Use of Contractors Is Tested on Many Fronts, Experts Say

This story appears in the Nov. 7 print edition of Transport Topics.

The trucking industry’s independent contractor model is being increasingly challenged in the courts, by regulatory authorities and in state legislatures, industry experts said.

Most recently, carriers have been battling efforts to reclassify independent contractors as employees in Washington, California and several states in the Northeast, said Gregory Feary, a managing partner with the Indianapolis law firm of Scopelitis, Garvin, Light, Hanson & Feary.

“It’s the political and economic pressures that have caused the current environment to be more contentious,” Feary told Transport Topics, “and I would say the third leg of the stool is an active plaintiffs’ bar that has found some fee revenue associated with class actions.”

Dan England, the new chairman of American Trucking Associations, said preserving the independent contractor model will be one of his priorities over the next year.

California is one state that has stepped up audits of carriers using independent contractors, said England, also chairman of C.R. England Inc., Salt Lake City.

“We’re seeing this with increasing frequency,” England said. “It’s a real risk to us, and it may have a dampening effect on our ability to hire and keep independent contractors.”

England said legislation passed in California has tacked on fines for employers found intentionally misclassifying independent contractors.

Feary said efforts by the Obama administration to increase the number of audits for carriers that use independent contractors also have “empowered” unions to push for state legislation to help regulators reclassify drivers as employees.

In September, the Internal Revenue Service and U.S. Department of Labor signed a memorandum of understanding announcing they would share information and cooperate in conducting audits to check if independent contractors should be reclassified as employees.

“In fact, the IRS said, in a year or two, a full 35% of its audits would focus on this issue of misclassification,” Feary said.

A recent Government Accountability Office study concluded that the federal government is losing billions of dollars in tax revenue on worker misclassification, and a Labor study indicated that up to 30% of employers misclassify their workers, the agencies said.

“We’re here today to sign a series of agreements that together send a coordinated message: We’re standing united to end the practice of misclassifying employees,” Labor Secretary Hilda Solis said in a Sept. 19 statement.

The classification of a worker as either an employee or an independent contractor has significant implications for employers’ payment of payroll taxes and workers’ compensation, insurance and compliance with minimum wage, overtime and other laws.

And with many state budgets shrinking, reclassification is, “for certain states, a way to generate additional tax revenue,” Feary said.

In fact, as part of the joint IRS-DOL agreement, labor commissioners and other agency leaders representing 11 states signed memorandums of understanding with Labor to participate in the effort.

Robert Digges Jr., ATA’s chief counsel, said that ATA is fighting a potential “right to know” regulation that would require every employer that deals with an independent contractor to write a legal analysis of why the contractor meets the test to be classified as a contractor and not as an employee, and then give a copy to the contractor.

The regulation also would require the employer to keep a copy of the legal analysis on file for investigators.

“That’s something that we’ve opposed strenuously and had a lot of meetings . . . about,” Digges said.

Last month, ATA filed a friend of the court brief with a federal court in the state of Washington in a lawsuit filed by several fleets attempting to block a reclassification decision by the commissioner of the state’s Employment Security Department.

ATA said the case represents a misinterpretation of the “right-of-control test,” a common test judges and regulators use to determine if a carrier has too much daily control over a truck driver.

“Worker classification determinations have significant financial consequences for the trucking industry, and the legal conclusions reached in this matter will have ramifications for virtually every segment of the trucking industry that operates in the state of Washington,” ATA’s brief said.

ATA estimated about 500,000 independent operators work in the trucking industry.

Since the 1970s, carriers have been winning more legal and regulatory challenges than they have lost, Feary said.

“If you look at the long view, I think it’s clear that trucking is winning the battle,” Feary said.

Digges said that, despite the challenges, recent changes in the composition of some state legislatures actually have improved prospects for preserving the independent contractor model.

But he said the issue probably always will be subject to the “ebbs and flows” of politics.

“It’s something that’s not going to go away,” Digges said. “You’re going to have to resolve it on a state-by-state basis, and you’re always going to have the Teamsters [union] trying to undermine independent status to create more employees that can be organized.”