Important Worker Classification Tips for Transportation Businesses Authored by Matt Daus and Jasmine Le Veaux
Most for-hire vehicle ("FHV") drivers in New York are classified as independent contractors, a status which is important under federal, state and local tax and labor laws. Worker classification has become a particularly important topic recently as the Internal Revenue Service ("IRS") has stepped-up enforcement of rules regarding independent contractors.
This increased enforcement has been facilitated by the formation of joint task forces among the Federal Department of Treasury and the Department of Labor ("DOL"), as well as between state agencies, to crack down on independent contractor misclassification1. A striking example of how far New York is willing to go to enforce proper classification of workers occurred in 2008 when then-Attorney General Andrew Cuomo criminally prosecuted an owner of a pizzeria for failing to secure workers' compensation coverage and pay overtime wages2. The owner's arrest was a result of an investigation conducted by the New York Joint Enforcement Task Force on Employee Misclassification3. In addition to criminal and civil actions initiated by the government, there are also private causes of action that can be instituted under the Fair Labor Standards Act4 and equivalent state laws for overtime back-pay resulting from improper worker classification, which may be commenced by groups of workers in the form of a class action involving significant liability exposure.
The IRS defines an "independent contractor" as an individual that has the right to control or direct the result of the work performed5. The company for which an independent contractor works is not required to pay federal employment taxes for that worker. While tests for assessing worker status vary among governmental agencies, in general, the more control a company has over the manner and means by which a worker performs his services, the more likely the worker will be considered an employee. Although no one fact is determinative, we have outlined a number of provisions that may appear, and/or should appear, in a FHV driver affiliate application and/or agreement, in order to clarify the independent contractor status of the driver:
- Non-compete language is often considered as a base's attempt to control drivers. It is advisable that bases consider the benefit of maintaining their respective non-compete policies, and whether the policies outweigh any potential costs.
- Merely stating a driver is an independent contractor in the driver affiliate application will not satisfy a legal analysis of whether a driver truly is an independent contractor. How the driver actually performs his/her services is what really matters to investigators. Notwithstanding provisions in an agreement that specifically address the driver's right to retain discretion over the manner in which he/she performs the services provided (in accordance with all applicable laws, business customs and the highest industry standards), it may be helpful to further define the driver as an independent contractor.
- Sanctions or discipline imposed on drivers by the base for violations of company procedures is a factor that can suggest an employer-employee relationship. This would include base imposed fines or driver disciplinary systems or committees that exist at many New York City black car bases.
- Supplying drivers with technological equipment (e.g., including two-way radios, GPS navigation systems and/or digital dispatch systems) may suggest that the base has a level of control over the drivers. Bases should consider requiring drivers to purchase their own electronic devices, and set forth this obligation in the agreement.
- Governmental regulations that are enforced through company policies do not evidence control by the employer, but rather, constitute supervision by the state6. An example of this may be the enforcement of New York City Taxi and Limousine Commission ("TLC") regulations through provisions in a driver application or agreement with the base. For instance, TLC regulations require FHVs to be regularly inspected three times per year and bases can also be fined $350 for each failure of its affiliated vehicle owner/drivers to comply7. A base may enforce this regulation through the provisions of its driver application or agreement by requiring each driver to ensure that their affiliated vehicle is inspected. This practice is not likely to harm the independent contractor status of the driver because the base has simply incorporated a TLC mandate into their company policies, rather than exerting its own control over the driver. Also, some FHV bases also insert indemnity provisions in their driver or vehicle affiliation agreements to require owner-drivers to reimburse the base for any TLC fines paid as a result of the misconduct of the affiliated FHV.
As the issue of worker misclassification becomes increasingly enforced by government agencies who are now sharing information with one another, FHV bases should be aware of the laws with respect to this issue, and make responsible changes to driver affiliate applications, company policies, and business practices in order to clearly define a driver's status as an independent contractor. While the above-mentioned points may serve as guideposts to initiate company review of internal policies and documents, FHV bases need not abandon all policies that exert some form of control over the drivers. Instead, bases should consider their internal policies and apply a cost/benefit analysis to whether such policies are in fact necessary, effective, and worth potential liability exposure.
It is highly recommended that FHV bases spend time preemptively auditing their policies and current agreements with drivers now, as the costs of litigation and/or defending government action, as well as the monetary damages and penalties that could be assessed, could be quite significant and "far outweigh" the costs of conducting a legal review8.
For questions or to learn more, please contact Matt Daus, Jasmine LeVeaux or a member of our Transportation team.
[1] See U.S. Department of Labor Strategic Plan at pg. 31, available at http://www.dol.gov/_sec/stratplan/StrategicPlan.pdf
[2] See National Employment Law Project, Summary of independent contractor reforms - new state activity, available at http://www.nelp.org/page/-/Justice/SummaryIndependentContractorReformsJuly2009.pdf
[3]This task force is comprised of the New York State DOL- Bureau of Labor Standards, the Unemployment Insurance Division, the Workers Compensation Division and the Department of Taxation.
[4] See The Fair Labor Standards Act of 1938 ("FLSA"), as amended, 29 U.S.C. § 201, et seq., available at http://www.dol.gov/whd/flsa/. Notable cases regarding worker misclassification under the FLSA include a federal class action lawsuit brought in California against UPS which settled for $12.8 million in December 2009; ongoing litigation against FedEx in 28 states over the misclassification of drivers for which total financial penalties could reach upwards of $1 billion; and a pending $200 million federal class action lawsuit brought in July 2009 against Northwestern Mutual alleging minimum wage violations and failure to pay overtime. See Worker Misclassification: Recent Trends in Independent Contractor Lawsuits, available at http://media.straffordpub.com/products/worker-misclassification-recent-trends-in-independent-contractor-lawsuits-2010-04-27/presentation.pdf.
[5] See Independent Contractor Defined, available at http://www.irs.gov/businesses/small/article/0,,id=179115,00.html.
[6]See e.g., Elite Limousine Plus, Inc., 324 NLRB No. 182 (1997).
[7] See TLC Regulation §59A-26 stating that for-hire vehicles must be regularly inspected three times every year. Violation of TLC Regulation §59A-26 could result in a $100 fine and suspension of the Vehicle Owner License, as well as a base fine of $350. TLC Regulations available at http://www.nyc.gov/html/tlc/html/rules/rules.shtml.
[8] Disclaimer: These comments are intended to be for information purposes only and should not be taken as legal advice. Prior results do not guarantee a similar outcome.
