ADDRESSING THE THREAT TO THE IC MODEL

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ADDRESSING THE THREAT TO THE IC MODEL
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ATTACKS ON THE USE OF ICs Presented by Scott
Grandys Contractor Management Services
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SCOTT GRANDYS Biography Scott is the Vice
President of Sales for Contractor Management
Services (CMS), the leading full-service
consulting firm that works with companies
utilizing the services of Independent
Contractors. He has over 12 years experience in
the transportation industry, performing or
supervising every function of operating a
transportation/courier company. Prior to CMS,
his experience was in managing and owning
operations that utilized the services of ICs as
well as implementing IC programs into the Air
Freight Forwarding Industry. Scott works
hand-in-hand with CMS Legal, Compliance and
Sales Departments to coordinate education on the
proper use of ICs by transportation and courier
companies. Two of Scotts primary
responsibilities at CMS include (1) analyzing
existing courier and transportation companies to
recommend, and assist with the implementation of
solutions for the companies to ensure they are
protected when utilizing the services of ICs, and
(2) analyzing and critiquing audits of
transportation and courier companies conducted by
CMS Audit Division to ensure on going quality
and thoroughness (an internal audit of the Audit
Divisions work). Working with companies across
43 states and with an Independent Contractor base
of over 10,000 members, Scott is well aware of
the problems and attacks against the use of ICs
that have been increase around the country, and
is well versed in the proper way to handle the IC
Model
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Attacks On the Use of ICs
FACT IRS, Department of Labor, state agencies,
courts, Workers Compensation Carriers and ICs
themselves. PAST IRS 20 Factors, Safe
Harbors PRESENT Ever-Changing Requirements.
Several different tests, case studies, state
agency interpretations
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Attacks On the Use of ICs

• IRS Safe Harbor Provision
• File all required 1099s for worker
• Consistently treat worker and all doing similar
  work as independent contractor
• Reasonable basis for treating worker as
  independent contractor

Warning IRS Safe Harbor only applies to Federal
Taxes. It does not provide any help for state
(UI or WC) or other Federal (FLSA, NLRB, EECO) law
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Legislative Attacks on the Use of ICs
Legislative Attacks
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Legislative Attacks on the Use of ICs

• Massachusetts
• 2004 Altered B prong of ABC test under the MA
  Independent Contractor Law, which impacts
  discrimination, minimum wage, over-time claims.
• ABC Test
• Control and direction of the work (Control Test)
• Outside service
• Outside usual course of firms business or
• Outside firms usual places of business.
• Engaged in independently established trade,
  occupation, profession, or business
• Does not impact Massachusetts tax withholding
  requirements or UI

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Legislative Attacks on the Use of ICs

• New York 08686 and 5626
• ABC test modified (Massachusetts)
• B Services performed outside the employers
  usual course of business
• Only Construction industry right now.
• Originally Introduced in June 2005. Not moving
  fast. Not dead still in committee
• Creates criminal sanction, including jail time
• If employer knew or should have known the worker
  whom the employer classified as an IC should have
  been classified as an employee

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Legislative Attacks on the Use of ICs

• Illinois (Criminal Sanctions)
• Illinois 5002 (Employee Classification Act)
• Originally introduced to apply to all independent
  contractor scenarios, but amended to apply to
  only the construction industry
• As originally introduced, any employer who
  willfully failed to properly designate a worker
  as an employee was subject to misdemeanor
  criminal sanctions

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Legislative Attacks on the Use of ICs

• Criminal Sanctions
• Criminal and civil sanctions (first offense)
• Imprisonment of not more than one year and/or
  fine of not more than 25,000
• 5 Year debarment from public projects
• Any combination of penalties and fines above

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Legislative Attacks on the Use of ICs

• Texas
• Proposed in 2005. Creates one definition for
  independent contractor for all state purposes.
  Appears to leave out the specific exemption in
  the UI law for delivery services.
• Meet all of following
• Business separate from that of the firm
• Holds Federal Employer ID Number
• Contract that provides worker performs specific
  work for a specific amount
• IC Controls means of performing work
• Incurs main expenses related to work
• Pay on commission, per job or competitive bid
  basis

