With the federal and many state governments facing record deficits, legislatures and various governmental agencies have set their sights on the practice of Independent Contractor Misclassification as a way of adding billions of dollars to their revenues. It has been estimated that the misclassification of employees as independent contractors will cost the U.S. Treasury Department an estimated $7 billion in lost payroll tax revenue over the next 10 years. Recent audits by the California Employment Development Department (EDD) netted $140 million in additional tax revenues from companies that had misclassified 70,000 workers. Since 2009, multiple states have passed laws giving labor enforcement agencies more authority in auditing and penalizing companies that illegally classify employees as independent contractors. And although federal legislation aimed at enforcing improper classification has stalled in Congress, the 2011 federal budget appropriated $25 million to aid the Department of Labor in identifying and attacking employee misclassification. Similarly, the Internal Revenue Service is implementing a tax audit program that has also been fully funded in President Obama’s budget.
As if employers did not have enough motivation to take a second look at their use of independent contractors, plaintiff attorneys throughout the country have hastened the need for transportation companies to examine their employment practices with extensive class action litigation that has resulted in high stake verdicts and settlements in federal and state jurisdictions. While litigation was costly to the companies involved, it has also helped trucking and logistics companies identify employment and payment practices that contributed to findings that drivers were misclassified as independent contractors. Some of these practices have helped clear up the blurry line distinguishing employees from independent contractors. Among the policies that have led judges and juries to find that misclassification had occurred include:
- Drivers being required to adhere to company standards set forth in a guidebook
- Company advertising that it maintains its own fleet of vehicles
- Employers controlling the workload of the drivers and not allowing substitution of drivers
- Companies giving specific instructions to their drivers as to how to load, transport and unload shipments
- The practice of prohibiting drivers from using their own vehicles to provide services to other companies
- Internal employer evaluation of the performance of its drivers
- The requirement the drivers use certain routes on pick-ups and deliveries, drive trucks with the company logo and wear company uniforms
In short, companies that exercise control over the payment, routes, manner of delivery, and the ability of their drivers to work for other companies were deemed to be misclassifying employees as independent contractors. As a result, expensive settlements were reached to provide the drivers with lost workers' compensation, overtime, minimum wage, and other benefits. Ironically though, transportation companies have arguably benefited from the aggressive plaintiff litigation tactics since it has forced the industry to develop policies and procedures consistent with delegating control over duties to the drivers and preserving the independent contractor relationship. These practices include
- Allowing the independent contractors the freedom to accept or turn down loads with the exception that drivers need to be shut down when they are close to exceeding federal hours of service limits
- Avoiding the use of driver uniforms, universal driver policies and the common painting or logos on vehicles (especially in fleets with a combination of an employee and independent contractor drivers)
- Requiring drivers to maintain their own insurance, special permits and training records
- The updating and revision of owner-operator and lease agreements to make sure that the language reflects the intent of the parties to enter into an independent contractor relationship
- Making an independent contractor responsible for specific charges in vehicle lease agreements by correctly disclosing the charges pursuant to 49 CFR 376.12(h)
In sum, the transportation employers are faced with a difficult task of delegating control to drivers in an industry that certainly requires compliance with federal regulations. This inherent tension makes it wise for transportation employers to conduct mock audits as to the practices identified above. If an internal audit does reveal misclassification, employers do have options to remedy the situation:
1. Use the Safe Harbor provision of Section 530 of the Internal Revenue Code to provide an administrative settlement program, which is still more employer-friendly than many of the newer state laws.
2. Reclassify contractors who are clearly employees or, in the alternative, restructure the relationship via the use of an owner-operator agreement and the policy changes identified above.
3. Consult with local labor and employment attorneys who can assist in the creation and the management of the audit and provide ongoing guidance about the evolving legal landscape and the likelihood of further changes in federal and state law in this area.