PUBLICATIONS
Publications
Publications

New York State Cracks Down on Independent Contractor Misclassification in the Transportation and Delivery Industry

Wednesday, January 15, 2014

Reprinted with permission from the November 27, 2013 edition of the New York Law Journal © 2013 ALM media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact ALMReprints.com, 877.257.3382 or reprints@alm.com.

On January 10, 2014, Gov. Andrew Cuomo signed into law the New York Commercial Goods Transportation Industry Fair Play Act (S5867-2013; A5237b). The new law targets transportation, delivery, and limousine companies in New York that classify as independent contractors certain drivers that deliver commercial goods in the state. The law drastically changes the legal test in New York for determining if such drivers are independent contractors or employees – requiring far more effort for legitimate businesses in this industry to create and maintain independent contractor relationships in the state. New York has been at the forefront of independent contractor misclassification initiatives in the recent past, and it is likely many other states will consider enacting similar laws for the transportation and delivery industry in 2014.

The article below was published originally in the New York Law Journal shortly after Thanksgiving 2013 in anticipation of the governor’s signature. It details the new tests that must be met in order for certain drivers of commercial goods in New York to be treated as independent contractors; the penalties and liabilities flowing from a violation of the new law; when the law becomes effective; and what notices must be posted by businesses in the industry. The article also includes a comprehensive analysis of the new law and offers “takeaways” to commercial goods and passenger transportation companies about the need to restructure, re-document, and re-implement their independent contractor relationships to comply with the law.

After signing the bill the governor returned it to the Legislature this past week for consideration and passage of certain proposed “chapter amendments” to the original bill that had passed both houses of the state Legislature in 2013. References to key proposed chapter amendments are noted in [brackets] in the article below.

Major Change in Law of Independent Contractors: The New York Commercial Goods Transportation Fair Play Act

A new bill that will significantly limit the use of independent contractors to deliver commercial goods in New York is awaiting signature by Gov. Andrew Cuomo. [Authors’ note: The bill was signed into law by the governor on January 10, 2014; he then returned it to the Legislature to make proposed "chapter amendments" to the original bill that passed the Legislature in 2013.] Businesses that currently treat as independent contractors drivers who deliver commercial goods to their customers [while operating vehicles with a gross vehicle weight rating (GVWR) or gross combination rate of more than 10,000 pounds, according to the proposed chapter amendments] will have to reclassify such individuals as employees unless the drivers meet one of two tests. Both of these tests are far more challenging to meet than the common-law test currently used in New York to determine if a worker is an employee or independent contractor.

The New York State Commercial Goods Transportation Industry Fair Play Act (S5867-2013; A5237b) was passed with bipartisan support by both the Senate and Assembly. It purportedly was passed in view of the perceived misclassification of many drivers as independent contractors instead of employees. Instead of simply increasing the penalties for misclassification and/or enhancing regulatory enforcement of the current common-law test for independent contractors (as some states have done), the New York Legislature chose to join a number of other states in enacting a new statutory test that will considerably reduce the number of independent contractors delivering commercial goods in New York.

Overcoming Presumption

The new law will create a presumption that any person [operating a commercial motor vehicle with a GVWR of more than 10,000 pounds, according to the proposed chapter amendments] performing transportation services of commercial goods for a "commercial goods transportation contractor" will be classified as an employee and not an independent contractor unless one of two tests is met.1

The first is a three-pronged requirement frequently referred to as the "ABC test," which is used by well over a dozen states in their wage, unemployment, and/or workers' compensation laws. Under that test, the business treating a driver as an independent contractor must show three things: (A) the driver is free from control and direction in performing the job, both under his or her contract and in fact; (B) the transportation/delivery service is "performed outside the usual course of business for which the service is performed;"2 and (C) the driver is "customarily engaged in an independently established trade, occupation, profession, or business" involving the transportation or delivery of commercial goods.3 The three factors are conjunctive; they must all be shown to satisfy the ABC test.

