As set forth in my 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.
I 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 my 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 type of process such as IC Diagnostics™.
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. My 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.
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.
Written by Richard J. Reibstein.