An “Independent contractor” is a category of worker that is legally distinct from an employee. The distinction between the two is one of substance, not title or a recital in an agreement.
In other words, just because an employer calls a worker an independent contractor does not mean the individual is one in fact. Courts and agencies have the final say over the classification of a worker and, when making that determination, they will look to the “economic reality” of the relationship, not the label assigned by the employer.
Typically, to qualify as an independent contractor (i.e., not an employee), the worker:
- Has a business license
- Has multiple clients
- Has discretion to utilize helpers or substitutes
- Is engaged for a specific assignment with a defined time limit/defined end point
- Performs work that is different from the entity that engages them
- Retains control over the manner and means of performing the work
- Is not subject to direction and control (outside of scope of work) over how their work is performed
- Is only accountable for the end product.
In contrast, a worker who is supervised by an employer and must follow the employer’s requirements as to the manner and means for performing work is usually an employee.
Some examples of the laws that now affect the classification of independent contractors are:
Effective 1/1/2020, California Assembly Bill 5 (AB 5) established the standards for classifying workers as independent contractors. Under the “Dynamex ABC test”, “a person providing labor or services for remuneration” is an “employee rather than an independent contractor” unless the hiring company demonstrates that the worker in question satisfies all of the following three conditions:
A. The worker is free from the control and direction of the hirer in the performance of the work, both under the contract for the performance of the work and in fact.
B. The worker performs work that is outside the usual course of the hiring entity’s business.
C. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Under AB 5, the ABC test is extended to the California Labor Code, Unemployment Insurance Code and for workers’ compensation claims. Misclassification of workers can result in significant costs and wage and hour liability, as well as expenses for employee benefits, unemployment insurance, and workers’ compensation.
In a recent Illinois case, Yata v. BDJ Trucking, 17CV03503 (May 3, 2021), the plaintiffs, all 1099 truck drivers brought a lawsuit claiming the trucking company they were driving for violated the federal Truth in Leasing Act (TLA) by:
- Deducting escrow amounts that were not authorized in the lease agreement.
- Neglecting to pay interest on the escrow deposits.
- Deducting processing fees that were not authorized by the agreements.
- Overcharging the drivers for insurance.
- Underpaying drivers.
On the TLA claims the court held that:
- Letters are not sufficient to modify a service agreement pay provision. Service agreement pay rates can only be modified by written amendment of the service agreement.
- The TLA requires that the agreement describe specific items to which the escrow fund can be applied.
- Although the agreements used by the company specified that “owner-operator must pay all fines and damages incurred, such as traffic violations, damage to loads, etc.”, the agreement did not specify that the insurance deductible will be held in escrow prior to any accident occurring. This failure to specify violates the TLA.
- The company added an “up-charge” to the monthly occupational insurance charge which constituted an undisclosed processing fee which was a TLA violation.
They further claimed that they were actually employees and not independent contractors under the Illinois Wage Payment and Collections Act (IWPCA). More importantly, on these Illinois Wage Payment and Collections Act (IWPCA) claims the court held:
- The company improperly classified the drivers as independent contractors rather than employees under the IWPCA. To classify a driver as a contractor, they must be:
- Free from control and direction over performance of their work, both contractually and in reality;
- Perform their work either outside the usual course of business or outside all the places of business of the employer unless the employer is in the business of contracting with third parties for placement of employees; and
- In an independently established trade, occupation, profession, or business (820ILCS115/2).
- Because the company controlled the majority of the plaintiff’s work, the plaintiffs were not free of the company’s control and direction over performance of their work, accordingly the drivers were actually employees rather than contractors and were subject to IWPCA requirements.
- The IWPCA prohibits employers from taking deductions from employees’ wages unless the deductions are:
- Required by law;
- To the benefit of the employee;
- In response to a valid wage garnishment, or
- Made with the express written agreement and consent of the employee, freely given at the time the deduction is made.
