Feary & Cohen: Changes might affect transportation independent contractors

Feary

By Greg Feary and Shannon McClellan Cohen

The “gig” economy has brought increased attention to the use and meaning of independent contractors in America. With increased focus comes a change in how states attempt to define the work status of independent contractors, and if paternal protections should be offered to such workers. A recent California Supreme Court decision significantly changed the way in which independent contractor status is determined under California wage and hour law — a decision that may impact independent contractor relationships across the country, especially in the transportation industry.

Motor carriers have used independent contractors for decades to provide subcontracted hauling services. This independent contractor model is typically viewed as a beneficial operational platform in trucking and is governed, in part, by federal regulations that set forth the motor carrier’s ultimate responsibility for safe operations (the Federal Motor Carrier Safety Regulations). Since 1979, a complementary set of federal regulations (known as the Federal Leasing Regulations) has dictated the terms that must be included in agreements between motor carriers and drivers where the driver provides the equipment to be used by the motor carrier.

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Despite this federal framework, determining whether a driver is an employee or an independent contractor is often fraught with nuance and subjectivity. Common law determination of independent contractor status is highly fact-specific and is often referred to by courts as a mixed question of fact and law. Further complicating the issue is that the test to determine independent contractor status varies by state and by area of law. The same worker may be held to be an independent contractor for purposes of Indiana’s unemployment compensation tax but will be deemed to be an employee for purpose of Illinois’ workers’ compensation law using a completely different legal test. And worse, that same worker may be either an employee or independent contractor under Illinois unemployment tax law depending on how and from whom the worker acquired his truck. As one can imagine, this has a marked impact on the use of independent contractors engaged by motor carriers, as such drivers continually operate in multiple states and are subject to multiple laws.

So, what does a California decision have to do with truck drivers in Indiana? The ruling has the potential to create a waterfall effect in which the more restrictive interpretation in Dynamex of the ABC test defining independent contractor status is applied outside of California and across a wide array of employment protection laws. The ultimate impact of this change would be a net reduction in the use of independent contractors, including traditional uses such as in the transportation industry, and more modern iterations such as in the gig economy. This could then stunt economic growth and frustrate small business entrepreneurship.

In Dynamex Operations West, Inc. v. Superior Court, the California Supreme Court held that the common law/multi-factor test for determining employment status, set out in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, does not apply to certain wage and hour claims based on California Industrial Welfare Commission (“IWC”) wage orders. Instead, using the IWC’s definition of employment, an employee is anyone a business “engage[s], suffer[s], or permit[s]” to work as an employee. This nebulous definition was forged during the early 1900s to combat child labor abuse. The Court held that this standard must be analyzed under the ABC test used in a handful of other jurisdictions due to its broad and inclusive goal of finding employment — a goal understandable within the era of its creation and the benign social welfare protections needed at the time. Under the ABC test, a worker is presumed to be an employee unless the business proves that (A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; (B) the worker performs work that is outside the usual course of the hiring entity’s business, and; (C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. Failure to prove any one of these three prongs results in an employment determination. As such, the ABC test is not the balancing test most frequently applied under a multitude of federal and state common laws, but rather a test designed to present three hurdles, each of which must be crossed to reach independent contractor status.

The use of the ABC test creates difficulties in interpretation across industries, but especially in transportation, where judiciary and regulators unfamiliar with the industry may not recognize the various horizontal layers or separate trades within the logistics business as not “outside the usual course of the hiring entity’s business.” The typical paternalistic argument is that drivers are employees under the ABC test because they perform work within the usual course of a motor carrier’s business. That was the argument in Dynamex. The Court suggested that the Dynamex delivery drivers, who typically used personal vehicles (minivans and pick-up trucks), were likely employees because Dynamex was in the delivery business. Still, the Court suggested (without explanation) that there may be “other types of businesses in which the delivery of a product may or may not be viewed as within the usual course of the hiring company’s business,” and it remains to be seen whether drivers of business vehicles and heavier vehicles might be viewed as in a distinct occupation so as to meet the B prong.

Currently, the Indiana Supreme Court is considering how the ABC test should be applied to a very specific type of transportation service for purposes of the state’s unemployment tax. In Company v. Indiana Department of Workforce Development, the Court has been asked to determine whether RV drive-away drivers are employees or independent contractors using the ABC test. These drive-away drivers deliver RVs from the RV manufacturer for delivery to dealerships or consumers across the country. Of note, drive-away drivers are unique in transportation law because the vehicle being driven is the commodity being delivered. This prevents application of Ind. Code § 22-8-4-3.5, which makes a driver under a lease to a motor carrier an independent contractor where the driver also provides the vehicle being operated. Here, because the vehicle is the cargo being transported and is not owned by either the driver or the motor carrier, even the traditional common law analysis can become murkier. In the past 18 months, two separate panels of the Indiana Court of Appeals have considered whether drive-away drivers’ operations are outside the usual course of the motor carrier’s business and have reached different conclusions. This has created uncertainty within this segment of the industry, leaving the parties to guess how to properly enter into an independent contractor relationship. The longstanding and well-settled business operations desired by both the motor carrier drive-away companies and the drivers have been cast into doubt by state tax regulators. It remains to be seen where Indiana law will land on this issue, but the impact of the Dynamex interpretation of the ABC test, which leans strongly against independent contractor determinations, remains an issue of great controversy in the transportation industry.•

• Greg Feary — [email protected] — is president and managing partner of Scopelitis, Garvin, Light, Hanson & Feary, P.C., focusing on independent contractor issues, legislation, transportation insurance and corporate structure designs. Partner Shannon McClellan Cohen — [email protected] —provides legislative counsel services at the firm. Opinions expressed are those of the authors.