The second test has 11 prongs and, like the ABC test, all of these factors must be met to overcome the presumption that drivers of commercial goods in New York are employees and not independent contractors. This test is referred to as the "separate business entity" standard, which is applicable to any sole proprietorship, partnership, corporation, [limited liability company or association, according to the proposed chapter amendments] or other business entity.4 Some of the more challenging of the 11 factors that must be shown by a commercial goods transportation contractor are that the separate business entity with which it has contracted to deliver or transport commercial goods:

  • has a substantial investment of capital in the business entity, including but not limited to ordinary tools and equipment
  • owns or leases the capital goods (which presumably means the delivery vehicle)
  • gains the profits and bears the losses of the business entity
  • has the option to [changed to “may,” according to the proposed chapter amendments] make its services available to the general public or [others in the business community, according to the proposed chapter amendments]
  • includes its income from the business on the appropriate schedule on its federal income tax return [changed to “provides services reported on a Federal Income Tax Form 1099, if required by law,” according to the chapter amendments]
  • performs its services pursuant to a written contract that identifies the relationship with the commercial goods transportation contractor as involving independent contractors or separate business entities, and
  • [hires its own employees, if needed, “without the commercial goods transportation operator’s approval, subject to applicable qualification requirements or federal or state laws and regulations,” according to the proposed chapter amendments, and] pays any employees it may hire without reimbursement from the commercial goods transportation contractor and reports the wages of any such employees to the IRS.5

Penalties, Liability

The new law, which is to be codified, once enacted, as new Article 25-C of the New York Labor Law, includes substantial civil penalties of up to $1,500 for a first violation and up to $5,000 for a subsequent violation within a five-year period.6 Where the misclassification is "willful," the civil penalties increase to $2,500 "per misclassified employee" for a first violation and up to $5,000 "per misclassified employee" for each subsequent violation within a five-year period.7 A willful violation occurs where a commercial goods transportation contractor "knew or should have known" that its conduct was prohibited.8

The Commercial Goods Transportation Industry Fair Play Act will also impose criminal liability upon employers who are found to have willfully violated the new law.9 A first offense is punishable as a misdemeanor and may include imprisonment of up to 30 days or a fine of up to $25,000. A subsequent offense exposes the employer to up to 60 days' imprisonment or a fine not to exceed $50,000.

Where the commercial goods transportation contractor is a corporation, each shareholder owning 10 percent or more of the company and each officer "who knowingly permits the corporation to willfully violate" the new law shall be personally liable for the civil and criminal penalties upon conviction.10 In addition, any "substantially owned affiliated entity" shall be subject to the same civil penalties as the commercial goods transportation contractor.11

The above penalties are in addition to those that may be imposed under the unemployment, workers' compensation, and tax laws for misclassification of employees as independent contractors.12

Under the new law, once enacted, it will be a violation for an employer or its agent to retaliate against any person through discharge or any other manner in the terms and conditions of his/her employment for exercising any rights provided under the law, including making complaints or for providing any information to a public body conducting an investigation under the law.13

Effective Date and Notices

The Commercial Goods Transportation Industry Fair Play Act will become effective 60 days after signature by the governor.14 [The effective date is proposed to be changed to 90 days after enactment of the 2013 law that the governor signed on January 10, 2014, according to the proposed chapter amendments.] By that date, each commercial goods transportation contractor must post in a conspicuous location on its site a notice prescribed by the Labor Commissioner.

By law, the prescribed notice will describe:

  • the responsibility of independent contractors to pay taxes required by state and federal law
  • the rights of employees to workers' compensation, unemployment benefits, minimum wages, overtime, and other federal and state workplace protections
  • the protections against retaliation, and
  • the penalties for failure to properly classify individuals under the law.15

Analysis and Takeaways

The first test for establishing independent contractor status under this new law is the ABC test—a statutory scheme currently in use in a number of other states. The language in prong (A) of that test (that the driver is free from control and direction in performing the job, both under his or her contract and in fact) is comparable to the common-law test, which considers an array of factors that directly or indirectly bear on the question of direction and control over the manner of performing the services. Merely satisfying the common-law test, though, will no longer be sufficient in the commercial goods transportation industry. Once the law is enacted, any such business that wishes to treat drivers as independent contractors must also satisfy prongs (B) and (C). Those two factors, each of which are similar in nature to two of the many factors traditionally considered under the common-law test applicable to almost all other industries, will each be separately determinative of independent contractor status under the ABC test.

The language of prongs (B) and (C), however, are rather obtuse and ambiguous; indeed, it is not uncommon for courts in one state with an ABC test to interpret prong (B) or (C) in a wholly different manner than do the courts in other states. Thus, because there are virtually no court decisions in New York interpreting prongs (B) or (C), it is unknown whether the ABC test will be construed narrowly or broadly by the New York courts. It is therefore uncertain at present whether it will be easier or harder for some commercial goods transportation contractors to overcome the presumption of employment by satisfying the ABC test instead of the separate business entity test.

