Employee Misclassification in The Trucking Industry

By Michele Larrinaga

September 11, 2018

Worker classification issues affect businesses across the country, as the worker’s status as either employees or independent contractors, has an impact on many areas including federal tax, state wage and hour laws, workers’ compensation, and unemployment tax laws.

These employment classification issues are especially important when it comes to the trucking industry due to employers’ propensity to rely on independent contractor truck drivers to facilitate their businesses. Thus, changes to worker classification laws and case precedent stand to greatly impact the industry.

If a worker is classified as an employee, the employer bears the responsibility of paying federal Social Security and payroll taxes, unemployment insurance taxes and state employment taxes, providing workers’ compensation insurance, and complying with numerous state and federal statutes and regulations governing the wages, hours, and working conditions of employees.

If, alternatively, the worker is classified as an independent contractor, the worker is responsible for paying their entire portion of FICA and social security taxes and the employer is exempted from the costs and responsibilities associated with employee status.

Worker Classification Tests

The ever-growing rift in the worker classification realm stems largely from varying treatment among federal and state agencies, resulting in confusion about what standard applies and how particular jurisdictions address various situations.

“Multifactor” Test

For example, the IRS utilizes a “multifactor” test to determine whether a worker should be classified as either an employee or an independent contractor, focusing on three basic categories including:

  1. Behavioral control,
  2. Financial control, and
  3. Type of relationship involved.
“Right to Control” Test

Additionally, there is the “right to control” test, which is highly fact-specific and examines several factors to ultimately determine who has the right to control the means and manner of the worker’s performance.

“Economic Realities” Test

The “economic realities test” focuses on the economic reality of the relationship at hand by looking at 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.

“Relative Nature of the Work” Test

Further, various states utilize the “relative nature of the work test” or a modified version to evaluate whether the work performed is the type that normally could be carried out by an employee in the usual course of business and whether the activities performed are an “integral part” of the employer’s regular business.

“Borello” Test

The “Borello test,” a version of the economic realities/multi-factor test, has been cited in California case law and is mainly concerned with whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired, among other factors.

“ABC” Test

Lastly, various states have shifted to use of the “ABC test,” where, in order to be classified as an independent contractor the worker must be free from their employer’s control or direction in performing their work, the work performed is not in the normal course, occupation, trade, business or profession of the employer’s business, and workers are customarily engaged in an independently established trade or profession.

If one of the three prongs are not met, the worker should in theory be classified as an employee for all relevant purposes. The ABC test is evolving and being modified by recent case law and judicial interpretation.

State Turmoil Regarding Worker Classification

States have stirred up even more turmoil than usual in the world of worker classification issues, particularly concerning how workers are classified in the trucking industry. For instance, in Washington, trucking business owners must keep in mind that they need to be able to prove three things to properly treat their workers as independent contractors:

  • The worker is free from the employer’s control or direction in performing their work;
  • The work takes place outside the usual course of the business of the company and off the site of the business; and
  • Customarily, the worker is engaged in an independent trade, occupation, profession, or business.

If one of the prongs is not met, the owner will likely face scrutiny and runs the risk of having their workers reclassified as employees. There have been cases where independent contractors have been reclassified as employees when the trucking company failed to prove prong A listed above, because the court determined they had the right to control the method and details of driving services performed.

Courts in Washington have also historically focused on the owner-operators lack of federal operating authority, and their dependence on the trucking companies’ authority to complete their work.

In Oregon, courts care less about the owner-operators having their own federal operating authority, concluding that only possession of a valid state driver’s license was required, because the truck drivers were providing services to the trucking company’s customers, not providing transportation to the public.

As such, the drivers were not interstate motor carriers for which licensing authority would be required and were properly considered independent contractors under the state’s statute. This distinction is important because it shows the varying treatment among states, concerning seemingly identical facts.

Some trucking companies have shifted to use of a modified model, referred to as the Settlement Carrier Model, where carriers use a broker or freight forwarder authority to contract with an owner-operator working under their own motor carrier authority. Use of this model would be advantageous in states like Washington, where the trucker’s lack of motor carrier authority was highly determinative when analyzing worker’s classification.

Some states, including Illinois, have already seen similar models used, where the trucking company functions as a trucking brokerage entity of sorts, assisting owner-operators in starting their own trucking companies, and then leasing equipment and resources to them. There, courts determined the drivers were properly characterized as independent contractors.

To gain independent contractor status, some jurisdictions, including Washington D.C., focus on the driver’s ability to engage in multiple routes, sell their existing routes to other drivers without permission, and hire additional drivers.

Other jurisdictions, such as Indiana, consider independent contractor status if the driver receives remuneration solely upon a commission basis and is the master of their own time and effort. There, courts leaned toward independent contractor status if the trucking company functioned as an intermediary or middleman, pairing those who needed freight moved with drivers who were licensed to do the actual work.

This is another glimpse at a Settlement Carrier-type model, where the company is seen as distinct and apart from the owner-operators it hires.

