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
1
“The Battlefield” &
Legislative Case Law
“Recon”
2
Primary Areas of Law
Impacted by IC Challenges
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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
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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
Borello Test
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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]
9
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 Model
IRS 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 Model
IRS 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
ME
VT
WA
MT
ND
MN
MI
OR
NH
WI
CT
MI
SD
ID
PA
WY
IA
NE
IL
KS
NJ
DE
WV
VA
UT
CO
RI
MD
OH
IN
NV
MA
NY
KY
MO
NC
CA
TN
OK
AZ
AR
SC
NM
MS
AL
GA
TX
Favorable Statutory Law
Favorable Case Law
Difficult Statutory Law
Unfavorable Case Law
Conflicting Case Law
LA
FL
13
Legislative and Case Law Forecast
Workers’ 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)
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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
14
Legislative and Case Law Forecast
Workers’ 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
15
Legislative and Case Law Forecast
Workers’ 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
16
Legislative and Case Law Forecast
Workers’ Compensation Legislation/Amendments
Proposed IC Misclassification Laws
that 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
17
Legislative and Case Law Forecast
Workers’ 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
18
Legislative and Case Law Forecast
Workers’ 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
19
Legislative and Case Law Forecast
Workers’ 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 Forecast
Unemployment 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 Forecast
Other 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
22
Legislative and Case Law Forecast
Other 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
23
Legislative and Case Law Forecast
Other 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 Forecast
Workers’ 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 owneroperator:
 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”
25
Legislative and Case Law Forecast
Related Case Law
Western Home Transport, Inc. v. Idaho Dept. of Labor (Idaho
Supreme Court Feb. 2014)
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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
26
State Owner-Operator
Exemption “Gotchas”
Workers’ Compensation
27
State Owner-Operator Exemption “Gotchas”
Workers’ Compensation
Owner-Operator Exemptions
Arkansas
Indiana
Minnesota*
North Dakota
Tennessee
Alabama
Iowa
Mississippi*
Oklahoma
Texas
Colorado
Kansas
Missouri
Oregon
Utah
Florida
Louisiana
Nebraska*
South Carolina
Washington
Maryland
North
Carolina*
South Dakota
Wyoming
Georgia
*Statute Does Not Provide Pure Owner-Operator Exemption
28
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 noncoverage”
 Provides mechanism for owner-operator to obtain workers’
compensation coverage under motor carrier’s policy without
otherwise affecting status as IC
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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
29
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 for
Avoiding Litigation
41
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
42
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
43
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
44
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
45
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).
46
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.
47
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
48
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
49
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 nondriving activity. Ortega v. J.B. Hunt, 07-08336 (C.D.
Cal. June 3, 2014).
50
Settlement Carrier Model
51
Overview of Conversion
 Traditional Model: authorized Motor Carrier
utilizes independent contractor owneroperators 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 SC
2. Satisfies different trade, occupation, or profession
prong
a) SC: For hire motor carrier
b) PB: Property broker
3. Satisfies exclusive work relationship prong
a) SC is for hire carrier that may haul without legal
limitation
4. Compliance with federal motor carrier law no longer
creates control
continued
54
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
requirements
6. Less legal and historical precedent for finding motor
carriers the employees of brokers/ freight forwarders
7. Expense of becoming a motor carrier creates favorable
fact of investment in tools of trade
8. SC must make independent business decisions regarding
motor carrier compliance
9. Placards identifying SC as the motor carrier equate to
holding out as independent business
10. Easily misapplied Federal Leasing Regulations no longer
relevant
55