March 2014 Monthly Independent Contractor Compliance and Misclassification Update

March 2014

In the Courts

  • LOGISTICS COMPANY HIT WITH $2.2 MILLION IC MISCLASSIFICATION CITATION. Pacer Cartage, which was recently acquired by logistics giant XPO, was ordered by the California Labor Commissioner’s Division of Labor Standards Enforcement (DLSE) to pay $2,214,496.39 in back pay, attorney’s fees, and interest for reportedly having misclassified seven short-haul drivers as independent contractors instead of employees. The order, released to the public on April 2, 2014, found that Pacer Cartage, a drayage company, “knew or should have known” that the drivers were employees rather than independent contractors.
  • HOME IMPROVEMENT INSTALLERS DENIED CLASS CERTIFICATION. Massachusetts federal district judge denies class certification to a group of installers suing home improvement retailer, Lowe’s Home Centers, under state law and the Fair Labor Standards Act for allegedly misclassifying them as independent contractors. Although the installers had signed similar contracts with Lowe’s, the court found, among other things, that the analysis of whether each installer was free from direction and control and whether each had an independently established business required individualized inquiries. The installers are free to pursue their claims individually. Magalhaes v. Lowe’s Home Centers, Inc., No. 1:13-cv-10666 (D.Mass. March 10, 2014).
  • $905,000 SETTLEMENT OF CLASS ACTION BROUGHT BY BAKERY DRIVERS. A federal judge in Pennsylvania approved a $905,000 settlement in a collective action between food distribution company and over 700 independent operator drivers delivering bakery goods for the company. The allegations against Bimbo Foods Bakeries Distribution, owner and distributor of Sara Lee, Entenmann’s, and Thomas’ baked goods, included violations of the Fair Labor Standards Act for unpaid minimum wage and overtime compensation due to misclassification of the drivers as independent contractors. Scott v. Bimbo Bakeries USA, Case No. 2:10-cv-03154 (E.D. Pa. March 5, 2014)(MSG).
  • WYOMING SUPREME COURT HOLDS THAT CASE MANAGER IS AN EMPLOYEE, NOT AN IC. The Wyoming Supreme Court upheld an administrative agency’s determination that an injured case manager working for a company that provides living assistance services to persons with developmental disabilities was entitled to workers’ compensation benefits under state law because she was an employee and not an IC. The court, ruling under the Wyoming Workers’ Compensation Act’s “ABC” test, found that Circle C Resources had failed to establish each of the three requirements that (1) the case manager was free from direction and control; (2) she represented her services to the public as a self-employed individual or independent contractor; and (3) she had the ability to select a substitute to perform her services. Circle C Resources, Inc. v. Kobielusz, No. S-13-0058 (2014 WY 35) (Sup. Ct. Wyo. March 11, 2014).
  • NEW JERSEY GETTING CLOSER TO IC TEST IN WAGE CLAIMS. The New Jersey Supreme Court heard arguments on March 17, 2014 as to what test to use in determining whether a worker is an IC or an employee under the state’s wage and hour laws. In May 2013, the U.S. Court of Appeals for the Third Circuit requested that the New Jersey Supreme Court advise it of the test to be used for determining if a worker is an IC or employee in a class action lawsuit by delivery drivers against Sleepy’s. Finding that “there are at least four distinct employment tests that have been applied under New Jersey law in other contexts (including unemployment, whistleblowing and tort claims) to determine independent contractor/employee status,” the Third Circuit certified the following question: “Under New Jersey law, which test should a court apply to determine a plaintiff’s employment status for purposes of the New Jersey Wage Payment Law…and the New Jersey Wage and Hour Law?” Hargrove v. Sleepy’s, LLC, Nos. 12-2540 & 12-2541 (3d Cir. May 2013) and Case No. 072742 (Sup. Ct. N.J. 2014).
  • FED EX GROUND PAYS $5.8 MILLION TO SETTLE MAINE IC MISCLASSIFICATION LAWSUIT. A federal judge in Maine approved a class action settlement of $5.8 million between FedEx Ground and drivers who had alleged that FedEx had misclassified them as ICs instead of as employees. As noted in our prior blog post of March 21, 2014, the federal court lawsuit alleged violations of federal and Maine wage and hour laws, including claims that FedEx Ground improperly denied the drivers’ overtime pay for hours worked over 40 in a workweek, improperly made deductions from the drivers’ pay, and improperly required the drivers to pay for their own expenses. Scovil v. FedEx Ground Package System, Inc., d/b/a FedEx Home Delivery, No. 1:10-cv-00515-DBH (D. Maine, March 14, 2014).

On the Legislative Front 

  • NEW YORK ENACTS COMMERCIAL GOODS TRANSPORTION INDUSTRY FAIR PLAY ACT. Governor Cuomo signed a bill on March 17, 2014 extending the effective date of a new IC misclassification law in New York covering the transportation and delivery industries. As of April 10, 2014, the law of IC misclassification in New York State will change dramatically in the transportation and delivery of commercial goods industry from the common law test to a more stringent standard for establishing IC status for drivers of commercial vehicles with a GVWR of more than 10,000 pounds. Our latest blog post on the topic tells companies how they can comply with the new law. An earlier blog post includes a detailed article co-authored by one of the co-publishers of this legal blog appearing in the New York Law Journal.
  • NEW JERSEY LEGISLATURE RE-INTRODUCES TRUCK OPERATOR IC LAW. A New Jersey Assemblyman re-introduces the Truck Operator Independent Contractor Act (A2868, S992), a bill similar to the one vetoed by Governor Christie last May. The proposed bill would create a presumption that parcel (small package) delivery and drayage truck drivers are employees and not independent contractors unless they can satisfy a three-part ABC test. The bill also provides substantial civil and criminal penalties for the misclassification of such drivers. Although last year’s bill passed in the Assembly and Senate in May, the votes were along party lines, with Democrats favoring the bill and Republicans opposed. Governor Christie vetoed the bill because, in his view, it would discourage small business ownership in the parcel and drayage industries and hamper the New Jersey economy.  See prior blog post on September 9, 2013.

