”

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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

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Important Tests to Know Right to Control ABC Relative Nature of the Work Economic Realities Borello – CA specific IRS “20 Factor” Affordable Care Act

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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]

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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]

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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]

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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

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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

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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

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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

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Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments

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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


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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


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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


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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


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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

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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


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

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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

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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

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continued


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

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continued


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

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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

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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

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State Owner-Operator Exemption “Gotchas”Workers’ Compensation

Owner-Operator Exemptions

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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


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


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)

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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

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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

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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

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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

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Oklahoma Owner-operator exemption does not apply when motor

carrier leases equipment to owner-operator

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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.

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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

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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

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Wisconsin Owner-operator exemption only applies to bona

fide lease-operators when lease arrangement is with any person other than the carrier.

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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.

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Strategies forAvoiding Litigation

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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

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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

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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

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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

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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).

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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.

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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

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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

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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

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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

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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

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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

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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

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Documents

THE CONTINUING ASSAULT ON INDEPENDENT CONTRACTORS AND HOW TO SURVIVE Presented by: Gregory M. Feary Managing Partner Andrew J. Butcher Attorney 2014 ITLC/NAFC