The separate business entity test found in the New York Commercial Goods Transportation Fair Play Act is generally similar to a comparable law that took effect in October 2010: the New York Construction Industry Fair Play Act.16 That law, which sought to curtail the misclassification of employees as independent contractors in the building and construction industry in New York, likewise creates a presumption that a person providing construction services is an employee unless the construction business can establish all three factors of the ABC test or show that the person is a separate business entity.

The Commercial Goods Transportation Industry Fair Play Act had been the subject of considerable lobbying in Albany by the Teamsters Union, which seeks to organize truck drivers in New York, and by transportation industry associations and specific companies, such as FedEx Ground, which use independent contractors to deliver commercial goods to customers. Much of the lobbying was reportedly over certain of the prongs listed in the original version of the bill defining a separate business entity. That initial version of the commercial goods bill borrowed virtually the same definition of "separate business entity" from the Construction Industry Fair Play Act. The final bill that passed both the state Senate and Assembly, however, contained the several key differences from the definition of separate business entity in the Construction Industry Fair Play Act:

  • whereas the construction industry law requires the separate business entity to make its services available to the general public or business community, the Commercial Goods Transportation Industry Fair Play Act only requires that the separate business entity be afforded the option to do so
  • the Construction Industry Fair Play Act mandates that the separate business entity must have a substantial investment of capital in the business beyond the ordinary tools and equipment necessary to provide the service, while the Commercial Goods Transportation Industry Fair Play Act provides that the substantial investment may include such ordinary tools and equipment
  • the construction law requires that the separate business entity makes its services available to the general public, whereas the commercial goods law only requires that the separate business entity have an option to make its services available to others
  • the construction law prohibits the contracting business from approving any employees of the separate business entity, while the commercial goods transportation law permits the contracting business to impose qualification requirements or compliance with federal or state law upon the separate business entity in its hiring of employees
  • the construction industry law prohibits the principal of the separate business entity from representing that he or she is an employee of the contracting business, whereas the commercial goods transportation industry law permits such a representation as long as the contracting business does not require the separate business entity to do so
  • finally, while the construction law requires the separate business entity itself to furnish all tools and equipment necessary to provide the service, that factor has been eliminated from the commercial goods law, thereby suggesting that a commercial goods transportation contractor may provide one or more of the tools and equipment used by the separate business entity.

It was generally believed that the Construction Industry Fair Play Act was so strict that it may have eliminated the use of independent contractor status for workers in the construction industry. See, e.g., R. Reibstein et al., "NYS Construction Industry Fair Play Act: An End to Independent Contractors?" NYLJ Sept. 9, 2010. By virtue of the legislative changes made in the final version of the Commercial Goods Transportation Industry Fair Play Act, this new law will not likely eliminate the use of all independent contractors in the transportation and delivery industry in this state, although it will undoubtedly limit considerably those persons who would otherwise qualify for independent contractor status.

It is likely that few companies currently using independent contractors to deliver or transport commercial goods to their customers are in a position today to satisfy either the ABC or the separate business entity tests. Such businesses are likely to require some degree of restructuring, re-documentation, and re-implementation of their relationships with drivers if they wish to continue to treat them as independent contractors and remain in compliance with the law.

While most of the 11 prongs in the separate business entity test are rather straightforward, a number of them require considerable familiarity with independent contractor compliance law in order to formulate a structure that will comfortably meet the requirements of each of the 11 prongs. An independent contractor agreement that is drafted by merely incorporating the wording of the statutory definition of an independent contractor or a separate business entity is unlikely to provide anything except a false sense of security. Indeed, as expressly noted in the first factor in the ABC test, the law examines the parties' relationship "both under his or her contract and in fact" (emphasis added), and regulators and the courts routinely discount contractual language that is inconsistent with the parties' actual day-to-day practices. Thus, a "one-size-fits-all" approach to compliance with this new law is unlikely to serve a client's interests, especially because of the conjunctive nature of both tests, where a failure to satisfy even a single prong can create substantial civil and criminal misclassification liability.

For example, prong (A) in the ABC test and the first factor in the separate business entity test are very similar, requiring that the driver be "free from direction or control" over the means and manner of performing the service. By its very nature, this threshold factor under both tests is extraordinarily comprehensive in scope and may implicate an array of different facts pertinent to whether the driver meets the first prongs of either of the two tests. For this reason, it is recommended that a multi-factor analysis be utilized, such as the “48 Factors-Plus” used as part of IC Diagnostics™. See http://independentcontractorcompliance.com/legal-resources/ic-diagnostics/.

