The New York State Commercial Goods Transportation Industry Fair Play Act, which takes effect March 11, 2014, will change the commercial delivery landscape in New York by making it harder for companies to treat its drivers as independent contractors .
Due to New York's Fair Play Act, companies with drivers who are currently classified as independent contractors will have to reclassify them as employees in the coming months, unless the drivers meet specific requirements of the new law.
Earlier this year, Governor Andrew Cuomo signed into law the New York State Commercial Goods Transportation Industry Fair Play Act ("Fair Play Act" or "Law"), which takes effect March 11, 2014.
The Fair Play Act represents a major shift in the way drivers who deliver commercial goods in New York State will be classified by the companies which hire them. Specifically, it changes the legal tests for determining whether those drivers are independent contractors or employees of the companies for which they perform services. For those companies currently treating their drivers as independent contractors, reclassification to employee status will be necessary in the coming months unless the drivers meet the statutory requirements under at least one of the two delineated tests under the Fair Play Act.
This alert discusses the two tests, the penalties and liabilities for companies that are found to have violated the Law, the new notice requirements under the Law and other important implications for companies that operate in the commercial goods transportation industry in New York.
The Rebuttable Presumption
The Fair Play Act creates a rebuttable presumption that any vehicle drivers who: (1) posses a state-issued commercial driver’s license, (2) perform transportation services of commercial goods, and (3) work for a "commercial goods transportation contractor" shall be classified as an employee unless one of the tests (discussed below) are met.
The Covered Company
Under the Fair Play Act, a "commercial goods transportation contractor" is any sole proprietor, partnership, firm, corporation, limited liability company, association or other legal entity permitted by law to do business within the state who compensates commercial vehicle drivers who possess a state-issued commercial drivers license to transport goods in the state of New York.
The Telltale Tests
The two tests under the Fair Play Act are as follows:
The Independent Contractor Test
The Fair Play Act adopts what is commonly referred to as the "ABC" Test (not an acronym, but rather a simple checklist used by about two-thirds of the states to determine whether workers are employees or independent contractors), which has three conditions that must be met for a person to be classed as an independent contractor. Under the ABC Test, a commercial goods transportation contractor can rebut the presumption that its driver is its employee if the contractor can show each of the following:
the driver is free from the control and direction of the hiring company in performing the work
the service provided by the driver is different than the services provided by the company or is otherwise not part of the usual business of the company
the driver is customarily engaged in carrying out such same services as an independent established trade or profession, rather than simply working for the company
Under the Law, all three of the above conditions must me met in order for the company to rebut the presumption of an employer-employee relationship with its driver.
Separate Business Entity Test
Under the Fair Play Act, the Separate Business Entity Test contains the following 11 separate requirements, each of which must be met to rebut the presumption that a driver is an employee:
the business entity is performing the service free from the direction or control over the means and manner of providing the service, subject only to the right of the commercial goods transportation contractor for whom the service is provided to specify the desired result or federal rule or regulation
the business entity is not subject to cancellation or destruction upon severance of the relationship with the commercial goods transportation contractor
the business entity has a substantial investment of capital in the business entity, including but not limited to ordinary tools and equipment
the business entity owns or leases the capital goods and gains the profits and bears the losses of the business entity
the business entity has an option to make its services available to the general public or the business community 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 commercial goods transportation contractor pursuant to a written contract, under the business entity's name, specifying their relationship to be as independent contractors or separate business entities
when the services being provided require a license or permit, the business entity pays for the license or permit in the business entity's name or, where permitted by law, pays for reasonable use of the commercial goods transportation contractor's license or permit
if necessary, the business entity hires its own employees, subject to applicable qualification requirements or federal or state laws, rules or regulations, pays the employees without reimbursement from the commercial good transportation contractor and reports the employees' income to the internal revenue service
the commercial goods transportation contractor does not require that the business entity be represented as an employee of the commercial goods transportation contractor to its customers
the business entity has the right to perform similar services for others on whatever basis and whenever it chooses
Driving Home the Point: Severe Penalties and Liability for Noncompliance with the Law
The Fair Play Act includes civil penalties of up to $1,500 for a first violation and $5,000 for subsequent violations within a five-year period. For "willful violations" (when the contractor "knew or should have known" that it committed a violation), civil penalties increase to $2,500 per misclassified employee for a first violation and up to $5,000 per employee for subsequent misclassifications within a five-year period. Furthermore, the Fair Play Act imposes criminal liability on contractors for willful violations. The penalty for a first offense includes up to 30 days of imprisonment and a fine up to $25,000, and any subsequent offense includes penalties up to 60 days of imprisonment and a $50,000 fine.
