Transportation Employment Law Update: Use of Independent Contractors

Jun 25, 2014 by

Transportation companies frequently utilize independent contractors or owner/operators to handle various services for them, ranging from hot shot jobs to dedicated routes to their entire trucking operations. Independent contractors may be of great help to such companies, but in California they must be utilized with caution and a clear understanding of the risks associated with misclassifying them as independent contractors rather than employees. The Ninth Circuit Court of Appeals recently issued an opinion in Ruiz v. Affinity Logistics Corp. addressing this sensitive employment issue. http://cdn.ca9.uscourts.gov/datastore/opinions/2014/06/16/12-56589.pdf

CASE DISCUSSION

In Ruiz, Affinity the defendant employer, offered to hire Ruiz and other drivers as independent contractors. Affinity told the drivers they needed a fictitious business name, a business license and commercial checking account, all of which Affinity helped the drivers prepare and obtain. Apart from a driver’s license, no other special skills or licenses were necessary. Affinity required each driver to sign an Independent Truckman’s Agreement (“ITA”) and an Equipment Lease Agreement (“ELA”). The ITA’s term was for one year and automatically renewed from year to year. It could be terminated at any time by either party without cause on sixty days’ notice or with cause on breach of the ITA. Drivers were paid a flat per stop rate, handled approximately 8 deliveries per day and usually worked 5 to 7 days per week. Affinity also provided the drivers with a procedural manual, which detailed the procedures drivers were required to follow regarding their home delivery services, customer service and general operations. Affinity encouraged, if not required, drivers to lease trucks from it. Lease payments and maintenance costs were deducted from the driver’s paychecks.

Each day the drivers were required to report to Affinity’s warehouse, where they checked in with a supervisor, received their route for the day, checked their assigned freight and then waited to attend a 15-30 minute mandatory morning stand up meeting. Affinity’s drivers had to wear uniforms and adhere to strict appearance requirements. Drivers were not allowed to defer from the route provided to them and had no choice as to the order in which they made their deliveries. Affinity required drivers to call customer service after each delivery and check in with a supervisor throughout the day to report their location and status.

The Court found that due to the control Affinity exercised over its home delivery drivers, they were actually employees wrongfully classified as independent contractors under California law. The drivers were therefore entitled to California labor law protections afforded to employees, such as paid sick leave, vacation, holidays, severance wages and workers compensation insurance. The Ruiz Court’s ruling was based on an in depth analysis of the parties relationship under historical agency factors.

In California, a person performing services for an employer is presumed to be an employee. Narayan v. EGL, Inc. (9th Cir. 2010) 616 F.3d 895, 900. An employer has the burden to prove that the presumed employee is actually an independent contractor. Id. Courts look at a variety of factors rooted in the law of agency to determine whether a worker is an independent contractor or an employee. The importance of and weight to be given each factor depends on the totality of the circumstances, however, the right to control the manner and means of job performance is the primary consideration. S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal. 3d 341. “But this [control] rule requires that the right to exercise complete or authoritative control, rather than mere suggestion as to detail, must be shown. Also, the right to control, rather than the amount of control which was exercised, is the determinative factor.” Varisco v. Gateway Science & Engineers, Inc. (2008) 166 Cal. App. 4th 1099, 1103; see also Ruiz.

The secondary factors courts consider are grounded in the Restatement Second of Agency § 220 and include:
• whether the employment relationship may be terminated at will;
• whether the worker engages in an occupation or business distinct from the employers;
• whether the type of work performed in the locality is usually done under the employer’s direction or by a specialist without supervision;
• the skill required to perform the work;
• who provides the instrumentalities, tools, and place of work;
• the length of time for which services are to be performed;
• whether the worker may hire and fire others;
• whether payment for work is by time, piece, rate or job; and
• whether the parties believe they are creating an employment or independent contractor relationship – which is often expressed via an agreement.

See generally Ruiz; see also S.G. Borello & Sons, Inc., 48 Cal.3d at 351. “These individual factors cannot be applied mechanically as separate tests; they are intertwined and their weight depends often upon particular combinations.” Cristler v. Express Messenger Systems, Inc. (2009) 171 Cal.App.4th 72, 85-86. With respect to the final secondary factor, courts have routinely found that the label the parties place on their employment relationship is not dispositive and will be ignored if their conduct establishes a different relationship. Estrada v. FedEx Ground Package Sys. (2007) 64 Cal.App.3d 327, 355.

The Ruiz Court found that Affinity had the right to and did exercise control over every detail of the drivers’ work, including their rates, start times, schedules, routes, number of stops, trucks, equipment, vacation, appearance, who could assist the drivers, and how they checked in with customer service and supervisors. See Ruiz. Secondary agency factors also indicated the drivers were employees, not independent contractors, because the drivers: (1) were not in a distinct occupation or business from Affinity and were discouraged from working elsewhere or using their leased trucks outside of Affinity’s operations; (2) worked under Affinity’s direction and supervision in all aspects of the transportation and installation of freight; (3) did not need any substantial or specialized skills; (4) had their trucks and equipment provided by Affinity, albeit deducting those expenses from paychecks; (5) while paid per stop were more accurately paid at a regular rate of pay; (6) were not in a business distinct from Affinity’s operations, rather they were an integral part of those operations; and (7) had no contemplated end date to their service relationship.
The only factors not strongly leaning towards misclassification were that the drivers understood they had entered into an independent contractor relationship through the ITA and that there was a mutual termination provision in the ITA.

CONCERNS AND CONSIDERATIONS
Transportation companies should consider the Ruiz decision when deciding how to set up their operations and whether, and in what circumstances, to use independent contractors to supplement their workforce. Misclassification of employees as independent contractors is a very expensive problem to resolve. If misclassified, employers expose themselves to civil lawsuits by employees seeking compensation for labor claims and penalties, Private Attorney General Actions brought by employees on behalf of the State of California, government fines and possible audits by the IRS or California’s EDD. There is also a possibility for vicarious liability for acts performed by the misclassified independent contractor while working in your employ.

This office suggests you proceed with caution in utilizing independent contractors for trucking operations in California, have carefully drafted independent contractor agreements and actively monitor your operations to insure that you are operating within the confines of the law. If you have questions or concerns regarding the use or potential use of independent contractors for transportation services, do not hesitate to contact us.

Jamie C. Couche

moc.walpdanull@ehcuocj

 

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