The Dynamex Decision The End of the Independent Contractor Era? - - PowerPoint PPT Presentation

The Dynamex Decision

The End of the Independent Contractor Era?

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Paul Marron, Esq. July 24, 2018 CLDA Webinar

CONFIDENTIALITY

• This presentation is only for members of CLDA and includes advice and

discussion focused on the legal interests of the CLDA industry

• It is to be used only by members of the CLDA community
• Those who do not fit the above criterion and by intention or inadvertence

receive a copy of this power point and/or audio recording are not authorized to review, use or disseminate it

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Overview - 1

• Dynamex ushers in the ABC test
• What is the ABC test?
• Will it apply in my state?
• Increase my company’s risk?
• Litigation and Legislative Attacks on

ABC

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Overview # 2

• Goals of this Presentation:
• Strengthen your company’s ability to beat back

misclassification threat regardless of ABC or traditional common law test

• Tell the objective truth – for those in states where

Dynamex does or may apply, it is a nail in the coffin without major change

• Identify ways your company can adapt and thereby

prosper in this growing industry

• Dynamex is not the end of the road for imaginative

companies willing to a) invest in model change and b) do it

• Questions

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Common Law Test

• Multi-factor analysis focused on “right-to-

control.”

• Prevalent across US

FACTORS INCLUDE:

• Worker engaged in a distinct occupation;
• Work done under supervision;
• Whether worker provides tools and place of

work;

• Length of time services are performed;
• Method of payment;
• Whether work is part of the regular business
• f the principal;
• Work requires special skills; and
• Belief of the parties.

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NEW CA “ABC” TEST

• A. Is free from control and direction of the

hiring entity;

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Presumes all hired workers are employees unless hiring entity can prove that the worker:

• B. Performs work that is outside usual course
• f hiring entity’s business; and
• C. Engaged in an independently established

trade, occupation or business doing the same type of work as performed for the hiring entity.

MUST SATISFY ALL THREE

DOES DYNAMEX (ABC) APPLY TO MY COMPANY?

• Yes: MA; NJ; CONN; ILL; NH; WA; MD; VT (Pay special attention!) (Some variation/lighter

application in some of these states

• No: All other states (but only “sort of”)
• Do the “sort of” states need to pay attention to this presentation? (YES)
• Other blue (Democratic) states follow CA or have similar statues; i.e.; NY (“Fair Play”);

PA; OH; MI; CO; AZ; NM; etc. often follow CA

• Prophylactic & the “good ole days” of the traditional test?
• The traditional test is hardly a “silver bullet” for companies. Under traditional

tests, companies routinely are sued, only win 50% of the time and get hammered by huge attorney fees, extortionate settlements and regulator hostility.

• This is true even in deep red states, many of which have large metro areas with

lefty judges, regulators and juries

• Efforts to protect against ABC in states where it is not applicable will increase

company wins in “traditional test” states

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IMPLICATIONS OF ABC

• The harsh reality brought about by

Dynamex is that the California Supreme Court has effectively issued a “sledge hammer” decision designed to:

• Reclassify all California

independent contractor drivers as employees

• This analysis common amongst

attorneys and sophisticated

• perators

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Dynamex Part A = Right to Control =

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• Right to control > Exercise of control
• Lack of control must exist in contract and in

practice

• Similar to traditional control test. If your business

cannot pass this test, it will not satisfy Part A of the ABC test

COMPARE YOUR COMPANY TO THE FACTORS THAT LOST IN DYNAMEX

• Independent contractor drivers since 2004, converted from employee
• Drivers provide own vehicles and pay expenses (fuel, tolls, maintenance, insurance, taxes,

workers comp, Nextel device).

• Drivers set own schedules but must notify Dynamex of days they are available in advance.
• Drivers assigned delivery list daily. Must notify "promptly" if they reject an offered delivery

and are liable for any loss incurred as a result. Drivers can set route/sequence of deliveries but must complete all deliveries same-day and must comply if a customer sets the route.

• Drivers wear Dynamex shirts/badges. Some required decals on vehicles.
• Dynamex obtains its customers and sets rates, negotiates amount to be paid to drivers, and

retains right to control number and nature of deliveries it offers.

• Drivers can hire other drivers and can drive for other companies, but cannot divert

deliveries to another provider.