Classification under statute cannot be altered or
waived by parties. Just calling person
independent contractor in contract not enough.
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Regulatory Attacks On the Use of ICs
Attacks by Regulatory Agencies
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Regulatory Attacks On the Use of ICs
California EDD Although guidelines have been
issued for newspaper distribution, product
demonstrators, process services and several other
industries, so far the EDD has refused to issue
any guidelines for the courier industry. Even if
they do, its doubtful it will be very
useful. Although their top people attend
meetings telling groups that ICs in the courier
industry are legal if done properly, the minions
of auditors approach the audits with the obvious
intent to merely find out how much to assess.
The approach is that the workers are assumed to
be employees and the courier company has the
burden of appealing the assessment to overturn
the workers being classified as employees.
However, so far in only one case, involving just
seven drivers, has the EDDs determination been
overturned on appeal. And those seven complained
loudly that they wanted to be ICs
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Regulatory Attacks On the Use of ICs
Department of Labor Gives lip service to
following the common law test in applying the
Fair Labor Standards Act. But, focus of its
approach is more in line with economic reality
test Is worker an integral part of the
companies economic survival.
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Regulatory Attacks On the Use of ICs
National Labor Relations Board Fighting IC
Model. If IC, NLRB has no jurisdiction. If can
establish Employer-Employee, NLRB has
jurisdiction   Florida case. NLRB determined
worker to be an employee because required to
wear a uniform, required to have company name on
side of vehicle, dedicated by company to provide
services to just one of companies customers
(which precluded him from doing work for others),
and he was paid by the hour (although contract
said 55 commission) because company charged
customer by hour, worker received 55 of hourly
rate for number of hours he worked.
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Regulatory Attacks On the Use of ICs
Texas Workforce Commission Historically, the
Texas Workforce Commission (TWC) would just look
at the contract to see if on paper an IC
relationship was established. If so, the TWC
took the position that adults should have the
right to decide what contracts to enter into, and
even to enter into contracts that are not
favorable to them. The idea of a protective and
paternalistic government has started to take seed
in Texas. The TWC digs deeper. In a recent
case, even though the driver signed a contract as
an IC, the hearing office dug deeper and found
that all the worker did was use the company
tractor to move the trailers around the company
yard. Even though the contract stated he was an
IC, the TWC determined he was an employee. Also,
consider legislation proposed in 2005.
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Workers Compensation Carriers Attacks On the Use
of ICs
Workers Compensation Carriers
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Workers Compensation Carriers Attacks On the Use
of ICs
Looking for additional premiums. The Carriers
are auditing companies and assessing premiums,
for up to three years, for workers the company
classified as ICs and who were not reported to
the Carrier. Also, some Carriers charge a 1/3
rate for ICs. Theory is that 1/3 represents what
the drivers actual wages would have been after
excluding all expenses a driver has to pay
directly. Problem Even though receiving a 1/3
premium, some Carriers maintain a worker is not
covered and charges the company for all costs the
Carrier has to pay for a driver determined by ALJ
or court to be an employee and entitled to
workers compensation insurance. Caveat Dont
expect your carrier to argue very forcefully for
you that the driver was an IC rather than an
employee. They get premiums for employees, not
ICs and if a worker is designated an employee so
that the Carrier has to pay, they can recover all
they pay from the company.
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How is the Industry Responding to these
Attacks?
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GUIDELINES, LEGISLATION and JUDICIAL BATTLES
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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• Massachusetts
• The Coalition
• The Massachusetts Society of Certified Public
  Accountants (MSCPA) were instrumental in forming
  a coalition
• NFIB
• Associated Industries of Massachusetts (AIM)
• Retailers Association of Massachusetts
• New England Council of the American Electronics
  Association
• Contractor Management Services (CMS)
• The Smaller Business Association of New England
• The Massachusetts Association of Insurance Agents
• The Neponset Valley Chamber of Commerce

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• Massachusetts
• The Advocacy
• The advocacy efforts were two-fold
• Raising awareness of the issue since most people
  had no idea that the problem even existed in the
  first place
• Creating a sense of urgency about why something
  needed to be done
• Restoring the original definition or
• Remove some of the ambiguity associated with it

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• New York
• Guidelines for determining worker status
  Messenger Courier Industry
• The guidelines are used by the Unemployment
  Insurance Division, the Division of Labor
  Standards and the Division of Safety and Health
  to determine a workers status
• Developed by the MCAA and NYSMCA
• Effective January 1, 2006
• Status determined by Indicators of Independence
  Neutral Factors for On-Demand and Route Drivers
• Provides clarity on the IC Model

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• Illinois
• Successful Lobbying Efforts
• A local Illinois Messenger Association, in
  conjunction with various industries and
  Contractor Management Services (CMS) successfully
  changed the Criminal Sanction to only apply to
  the construction industry through successful
  lobbying efforts

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• California
• Three-Prong Approach
• The California Delivery Association working on
  the Guideline approach
• MCAA and IC Steering Committee working on
  appealing a precedent setting case in CA
  regarding IC Status
• Legislative action a third group is currently
  working with a lobbyist to change legislation in
  CA to add clarity to the IC Model

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• Georgia
• Legislative Change
• A local group facilitated a change in Georgia
  Legislation through the collective efforts of a
  law firm and lobbyist
• Services performed for a common carrier of
  property
• The individual is free to accept or reject
  assignments
• The Individual is paid on a commission basis
• Such individual personally provides the vehicle
  used
• Such individual has a written contract with the
  common carrier
• The written contract states expressly and
  prominently
• Individual is responsible to pay social security,
  state and federal taxes
• The SS tax is higher than what they would pay as
  an employee
• The work is not covered by the unemployment laws
  of GA
• The written contract does not prohibit the
  individual from providing services to multiple
  common carriers

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• Connecticut
• Declaratory Ruling, In the Matter of Connecticut
  Messenger Courier Assoc., dated June 7, 1994,
  addressing the application of the ABC test to the
  Messenger and Courier Industry
• The driver is not personally supervised by a
  representative of the company
• Drivers are not required to render the contracted
  services personally
• The drivers are in a position to realize a profit
  or suffer a loss
• The drivers are paid on a per-job or per-delivery
  basis and not on an hourly or salaried basis
• The drivers provide their own vehicles
• The drivers select their own routes and order of
  delivery
• The drivers contracts are of a fixed duration
  with specified renewal dates
• The contract includes an explicit understanding
  of the parties that the driver is an independent
  contractor

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ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS
Guidelines, Legislation and Judicial Battles

• Summary
• Keep Your Eye On the Ball
• Change is inevitable. Make sure it is always
  favorable
• Hire a professional to watch the potential
  changes and make sure you are safe
• State
• Case Law
• Federal
• Associations Very important in keeping the
  status quo
• ALWAYS be proactive in your approach
• An ounce of prevention is worth a pound of cure
  

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• Q A