In the last five years, nearly $600 million has been awarded in independent contractor misclassification lawsuits in trucking. Adding insult to injury, the April 2018 decision in Dynamex Operations West Inc. v. California Supreme Court ruled that the ABC Test must be applied in analyzing whether workers are employees or independent contractors. The ruling applies rigid guidelines for classification and presumes workers are employees unless proven otherwise. This volatile legal environment has many wondering if independent contractors can be utilized by transportation providers at all.
Worker misclassification is a costly issue. However, by understanding the law and addressing risks, independent contractors can provide tremendous business benefits. Plus, eliminating the use of owner-operators would increase the current driver shortage by seven times overnight. The industry needs independent contractors to meet shipper demand, but companies must know how to work with them.
Employee vs Independent Contractor
Let’s start with the basics. The level of control a business has over a worker defines classification.
Employees are hired for a regular, continuous period. They work for an employer who maintains control over the work performance and product.
Independent contractors typically work under contract for a defined period. They perform a service for a company while maintaining their own financial independence. The contractor controls how the service is delivered and the final product.
Understanding the ABC Test
ABC is one of the most common tests used to classify workers. The test generally applies to compensation considerations. Under the ABC Test, independent contractors must meet three criteria:
- The hiring business does not control or direct the worker’s service performance (A test);
- Work performed is outside the usual course of business for the hirer (B test);
- The worker operates an independent enterprise from the hiring entity (C test).
The B test draws the most concern and elicits the question, can independent contractor drivers work for trucking companies that also have drivers as employees?
There are a few things to consider that leave California’s verdict under debate. First, while about two-thirds of states use the ABC Test, the Dynamex case was specific to drivers in California. Second, California applied the ABC Test in its ruling regarding minimum wages, overtime, meal and rest breaks, and wage statement violations. This application of the test omits other variables commonly used to establish independent contractor autonomy. Third, the Court left it open that other types of businesses involving product delivery may be viewed as outside of the usual course of the hiring company’s work even if they provide a similar service. Fourth, California’s application of the B test could conflict with economic regulation prohibited under the Federal Aviation Administration Authorization Act, which provides a broader definition of the B test. The FAAAA already struck down applications of the ABC Test in Massachusetts that limited the rights of independent business owners. Overall, California’s ABC Test raises as many questions as it answers.
Assessing Worker Status
In addition to the ABC Test, government agencies also frequently use the Common Law Test and the Economic Reality Test. The ABC Test may be the most stringent, but also the most ambiguous. Businesses seeking to classify workers as independent contractors would be wise to assess that decision using the Common Law and Economic Reality tests as well, which provide additional clarity.
The Common Law Test is primarily used by the Internal Revenue Service. It looks at who has control of the work – the business or the contractor. It assesses 20 factors, not all of which must be present to assign classification. Factors include:
- Instructions and sequence – who determines how the work is performed?
- Training – is ongoing training required from the hirer to ensure work is performed in a certain way?
- Services rendered – must the work be performed personally, or can it be subcontracted/given to the contractor’s employees?
- Hours of work – who sets the hours when services are performed?
- Profit and loss – is time and labor pay provided regardless of who gains or loses economically based on the work provided?
- Location – who chooses where services are performed?
- Relationship duration – at service completion, can the worker move on to other projects outside of the hirer?
- Integration of services – do provided services significantly impact overall daily business success?
- Payment method – are workers paid by project or by regular intervals (hour, week or month)?
- Business expenses – who is responsible for paying the worker’s business expenses?
- Investments – who provides the tools, equipment, materials, and facilities to execute the project?
- Service availability – is the worker free to provide services to the general public while partnering with the hiring entity?
- Right to terminate and quit – does the employer have discretion to discharge the worker or can the worker quit without a breach of contract?
The Economic Reality Test establishes an employer-employee relationship when a worker economically depends on a business as services are provided. The test uses five factors collectively and examines the strength of each factor to determine a worker’s status. Factors include:
- Degree of control – who controls the worker and the work product?
- Opportunities for profit or loss – who profits from the success or failure of the business?
- Investment in facilities – who pays for the facilities, tools and equipment?
- Relationship permanency – is the relationship duration indefinite or periodic?
- Skills and initiative – are the worker’s skills benefiting one business or being leveraged in the open market to support multiple businesses?
The three tests help the government protect workers. However, the government aims to avoid overly regulating the business of employers or independent contractors. Therefore, government entities typically assess the entire working relationship to make classifications. Factors indicating employee status may be balanced by other factors indicating independent contractor status. The major takeaway – failing to meet a factor among the tests may not necessarily change employment classification. However, better safe than sorry, and transportation providers should consult with their legal counsel to act on the criteria for risk mitigation.
What’s the Solution?
Should trucking just do away with independent contractors? No company wants to pay several million dollars in misclassification lawsuits. Companies also don’t want to miss out on millions in freight revenues and adding employee drivers is difficult, expensive, and time consuming. One possible solution? Modify business practices to shift more entrepreneurial control to independent contractors. For help with that, there’s FreightRover’s CarrierHQ.
CarrierHQ provides an online marketplace of fleet services designed for one-truck operations all the way to the largest carriers in the US. The technology was created specifically to address the industry’s increasing struggle to maintain the independent contractor model. When assessing who has control of the worker, CarrierHQ offers flexibility to fleets working to establish contractors as truly independent. Here’s how:
- Autonomous enterprise operations – contractors have access to business formation services to create and manage their own business entity (LLC) and may apply for their DOT authority through CarrierHQ (requires Auto Liability insurance). By managing their own business under their DOT authority, they are capable of offering their services in the open market and aren’t affiliated with the hiring fleet’s DOT number the same as employee drivers.
- Payment method – CarrierHQ offers driver settlement services. The benefits are twofold. First, contractors have the option to select how they want to be paid – weekly or by trip (addressing the pay by project consideration). Second, hiring fleets leverage a third party to provide differentiation between how contractor and employee pay is processed. Contractors with their DOT authority also can access FreightRover Factoring to further control the speed of their settlements.
- Investments – CarrierHQ provides access to affiliate leasing entities for equipment needs. This allows contractors to acquire trucks and trailers for lease or purchase independent of the hiring fleet.
- Business expenses – contractors can sign up for Comdata fuel cards with limits established by their credit score rather than using a card with financial attachments to the hiring fleet. This addresses classification concerns stemming from fuel advances or price-based access to fuel stations and per-gallon costs. Physical Damage, Occupational Accident, and Non-Trucking Liability insurance are available for purchase in the contractor’s name as well. Using a series of questions and answers, contractors receive quotes from multiple insurance providers to self-select their plan based on coverage and cost. The system delivers insurance certificates electronically to the driver and the hiring fleet. Online access to Auto-liability insurance is coming soon.
- Control of the work – hiring fleets can launch a private load board inside CarrierHQ. Through a mobile app, contractors self-select freight eliminating the error of forced dispatch and supporting contractor control over the profits and losses of their business. Contractors determine what work they perform and how they perform it while still providing capacity to the hiring fleet.
CarrierHQ provides the blend of control and choice the industry has desperately needed. Fleets take back control of their business and have new means of addressing the potential dangers of worker misclassification. Contractors have an online marketplace providing choice around their work and flexibility on how they manage their enterprise. Independent drivers remain entrepreneurs, not employees. These contractors present more rewards, with more manageable risk, and the industry keeps moving forward.
Interested in learning more? Let’s connect to discuss how CarrierHQ can benefit your overall classification risk strategy.