Regulatory and Enforcement Initiatives 

  • U.S. WAGE HOUR DIVISION FINDS JANITORIAL FIRM MISCLASSIFIED CUSTODIANS.  The United States Department of Labor’s Wage and Hour Division (WHD) obtained the agreement of Empire Janitorial Sales and Services, Inc., a janitorial service subcontractor based in Metairie, Louisiana, to pay $277,000 in back wages to 233 janitorial services workers at the New Orleans Convention Center and other locations.  The WHD found the custodians were misclassified as independent contractors in violation of the Fair Labor Standards Act’s minimum wage, overtime, and recordkeeping provisions. According to a March 25, 2014 press release, the WHD also found that Acadian Payroll Services was a joint employer, failed to establish a seven-day workweek, and did not maintain proper records of weekly hours worked by the janitorial workers. The monetary penalties were paid by the janitorial subcontractor, and both companies agreed to future compliance with the FLSA.
  • PRESIDENT’S BUDGET INCLUDES FUNDING FOR PREVENTING AND DETECTING IC MISCLASSIFICATION. President Obama’s 2015 Budget shows no letup in the federal government’s crackdown on misclassification of employees as ICs. As noted in our blog post of March 4, 2014, the fifth of six “funding highlights” listed in the section of the Budget covering the Department of Labor is “Increasing support for agencies that protect workers’ wages and overtime pay, benefits, health and safety, and investing in preventing and detecting the misclassification of employees as independent contractors.”
  • IRS SEEKS TO PROMOTE SS-8 PROGRAM. The IRS launches a telephone forum to facilitate its Determination of Worker Status Program (SS-8 program) designed to help educate employers about the proper way to classify workers as ICs or employees, according to John Tuzynski, Employment Tax Policy Chief, IRS Small Business/Self-Employed Division. The launching of the phone forum is in response to the June 2013 report issued by the Treasury Inspector General for Tax Administration (TIGTA) that urged the IRS to take steps to encourage employer compliance with classification determinations reached by the SS-8 program.
  • IRS SETS GOALS TO CATCH WORKER MISCLASSIFICATION. Janine Cook, Deputy Division Counsel/Deputy Associate Chief Counsel of the Tax Exempt and Government Entities Division of the IRS, reportedly said at the American Payroll Association Capital Summit conference on March 10, 2014 that employers are “more likely to get a positive result sooner” if they work in conjunction with the IRS in changing their classification processes and coming into compliance on a going forward basis. She further stated: “Obviously there’s a cost, there’s a tax liability and there could be various penalties and things depending on the situation, but when we’re working with them in exam, even if it does come to litigation, a lot of what’s thought is: “is there a way we can get to resolution with compliance going forward?’”
  • NLRB SETTLEMENT INCLUDES ACKNOWLEDGMENT THAT PORT DRIVERS ARE EMPLOYEES AND NOT ICs.  On March 20, 2014, Pacific 9 Transportation Inc. settled an unfair labor practice case by agreeing to post a notice effectively acknowledging that its that port truckers working for the Los-Angeles area freight hauling company had been misclassified as independent contractors instead of employees.  By this settlement, Pacific 9 essentially concedes that the drivers are employees under the National Labor Relations Act, thereby entitling the drivers to the right to be represented by a labor union if they so choose.

Published by Richard Reibstein, Lisa Petkun, and Andrew Rudolph.  Compiled by Janet Barsky.

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How to Comply with the New York Transportation Law Covering Independent Contractor Drivers, Which Becomes Effective on April 10, 2014

As set forth in a prior blog post, April 10, 2014 is the new effective date for compliance with the New York Commercial Goods Transportation Industry Fair Play Act – although many commentators have advised readers that the effective date was March 10, 2014. That effective date changed when Governor Cuomo signed a bill (A.8451-2013) on March 17, 2014 making technical corrections to the law and extending the effective date by another 30 days.

The law’s name is not particularly informative; the statute is, plain and simple, a law seeking to make it more difficult for a company to maintain an independent contractor (IC) relationship in New York with drivers transporting goods in trucks with a Gross Vehicle Weight Rating (GVWR) of more than 10,000 pounds.

We noted in a prior blog post that this law is likely to spur similar legislation in other jurisdictions, inasmuch as New York is considered the leading state in the nationwide crackdown on IC misclassification.

As set forth in our comprehensive article on the new law, which was first published in the New York Law Journal while the bill was still awaiting the Governor’s signature, the Fair Play Act is a sea-change for businesses using ICs to transport commercial goods in New York. The new law also includes considerable penalties for those who have not placed themselves in compliance.

Some companies may be able to continue to use ICs in compliance with the new law. IC compliance with the Fair Play Act is not, however, something that can be accomplished overnight, and there are no “quick fixes” or one-size-fits-all solutions that make sense or provide much if any comfort for the overwhelming number of businesses that currently use ICs to transport commercial goods.

How to Attain IC Compliance with the Fair Play Act

So, how can a company continue to use ICs and comply with the new law? Three words: Restructure, re-document, and re-implement.

1. Restructuring the IC relationship with drivers.

Almost all businesses using an IC model with drivers will have to restructure their IC relationships. Some restructuring may only need be modest in scope, but most companies need substantial IC restructuring. However, IC restructuring is readily attainable for many companies, without inflicting damage to the framework of the company’s successful business mode, by use of a process such as IC Diagnostics™, which works in sync with proprietary compliance tools such as 48 Factors Plus™.

There are two IC tests set forth in the new Fair Play Act. Compliance with either is sufficient. The first is the 3-factor “ABC” test and the second is the 11-factor “Separate Business Entity” test.  Both tests require all the factors to be satisfied.  For those unfamiliar with the factors in both test, they are described in detail in the New York Law Journal article and available online.

Both tests, though, contain traps for the unwary and insurmountable hurdles for those companies either wedded to doing things the way they have been done in the past or not willing to be creative in satisfying the strict requirements.

Although the B and C prongs of the ABC test contain nearly identical language to that found in a number of other states’ ABC laws, such language has been interpreted differently by courts in different states, and there is no body of law yet developed in New York to guide businesses and the courts. Thus, presumed compliance with the ABC test may be risky, as it requires one to anticipate the manner in which the New York courts will construe similar statutory language that has led courts in other states to vastly different interpretations. In contrast, the Separate Business Entity test, while still challenging to satisfy all 11 requirements, may be the better choice for a number of companies, as it contains terms that are less likely to be subject to ambiguity.

Restructuring can typically be accomplished in most situations with creative solutions proven to be effective in the transportation related industries. One word of caution: There is no guarantee that every state or federal agency or court will give a stamp of approval to a restructured IC relationship. Our experience with the New York Department of Labor regulators, however, has been uniformly positive in their approach to companies that take bona fide steps to get into IC compliance.

2. Re-documentation of the restructured IC / separate business entity relationship.

Once an effective plan for restructuring has been set in motion, the next step is re-documenting the IC relationship, using state-of-the-art contractual language.

Although there are only three factors in the ABC test and 11 factors in the Separate Business Entity test, documentation is not achieved or legally effective by reciting those factors in an agreement intended to satisfy the ABC and/or Separate Business Entity tests. Typically, well over 48 IC factors are addressed in drafting the IC or separate business entity agreement, using the 48 Factors-Plus™ proprietary tool as a guide.

The new documented agreement must also be consistent with and articulate the restructured relationship. It should also be expressed in such a manner as to be consistent with the ways in which the new relationship is implemented. Re-documentation, therefore, typically requires a considerable amount of interaction between management and the attorney(s) drafting the documentation. This interactive process not only ensures that the documentation is consistent with the structure, but facilitates a refinement of the restructured relationship and anticipates the final step: re-implementation.

3. Re-implementation of the restructured and re-documented relationship.

This last step can present challenges to transportation industry businesses due to the amount of regulation involved in interstate and intrastate transportation, motor vehicle, insurance, and tax laws. Anticipating such issues at the time of restructuring and re-documenting is the key. Delays in effectuating only one or two elements of the new relationship can hold up implementation.

Transportation industry businesses must also ensure that what is set forth in the IC / separate business entity agreement will be implemented in the field as documented and does not create one or more empty recitals and misstatements of the relationship. Those oversights, which are not uncommon, can provide arguments to class action lawyers and government regulators that the IC / separate business entity agreement is a fraudulent and misleading document.