Trucking companies should be cautious when trying to implement the Settlement Carrier Model, or something similar, because another court in Indiana determined that because the trucking company was also a registered motor carrier with the DOT, the use of transport and delivery licensed contractor drivers was determined to be within the company’s “usual course of business,” failing prong B of the ABC test.

Thus, companies should ensure they comply with the second prong of the ABC test if they want to implement something akin to the Settlement Carrier Model.

Dynamex and its Impact on Worker Classification

Worker classification issues have been exacerbated by the Dynamex decision issued on April 30, 2018, where the Supreme Court of California seemingly implemented a new, more stringent worker classification test for purposes of Industrial Welfare Commission (“IWC”) wage orders.

While the holding is limited to facts involving IWC wage order No. 9, it could potentially affect other areas of California law such as workers’ compensation, unemployment tax, state tax laws, special state laws, and could impact how other states deal with worker classification issues.

This case arose out of a suit brought by two individual delivery drivers against Dynamex Operations West (“Dynamex”), a transportation services company in the business of delivering packages and documents across the United States, based on the assertion Dynamex misclassified the workers as independent contractors, violating California’s wage order governing transportation, along with other provisions of California’s Labor Code.

The main issue decided in Dynamex ultimately dealt with whether or not the “suffer or permit to work” language in the wage order could be applied to worker classification issues to determine whether or not a worker should be defined as an employee or an independent contractor.

The court concluded that they agreed with the trial court’s determination that the definition of “employ,” containing the language “suffer or permit to work,” may be relied upon in evaluating worker classification for purposes of the obligations imposed by the wage order.

Dynamex’s main argument was based on the contention that a literal reading of the “suffer or permit to work” standard would undoubtedly characterize all individual workers who directly provide services to a business as employees, even enveloping individuals hired by a business who have traditionally been viewed as working in their own independent business.

The court agreed with Dynamex’s argument to a certain degree, but concluded that the language in the wage order has substantial bearing on the determination of a worker’s status as either an employee or independent contractor.

As such, the “suffer or permit to work” standard should be construed to encompass all individual workers who can reasonably be viewed as working in the hiring entity’s business, and should exclude traditional independent contractors who instead are viewed as working only in their own independent business.

The court listed various examples of work taking place within the hiring entity’s normal course of business, pointing to a bakery who hires cake decorators, or a seamstress who supplies the company with clothing, and examples of when the work is validly considered outside the usual course of business, including an electrician hired to install an electrical line, or a plumber hired to fix a leak. The court also cautioned that simply using the label independent contractor is not enough.

The court in Dynamex did not ultimately conclude that the drivers in question were employees as opposed to independent contractors; however, it makes clear the inclination to do so based on their class certification allowance and brief analysis of the ABC factors.

It is worth noting that Dynamex applies, in a limited manner, to a defined class of persons, that being single drivers who do not work for another company or for personal customers, and only discusses classification issues as they relate to wage order No. 9. However, as mentioned above, the case could affect other areas of the law and other states who look to the Supreme Court for guidance in an everchanging area such as employment classification.  

Alternate Model for Worker Classification

Post-Dynamex, companies are struggling to understand the case’s implications on the trucking industry, and how the holding will affect day-to-day operations. The Dynamex decision expanded the definition of employee in California, which may result in a decrease in utilization of owner-operators in the field, greatly impacting the trucking industry across the board.

Moving forward, businesses will likely change their practices to account for the recent decision’s implications. Thus, use of a new model, referred to as the “Settlement Carrier Model,” as briefly mentioned above, might be advantageous.

The Settlement Carrier Model focuses on the relationship between the carrier and owner-operator, where the motor carrier functions akin to a property broker and the owner-operator acts as the authorized motor carrier, then the ‘broker’ pays the motor carrier via settlements. Further, use of chargebacks for purchased goods could essentially be deducted from the driver’s weekly settlement payment.

This model has predominantly been used in the home delivery area of the transportation industry, so has not been involved in many multi-truck, multi-customer fleet operations to date. However, the potential for successful application within the larger trucking industry is feasible.

This contemporary model works to eliminate issues inherent in the ABC test by requiring the owner-operator to maintain their own motor carrier authority/license, functioning to minimize compliance control, and demonstrating the contractor/motor carrier is in an independently established trade or business.

This also works to satisfy other independent contractor prongs of the ABC test by evidencing a substantial investment in the driver’s business and a prominent holding out of their separate business by way of federal filings, placards, etc.

This model is not without complications; it brings an additional level of complexity based on the requirement that owner-operators maintain their own motor carrier license, as this involves permits, federal filings, state filings, etc. Further, utilizing the Settlement Carrier Model would result in customers dealing with property brokers as opposed to motor carriers, a change they may not be inclined to accept.

Also, lack of precedential case law on the model could deter companies and workers from implementation. That being said, in time, the Settlement Carrier Model could prove to be a useful tool in the trucking industry, especially for companies concerned with worker misclassification issues.


Disclaimer of Liability

The information provided here is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

Mazars USA LLP is an independent member firm of Mazars Group.

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