Back on Sept 21, 1897, eight-year-old Virginia O’Hanlon wrote a letter to the editor of the New York Sun asking if there really was a Santa Claus. That letter has since become history. Now, let’s move forward 120 years. The answer is almost the same, except Santa Claus comes to us in the form of President Trump. He just brought the transportation industry a great present.
Trucking companies that utilize independent contractors can now breathe a sigh of relief after the Department of Labor (DOL) recently withdrew the Obama-era guidance on the classification of independent contractors that some viewed as an attack on the owner operator model used in trucking. The 2015 Obama administration guidance on independent contractors expanded the definition of employees as part of a crackdown on so-called “misclassification” of employees as contractors. That guidance said the department would consider most workers to be employees under the Fair Labor Standards Act. It told employers to use an “economic realities test” in determining whether workers are employees.
At the time, the American Trucking Association called it “the most aggressive departure from current classification standards,” adding, “It no doubt signals an attack on industries like trucking that rely significantly on independent contractors.” The “economic realities” test has since been used by several courts and regulatory agencies and includes factors such as: the extent to which the work performed is an integral part of the employer’s business; the worker’s opportunity for profit or loss depending on his or her managerial skill; the extent of the relative investments of the employer and the worker; whether the work performed requires special skills or initiative; the permanency of the relationship; and the degree of control exercised or retained by the employer.
When this guidance was originally issued, it was called “problematic” for the industry, noting, “A trucking company is not going to be able to say having truckers move your freight isn’t an integral part of your business.” The brief announcement on the DOL website said, “Removal of the administrator interpretations does not change the legal responsibilities of employers under the Fair Labor Standards Act. The department will continue to fully and fairly enforce all laws within its jurisdiction.”
While the announcement is welcome news for employers and may signal less extreme positions by the DOL, employers should still be mindful of potential liability associated with independent contractor classifications. In addition to DOL enforcement (which the agency made clear will continue), a number of states have been active in their efforts to curb employee misclassification, and employees also have a private right of action under the FLSA (Fair Labor Standards Act) and various state laws.
The DOL has now deleted the Obama-era guidance from its website. For those of you that are not familiar with the old DOL guidance, the rest of this article will explain what it was all about. Administrator’s Interpretation 2015-1 targeted “misclassification” of employees as independent contractors. The issue had been a focus of the Obama administration and was being pushed by labor unions, mostly among port drayage firms and in highly-publicized and successful lawsuits against FedEx. Basically, the guidance seemed to threaten the owner operator model used in trucking.
The DOL is not the only agency that determines independent contractor status. There’s the IRS and many state-level agencies, including those governing worker’s comp, as well as state income taxes. However, according to the guidance notice, the DOL’s Wage and Hour Division had entered into memoranda of understanding with many of these states, as well as the IRS. In conjunction with these efforts, the DOL said it decided to put out this guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act.
According to a legal alert, the interpretation was significant from a number of standpoints because: it stated that the DOL’s unequivocal opinion was that “most workers are employees” under the FLSA; it fully embraced the “economic realities” test as the DOL’s preferred approach to determining whether a worker is an employee or a contractor; it downplayed the significance of an employer’s exertion of control over the tasks performed by the worker; and it reinforced the DOL’s pattern over the last several years of aggressively examining the classification of workers.
While much of the guidance in the document was not new, the “economic realities” emphasis was going to be problematic. Trucking companies were not going to be able to say that having truckers move their freight isn’t an integral part of their business, and the “economic realities” focus was a test they were set up to fail. Basically, under this test, the only people who could be an independent contractor at a trucking company were the plumber, and maybe the guy that cuts the grass!
If the guidance was interpreted literally, trucking companies wanting to use independent contractors may have been forced to go to a model where their core business was not moving freight, but brokering loads to those independent contractors – even to a pure broker model, where those owner operators must have their own authority. What it did was push a lot of one-man / one-truck outfits into the motor carrier model rather than being independent contractors leased-on to somebody else. I am so glad Mr. Trump had this guidance removed, because it was making the business of trucking a lot more complicated (and more expensive).
Historically, the issue of control has been regarded as the most important factor in assessing whether a contractor actually is an employee. That makes it even more important for companies and independent contractors to maintain the independent nature of that relationship. And that fact needs to not just be in the written documents – even if you have a contract with a driver that says they are an independent contractor, that’s not a failsafe safeguard by itself. The courts have already stated that this is just a label. If you used the excuse of the issuance of a 1099, the courts have said all that means is that you did not deduct any taxes. It’s the old adage of, if it walks like a duck and quacks like a duck, it probably is a duck – even if it isn’t a duck.
We at the NTA recommend that companies check with their own trucking association or legal counsel to see what steps they may need to take to fully protect their independent contractor relationships. NTA can also help you with that. Call us today at (562) 279-0557 or visit our website at www.ntassoc.com. And, as always, until next month, “Drive Safe – Drive Smart!”