Other steps in the re-implementation process may include reviewing and revising company operating manuals and procedures; documenting the implementation of certain provisions in the IC / separate business entity agreement; educating those at all levels of management as to the general nature and specifics of the restructured relationship; and putting safeguards in place to ensure continued and sustained conformity with the legal requirements.

Takeaways and Conclusion

Because few companies that have historically used ICs to deliver or transport commercial goods to their customers can satisfy either the ABC or the separate business entity tests, prudent companies are taking steps to minimize their risk of Fair Play Act liability and attain compliance.

While most of the 11 prongs in the separate business entity test are rather straightforward, a number of them require considerable familiarity with independent contractor compliance law in order to formulate a structure that will comfortably meet the requirements of each of the 11 prongs.

The 90-day period before the law becomes effective is fast approaching: it arrives on April 10, 2014 (depending on how the days are counted, which is not always a matter of simple arithmetic). Thus, any commercial goods transportation contractor that wishes to retain its IC or separate business entity relationships with drivers delivering or transporting goods to its clients should promptly seek to attain compliance with the Fair Play Act.

Many transportation and delivery businesses affected by this new law in New York also operate in other states. Class action lawsuits against transportation companies misclassifying drivers as ICs have mushroomed in the past few years, and both state and federal governmental regulators have likewise been active in cracking down on delivery companies that are regarded as misclassifying drivers as independent contractors under applicable state and federal laws. The New York Commercial Goods Transportation Industry Fair Play Act may be a useful alert for such businesses to determine if they need to enhance their independent contractor compliance throughout their network of drivers in states across the country.

By Richard J. Reibstein and Janet B. Barsky

© 2014 Independent Contractor Compliance Legal Blog and Richard J. Reibstein

All Rights Reserved

Posted in IC Compliance

FedEx Ground Settles Drivers’ Independent Contractor Misclassification Case in Maine for $5.8 Million

141 drivers classified as independent contractors by FedEx Ground will receive $5.8 million in settlement of their misclassification lawsuit brought under federal and Maine wage and hour laws.  The amount includes their class counsels’ legal fees of $1.9 million.  Scovil v. FedEx Ground Package System, Inc., d/b/a FedEx Home Delivery, Case No. 1:10-cv-00515-DBH (D. Maine, March 14, 2014).

The federal court lawsuit in Maine alleged that the FedEx Ground improperly denied the drivers’ overtime pay for hours worked over 40 in a workweek, improperly made deductions from the drivers’ pay, and improperly required the drivers to pay for their own expenses.  There were seven named plaintiffs, but only two of the seven signed the settlement agreement, arguing that the amount being paid by FedEx Ground should have been even more substantial.

The federal court judge noted that if the drivers’ case was tried, damages could have topped $10,000,000, with the potential for double damages under state and federal wage laws.  The court nonetheless found that the proposed settlement of $5.8 million was fair, reasonable, and adequate.

In approving the settlement last week, the court acknowledged that “the proposed settlement…is clearly a compromise that discounts to some degree…the drivers’ total claims” but is a “fair trade-off for the uncertainties of trial and appeal and a prolonged delay in receiving any money. In that regard, the court noted that FedEx Ground has won some independent contractor misclassification cases and lost others.  The court also found that the amount (one-third of the $5.8 million settlement) sought by the lawyers for the class for counsels’ legal fees, costs, and expenses was reasonable.

Analysis and Takeaways

FedEx Ground and its drivers have been at the center of the independent contractor misclassification issue for many years. FedEx has lost in such states as California, Illinois, and Massachusetts; won under the state law of Kansas and the federal National Labor Relations Act; won before the IRS (which reportedly concluded that the drivers were independent contractors but that FedEx was entitled to the benefit of safe harbor relief under Section 530 of the Revenue Act of 1978), and settled cases with state Attorneys General, including those in Montana and Massachusetts.  Dozens of cases brought by class action lawyers and other states’ Attorneys General remain pending, including a case reportedly going to trial in Missouri.

In addition to the cost of the settlements as well as the judgments rendered against FedEx Ground, the company has incurred very considerable legal fees for its own lawyers defending these legal proceedings around the country.  Few businesses can afford to defend themselves against a rash of lawsuits or afford to pay multi-million dollar judgments and settlements.

How can a business, which makes use of independent contractors, avoid or minimize independent contractor misclassification liability? As noted in our White Paper, there are alternatives that businesses can take to avoid or minimize such misclassification liability, including restructuring, re-documenting, and re-implementing their business models; voluntary or government-sponsored reclassification; or redistribution of independent contractor through the use of a workforce management or staffing firm.

Most businesses built on an independent contractor model or that use a substantial number of 1099ers prefer to maintain their business model by opting for the first alternative: restructuring their independent contractor relationships to enhance compliance with applicable state and federal labor, tax, and employee benefit laws.  This alternative can be accomplished through the use of IC Diagnostics™, a process developed, refined, and improved over a period of over four years, using proprietary diagnostic tools to assess the level of compliance and guide the restructuring, re-documentation, and re-implementation to minimize exposure to liability under various federal and state laws.

The same proprietary tools used to enhance independent contractor compliance are also key tools used in defending administrative and court challenges to a company’s worker classifications.  The cost of defense, however, typically far outweighs the cost of avoiding lawsuits in the first place.  While businesses that operate with an enhanced level of independent contractor compliance cannot completely avoid scrutiny by governmental regulators and plaintiffs’ class action counsel, it is a given that the higher the level of compliance, the less likelihood that the business be subject to legal challenges at all.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

Posted in IC Compliance

Governor Cuomo Signs Bill Extending Effective Date of New Independent Contractor Law in New York for Transportation and Delivery Industries

After months of uncertainty in the second half of 2013 and the first three months of 2014, the law of independent contractor misclassification in New York State will change in the transportation and delivery of commercial goods industry on April 10, 2014.  Yesterday, March 17, 2014, Governor Andrew Cuomo signed A.8451-2013 that made “technical corrections to the New York State Commercial Goods Transportation Industry Fair Play Act”.  The new bill, also called a chapter amendment, extended the effective date of the law from 60 days after it was previously signed by the Governor to 90 days after he signed the original law on January 10, 2014. 

The new law affects transportation and delivery companies in New York that classify as independent contractors certain drivers that deliver commercial goods in the state. Once effective, the new law will drastically change the legal test in New York for determining if such drivers are independent contractors or employees – requiring far more effort for legitimate businesses in these industries to create and maintain independent contractor relationships in the state. 

New York has been at the forefront of independent contractor misclassification initiatives, and it is likely many other states will consider enacting similar laws for the transportation and delivery industry in 2014.

Final Legislative Update

The original statute was signed by Governor Cuomo on January 10, 2014 and had an effective date of 60 days after it became law. Many commentators have stated that the law would go into effect on Tuesday, March 11, 2014.  However, beginning in mid-January 2014, new bills were introduced by the State Assembly and Senate that would “make technical corrections to the New York state commercial goods transportation fair play act.” One such change is that the law would take effect 90 days after it shall become law, or April 10, 2014.  That bill was passed by both houses of the New York Legislature and delivered to the Governor on March 10. 

Yesterday, the technical corrections bill was finally signed by the Governor. 