• Dynamex retains right to terminate without cause on 3 days' notice.

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Part B: Distinct Business

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• The worker’s job is independent, separate, and distinct from the

hiring entity’s business

• Examples given by Dynamex Court: outside plumber or

electrician hired by retail store is a distinct independent contractor

• Distinct means routinely hired my multiple companies, not a

single principal company

• Distinct means not an integral part of principal company’s

business or services

Part C: Indicia of Self-Employment

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• Incorporation, licensure, advertisements or routine offerings of

service to the general public unrelated to hiring entity

• Bitter but necessary pill: contract only with drivers who have

formed a business entity and that, at the least, provide services for multiple companies.

• Use contract and operational terms to protect your client

base and customers

What does this all mean for the traditional independent contractor operations that do not change and adapt?

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Rays of Hope? Practical Application in Other Jurisdictions

New Jersey, Connecticut, Illinois, New Hampshire, Washington, Maryland, Vermont, allow for “B” factor to be met when the work “is performed outside of all the places of business of the enterprise for which such service is performed.”

Vermont also has a statutory exclusion of “taxi-cab drivers” from definition of “employee.”

Legislative Modifications of “B” Factor

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FAAAA Preemption

• Federal Aviation Administration Authorization Act of 1994

(“FAAAA”) may offer some protections but outside of Massachusetts, not in the immediate future

• First Circuit (Maine, Massachusetts, New Hampshire, Puerto

Rico and Rhode Island) held that FAAAA preempts Part B for motor carriers, including many delivery businesses

• Note: Still must satisfy Parts A and C
• Limited to interstate commerce

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Pending Litigation & Legislation

• Western States Trucking Association is planning to challenge

Dynamex under the FAAAA. Ninth Circuit could create a circuit split for the US Supreme Court to decide.

• Denham Amendment, already passed US House of

Representatives, would exempt carriers from complying with state laws that require employers to provide paid meal and rest breaks to employees. It also would preempt state rules on misclassification of truck drivers.

• Must pass Senate before mid term elections?

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Legislative modifications and litigation shifts are all 3-5 years down the line Anticipate expansion of ABC and “employee” definition similar to California in blue states and metropolitan areas with strong plaintiffs’ bars

Companies must adapt now

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General Trends Along Political lines

SOLUTION-TECHNOLOGY

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Develop (or buy) a Dispatch System that allows and can prove:

• Algorithmic dispatch
• Minimize human dispatcher

involvement

• Deliveries posted electronically to

drivers who have right to accept or reject electronically

• Post large # deliveries on line

afternoon before to establish “freedom

• f choice”
• Allows for negotiation on pricing re

hard to get accepted deliveries

• Develop contracted routes

SOLUTION –TECHNOLOGY - 2

• Develop and maintain a system that allows “prove it” in court
• “I had to accept the delivery or they would block me from the system”
• I never rejected deliveries because if I did, they would blackball me
• It was always take it or leave it on the price
• The money was so poor that I had to work 24/7
• They gave me lousy deliveries because I tried to assert my rights
• They dictated my routes
• A TECHNOLOGY SYSTEM THAT RETAINS THE INFORMATION FROM THE

PRIOR SLIDE IN A WAY THAT CAN BE PRESENTED AS EVIDENCE IN COURT, DISCREDITS HOSTILE DRIVERS AND GOES MILES TO WIN A CASE

• As the typical “he said vs. she said” of management & dispatchers testifying

anecdotally never will

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SOLUTION – DRIVER INDEPENDENT BUSINESS

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• Do not contract with a driver that has not

incorporated/LLC, etc. and obtained business license. Cross this “Rubicon”

• Focus on drivers that hire other drivers

through their entity

• Establish your own ABC:
• A = Your Company;
• B = Delivery Entity (your traditional

driver)

• C= Drivers B has hired
• Your company is A to B only; stays out of

any relationship with C

SOLUTION – DRIVER INDEPENDENT BUSINESS

• Nuture your ABC by identifying local “business advisors” who you can refer

driver to for incorporation/LLC status, etc.

