THE CONTINUING ASSAULT ON INDEPENDENT CONTRACTORS AND HOW TO SURVIVE

1. 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

2. “The Battlefield” & Legislative Case Law “Recon”

3. 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

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

5. 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]

6. ABC Test • In order to be an IC: • Worker is free from putative employer’s control; • Services are performed outside the putative employer’s place of business; and • Workers are customarily engaged in independently established trade or profession [Black’s Law Dictionary, Sixth Edition]

7. 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]

8. 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]

9. 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]

10. 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

11. 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

12. 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

13. Workers’ Compensation by State ME VT WA MT ND MN MI NH MA NY OR WI CT MI RI SD ID PA NJ WY IA MD OH NE IN DE NV IL WV VA UT CO KY KS MO NC CA TN OK AR SC AZ NM GA MS AL TX LA Favorable Statutory Law Favorable Case Law Difficult Statutory Law Unfavorable Case Law Conflicting Case Law FL

14. Legislative and Case Law ForecastWorkers’ 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) • Targetsmisclassificationofcommercialvehicledriverswho: • Possess a “state-issued” driver’s license; and • Contractor of 10,001 lbs. or heavier vehicle • Appliesfor 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

15. Legislative and Case Law ForecastWorkers’ 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

16. Legislative and Case Law ForecastWorkers’ 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

17. Legislative and Case Law ForecastWorkers’ Compensation Legislation/Amendments • Proposed IC Misclassification Laws • that Would Apply for WC Purposes • Washington EmployeeFairClassification 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

18. Legislative and Case Law ForecastWorkers’ 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

19. Legislative and Case Law ForecastWorkers’ 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

20. Legislative and Case Law ForecastWorkers’ 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

21. 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 • ICAOv. 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

22. 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 continued

23. Legislative and Case Law ForecastOther 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

24. Legislative and Case Law ForecastOther 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

25. Legislative and Case Law ForecastWorkers’ 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 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”

26. Legislative and Case Law ForecastRelated Case Law • 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

27. State Owner-OperatorExemption “Gotchas” Workers’ Compensation

28. State Owner-Operator Exemption “Gotchas”Workers’ Compensation Owner-Operator Exemptions

29. 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 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 application

30. State Owner-Operator Exemption “Gotchas”Workers’ Compensation • Colorado • Owner-operator exemption only applieswhen 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)

31. 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

32. 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

33. 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

34. 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

35. State Owner-Operator Exemption “Gotchas”Workers’ Compensation • Oklahoma • Owner-operator exemption does not apply when motor carrier leases equipment to owner-operator

36. 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.

37. 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

38. 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

39. 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.

40. 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.

41. Strategies for Avoiding Litigation

42. 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

43. 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

44. 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

45. 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

46. 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).

47. 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.

48. 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

49. 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

50. 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 non-driving activity. Ortega v. J.B. Hunt, 07-08336 (C.D. Cal. June 3, 2014).