The use of independent contractors in the logistics and home delivery industry has suffered another legal setback. Earlier this week, the United States Court of Appeals for the Ninth Circuit, applying California law, concluded that 300 drivers who were retained by Affinity Logistics Corp. to make home deliveries and install products purchased by customers from Sears were common law employees who had been misclassified as independent contractors – even though the contractors were all separate business entities.
The drivers’ class action lawsuit sought damages for unpaid sick leave, vacation pay, holiday pay, and severance wages; it also alleged that Affinity had charged drivers for workers’ compensation insurance premiums. The lower court had found that the drivers had been properly classified as independent contractors, but the Ninth Circuit disagreed. The decision did not create new law; it merely applied well-established California law to the undisputed facts.
As noted below in the “Analysis and Takeaways,” this is yet another case where misclassification occurred because of what appears to have been inadequate structuring, documentation, and implementation of the independent contractor relationship. Businesses using independent contractors need not only understand how to structure an independent contractor relationship in light of the applicable state and federal laws, but also how to record the relationship in a state-of-the-art fashion and put it into practice on a day-to-day basis without creating the seeds for a class action lawsuit or regulatory audit.
The Applicable Law
The Ninth Circuit set forth the governing law in California that the “right to control work details is the most important or most significant consideration.” In determining which work details are important, the Court stated that the key are those details that relate to control over “the manner and means of accomplishing the result.” The Court also noted that under California law, there are “secondary” factors that can be relevant to whether the worker is an independent contractor, including whether the work is a distinct occupation; whether the work is specialized and done without the supervision of another; the skill required; who supplies the tools and place of work; the duration of the relationship; the method of payment; whether the work is part of the regular business of the principal; and the intent of the parties.
For those familiar with the common law test for independent contractor status, such as the test used by the IRS, the test under California law is similar in many respects. It is rather different, however, from those state laws that have statutory tests, such as what is commonly called an “ABC” test of three factors, all of which must be proven to establish independent contractor status. Thus, California law is, relatively speaking, a less challenging test for independent contractor status than many other states. But, despite the less restrictive test that Affinity was required to meet in this case, the Ninth Circuit concluded that the drivers were misclassified because Affinity “had the right to control the details of the drivers’ work.” The specifics of such control are listed below.
Affinity’s Control Over the Drivers’ Work
The Ninth Circuit found that Affinity controlled the following aspects of the drivers’ work:
- their rates,
- their schedules,
- their routes,
- their days off,
- their equipment, including the trucks, tools, and mobile phones,
- the helpers used by the drivers,
- their uniforms, and
- their personal appearance.
In addition, the Court found that Affinity closely supervised and monitored the drivers; required them to adhere to a “Procedures Manual”; and had the right to terminate the relationship on 60 days’ notice without cause.
While every driver operated as a separate business entity, the Court found that Affinity told the drivers they needed a fictitious business name, a business license, and a commercial business checking account, and even prepared the paperwork for the drivers, leaving only blank spaces for their signatures. The Court found that “these businesses were in name only.”
Each driver was required to sign an Independent Truckman’s Agreement and an Equipment Lease Agreement, the terms of which were evidently not subject to bargaining. The Court noted that even though the drivers leased their trucks from Affinity, the company allowed other drivers to use their trucks to make deliveries on days the drivers were not operating their trucks themselves. Even worse, the drivers who had leased the vehicles were not compensated for such use.
The Court also found that the drivers did not own any of their equipment or tools (not even their cell phones), were “essentially paid by a regular rate of pay,” performed a service that was at “the core of Affinity’s regular business,” and often worked with Affinity for many years.
Analysis and Takeaways
Class action cases involving drivers who deliver commercial goods have proliferated in recent years, and most cases have reached results similar to the ruling in Affinity or have settled for millions of dollars payable to the drivers and their counsel. See, for example, my prior blog post on 3Pdelivery, my blog post dealing with XPO/Pacer Cartage and Bimbo Bakeries, my blog post on American Eagle Express (AEX Group), and my many blog posts on FedEx Ground.
Meanwhile. states have begun to legislate new independent contractor tests for delivery and other types of truck drivers. Most notably, New York recently enacted the Commercial Goods Transportation Industry Fair Play Act, which imposes a new legal challenge for companies that retain independent contractors to transport commercial goods in that state using vehicles with a gross vehicle weight rating of more than 10,000 pounds. As set forth in a number of my prior blog posts, such companies must meet a three-part ABC test or an 11-part separate business entity test. Few transportation and delivery companies operating in New York or other states can meet either of those tests without considerable restructuring and re-documentation, which has taken the author of this blog post months to create a workable model to maximize compliance.
Remarkably, few companies in this industry have seen fit to structure, document, and implement an independent contractor relationship that offers maximum protection from judicial scrutiny in class action cases or by regulatory agencies seeking to enforce the types of tests now applicable in New York and other states. Oftentimes, the companies themselves have created an abundance of documentary evidence that is then used against them, as was the situation in the Affinity case. Further, many companies are under a mistaken impression that rulings in administrative cases such as unemployment or workers’ compensation proceedings provide a defense to a new class action lawsuit, but judges may choose to give little if any credence to prior determinations not only by regulatory agencies but also by courts in other states – especially if the record at an earlier judicial or administrative proceeding differs from the evidence submitted in a new lawsuit.
Companies that have been seeking to enhance their level of independent contractor compliance under an array of different laws at the state and federal level have found a process such as IC Diagnostics™ to be useful to minimize the risks of independent contractor misclassification liability. This process uses comprehensive tools to diagnose a company’s level of independent contractor compliance and provides a methodology to restructure, re-document, and re-implement independent contractor relationships in a state-of-the-art manner, consistent with applicable laws and nuances of the industry. By proceeding in this fashion, companies can obtain the benefits of an independent contractor business model while diminishing the potential of spending hundreds of thousands of dollars in legal fees and millions of dollars in settlement costs to defend class action lawsuits that can usually be avoided.
Written by Richard Reibstein.