Frances McMorris, who covers the transportation and hospitality industries for American City Business Journals (ACBJ), wrote an article on January 29 about the impact of the latest Uber lawsuit on businesses that use independent contractors and what actions companies can take to protect themselves from IC misclassification risks.  Two approaches were discussed: “play it safe” and “play it smart.” Both offer companies valid choices.

The Two Approaches

McMorris first quoted a lawyer from Florida that represents transportation companies: “If there is a close call, we tell them to treat them as an employee to be safe or make sure people are working less than 40 hours a week.” That approach certainly makes sense for companies following a cautious business style: don’t take risks – treat those in the gray area as employees.

As McMorris recognized, however, as a practical matter most companies find that the “play it safe” approach is less than desirable. Even businesses that are cautious by nature are extremely reluctant to convert independent contractors to employees for a number of reasons, including  an unwillingness to incur substantial payroll costs, an aversion to changing their business model, or a fear that reclassification of workers from a 1099 to W-2 status will signal to workers that they may have been misclassified in the past and might therefore have valid legal claims against the business.

McMorris asked the publishers of this blog if there was another approach that companies may wish to take. As described in the ACBJ article, that approach is to “play it smart” when there is a close call. McMorris reported: “At Pepper Hamilton, [the firm] helps clients improve their compliance with a proprietary system known as IC Diagnostics. It reviews as many as 60 to 70 different factors to determine classification and whether a company’s system needs to be revamped. With IC Diagnostics, [Richard] Reibstein said, “you keep your business model but you tailor it to the law. You tweak it, you restructure it, you re-document it, [and] you re-implement in a way that [enhances compliance] with the law.”

McMorris then continued: “Among the actions Reibstein counsels businesses who use independent contractors to avoid are: Needlessly directing and controlling actions [that] may transpire [in the ordinary course] without [exercising any] direction and control. For example, Reibstein said, ‘You don’t have to direct a contractor to provide services between 9 and 5 when your business is [only] open between those hours. When else can they do the work?’ ‘You don’t need to prevent or restrict a contractor [from] delegating responsibility or duties to others.’ Avoid paying for expenses of the contractor and work out a fee that includes those costs. ‘If someone wants $10 hour plus expenses, [negotiate an all-in rate of] $12 an hour,’ Reibstein said.

The ACBJ article refers to a few of the many state-of-the-art ways by which companies can useIC Diagnostics™ to enhance their level of independent contractor compliance and determine whether a group of 1099ers might pass the applicable tests for IC status under governing state and federal law.  Companies that wish to keep their independent contractor business model generally opt for restructuring, re-documenting, and re-implementing their IC relationships. While not all companies can eliminate most control and direction over workers treated as 1099ers, the overwhelming number can effectively restructure their independent contractor relationships to comply with federal and most state laws. The IC Diagnostics™  process provides the means to stress-test the independent contractor relationship. If it can be effectively restructured to comply with such laws, the next step in the process is re-documentation.  What seems like a simple act of dotting your i’s and crossing your t’s, though, is anything but; indeed, many independent contractor statutes and most judicial and administrative decisions in this area are often counter-intuitive.

The FedEx Fallacy

Even experienced labor and employment lawyers and in-house counsel have difficulty drafting IC agreements in an effective manner. As we noted in our August 29, 2014 blog post entitled “Earthquake in the Independent Contractor Misclassification Field,” FedEx Ground lost a key case because of its misplaced reliance on an independent contractor agreement and its policies and procedures that were undoubtedly drafted by a sophisticated legal team of outside and inside counsel.  But close scrutiny by a court found one fallacy after another in the very documents FedEx created – sufficient in degree to lead the court to rule against FedEx. As we noted in our blog post, “IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.”  Or, in the FedEx case, can cost the company a rather handsome amount – $228 million in settlement costs, as we reported in our June 13, 2015 blog post.

The Uber Error

Proper documentation, though, is not a guaranteed safety net. Something more is required: implementation of a legitimate IC relationship consistent with the restructured and re-documented business structure.

As shown in a key court decision handed down in the past year against Uber, even when the company’s contractual provisions were attempted to be drafted in a manner intended to be consistent with independent contractor laws, a court denied Uber’s motion for summary judgment where evidence introduced by the drivers in court papers showed that Uber failed to strictly follow in practice the contractual limitations on direction and control.

Thus, companies that want to “play it smart” must be willing to exercise the necessary rigor to implement and carry out in practice an enhanced independent contractor relationship. By so doing, such companies can effectively maximize their IC compliance and minimize their IC misclassification risk.