TORT TRIAL AND INSURANCE PRACTICE: Independent Contractor or Employee?

Vol. 29 No. 3

By

Robert T. Franklin is a principal in the law firm of Franklin & Prokopik in Baltimore, Maryland. Michael Kota is general counsel of Cardinal Logistics Management Corporation in Concord, North Carolina. Robert M. Milane is the claims legal manager with Canal Insurance Co. in Greenville, South Carolina.

 

The issue of classifying workers as employees or independent contractors has become an extremely complex one. It comes into play in many different legal arenas, including imputed tort liability, workers’ compensation, unemployment, and taxation. Moreover, the stakes are extremely high, as the exposure, including taxes, can be staggering. Indeed, if independent contractors are ultimately held to be employees, the exposure for tax liability alone may threaten the ongoing financial viability of many entities.

Awareness of issues surrounding worker classification has been growing throughout all types of industries (this article focuses on the transportation industry) and is the result of increased enforcement actions and challenges by various government entities to the classification of workers as contractors. For example, federal “worker misclassification” legislation has been proposed. In addition, the Internal Revenue Service recently launched an initiative focusing on more aggressive audits of companies to examine the classification of their workers as contractors.

A number of states have also taken increased action. New statutes have included tougher standards for classification as an independent contractor. Some have even shifted the burden of proof to the purported employer to establish that the worker in question is an independent contractor. Penalties for “misclassification” of those determined to be employees have been increased. Some states have even enacted “private attorney general” statutes, allowing private parties, and their attorneys, to prosecute alleged violations of misclassification statutes.

In addition to legislative and executive actions, there is also exposure for litigation premised on the classification issue. A more obvious exposure exists for workers’ compensation claims by contractors claiming to be “covered employees” for such purposes. Also, a motor carrier may be held liable for acts of certain agents, even if they are classified as independent contractors. A leading example is the tort liability artificially imputed to motor carriers for actions of owner-operators under dispatch of, and working under the operating authority of, the motor carriers.

Standards for classification. At the very heart of the issue of worker classification—and the difficulties in grappling with it—is the fact that there is no one definitive test or standard for classifying workers as either employees or independent contractors. The “standard” varies in the substantive legal context in which it is encountered. For example, the test for the classification of workers as employees is different for tax, unemployment, workers’ compensation, and tort liability purposes. In addition, the standards vary by state, with laws such as those pertaining to workers’ compensation and unemployment being extremely state-specific. In fact, the practical way in which the test is applied often varies on the basis of individuals encountered in the process, both in terms of field officers for the various agencies charged with enforcement and judicial officers, whether they are judges or administrative commissioners.

Although there is no “bright line” test for worker classification, there are certain recurring themes. The most prevalent factor emphasized by various regulatory agencies and the courts is one’s “right to control” the detail of the individual’s work performance. The related issue of “control versus exposure” is particularly acute in the owner-operator setting. It was recognized that, at common law, owner-operators were generally not employees of the motor carriers with which they contracted. Accordingly, tort liability for negligence of the owner-operators could not be imputed to the motor carrier, pursuant to respondeat superior. There was concern that an individual owner-operator might not have sufficient insurance, or other wherewithal, to satisfy judgments for injuries to members of the public. In order to address this perceived need for additional financial responsibility, the federal equipment leasing regulations were enacted in 1979.

The regulations create further problems by certain language that they require to be included in an equipment lease with an owner-operator. For example, 49 C.F.R. § 376.12(c)(1) requires as follows: “The lease shall provide that the authorized carrier lessee shall have exclusive possession, control, and use of the equipment for the duration of the lease. The lease shall further provide that the authorized carrier lessee shall assume complete responsibility for the operation of the equipment for the duration of the lease.”

The language required by the applicable federal regulations creates further issues in that various state officials and bureaucrats often misinterpret it as being evidence, sometimes dispositive, of an employee relationship. Such an approach ignores 49 C.F.R. § 376.12(c)(4), which provides: “Nothing in the provisions required by paragraph (c)(1) of this section is intended to affect whether the lessor or driver provided by the lessor is an independent contractor or an employee of the authorized carrier lessee.”

Grappling with the worker classification issue. An entity must focus on how it structures its relationships with contractors and, acknowledging the absence of an applicable definitive standard, it must instead note that the test is essentially one of weighing “good rocks” (i.e., factors showing absence of control) against “bad rocks” (factors indicating control).

In the transportation industry, for example, “good rocks” include allowing the contractor to set the hours for work; permitting the contractor to decline work; authorizing the contractor to establish routes and other details for work; paying the contractor on a basis other than hourly or weekly (e.g., per mile or percentage of gross revenue); and allowing the contractor to contract with others. “Bad rocks” include requiring uniforms; requiring adherence to company standards beyond those imposed by the applicable regulations; having the contractor attend “tool box” or other safety meetings for drivers; requiring the contractor to return the equipment to the motor carrier’s facility each day; and paying the contractor on an hourly basis. In balancing these “rocks,” one must also consider the dilemma between wanting to avoid control and yet having to account for the potential exposure for acts of the contractor being imputed to the motor carrier, particularly in the owner-operator context.

In the course of revisiting the structure of one’s relationship with contractors, one should also revisit the applicable contracts utilized. Motor carriers frequently use antiquated equipment leases that, on their very face, violate certain aspects of the applicable federal regulations. The leases may contain language that is likely to be interpreted as creating an employer-employee relationship.

A motor carrier may also require certain types of insurance to be provided by its contractors. One should require contractors, including owner-operators of Class F tractors, to have nontrucking liability insurance. Motor carriers should consider requiring the minimum limits of such insurance to be equal to their own commercial auto policy. It is also beneficial if one can have the contractor provide proof of actual statutory workers’ compensation insurance. In the case of contractors who have employees, helpers, etc., such a requirement is imperative. Otherwise, one can be held responsible for a claim by an injured employee of a subcontractor, pursuant to “statutory employment.” A motor carrier must also consider the requirements of its customers. Some customers require the motor carrier to commit to having contractors meet certain rigid requirements, such as wearing uniforms or submitting to background checks. Such actions can readily be interpreted as indicating employment status. Accordingly, the motor carrier should carefully spell out for its contractors that the customer, not the carrier itself, is imposing the requirements.

 

FOR MORE ABOUT THE TORT TRAIL AND INSURANCE PRACTICE SECTION

This article is an abridged and edited version of one that originally appeared on page 24 of The Brief, Fall 2011 (41:1).

For more information or to obtain a copy of the periodical in which the full article appears, please call the ABA Service Center at 800/285-2221.

Website: www.americanbar.org/tips.

About: As the leading source of knowledge and leadership on trial practice and critical issues of justice that involve tort, trial, and insurance law, TIPS is the only national professional group to unite plaintiff, defense, insurance, and corporate counsel to advance the civil justice system.

Periodicals: The Brief, quarterly magazine; Tort Trial & Insurance Practice Law Journal, quarterly law review; TortSource, quarterly newsletter; e-TIPS news, monthly electronic newsletter.

Books and Other Recent Publications: The Attorney-Client Privilege in Civil Litigation; The Reference Handbook on the Comprehensive General Liability Policy; A Practitioner’s Guide to Class Actions. To view a complete listing of our publications, visit www.americanbar.org/groups/tort_trial_insurance_practice/publications.html.

CLE: TIPS offers an impressive lineup of more than 50 continuing legal education programs each year, including low-cost teleconferences and webinars.

 

Advertisement

  • About GPSolo magazine

  • Subscriptions

  • More Information

  • Contact Us