The Proposed Changes to the Fair Play Act

As noted in our prior blog post on this new law, most of the proposed changes are  “technical” in nature, but a few are more akin to truly substantive changes to the law, including the scope and coverage of the Fair Play Act.

First, the original law covers companies and firms that compensate a driver who possesses a state-issued commercial driver’s license, which in New York is generally needed for driving vehicles with a gross vehicle weight rating over 26,000 pounds.  The new law now covers any driver with any state-issued driver’s license where the driver operates a motor vehicle “as defined in subdivision four-A of section two of the [New York] Transportation Law.”  Subsection 4-A defines a “Commercial motor vehicle” as including a motor vehicle used in intrastate or interstate commerce when the vehicle has a gross vehicle weight rating of over 10,000 pounds.

A second non-technical change is that the proposed technical corrections make explicit that the driver will be presumed to be an employee if his services are not reported on a Form 1099, if required by law, even if he otherwise meets the other tests for independent contractor or separate business entity status.

A third and final non-technical change is that the commercial goods transportation contractor cannot require approval of any employees that the driver may hire.

How the Fair Play Act Changes the Landscape of the Transportation and Delivery Industry in New York

This article below details the changes that are forthcoming in New York’s transportation and delivery industry. This article is reprinted with permission from the November 27, 2013 edition of the New York Law Journal ©2013 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact ALMReprints.com, 877.257.3382 or reprints@alm.com.

MAJOR CHANGE IN THE LAW OF INDEPENDENT CONTRACTORS: THE NEW YORK COMMERCIAL GOODS TRANSPORTATION INDUSTRY FAIR PLAY ACT

By Richard J. Reibstein and Janet B. Barsky of Pepper Hamilton LLP.  Mr. Reibstein is co-chair of Pepper’s Independent Contractor Compliance practice, an interdisciplinary working group of over 30 labor and employment, tax, employee benefits, and class action lawyers.  Ms. Barsky is a member of Pepper’s IC Compliance team.  The technical changes to the law are noted in [brackets] in the article below.

A new bill that will significantly limit the use of independent contractors to deliver commercial goods in New York is awaiting signature by Governor Andrew Cuomo. [Authors’ note:  The bill was signed into law by the Governor on January 10, 2014; he then returned it to the Legislature to make proposed “technical amendments” to the original bill that passed the Legislature in 2013.  Those technical changes were passed by the Legislature in Assembly Bill A8451-2013 and signed into law by the Governor on March 17, 2014. ]  Businesses that currently treat as independent contractors drivers that deliver commercial goods to their customers [while operating vehicles with a gross vehicle weight rating (GVWR) or gross combination rate of more than 10,000 pounds, according to the technical amendments] will have to reclassify such individuals as employees unless the drivers meet one of two tests. Both of these tests are far more challenging to meet than the common law test currently used in New York to determine if a worker is an employee or independent contractor.

The New York State Commercial Goods Transportation Industry Fair Play Act (S5867-2013; A5237b) was passed with bipartisan support by both the Senate and Assembly. It purportedly was passed in view of the perceived misclassification of many drivers as independent contractors instead of employees. Instead of simply increasing the penalties for misclassification and/or enhancing regulatory enforcement of the current common law test for independent contractors (as some states have done), the New York Legislature chose to join a number of other states in enacting a new statutory test that will considerably reduce the number of independent contractors delivering commercial goods in New York.

Overcoming Presumption

The new law will create a presumption that any person [operating a commercial motor vehicle with a GVWR of more than 10,000 pounds, according to the technical amendments] performing transportation services of commercial goods for a “commercial goods transportation contractor” will be classified as an employee and not an independent contractor unless one of two tests is met.1  The first is a three-pronged requirement frequently referred to as the “ABC test,” which is used by well over a dozen states in their wage, unemployment, and/or Workers’ Compensation laws. Under that test, the business treating a driver as an independent contractor must show three things: (A) the driver is free from control and direction in performing the job, both under his or her contract and in fact; (B) the transportation/delivery service is “performed outside the usual course of business for which the service is performed;”2 and (C) the driver is “customarily engaged in an independently established trade, occupation, profession, or business” involving the transportation or delivery of commercial goods.3 The three factors are conjunctive; they must all be shown to satisfy the ABC test.

The second test has 11 prongs and, like the ABC test, all of these factors must be met to overcome the presumption that drivers of commercial goods in New York are employees and not independent contractors. This test is referred to as the “separate business entity” standard, which is applicable to any sole proprietorship, partnership, corporation, [limited liability company, association, firm, or other business entity, according to the technical amendments] or other business entity.4 Some of the more challenging of the 11 factors that must be shown by a commercial goods transportation contractor are that the separate business entity with which it has contracted to deliver or transport commercial goods:

  • has a substantial investment of capital in the business entity, including but not limited to ordinary tools and equipment
  • owns or leases the capital goods (which presumably means the delivery vehicle)
  • gains the profits and bears the losses of the business entity
  • has the option to [changed to “may”, according to the technical amendments] make its services available to the general public or [others in the business community, according to the technical amendments]
  • includes its income from the business on the appropriate schedule on its federal income tax return [changed to “provides services reported on a Federal Income Tax Form 1099, if required by law, according to the technical  amendments]
  • performs its services pursuant to a written contract that identifies the relationship with the commercial goods transportation contractor as involving independent contractors or separate business entities, and
  • [hires its own employees, if needed, “without the commercial goods transportation operator’s approval, subject to applicable qualification requirements or federal or state laws and regulations,” according to the technical amendments, and] pays any employees it may hire without reimbursement from the commercial goods transportation contractor and reports the wages of any such employees to the IRS.5

Penalties, Liability

The new law, which is to be codified, once enacted, as new Article 25-C of the New York Labor Law, includes substantial civil penalties of up to $1,500 for a first violation and up to $5,000 for a subsequent violation within a five-year period.6 Where the misclassification is “willful,” the civil penalties increase to $2,500 “per misclassified employee” for a first violation and up to $5,000 “per misclassified employee” for each subsequent violation within a five-year period.7 A willful violation occurs where a commercial goods transportation contractor “knew or should have known” that its conduct was prohibited.8

The Commercial Goods Transportation Industry Fair Play Act will also impose criminal liability upon employers who are found to have willfully violated the new law.9 A first offense is punishable as a misdemeanor and may include imprisonment of up to 30 days or a fine of up to $25,000. A subsequent offense exposes the employer to up to 60 days’ imprisonment or a fine not to exceed $50,000.

Where the commercial goods transportation contractor is a corporation, each shareholder owning 10 percent or more of the company and each officer “who knowingly permits the corporation to willfully violate” the new law shall be personally liable for the civil and criminal penalties upon conviction.10 In addition, any “substantially owned affiliated entity” shall be subject to the same civil penalties as the commercial goods transportation contractor.11

The above penalties are in addition to those that may be imposed under the unemployment, workers’ compensation, and tax laws for misclassification of employees as independent contractors.12

Under the new law, once enacted, it will be a violation for an employer or its agent to retaliate against any person through discharge or any other manner in the terms and conditions of his/her employment for exercising any rights provided under the law, including making complaints or for providing any information to a public body conducting an investigation under the law.13

Effective Date and Notices

The Commercial Goods Transportation Industry Fair Play Act will become effective 60 days after signature by the governor.14  [The effective date has been changed to 90 days after enactment of the 2013 law that the Governor signed on January 10. 2014, according to the technical amendments, or April 10, 2014.]  By that date, each commercial goods transportation contractor must post in a conspicuous location on its site a notice prescribed by the Labor Commissioner.

