MIXED UP ON MISCLASSIFICATION: WHERE “ABCs” ARE NOT SO ELEMENTARY
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Nothing written in this Q&A is intended to represent or constitute legal advice. Openforce provides general information and industry guidance related to solutions and services for working with independent contractor workforces. Openforce does not provide legal advice and is not a law firm. While we may have former lawyers and other legal specialists on staff, none of our representatives are licensed lawyers. Although we go to great lengths to ensure our information is accurate and useful, this information is not a substitute for legal advice. Openforce and the author(s) provide no warranty relating to any information herein.
No, it is not an automatic failure. The fact of a mixed fleet of ICs and employees is not necessarily the issue. The problem with prong B of the test is that it prevents employers from contracting with workers that perform the same work as the business itself. Generally speaking, any time you have independent contractors performing the same role that is done or could be done by the carrier and its own employees, there is a serious risk of failing this prong. If the ICs are providing different types of driving services from employees (such as last mile and courier, or courier and long haul), that may reduce the risk, but only marginally. Having an overlap in duties makes it tough to argue why a specific worker is an employee (and entitled to benefits and such) when they are performing the same function or providing the same service as ICs.
After AB5 was passed, there were many actions taken by several parties. The most relevant and successful was by the California Trucking Association (CTA), which achieved an injunction against the imposition/enforcement of AB5 for the trucking industry. The CTA argued that AB5 was preempted by federal transportation laws affecting motor carriers. The Federal Aviation and Administration Authorization Act of 1994 (“FAAAA”), 49 U.S.C. § 14501, et seq., prohibits states from enacting or enforcing laws or regulations that relate to “a price, route or service of a motor carrier . . . with respect to the transportation of property.” The injunction temporarily rules that the FAAAA preempts AB5. The federal court has been asked to review the injunction. Assuming that the California federal courts find that AB 5 is not preempted by the FAAAA, it could set the stage for an appeal to the U.S. Supreme Court, because there is opposing case law from non-California jurisdictions holding that the FAAAA does preempt this type of regulation.
California is definitely the hot spot for misclassification litigation. While several other states are starting to get more active, the following states already have laws in place saying workers are presumed to be employees and setting standards employers have to overcome to prove independent contractor status: Pennsylvania, Delaware, Colorado, Minnesota, New York, and Maine. That said, their aggression in enforcement may vary. Florida and Texas tend to generate large amounts of misclassification lawsuits, partially due to a large number of carriers present in those states. New Jersey also recently enacted several pieces of legislation, referred to as the “Misclassification Package,” that aim to redefine the relationships between companies and independent contractors. Similarly, the U.S. House of Representatives passed the PRO Act, which has been compared to a federal version of AB5 but is unlikely to pass the Senate or White House.
In our model with different aspects of independent contracting that can have safeguards in place to avoid misclassification, we identified “terminating” as one of those aspects. This is a pretty broad topic, so we’ll offer this: Employees typically do not have contracts or rules governing their termination; the company may have policies and procedures they use in handling employees, but much employment is at-will without any further terms. This means employees may typically be terminated without advance notice or penalty. Conversely, independent contractors ideally should have a contract in place governing the terms of their working relationship. That contract may contain specific termination verbiage within it. That terminology can vary based upon your business needs and requirements. Once in writing, the best practice is to follow the documented terms, whether that be giving proper notice or complying with penalties. It is a good idea to have penalties for failure to meet those terms for both parties, as one-sided penalties or fines do not sit well with the court—and there are already enough contractor-related issues, so there’s no reason to provide an easy target!
Yes, we recommend almost always having separate policies for employees and ICs. There will necessarily be practices that are specific to employees only. And there may be other practices specific to ICs and that reflects your contractual relationship. As a matter of practice, employee policies do not apply to ICs. However, the policies and practices of a carrier may apply to both employees and ICs, particularly if they govern relationships and interactions. For example, how you onboard, how you process payment disputes, how you award services, etc. Remember, the key to having a legally defensible contractor model is to focus on the end result, not how the IC achieved it. Policies and procedures tend to overstep a bit and get a company involved in how the work is done, which can create a direction and control dilemma.
We eliminated ICs in CA, but what about the risk of a CA-resident IC who is only used for interstate commerce? For example, LAX to Chicago and back.
When AB5 went into effect, we saw many trucking companies pull operations out of California or end their IC fleets due to the risk that location within California would give rise to AB5 violations. The jurisdictional issue is unclear, but strong arguments exist that non-California resident ICs are not subject to AB5 due to both jurisdiction and preemption of federal law. Unfortunately, given the legal environment in California, the risk is still there. For now, the enforcement of AB5 seems to have taken a back seat to deal with the COVID-19 pandemic, so there is a bit of a pause. Hopefully, this added time will allow those fighting AB5 to present a case that results in a positive outcome for the IC environment.