The Fair Play Act also imposes personal liability on corporate officers, directors and shareholders who control at least 10 percent of the company when that individual is found to "knowingly permit the corporation to willfully violate" the law. The aforementioned penalties are in addition to any penalties that arise under other laws, including tax laws, unemployment insurance, workers compensation, etc.
Additionally, the Fair Play Act includes protections against retaliation. Under the Law, it is a violation for a company to retaliate against any person through discharge or other manner in the terms and conditions of his/her employment for exercising any rights provided under the Law, including making or threatening to make complaints, initiating proceedings under the law or providing information to or testifying before a public body regarding violations of the Law.
Notice Requirement: Put Up or Pay
By March 11, 2014, the Law requires that commercial goods transportation contractors and subcontractors post a conspicuous notice that describes each of the following:
the tax responsibilities of independent contractors
the rights of employees pertaining to minimum wage, workers compensation, unemployment benefits, and other federal and state laws
The Fair Play Act's protections against retaliation
the penalties under the Law
contact information for filing a complaint under the Law
The failure to post a notice may result in a fine of up to $1,500 for the first violation and $5,000 for each subsequent violation. The New York State Department of Labor will post a "model" notice on its website within 30 days of the Fair Play Act's effective date.
Why Misclassification Matters?
The Extent and Costs of Misclassification in New York
According to a 2011 list of state audits compiled by the National Employment Law Project, using audit data of misclassified workers to account for employers, state-by-state, there were an estimated 704,780 workers deemed to have been misclassified as independent contractors in New York. Annual revenue losses can be very significant to the state coffers where, for example, New York's annual revenue loss due to misclassification, for unemployment insurance alone (both in tax revenue and contributions to state funds), has been approximately $200 million in each of recent years. In 2010, New York’s Task Force on Employee Misclassification identified nearly 20,000 instances of worker misclassification, discovered over $300 million in unreported wages, and assessed over $10 million in unemployment taxes, over $2 million in unpaid wages and nearly $1 million in workers' compensation fines and penalties.
New York Remains Increasingly Vigilant in Enforcing Fair Play and Employee Rights
For these and other reasons, including high unemployment and the tenuous economic environment more generally, in recent years both federal and state governmental agencies have been redoubling their efforts in investigating and rooting out misclassification of workers across myriad industries. The Fair Play Act is New York's latest initiative in combating misclassification and protecting those workers who should be classified as employees rather than as independent contractors.
In this regard, Eric Schneiderman, New York's Attorney General since 2011, is the lead prosecutor for the Governor's Misclassification Task Force, and has made it one of the chief objectives of his administration to crack down on unlawful activities by employers in connection with misclassification of workers. The well-grounded theory is that companies misclassify workers in order to lower their labor costs, by as much as 50 percent in some cases, thereby gaining an unfair advantage over their competitors who comply with the labor laws. The result of such disparity has resulted in the law-abiding employers being consistently underbid on job proposals and losing business to their law-breaking competitors. As Attorney General Schneiderman reports on his office's website, in stark and sobering terms, "[u]nscrupulous employers attempt to avoid obligations to workers by 'misclassifying' them as independent contractors instead of employees. In this way, employers shirk their responsibility to comply with unemployment insurance, workers' compensation, social security, tax withholding, temporary disability, and minimum wage and overtime laws that protect workers. This is fraud and a crime. . . . Moreover, the entire state pays more for [workers' compensation] insurance to cover the costs of the cheaters."
Implications and Takeaways on Complying with Obligations Under the Fair Play Act
Most companies currently using independent contractors to transport commercial goods are unlikely to meet the strict requirements under either the ABC or Separate Business Entities Tests. It therefore behooves such companies to immediately evaluate analyze their relationships with their drivers, driver by driver if necessary, in order to determine:
whether the existing structure can support the maintenance of an independent contractor classification, and if not
whether feasible adjustments can be made in order to pass one of the two enumerated tests under the Law, and if not
those drivers formerly treated as independent contractors must now be classified as employees under the Fair Play Acts' mandate
Companies should also consider whether changes in the classifications of their drivers (from independent contractor to employee), due to the Fair Play Act, will now also result in heightened obligations under federal laws including, but not limited to, the Fair Labor Standards Act, Family Medical Leave Act and Affordable Care Act. For example, with the Affordable Care Act's employer mandate taking effect at the beginning of 2015, a company that employs over 50 employees because of the Fair Play Act may be subject to additional penalties for failing to provide their employees with minimum essential healthcare (the annual employer mandate fee [officially called an Employer Shared Responsibility Payment] is a per-employee fee for employers with over 50 full-time equivalent employees who don't offer health coverage to full-time employees).