By law, the prescribed notice will describe:

  • the responsibility of independent contractors to pay taxes required by state and federal law
  • the rights of employees to Workers’ Compensation, unemployment benefits, minimum wages, overtime, and other federal and state workplace protections
  • the protections against retaliation, and
  • the penalties for failure to properly classify individuals under the law.15

Analysis and Takeaways

The first test for establishing independent contractor status under this new law is the ABC test—a statutory scheme currently in use in a number of other states. The language in Prong (A) of that test (that the driver is free from control and direction in performing the job, both under his or her contract and in fact) is comparable to the common law test, which considers an array of factors that directly or indirectly bear on the question of direction and control over the manner of performing the services. Merely satisfying the common law test, though, will no longer be sufficient in the commercial goods transportation industry. Once the law is enacted, any such business that wishes to treat drivers as independent contractors must also satisfy Prongs (B) and (C). Those two factors, each of which are similar in nature to two of the many factors traditionally considered under the common law test applicable to almost all other industries, will each be separately determinative of independent contractor status under the ABC test.

The language of prongs (B) and (C), however, are rather obtuse and ambiguous; indeed, it is not uncommon for courts in one state with an ABC test to interpret prong (B) or (C) in a wholly different manner than do the courts in other states. Thus, because there are virtually no court decisions in New York interpreting prongs (B) or (C), it is unknown whether the ABC test will be construed narrowly or broadly by the New York courts. It is therefore uncertain at present whether it will be easier or harder for some commercial goods transportation contractors to overcome the presumption of employment by satisfying the ABC test instead of the separate business entity test.

The separate business entity test found in the New York Commercial Goods Transportation Fair Play Act is generally similar to a comparable law that took effect in October 2010: the New York Construction Industry Fair Play Act.16 That law, which sought to curtail the misclassification of employees as independent contractors in the building and construction industry in New York, likewise creates a presumption that a person providing construction services is an employee unless the construction business can establish all three factors of the ABC test or show that the person is a separate business entity.

The Commercial Goods Transportation Industry Fair Play Act had been the subject of considerable lobbying in Albany by the Teamsters Union, which seeks to organize truck drivers in New York, and by transportation industry associations and specific companies, such as FedEx Ground, which use independent contractors to deliver commercial goods to customers. Much of the lobbying was reportedly over certain of the prongs listed in the original version of the bill defining a separate business entity. That initial version of the commercial goods bill borrowed virtually the same definition of “separate business entity” from the Construction Industry Fair Play Act. The final bill that passed both the state Senate and Assembly, however, contained the several key differences from the definition of separate business entity in the Construction Industry Fair Play Act:

  • whereas the construction industry law requires the separate business entity to make its services available to the general public or business community, the Commercial Goods Transportation Industry Fair Play Act only requires that the separate business entity be afforded the option to do so [changed to “may”, according to the proposed technical amendments] make its services available to the general public or [others in the business community, according to the technical amendments]
  • the Construction Industry Fair Play Act mandates that the separate business entity must have a substantial investment of capital in the business beyond the ordinary tools and equipment necessary to provide the service, while the Commercial Goods Transportation Industry Fair Play Act provides that the substantial investment may include such ordinary tools and equipment
  • the construction law prohibits the contracting business from approving any employees of the separate business entity, while the commercial goods transportation law permits the contracting business to impose qualification requirements or compliance with federal or state law upon the separate business entity in its hiring of employees
  • the construction industry law prohibits the principal of the separate business entity from representing that he or she is an employee of the contracting business, whereas the commercial goods transportation industry law permits such a representation as long as the contracting business does not require the separate business entity to do so
  • finally, while the construction law requires the separate business entity itself to furnish all tools and equipment necessary to provide the service, that factor has been eliminated from the commercial goods law, thereby suggesting that a commercial goods transportation contractor may provide one or more of the tools and equipment used by the separate business entity.

It was generally believed that the Construction Industry Fair Play Act was so strict that it may have eliminated the use of independent contractor status for workers in the construction industry. See, e.g., R. Reibstein et al., “NYS Construction Industry Fair Play Act: An End to Independent Contractors?” NYLJ Sept. 9, 2010. By virtue of the legislative changes made in the final version of the Commercial Goods Transportation Industry Fair Play Act, this new law will not likely eliminate the use of all independent contractors in the transportation and delivery industry in this state, although it will undoubtedly limit considerably those persons who would otherwise qualify for independent contractor status.

It is likely that few companies currently using independent contractors to deliver or transport commercial goods to their customers are in a position today to satisfy either the ABC or the separate business entity tests. Such businesses are likely to require some degree of restructuring, re-documentation, and re-implementation of their relationships with drivers if they wish to continue to treat them as independent contractors and remain in compliance with the law.

While most of the 11 prongs in the separate business entity test are rather straightforward, a number of them require considerable familiarity with independent contractor compliance law in order to formulate a structure that will comfortably meet the requirements of each of the 11 prongs. An independent contractor agreement that is drafted by merely incorporating the wording of the statutory definition for independent contractor or a separate business entity is unlikely to provide anything except a false sense of security. Indeed, as expressly noted in the first factor in the ABC test, the law examines the parties’ relationship “both under his or her contract and in fact” (emphasis added), and regulators and the courts routinely discount contractual language that is inconsistent with the parties’ actual day-to-day practices. Thus, a “one-size-fits-all” approach to compliance with this new law is unlikely to serve a client’s interests, especially because of the conjunctive nature of both tests, where a failure to satisfy even a single prong can create substantial civil and criminal misclassification liability.

For example, prong (A) in the ABC test and the first factor in the separate business entity test are very similar, requiring that the driver be “free from direction or control” over the means and manner of performing the service. By its very nature, this threshold factor under both tests is extraordinarily comprehensive in scope and may implicate an array of different facts pertinent to whether the driver meets the first prongs of either of the two tests. For this reason, it is recommended that a multi-factor analysis be utilized, such as the “48 Factors-Plus” used as part of IC Diagnostics™. See http://independentcontractorcompliance.com/legal-resources/ic-diagnostics/.

The 60-day hiatus [now, a 90-day hiatus, by virtual of the technical amendments] between the date when the new law is signed by the governor and when it becomes effective seems particularly short for businesses that currently treat drivers [operating vehicles covered by the new law] who deliver commercial goods as independent contractors. First, such businesses must determine if they are able to restructure their relationship with such drivers to conform to the requirements of the ABC or separate business entity tests. Second, if such businesses conclude that they are able to do so, the process of restructuring, re-documenting, and re-implementing is by no means a simple task, and it has taken the authors of this article 60 or more days to do so for some clients seeking to enhance their independent contractor compliance—either as a proactive step or in anticipation of a new law such as the Commercial Goods Transportation Industry Fair Play Act.