• LLC is particularly attractive to entrepreneurial drivers because it allows

them to grant a driver they hire a small “membership” interest and at least arguably classify the drivers they hire as “partners” and independent contractors

• Bs must be able to (and do) contract with other companies, and work

independent from your company

• Do not interfere with or limit B advertising, business cards, etc.
• Strong contract with B that prohibits solicitation, customer theft, etc.

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SOLUTION: Deep Drill Down on Your Business Model

• Put the drivers in a different business (delivery)
• Company is a broker, procures customers, handles

logistics etc.

• Driver entity pays your company set fees for

participation in company’s brokerage/distribution system? These fees must be set at amounts sufficient to maintain/grow company’s profit

• Revenue collected over and above fees driver

entity pays to company are for driver entity

• Puts company in position of provider of services

to driver entity, as opposed to “hiring” driver entity

• Incentivizes driver entity to increase

productivity

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SOLUTION: Deep Drill Down on Your Business Model

Finesse how your company holds itself out to customers:

• That Dynamex held itself out as a “logistics and delivery” company was

lethal in the case as it was near impossible to escape the B “same business” as drivers factor.

• This is a bitter harsh reality: Companies that continue to hold themselves
• ut as “logistics and delivery” without deep massaging will face near

certainty of loss in states where Dynamex/ ABC unqualifiedly applies

• Deep massaging includes contractually with drivers; how company holds

itself out to the public; and how company operates

• 100% EE or IC structures; do not mix unless entirely different functions AND

entities

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SOLUTION: YOUR DRIVER CONTRACTS & RELATIONS

• Fair and balanced contract vs. obviously company favorable. Pigs get fat, hogs . . .
• Be a smart pig and avoid danger points like: Reduced statute of limitations;

limitations on damages drivers can obtain; punitive damages waivers; remedies available to company but not driver (injunctions)

• Make sure there are substantial protections written into the contract, such as right

to decline deliveries; no retaliation for same; set own schedule/when operating, etc.

• Good cause contract termination with default and opportunity to cure notices vs.

at will or “we can terminate on 3 days notice”

• Periodic renewals as opposed to a single contract signed 5 years past
• Allow negotiation or choice on certain terms such as contract duration, territories,

limited flexibility on driver compensation; i.e.; 1,2,3 levels of compensation, with compensation increasing for more capable and efficient driver entities

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SOLUTION: YOUR DRIVER CONTRACTS & RELATIONS

• Cooling off period before signing contract
• Uniforms absolutely needed?
• Company logoed vehicles necessary? Perhaps “Independently owned and
• perated by XYZ LLC for [Your company name]”
• Manager/driver relations: Manage to contract vs. treating like employee;

i.e.; document service failures with “default notices” in writing with “opportunity to cure”

• Terminate drivers only after defaults and opportunity to cure failed
• For multi-driver entities, your managers only deal with driver entity

principals as opposed to “managing” drivers of entity

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SOLUTION: ARBITRATION AND CLASS ACTION WAIVER

• An effective arbitration clause that includes a class action waiver is the

single most important step a company can take to protect itself – whether in an ABC state or a traditional control state

• Plaintiff lawyer desire to sue goes down by 50% in the face of a credible

arbitration clause and class waiver

• Arbitration is not cheap, but it drastically reduces the extortion of class

action suits and runaway jury verdicts

• Arbitration law is changing constantly and clauses must be prepared by

deeply experienced practitioners and updated yearly

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SOLUTION: Third Party Providers

• Expand role of traditional outsourcing/third party companies
• Third Party Provider (TPP) recruits, hires and contracts with a pool of drivers/driver

entities that drive for multiple logistics companies and do in fact deliver for multiple logistics companies

• Your company steps out of the traditional driver recruitment role and instead goes

to TPP’s pool of qualified drivers willing to follow your contractual terms and protections of your customer and business base

• Your company continues the marketing, customer retention, delivery order,

customer service and other functions, while TPP handles traditional administrative functions associated with “employment” (settlement, insurance, occ acc policy, etc.)

• TPP’s technology database has the essential capability of identifying and

recording/proving that driver/driver entity has driven for multiple companies, not just yours. Essential to win on required driver as independent business factor

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SOLUTION: LOOK OUTSIDE THE BOX AT DIFFERENT BUSINESS MODELS

• Master Contractor (small to large companies)
• Franchisor (medium to large companies)
• Driver Co-Op (small to large companies)
• Master Contractor: FedEx: Plagued by suits until established a Master

Contactor program: Small business entities can contract with FedEx to be a master contractor and operate up to 5 delivery vehicles.

