How Independent Are Owner-Operators?

Despite the widespread treatment of drivers as independent contractors and written agreements making clear drivers are not employees, an increasing number of trucking companies face liability for claims they have violated federal and state laws by misclassifying drivers. Although there are strong financial incentives for companies to classify drivers as independent contractors, challenges to worker classification are rising, and liability for misclassification can be substantial.

For the government, misclassification of drivers means employers fail to withhold taxes and other deductions and fail to pay the employer’s share of Social Security contributions. For drivers, status as non-employees means they are not entitled to overtime pay for work that exceeds 40 hours a week and do not participate in certain of the employer’s benefit programs.

Class-action lawsuits against some companies have resulted in million-dollar settlements and have spawned additional private lawsuits and actions by various states’ attorneys general. The Obama administration has made worker misclassification a priority, and the IRS and Department of Labor last September announced a memorandum of understanding to share data and coordinate efforts to end worker misclassification.

Eleven states have signed similar MOUs. Proposed legislation in various states would create a presumption that drivers are employees, and legislation introduced in the House and Senate this year would require harbor drayage drivers to be employees. The perceived misclassification of port drivers was even one of the targets of the Occupy movement’s effort to shut down West Coast ports in December.

The trucking industry is a particularly attractive target for worker misclassification claims because extensive regulations compel some degree of control over drivers, and drivers provide the precise service trucking companies offer their customers, two facts advocates rely upon to argue drivers are really employees.

Unfortunately, there’s no uniform test to determine whether owner-operators are properly classified as independent contractors. Although state and federal courts and agencies apply a variety of tests, all of the tests are fact-specific and involve numerous factors, including:

-- Whether the company controls the manner in which the work is performed.

-- Whether the company furnishes the tools, supplies or materials necessary for the work.

-- Whether the worker is prohibited from using substitutes or assistants.

-- Whether the work is a part of the regular business of the company.

-- Whether the company can discharge the worker at any time.

-- Whether the parties believe they have an employee-employer relationship.

-- Whether the worker has worked with the company for a long time.

Applying those and other factors, advocates argue drivers are employees because trucking companies often require drivers to:

-- Attend mandatory training classes.

-- Work exclusively for the company.

-- Maintain specific licenses, permits and insurance.

-- Wear a uniform and display company logos on their cab.

-- Get repairs from specified repair technicians.

-- Purchase or lease vehicles meeting detailed specifications.

-- Lease or purchase vehicles from an affiliate of the company.

-- Maintain regular communication with dispatch and advise if they will miss scheduled appointments at warehouses, if free time is expiring, or if they will incur detention time.

Some companies also may instruct drivers how to load and unload shipments; bar substitute drivers; specify when drivers must pick up and deliver loads; dictate specific logs to be maintained and how they must be reported; and provide detailed policies and instructions on maintenance, safety and drug and alcohol policies.

Many of those “facts” are common in the industry, and if companies don’t thoughtfully implement policies to comply with recent rule changes and to incorporate new technologies, they may unwittingly lend support to misclassification claims.

For example, if companies aren’t careful about how they implement policies and provide training to monitor and improve unsafe driving, driver fitness, vehicle maintenance and other rating factors under the federal CSA program, the additional supervision and controls could provide a basis for claiming the drivers are employees.

Similarly, clean-trucks programs, which have resulted in many drivers leasing compliant trucks from trucking companies or their affiliates, have further complicated the independent contractor analysis.

The growing use of GPS truck tracking systems may be considered another form of supervision and control, further undercutting independent contractor status.

Given the financial risks of misclassification, trucking companies should review existing policies and procedures, assess their exposure and take appropriate action if necessary.

Companies that identify only a few problem factors in their relationship with owner-operators may be able to implement changes to buttress the independent contractor status. Other companies may determine the exposure to risk is too large, and may decide to participate in the IRS’s recently announced Voluntary Classification Settlement Program, which allows companies to reclassify workers, avoid penalties and interest and pay a reduced percentage of wages. Other companies seeking to maintain the owner-operator model may choose to engage leasing companies, through which they can lease drivers.

Doing nothing, however, is not an option. Companies should assume their practices will be analyzed, sooner or later, by the government or a claimant’s attorney. The time to correct deficiencies is before the government notice or lawsuit arrives.

Samuel Samaro and Sean Mack are with the Pashman Stein law firm in Hackensack, N.J. Contact them at ssamaro@pashmanstein.com and smack@pashmanstein.com.

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