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The Latest Threat to the Owner-Operator Model
New guidance from the Department of Labor could spell trouble for trucking
New guidance from the Department of Labor issued in July could pose a threat to the trucking industry's use of owner-operator drivers as independent contractors.
The American Trucking Associations calls it "an aggressive departure from prevailing classification standards," saying it "no doubt signals an attack on industries like trucking that rely significantly on contractors."
Administrator's Interpretation No. 2015-1 is aimed at "misclassification" of employees as independent contractors. The issue has been a focus of the Obama administration and is being pushed by labor unions, most visible among port drayage firms and in recent highly publicized and successful lawsuits against FedEx.
It's "a shot across the bow by the Department of Labor," says Ben Menzel, relationship manager and legal advisor at HNI, a non-traditional insurance brokerage that offers clients advice on reducing risk.
HNI CEO Mike Natalizio says this guidance seems to threaten the owner-operator model used in trucking.
"Many, many motor carriers are following the law, treating independent contractors appropriately, and it's working for both sides," Natalizio says. "This could take away that model. So we are concerned that this is maybe heading down a path of threatening that, and changing the way independent contractors in the trucking industry will survive."
The Department of Labor is far from the only agency that determines independent contractor status. There's the IRS and many state-level agencies, including those governing worker's comp as well as state income taxes.
However, according to the guidance notice, the DOL's Wage and Hour Division has entered into memoranda of understanding with many of these states as well as the Internal Revenue Service. In conjunction with these efforts, the DOL says, it decided to put out this guidance regarding the application of the standards for determining who is an employee under the Fair Labor Standards Act.
According to a legal alert from Barnes & Thornburg LLP, the interpretation is significant from a number of standpoints:
- It states the DOL's unequivocal opinion that "most workers are employees," under the FLSA.
- It fully embraces the "economic realities" test as the DOL's preferred approach to determining whether a worker is an employee or a contractor.
- It downplays the significance of an employer's exertion of control over the tasks performed by the worker.
- It reinforces the DOL's pattern over the last several years of aggressively examining the classification of workers as contractors.
While much of the guidance in the document is not new, the "economic realities" emphasis "is going to be problematic," says Rob Moseley, transportation attorney with Smith Moore Leatherwood LLP. "A trucking company is not going to be able to say having truckers move your freight isn't an integral part of your business.
"It's a test we're set up to fail," he says. "Basically,they're saying the only guys who could be an independent contractor at a trucking company are the plumber and the guy that cuts the grass."
Moseley says if the guidance is interpreted literally, trucking companies that want to use independent contractors may be forced to go to a model where their core business is not moving freight, but brokering loads to those independent contractors – even to a pure broker model where those owner-operators must have their own authority.
"What it may have the affect of doing is pushing a lot more one-man, one-truck operations into the motor carrier model rather than being independent contractors leased on to somebody else."
The "economic realities" test has been used by several courts and regulatory agencies for years and includes the following factors:
- The extent to which the work performed is an integral part of the employer's business;
- The worker's opportunity for profit or loss depending on his or her managerial skill;
- The extent of the relative investments of the employer and the worker;
- Whether the work performed requires special skills and initiative;
- The permanency of the relationship; and
- The degree of control exercised or retained by the employer
The guidance repeatedly de-emphasizes the element of control over how tasks are to be performed. Historically, note the attorneys at Barnes & Thornburg, the issue of control has been regarded as one of the most important factors in assessing whether a contractor actually is an employee.
"Although not abandoning the issue of control by any means, the fact the Department is downplaying the issue does call into question how control will be regarded in the future and more importantly, whether other factors might surpass it in prominence."
Smart trucking fleets have learned how to structure their operations to win the control test, Moseley says, which may be one reason this guidance is de-emphasizing it. "The reason they're saying the control test is bad is that truckers can win the control test; they can do that right."
HNI's Menzel says this is a signal that the DOL is going to err on the side of there being an employee/employer relationship.
That, he says, "makes it even more important for companies and independent contractors to maintain the independent nature of that relationship."
And that needs to not just be in the written documents, adds Menzel. "Even if you have a contract with a driver that says she's an independent contractor, that's not a safeguard," he says. "It's the old adage of if it walks like a duck and quacks like a duck, it probably is a duck."
HNI recommends that companies check with their own legal counsel to see what steps they may need to take to protect their independent contractor relationships.
However, ATA points out that it is too soon to tell what impact this new guidance will have. "Whether DOL's new view of the law will successfully upset well-settled legal precedent is a question that will have to be worked out in the courts."