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September 3, 2012 8:00 AM, EDT

Opinion: Independent Contractors Under Fire

This Opinion piece appears in the Sept. 3 print edition of Transport Topics. Click here to subscribe today.

By Michael Gregg

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Littler Mendelson

Transportation companies with independent contractor relationships should brace themselves for potential misclassification challenges from multiple fronts. Given the budget crises facing many states and the federal government, the interests of legislators, government agencies and unions have aligned, resulting in a coordinated effort to discourage the use of independent contractors — or to reclassify them as employees.

Because independent contractors are not employees, various workplace laws and rights, such as the right to join a union, do not apply to them. Thus, unions are interested in having employers reclassify independent contractors as employees to increase potential union membership.

Union efforts to have independent drivers reclassified as employees have been supported by state legislatures, agencies and local governments. For example, in 2006, the Port of Los Angeles adopted a Clean Truck Program in response to opponents’ arguments that port expansion would increase air pollution. As part of the program, the port implemented a progressive ban on older, higher-polluting trucks. The ban forbids noncompliant trucks from entering port property.

At the time it adopted the ban, the port believed it would be difficult for independent owner-operators to comply with the new requirements for port entry because research showed that owner-operators had low capital and limited opportunities to obtain credit to acquire new trucks. To address these concerns, the port adopted a multifaceted incentive program and concession agreement system to encourage motor carriers to cooperate with the progressive ban. The program barred trucking companies from operating on port property unless they entered into a concession agreement with the port. The concession agreement required, among other things, that motor carriers convert their independent owner-operators to employees.

In American Trucking Associations Inc. v. City of Los Angeles, 2011 U.S. App. LEXIS 19609 (9th Cir. 2011), the Ninth Circuit ruled that the port’s requirement that trucking companies convert their independent contractors to employees is preempted by the Federal Aviation Administration Authorization Act. The act generally prohibits states or political subdivisions from enacting or enforcing a law, regulation or other provision related to a price, route or service of a motor carrier with respect to the transportation of property.

In the wake of the ATA case, legislators have attempted to amend the FAAA Act to allow states to adopt laws regulating the route, price or service of motor carriers and commercial motor vehicles providing services at port facilities.

The Clean Ports Act of 2011, H.R. 572 and S. 2011, which is now being considered by Congress, would allow ports to require that trucking companies convert their owner-operators to employees if such requirement is “reasonably related” to reducing pollution, traffic congestion, improving highway safety or the efficient use of port facilities.

In 2012, the states of Washington and New Jersey introduced legislation to define certain drayage drivers operating on port or intermodal rail yard property as statutory employees, not independent contractors. The New Jersey bill also applies to parcel delivery drivers, and the bill allows the employer to overcome the legal presumption of employment based on a showing of lack of control or direction over the driver, among other factors. The New Jersey bill subjects employers and employees who fail to properly classify drivers to civil and criminal penalties, including imprisonment. California introduced a similar bill in 2011, A.B. 950, though that bill is now in inactive status.

State agencies are also taking steps to discourage the use of independent contractors in the transportation industry. The California Division of Labor Standards Enforcement, the agency charged with enforcing California’s wage-and-hour laws, recently started auditing trucking companies. In connection with these audits, the DLSE is sending “employee questionnaires” to independent contractors inquiring about:

• The types and amounts of deductions taken from their pay.

• Who tells them what jobs to pick up and at what time.

• Whether they can decline to pick up a load.

• If they are required to pay for gas.

• If they can use the truck to deliver for another business.

• If they are responsible for repairing the truck.

• If they are required to use the insurance the trucking company offers.

The DLSE also is issuing subpoenas to trucking companies for records “relating to the classification of drivers as independent contractors and compliance with the California Labor Code.”

In addition to that broad request, the subpoenas seek 36 different categories of documents, including, among others, documents relating to any requirement that a driver obtain insurance coverage, records of expenses paid by drivers, independent contractor agreements, insurance policies, truck lease agreements and advertisements.

The efforts of employers to classify workers properly is complicated by the fact that there is no single test to determine whether a worker is an independent contractor or an employee. In fact, different tests apply depending on the particular law at issue. For example, the Internal Revenue Service uses a 20-factor test, focusing on the concepts of behavioral control, financial control and the relationship between the company and the worker, while the U.S. Department of Labor uses six factors identified by the Supreme Court. To complicate matters even more, many states use their own tests to determine whether a worker is an employee or an independent contractor.

Given these complexities — along with the increased efforts of unions, legislators, and agencies to discourage the use of independent contractors or to have them reclassified — transportation companies with independent contractor relationships should reexamine these relationships to assess whether they are in compliance with applicable law.

Michael Gregg is a shareholder in Littler Mendelson’s Irvine, Calif., office. He represents companies in all aspects of labor and employment law.