Executive Summary: New York Governor Andrew Cuomo has signed the "New York State Commercial Goods Transportation Industry Fair Play Act," which will have a significant impact on employers in the transportation industry by changing the tests used to determine whether a worker is an employee or independent contractor. Under the Act, all workers in the commercial goods transportation industry will be considered to be employees unless the employer can prove otherwise through the tests set forth in the Act.
From 2007 to 2010 the state of New York discovered 35,000 misclassified workers within its borders and $457 million in unreported wages. State investigations led to the assessment of $13.2 million in unemployment insurance taxes, $1.3 million in unemployment fraud penalties, $14.5 million in unpaid wages, and $1.5 million in workers' compensation fines. The government has taken notice of the millions of lost tax dollars, and state lawmakers have now taken a major step to close the floodgates of lost revenue in the commercial goods transportation arena by tightening the reigns on worker classification.
On January 10, 2014, Governor Cuomo signed the "New York State Commercial Goods Transportation Industry Fair Play Act" (the Act), and, when it takes effect, commercial goods transportation contractors in New York will face new challenges in the realm of "employee" vs. "independent contractor" classification. Following the enactment of this law, all workers in the commercial goods transportation industry will be considered "employees" unless the company can prove otherwise under the Act.
Modeled after New York's recent changes to classification laws governing the construction industry, the Act aims to severely limit a commercial goods transportation contractor's ability to classify its carriers as "independent contractors." Gone are the days of the "common law test," which concentrated largely upon the "totality of the circumstances." In the not-so-distant past, New York courts would consider many factors in deciding whether a worker was truly an independent contractor, but primarily concentrated on the degree of control exercised by the employer over the subject worker. Under the new law, New York commercial goods transportation contractors will have to meet all of the prongs of one of two codified tests in order to prove that a worker is a not an employee of the company.
The ABC Test for Independent Contractor Status:
The first test has three prongs, all of which must be satisfied if a commercial goods transportation worker is to be properly classified as an independent contractor. This test is found in section 826-B(1), subsections (A), (B), and (C). The worker must be free from control and direction in performing the job, both under the terms of the contract and in fact (this prong is similar to the "totality of the circumstances" test). Further, the service provided by the worker must be outside of the usual course of business for the hiring company. Finally, the worker must be customarily engaged in an independently established trade, occupation, profession, or business that is similar to the service being provided to the company.
The "Separate Business Entity" Test:
The alternate test has eleven prongs and, once again, all of the prongs must be satisfied for the worker to be found a "separate business entity" and properly classified as an independent contractor. This test is found in section 826-B(2), subsections (A) through (K), and is referred to as the "separate business entity" test. For a commercial goods transportation worker to be deemed a "separate business entity" and classified as an independent contractor, the following must be shown:
- The business entity provides services free from the company's direction or control over the means and manner of providing the services, subject only to the right of the company to specify the desired result, or subject to applicable federal rules or regulations.
- The business entity is not subject to "cancellation or destruction" upon the severance of the relationship with the company (that is, it will continue to provide the services to other businesses should the arrangement with the company be terminated).
- The business entity has a substantial investment of capital, including, but not limited to, ordinary tools and equipment needed to perform the service/work.
- The business entity owns or leases the "capital goods" (presumably the vehicle/truck used for transporting the goods) and is in a position to gain profits or sustain losses.
- The business entity has the option to make its services available to the general public on a continuing basis.
- The business entity includes services rendered on a federal income tax schedule as an independent business or profession.
- The business entity performs services for the company pursuant to a written contract, and the contract specifies that their relationship is one of independent contractors or separate business entities.
- If a license or permit is required to provide the services, the business entity pays for the license/permit in its own name, or pays the company for the use of the company's license/permit where allowed by law.
- The business entity hires its own employees, pays those employees directly without reimbursement from the company, and reports the employees' income to the Internal Revenue Service.
- The company does not require the business entity to be represented as an employee of the company to the company's customers.
- The business entity has the right to perform similar services for other businesses whenever it chooses to do so.
Notification to Workers:
The Act requires that all commercial goods transportation contractors conspicuously post a "Notice of Rights," which will be provided by the Commissioner of the New York Department of Labor. This Notice describes the responsibility of independent contractors to pay federal and state taxes, and also explains the rights of employees to receive workers' compensation, unemployment benefits, minimum wage, overtime, and other federal and state workplace protections. The Notice also advises workers of the protections against retaliation provided by the Act and indentifies the penalties and consequences employers face if their employees are erroneously classified as independent contractors.
Consequences of Violation:
The Act does not provide for a private right of action by a worker against an employer; the New York Department of Labor will receive complaints regarding classification violations, investigate the complaints, and assess penalties for violations as appropriate.
If a commercial goods transportation contractor is found to be in violation of the Act, the penalties range in severity from $1,500 for a first-time non-willful violation to $5,000 for a subsequent non-willful violation within five years, to imprisonment for 30 days or a $25,000 fine for a first-time willful violation, up to imprisonment for 60 days or a $50,000 for a repeat willful offender. Additionally, the "corporate veil" will not protect corporate officers or stockholders (those who own 10% or more of the company's stock) from liability. Under the Act, officers or affected stockholders who allow a willful misclassification to occur can be held personally liable for the violation.
A commercial goods transportation contractor that is found guilty of a willful violation (a misdemeanor) will face more than monetary penalties and potential imprisonment. The new law specifies that any commercial goods transportation contractor that is found guilty of a misdemeanor will be barred from bidding on any public works contracts with the state or any municipal corporations, public benefit corporations, public authorities, or public bodies for one year (section 826-D(7)). Furthermore, the language in the statute does not limit "misdemeanor" to violations of the instant Act, and therefore this section of the Act could adversely affect contractors convicted of any misdemeanors.
The Act also prohibits retaliation against workers who seek to enforce their rights under the Act. Workers who make (or threaten to make) any complaints to an employer, co-worker, or public body alleging a violation of their rights under the Act are protected from adverse employment actions taken in response to or motivated by the complaint. The Act contains similar protections for workers who are involved in any proceedings under the Act against a company, whether the worker is involved in the initiation of the proceedings or assists in the proceedings by providing information and/or testifying. Companies who retaliate against such workers may find themselves held liable for the penalties discussed above and also may be subject to a private lawsuit from the aggrieved worker.
Effective Date and Proposed Amendments
The law currently is scheduled to take effect 60 days after the Governor's signature, or on March 11, 2014. However, after signing the law, the Governor returned it to the legislature for consideration of Proposed Chapter Amendments, one of which would extend the effective date to 90 days after enactment instead of 60 (or April 10, 2014). Another amendment would clarify that the law only applies to drivers operating commercial motor vehicles with a gross vehicle weight rating (GVWR) of more than 10,000 pounds.
Employers' Bottom Line:
While there are many benefits to classifying a worker as an independent contractor, including avoidance of tax issues and exclusion from laws that only protect employees, such as discrimination, wage/hour, workers' compensation, and unemployment compensation laws, it is essential to ensure that workers are properly classified. In response to widespread misclassification issues, federal and state government agencies have made clear efforts to tighten the net around employers and reap the billions of dollars in uncollected taxes lost due to worker misclassification.
Employers also face a cooperative enforcement regime, where federal and state agencies share information regarding investigations; a drop of blood in the water from a single agency investigation could cause a feeding frenzy of enforcement actions against an employer.
Additionally, unions and union funded organizations supported this bill, and officials from the Teamsters Joint Council 16 publicly thanked Governor Cuomo for signing it. In light of the support by unions, employers can expect more union organizing efforts among workers who may now be more likely to be classified as employees.