Thus, a commercial goods transportation contractor that wishes to retain its independent contractor relationships with drivers delivering or transporting goods to its clients should promptly begin to take steps to attain compliance. It is unrealistic, however, for government regulators in New York to expect businesses covered by the new law to get into compliance so quickly where the rules have been changed so dramatically for the entire industry, including a new requirement that drivers must own or lease the delivery vehicle. If the driver does not currently own or lease the vehicle, that requirement alone (with the resulting need to register and insure the vehicle) may take as much as 90-120 days to organize, including completion of all required paperwork. Hopefully, state regulatory bodies will afford businesses an informal transition period, beyond the 60-day period set forth in the new law, to achieve compliance, or the Legislature will modify the law to make it effective in 120-180 days after enactment. In fact, it is unlikely that most of the commercial goods transportation contractors in New York will even learn about the new law for some or all of the short 60-day transition period.  [As noted, by technical amendment, the law will be effective 90 days after enactment of the 2013 law, which the Governor signed on January 10, 2014, or April 10, 2014.]

Many businesses affected by this new law in New York also operate in other states. Class action lawsuits against transportation companies misclassifying drivers as independent contractors have mushroomed in the past few years, and both state and federal governmental regulators have likewise been active in cracking down on delivery companies that are regarded as misclassifying drivers as independent contractors under applicable state and federal laws. The New York Commercial Goods Transportation Industry Fair Play Act may be a useful alert for such businesses to determine if they need to enhance their independent contractor compliance throughout their network of drivers in states across the country.

By Richard J. Reibstein and Janet B. Barsky

Endnotes

1. N.Y. Labor Law §862-b. [Even a driver who meets one of the two tests will be classified as an employee if payment for such individual’s services is not reported on a Form 1099 if required by law, according to the technical amendments.]

2. A number of states with “ABC” laws add to prong (B) an alternative: “or…is performed outside of all the places of business of the enterprise for which such service is performed.” See, e.g., N.J.S.A. 43:21-19(i)(6)(A)(B)(C).

3. N.Y. Labor Law §862-b (1).

4. N.Y. Labor Law §862-b (2).

5. The full list of the 11 factors are found at N.Y. Labor Law §862-b (2)(A)-(K).

6. N.Y. Labor Law §862-c (3).

7. N.Y. Labor Law §862-d (3).

8. N.Y. Labor Law §862-d (2).

9. N.Y. Labor Law §862-d (4).

10. N.Y. Labor Law §862-d (5).

11. N.Y. Labor Law §862-d (8).

12. N.Y. Labor Law §862-d (6). Notably, however, the new law (in Section 4) provides that the presumption of employment provisions in §862-b shall not be applicable under the New York State tax law. Thus, the common law test for determining independent contractor status shall continue to apply for purposes of the tax laws in New York.

13. N.Y. Labor Law §862-e.

14. Section 5 of the Commercial Goods Transportation Fair Play Act.

15. N.Y. Labor Law §862-c.

16. That law was codified in the New York Labor Law as Article 25-B and is found in Section 861.

Posted in IC Compliance

Effective Date of New York Commercial Goods Transportation Industry Fair Play Act in Limbo

The law of independent contractor misclassification in New York State is about to change for many companies in the business of transportation or delivery of commercial goods – but no one quite knows if it will be tomorrow or in another 30 or more days.

The new law targets transportation and delivery companies in New York that classify as independent contractors certain drivers that deliver commercial goods in the state. The law drastically changes the legal test in New York for determining if such drivers are independent contractors or employees – requiring far more effort for legitimate businesses in this industry to create and maintain independent contractor relationships in the state.  New York has been at the forefront of independent contractor misclassification initiatives in the recent past, and it is likely many other states will consider enacting similar laws for the transportation and delivery industry in 2014.

Legislative Update

The original statute was signed by Governor Cuomo on January 10, 2014 and had an effective date of 60 days after it became law. Many commentators have said that the law goes into effect on Tuesday, March 11, 2014.  However, beginning in mid-January 2014, new bills were introduced by the State Assembly and Senate that would “make technical corrections to the New York state commercial goods transportation fair play act.” One such change is that the law shall take effect 90 days after it shall become law.

The only problem is that there has been no news as to whether the new bill making “technical corrections” has yet been enacted. Our latest information, as of close of business on March 10, 2014, is that the updated bill has passed the Legislature and was presented to the Governor yesterday, March 9, 2014.  Whether it was signed today, whether it will be signed tomorrow, or ever, is unknown.  But the law is one the Governor wholeheartedly supports and is likely to become law in the near term future. Even if the Governor wishes the Legislature to make further technical changes, he can simply sign the new law, which does not become effective until April 10, 2014, and then request further technical changes effective on April 10 or beyond.    

The Proposed Changes to the Fair Play Act

Most of the proposed changes are truly technical in nature, but a few are anything but technical and at least three are more akin to truly substantive changes to the law.

First, the original law covers companies and firms that compensate a driver who possesses a state-issued commercial driver’s license, which in New York is generally needed for driving vehicles with a gross vehicle weight rating over 26,000 pounds.  The new version would cover any driver with any state-issued driver’s license where the driver operates a motor vehicle “as defined in subdivision four-A of section two of the [New York] Transportation Law.”  Subsection 4-A defines a “Commercial motor vehicle” as including a motor vehicle used in intrastate or interstate commerce when the vehicle has a gross vehicle weight rating of over 10,000 pounds.

A second non-technical change is that the proposed technical corrections make explicit that the driver will be presumed to be an employee if his services are not reported on a Form 1099, if required by law, even if he otherwise meets the other tests for independent contractor or separate business entity status.

A third and final non-technical change is that the commercial goods transportation contractor cannot require approval of any employees that the driver may hire.

How the Fair Play Act, Once Effective, Changes the Landscape of the Transportation and Delivery Industry in New York

This article below details the changes that are forthcoming in New York’s transportation and delivery industry. This article is reprinted with permission from the November 27, 2013 edition of the New York Law Journal ©2013 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact ALMReprints.com, 877.257.3382 or reprints@alm.com.

MAJOR CHANGE IN THE LAW OF INDEPENDENT CONTRACTORS: THE NEW YORK COMMERCIAL GOODS TRANSPORTATION INDUSTRY FAIR PLAY ACT

By Richard J. Reibstein and Janet B. Barsky of Pepper Hamilton LLP.  Mr. Reibstein is co-chair of Pepper’s Independent Contractor Compliance practice, an interdisciplinary working group of over 30 labor and employment, tax, employee benefits, and class action lawyers.  Ms. Barsky is a member of Pepper’s IC Compliance team.  The proposed technical changes to the law are noted in [brackets] in the article below.

A new bill that will significantly limit the use of independent contractors to deliver commercial goods in New York is awaiting signature by Governor Andrew Cuomo. [Authors’ note:  The bill was signed into law by the Governor on January 10, 2014; he then returned it to the Legislature to make proposed “technical amendments” to the original bill that passed the Legislature in 2013.]  Businesses that currently treat as independent contractors drivers that deliver commercial goods to their customers [while operating vehicles with a gross vehicle weight rating (GVWR) or gross combination rate of more than 10,000 pounds, according to the proposed technical amendments] will have to reclassify such individuals as employees unless the drivers meet one of two tests. Both of these tests are far more challenging to meet than the common law test currently used in New York to determine if a worker is an employee or independent contractor.