- Because the president of the company knowingly allowed the company to violate the IWPCA, he was found personally liable for the amount of the escrow deductions taken from the drivers.
A new law effective October 1, 2021, requires Florida employers to report newly retained independent contractors in the same manner as new employees to the Florida Department of Revenue’s State Directory of New Hires.
The law requires a service recipient (the company that uses the 1099 contractor) to report to the Florida Department of Revenue’s State Directory of New Hires any newly engaged non-employee to whom the service recipient pays more than $600 in a calendar year for services performed by the individual in the course of the service recipient’s trade or business. Previously, the law required only that employers report newly hired employees to the State Directory of New Hires, while reporting independent contractors was optional.
To comply with the law, employers must report: the independent contractor’s name; address; Social Security number (or other identifying number assigned under Section 6109 of the Internal Revenue Code); the date services for payment were first performed by the individual; and the name, address, and employer identification number of the service recipient. The information may be submitted on the same Florida New Hire Reporting Center website as is used for employees. This information must be submitted within 20 days after the first payment to the independent contractor or on the date the business and independent contractor entered into the contract, whichever is earlier.
Indiana’s state agencies rely on different tests to determine the proper classification of employees and independent contractors.
For the purposes of eligibility for unemployment insurance, the Indiana Department of Workforce Development will consider a worker to be an independent contractor only if all of the following apply:
- the individual is free from control and direction in connection with the performance of their service;
- the service is performed outside the company’s usual course of business, and the individual’s usual area of employment is not within the company’s business; and
- the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the work that they do for the company or is a sales agent who is paid commission only and has complete control over their own time and effort.
For the purposes of eligibility for worker’s compensation, the Indiana Worker’s Compensation Board defers to the Internal Revenue Service (IRS) guidelines for the definition of “independent contractor”. Indiana’s workers’ compensation law generally excludes certain workers from the definition of “employee,” including real estate professionals, and owner-operators who provide a motor vehicle and the services of a driver.
For the purposes of state taxes, the Indiana Department of Labor evaluates the same factors as the IRS in making worker classification determinations.
A 2018 enacted Indiana law (House Bill 1286), states that a “marketplace contractor” (e.g., a rideshare driver) will be treated as an independent contractor only if certain factors apply:
- all or substantially all of the payment for the services performed by the marketplace contractor relates to the performance of services or other output;
- there is a written contract executed between the marketplace contractor and the marketplace platform that contains specific provisions, including that the marketplace contractor is not an employee of the platform;
- payments are based on services or output by the marketplace contractor; the marketplace contractor chooses the work hours or schedule;
- the marketplace contractor may perform services for other parties without restriction; and
- the marketplace contractor bears responsibility for all or substantially all of the expenses that they pay or incur in performing the services, without the right to obtain reimbursement.
Federal Highway Administration
In 1976, the federal TLA amended the Truth in Lending Act to protect consumers against inadequate and misleading leasing information, assure meaningful disclosure of lease terms, and limit ultimate liability in connection with leasing of personal property primarily for personal, family, or household purposes, and for other purposes. Many of our clients may think this has little do with their businesses. However, it has a big effect on the transportation industry and all transportation clients.
The Federal Highway Administration’s Truth-in-Leasing regulations, found at 49 C.F.R. § 376.12, require that leases between motor carriers and truck owner-operators contain certain provisions such as:
- The amount to be paid for the drivers’ services
- The cost of equipment insurance to be deducted from the drivers’ pay
- The escrow amount to be deducted from the drivers’ pay
- A statement that the motor carrier will pay interest on the escrow amount while in possession of the escrow
The Truth-in-Leasing regulations further require that motor carriers adhere to and perform those mandatory provisions. Section 14704(a)(2) of the Truth-in Leasing regulations creates a right of action (right to sue) for owner/operators to recover damages for violation of the Truth-in-Leasing regulations.
Companies that use “1099 contractors” should consider reviewing the worker classifications to ensure that the independent contractors they use are properly classified and if reporting is required, that the reporting is made.
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