The 60-day hiatus [now, a 90-day hiatus, by proposed chapter amendment] between the date when the new law is signed by the governor and when it becomes effective seems particularly short for businesses that currently treat drivers [operating vehicles covered by the new law and its proposed chapter amendments] who deliver or transport commercial goods as independent contractors. First, such businesses must determine if they are able to restructure their relationship with such drivers to conform to the requirements of the ABC or separate business entity tests. Second, if such businesses conclude that they are able to do so, the process of restructuring, re-documenting, and re-implementing is by no means a simple task, and it has taken the authors of this article 60 or more days to do so for some clients seeking to enhance their independent contractor compliance—either as a proactive step or in anticipation of a new law such as the Commercial Goods Transportation Industry Fair Play Act.

Thus, a commercial goods transportation contractor that wishes to retain its independent contractor relationships with drivers delivering or transporting goods to its clients should promptly begin to take steps to attain compliance. It is unrealistic, however, for government regulators in New York to expect businesses covered by the new law to get into compliance so quickly where the rules have been changed so dramatically for the entire industry, including a new requirement that drivers must own or lease the delivery vehicle. If the driver does not currently own or lease the vehicle, that requirement alone (with the resulting need to register and insure the vehicle) may take as much as 90-120 days to organize, including completion of all required paperwork. Hopefully, state regulatory bodies will afford businesses an informal transition period, beyond the 60-day period set forth in the new law, to achieve compliance, or the Legislature will modify the law to make it effective in 120-180 days after enactment. In fact, it is unlikely that most of the commercial goods transportation contractors in New York will even learn about the new law for some or all of the short 60-day transition period. [As noted, by proposed chapter amendment, the law will be effective 90 days after enactment of the 2013 law, which the governor signed on January 10, 2014.]

Many businesses affected by this new law in New York also operate in other states. Class action lawsuits against transportation companies misclassifying drivers as independent contractors have mushroomed in the past few years, and both state and federal governmental regulators have likewise been active in cracking down on delivery companies that are regarded as misclassifying drivers as independent contractors under applicable state and federal laws. The New York Commercial Goods Transportation Industry Fair Play Act may be a useful alert for such businesses to determine if they need to enhance their independent contractor compliance throughout their network of drivers in states across the country.

Endnotes

1. N.Y. Labor Law §862-b. [Even a driver who meets one of the two tests will be classified as an employee if payment for such individual’s services is not reported on a Form 1099 if required by law, according to the proposed chapter amendments.]

2. A number of states with "ABC" laws add to prong (B) an alternative: "or … is performed outside of all the places of business of the enterprise for which such service is performed." See, e.g., N.J.S.A. 43:21-19(i)(6)(A)(B)(C).

3. N.Y. Labor Law §862-b (1).

4. N.Y. Labor Law §862-b (2).

5. The full list of the 11 factors are found at N.Y. Labor Law §862-b (2)(A)-(K).

6. N.Y. Labor Law §862-c (3).

7. N.Y. Labor Law §862-d (3).

8. N.Y. Labor Law §862-d (2).

9. N.Y. Labor Law §862-d (4).

10. N.Y. Labor Law §862-d (5).

11. N.Y. Labor Law §862-d (8).

12. N.Y. Labor Law §862-d (6). Notably, however, the new law (in Section 4) provides that the presumption of employment provisions in §862-b shall not be applicable under the New York State tax law. Thus, the common-law test for determining independent contractor status shall continue to apply for purposes of the tax laws in New York.

13. N.Y. Labor Law §862-e.

14. Section 5 of the Commercial Goods Transportation Fair Play Act.

15. N.Y. Labor Law §862-c.

16. That law was codified in the New York Labor Law as Article 25-B and is found in Section 861.

Richard J. Reibstein and Janet B. Barsky

Written by

Richard J. Reibstein
Phone: 212.808.2722
Fax: 866.454.5857
reibsteinr@pepperlaw.com

Janet B. Barsky
Phone: 212.808.2726
Fax: 212.286.9806
barskyj@pepperlaw.com


Albert L. Barrueco, an associate with the firm in New York, contributed to this article.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

View the PDF version


Copyright © 2014 Pepper Hamilton LLP | Use of This Site Subject to These Terms & Conditions | PRIVACY POLICY | Contact Us: phinfo@pepperlaw.com or 866.737.7372 | Find Pepper Hamilton LLP on Facebook | Pepper Hamilton LLP on LinkedIn | Follow Pepper Hamilton LLP on Twitter | Pepper Hamilton LLP YouTube Channel | View Pepper Hamilton LLP's documents on JD Supra