The New York State Commercial Goods Transportation Industry Fair Play Act (S5867-2013; A5237b) was passed with bipartisan support by both the Senate and Assembly. It purportedly was passed in view of the perceived misclassification of many drivers as independent contractors instead of employees. Instead of simply increasing the penalties for misclassification and/or enhancing regulatory enforcement of the current common law test for independent contractors (as some states have done), the New York Legislature chose to join a number of other states in enacting a new statutory test that will considerably reduce the number of independent contractors delivering commercial goods in New York.

Overcoming Presumption

The new law will create a presumption that any person [operating a commercial motor vehicle with a GVWR of more than 10,000 pounds, according to the proposed technical amendments] performing transportation services of commercial goods for a “commercial goods transportation contractor” will be classified as an employee and not an independent contractor unless one of two tests is met.1  The first is a three-pronged requirement frequently referred to as the “ABC test,” which is used by well over a dozen states in their wage, unemployment, and/or Workers’ Compensation laws. Under that test, the business treating a driver as an independent contractor must show three things: (A) the driver is free from control and direction in performing the job, both under his or her contract and in fact; (B) the transportation/delivery service is “performed outside the usual course of business for which the service is performed;”2 and (C) the driver is “customarily engaged in an independently established trade, occupation, profession, or business” involving the transportation or delivery of commercial goods.3 The three factors are conjunctive; they must all be shown to satisfy the ABC test.

The second test has 11 prongs and, like the ABC test, all of these factors must be met to overcome the presumption that drivers of commercial goods in New York are employees and not independent contractors. This test is referred to as the “separate business entity” standard, which is applicable to any sole proprietorship, partnership, corporation, [limited liability company, association, firm, or other business entity, according to the proposed technical amendments] or other business entity.4 Some of the more challenging of the 11 factors that must be shown by a commercial goods transportation contractor are that the separate business entity with which it has contracted to deliver or transport commercial goods:

  • has a substantial investment of capital in the business entity, including but not limited to ordinary tools and equipment
  • owns or leases the capital goods (which presumably means the delivery vehicle)
  • gains the profits and bears the losses of the business entity
  • has the option to [changed to “may”, according to the proposed technical amendments] make its services available to the general public or [others in the business community, according to the proposed technical amendments]
  • includes its income from the business on the appropriate schedule on its federal income tax return [changed to “provides services reported on a Federal Income Tax Form 1099, if required by law, according to the proposed technical  amendments]
  • performs its services pursuant to a written contract that identifies the relationship with the commercial goods transportation contractor as involving independent contractors or separate business entities, and
  • [hires its own employees, if needed, “without the commercial goods transportation operator’s approval, subject to applicable qualification requirements or federal or state laws and regulations,” according to the proposed technical amendments, and] pays any employees it may hire without reimbursement from the commercial goods transportation contractor and reports the wages of any such employees to the IRS.5

Penalties, Liability

The new law, which is to be codified, once enacted, as new Article 25-C of the New York Labor Law, includes substantial civil penalties of up to $1,500 for a first violation and up to $5,000 for a subsequent violation within a five-year period.6 Where the misclassification is “willful,” the civil penalties increase to $2,500 “per misclassified employee” for a first violation and up to $5,000 “per misclassified employee” for each subsequent violation within a five-year period.7 A willful violation occurs where a commercial goods transportation contractor “knew or should have known” that its conduct was prohibited.8

The Commercial Goods Transportation Industry Fair Play Act will also impose criminal liability upon employers who are found to have willfully violated the new law.9 A first offense is punishable as a misdemeanor and may include imprisonment of up to 30 days or a fine of up to $25,000. A subsequent offense exposes the employer to up to 60 days’ imprisonment or a fine not to exceed $50,000.

Where the commercial goods transportation contractor is a corporation, each shareholder owning 10 percent or more of the company and each officer “who knowingly permits the corporation to willfully violate” the new law shall be personally liable for the civil and criminal penalties upon conviction.10 In addition, any “substantially owned affiliated entity” shall be subject to the same civil penalties as the commercial goods transportation contractor.11

The above penalties are in addition to those that may be imposed under the unemployment, workers’ compensation, and tax laws for misclassification of employees as independent contractors.12

Under the new law, once enacted, it will be a violation for an employer or its agent to retaliate against any person through discharge or any other manner in the terms and conditions of his/her employment for exercising any rights provided under the law, including making complaints or for providing any information to a public body conducting an investigation under the law.13

Effective Date and Notices

The Commercial Goods Transportation Industry Fair Play Act will become effective 60 days after signature by the governor.14  [The effective date is proposed to be changed to 90 days after enactment of the 2013 law that the Governor signed on January 10. 2014, according to the proposed technical amendments.]  By that date, each commercial goods transportation contractor must post in a conspicuous location on its site a notice prescribed by the Labor Commissioner.

By law, the prescribed notice will describe:

  • the responsibility of independent contractors to pay taxes required by state and federal law
  • the rights of employees to Workers’ Compensation, unemployment benefits, minimum wages, overtime, and other federal and state workplace protections
  • the protections against retaliation, and
  • the penalties for failure to properly classify individuals under the law.15

Analysis and Takeaways

The first test for establishing independent contractor status under this new law is the ABC test—a statutory scheme currently in use in a number of other states. The language in Prong (A) of that test (that the driver is free from control and direction in performing the job, both under his or her contract and in fact) is comparable to the common law test, which considers an array of factors that directly or indirectly bear on the question of direction and control over the manner of performing the services. Merely satisfying the common law test, though, will no longer be sufficient in the commercial goods transportation industry. Once the law is enacted, any such business that wishes to treat drivers as independent contractors must also satisfy Prongs (B) and (C). Those two factors, each of which are similar in nature to two of the many factors traditionally considered under the common law test applicable to almost all other industries, will each be separately determinative of independent contractor status under the ABC test.

The language of prongs (B) and (C), however, are rather obtuse and ambiguous; indeed, it is not uncommon for courts in one state with an ABC test to interpret prong (B) or (C) in a wholly different manner than do the courts in other states. Thus, because there are virtually no court decisions in New York interpreting prongs (B) or (C), it is unknown whether the ABC test will be construed narrowly or broadly by the New York courts. It is therefore uncertain at present whether it will be easier or harder for some commercial goods transportation contractors to overcome the presumption of employment by satisfying the ABC test instead of the separate business entity test.

The separate business entity test found in the New York Commercial Goods Transportation Fair Play Act is generally similar to a comparable law that took effect in October 2010: the New York Construction Industry Fair Play Act.16 That law, which sought to curtail the misclassification of employees as independent contractors in the building and construction industry in New York, likewise creates a presumption that a person providing construction services is an employee unless the construction business can establish all three factors of the ABC test or show that the person is a separate business entity.

The Commercial Goods Transportation Industry Fair Play Act had been the subject of considerable lobbying in Albany by the Teamsters Union, which seeks to organize truck drivers in New York, and by transportation industry associations and specific companies, such as FedEx Ground, which use independent contractors to deliver commercial goods to customers. Much of the lobbying was reportedly over certain of the prongs listed in the original version of the bill defining a separate business entity. That initial version of the commercial goods bill borrowed virtually the same definition of “separate business entity” from the Construction Industry Fair Play Act. The final bill that passed both the state Senate and Assembly, however, contained the several key differences from the definition of separate business entity in the Construction Industry Fair Play Act:

  • whereas the construction industry law requires the separate business entity to make its services available to the general public or business community, the Commercial Goods Transportation Industry Fair Play Act only requires that the separate business entity be afforded the option to do so [changed to “may”, according to the proposed technical amendments] make its services available to the general public or [others in the business community, according to the proposed technical amendments]
  • the Construction Industry Fair Play Act mandates that the separate business entity must have a substantial investment of capital in the business beyond the ordinary tools and equipment necessary to provide the service, while the Commercial Goods Transportation Industry Fair Play Act provides that the substantial investment may include such ordinary tools and equipment
  • the construction law prohibits the contracting business from approving any employees of the separate business entity, while the commercial goods transportation law permits the contracting business to impose qualification requirements or compliance with federal or state law upon the separate business entity in its hiring of employees
  • the construction industry law prohibits the principal of the separate business entity from representing that he or she is an employee of the contracting business, whereas the commercial goods transportation industry law permits such a representation as long as the contracting business does not require the separate business entity to do so
  • finally, while the construction law requires the separate business entity itself to furnish all tools and equipment necessary to provide the service, that factor has been eliminated from the commercial goods law, thereby suggesting that a commercial goods transportation contractor may provide one or more of the tools and equipment used by the separate business entity.

It was generally believed that the Construction Industry Fair Play Act was so strict that it may have eliminated the use of independent contractor status for workers in the construction industry. See, e.g., R. Reibstein et al., “NYS Construction Industry Fair Play Act: An End to Independent Contractors?” NYLJ Sept. 9, 2010. By virtue of the legislative changes made in the final version of the Commercial Goods Transportation Industry Fair Play Act, this new law will not likely eliminate the use of all independent contractors in the transportation and delivery industry in this state, although it will undoubtedly limit considerably those persons who would otherwise qualify for independent contractor status.

It is likely that few companies currently using independent contractors to deliver or transport commercial goods to their customers are in a position today to satisfy either the ABC or the separate business entity tests. Such businesses are likely to require some degree of restructuring, re-documentation, and re-implementation of their relationships with drivers if they wish to continue to treat them as independent contractors and remain in compliance with the law.

While most of the 11 prongs in the separate business entity test are rather straightforward, a number of them require considerable familiarity with independent contractor compliance law in order to formulate a structure that will comfortably meet the requirements of each of the 11 prongs. An independent contractor agreement that is drafted by merely incorporating the wording of the statutory definition for independent contractor or a separate business entity is unlikely to provide anything except a false sense of security. Indeed, as expressly noted in the first factor in the ABC test, the law examines the parties’ relationship “both under his or her contract and in fact” (emphasis added), and regulators and the courts routinely discount contractual language that is inconsistent with the parties’ actual day-to-day practices. Thus, a “one-size-fits-all” approach to compliance with this new law is unlikely to serve a client’s interests, especially because of the conjunctive nature of both tests, where a failure to satisfy even a single prong can create substantial civil and criminal misclassification liability.

For example, prong (A) in the ABC test and the first factor in the separate business entity test are very similar, requiring that the driver be “free from direction or control” over the means and manner of performing the service. By its very nature, this threshold factor under both tests is extraordinarily comprehensive in scope and may implicate an array of different facts pertinent to whether the driver meets the first prongs of either of the two tests. For this reason, it is recommended that a multi-factor analysis be utilized, such as the “48 Factors-Plus” used as part of IC Diagnostics™. See http://independentcontractorcompliance.com/legal-resources/ic-diagnostics/.

The 60-day hiatus [now, a 90-day hiatus, by proposed technical amendment] between the date when the new law is signed by the governor and when it becomes effective seems particularly short for businesses that currently treat drivers [operating vehicles covered by the new law and its proposed technical amendments] who deliver commercial goods as independent contractors. First, such businesses must determine if they are able to restructure their relationship with such drivers to conform to the requirements of the ABC or separate business entity tests. Second, if such businesses conclude that they are able to do so, the process of restructuring, re-documenting, and re-implementing is by no means a simple task, and it has taken the authors of this article 60 or more days to do so for some clients seeking to enhance their independent contractor compliance—either as a proactive step or in anticipation of a new law such as the Commercial Goods Transportation Industry Fair Play Act.

Thus, a commercial goods transportation contractor that wishes to retain its independent contractor relationships with drivers delivering or transporting goods to its clients should promptly begin to take steps to attain compliance. It is unrealistic, however, for government regulators in New York to expect businesses covered by the new law to get into compliance so quickly where the rules have been changed so dramatically for the entire industry, including a new requirement that drivers must own or lease the delivery vehicle. If the driver does not currently own or lease the vehicle, that requirement alone (with the resulting need to register and insure the vehicle) may take as much as 90-120 days to organize, including completion of all required paperwork. Hopefully, state regulatory bodies will afford businesses an informal transition period, beyond the 60-day period set forth in the new law, to achieve compliance, or the Legislature will modify the law to make it effective in 120-180 days after enactment. In fact, it is unlikely that most of the commercial goods transportation contractors in New York will even learn about the new law for some or all of the short 60-day transition period.  [As noted, by proposed technical amendment, the law will be effective 90 days after enactment of the 2013 law, which the Governor signed on January 10, 2014.] 

Many businesses affected by this new law in New York also operate in other states. Class action lawsuits against transportation companies misclassifying drivers as independent contractors have mushroomed in the past few years, and both state and federal governmental regulators have likewise been active in cracking down on delivery companies that are regarded as misclassifying drivers as independent contractors under applicable state and federal laws. The New York Commercial Goods Transportation Industry Fair Play Act may be a useful alert for such businesses to determine if they need to enhance their independent contractor compliance throughout their network of drivers in states across the country.

By Richard J. Reibstein and Janet B. Barsky

Endnotes

1. N.Y. Labor Law §862-b. [Even a driver who meets one of the two tests will be classified as an employee if payment for such individual’s services is not reported on a
Form 1099 if required by law, according to the proposed technical amendments.]

2. A number of states with “ABC” laws add to prong (B) an alternative: “or…is performed outside of all the places of business of the enterprise for which such service is performed.” See, e.g., N.J.S.A. 43:21-19(i)(6)(A)(B)(C).

3. N.Y. Labor Law §862-b (1).

4. N.Y. Labor Law §862-b (2).

5. The full list of the 11 factors are found at N.Y. Labor Law §862-b (2)(A)-(K).

6. N.Y. Labor Law §862-c (3).

7. N.Y. Labor Law §862-d (3).

8. N.Y. Labor Law §862-d (2).

9. N.Y. Labor Law §862-d (4).

10. N.Y. Labor Law §862-d (5).

11. N.Y. Labor Law §862-d (8).

12. N.Y. Labor Law §862-d (6). Notably, however, the new law (in Section 4) provides that the presumption of employment provisions in §862-b shall not be applicable under the New York State tax law. Thus, the common law test for determining independent contractor status shall continue to apply for purposes of the tax laws in New York.

13. N.Y. Labor Law §862-e.

14. Section 5 of the Commercial Goods Transportation Fair Play Act.

15. N.Y. Labor Law §862-c.

16. That law was codified in the New York Labor Law as Article 25-B and is found in Section 861.

Posted in IC Compliance