• They must hire employee drivers and are responsible for compliance with all

employment and similar laws.

• Fed Ex does not deal with employee drivers hired by MCs
• Misclassification lawsuits vs. FedEx have plummeted as a result

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Alternative Non-Employee Business Models

Franchise Model

• “Franchising is Different” (Patterson v. Domino’s

Pizza)

• Allows control of business sources, quality

standards, marketing and branding but service providers are recognized by law as distinct and separate business

• Franchisor set ups allow revenue splits

Co-Op Model

• Delivery businesses owned by drivers
• Management and broker companies control

marketing, source business and provide work * Both of these models are tried to verdict and won tests in analogous transportation industries

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ABC and Real World Business Models

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• Curry v Equilon Enterprises : First California Appellate case post-Dynamex.

ABC Test does not apply to joint employer situations.

• Facts: Plaintiff worked for ARS, a company that leased service stations

from Shell. Plaintiff managed service stations for ARS in the usual course of ARS business which was operating service stations. Employee was determined not to be an employee of Shell because Shell is not in the business of operating fuel stations—Shell is in the business of

• wning fuel and real estate.
• Other lawsuits filed in CA pleading facts addressing Part B directly.

Questions

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www.marronlawyers.com

• 10 attorney misclassification team. Nationwide experience

and wins on misclassification

• Cases handled CA, AZ, CO, TX, OR, MO, MI, FL, AL, TN, MN,

NY, HI Contact: pmarron@marronlawyers.com (562) 432-7422

CLDA Webinar – Dynamex Case in California July 24, 2018 Unanswered Questions

• 1. If California adopted the ABC test, why wouldn't they have the same approach? NOT SURE WHO “THEY”

ARE BUT IF THE QUESTION IS ASKING IF APPELLATE COURTS IN OTHER STATES WILL TEND TO FOLLOW OR BE INFLUENCED BY CA RULINGS, THE ANSWER IS “YES,” PARTICULARLY IN BLUE/MORE LIBERAL STATES.

• 2. Can utilizing master drivers, those who have hired their own drivers, still can drag you into a lawsuit over

the master company's failures, like Workers Comp failures if they use IC's improperly? YES. USE O FMASTER DRIVERS WHO HIRE OTHER DRIVERS IS MUCH BETTER THAN DOING NOTHING, HOWEVER. SUGGEST STRENGTHENING MASTER DRIVERS OBLIGATIONS TO MAINTAIN WC OR PROPERLY TREAT THEIR DRIVERS AS INDEPENDENT CONTRACTORS. AS WELL STAY OUT OF MASTER DRIVERS’ RELATIONSHIP WITH

• DRIVERS. DO THE DRIVERS MASTER HIRES SEE YOUR COMPANY AS THE COMPANY THEY WORK FOR, OR

DO THEY (PROPERLY) SEE IT AS BEING THE MASTER DRIVER? SEE TO IT THAT MASTER DRIVER FORMS AN ENTITY AND OPERATES THROUGH SAME. BOTTOM LINE, LITIGATION CAN NEVER BE ELIMINATED. IT IS ABOUT REDUCING RISK AND REDUCING THE THREAT OF LITIGATION WHICH AN EFFECTIVE MASTER DRIVER APPROACH WILL DO.

• 3. How do you suggest maintaining compliance for the drivers downstream from the Vendors? HAVE A

COMPLIANCE MANAGER/OFFICER AT YOUR COMPANY THAT AUDITS DOWNSTREAM COMPLIANCE BY THE COMPANIES USING THE DOWNSTREAM DRIVERS. WRITE THE RIGHT TO AUDIT INTO YOUR CONTRACT. IF DOWNSTREAM DRIVERS/COMPANY PRACTICES ARE NOT IN COMPLIANCE, FOLLOW A NOTICE OF DEFAULT AND OPPORTUNITY TO CURE APPROACH AS OPPOSED TO DIRECTLY INTERVENING WITH DOWNSTREAM DRIVERS OR DEMANDING THEIR TERMINATION. HOWEVER, AFTER REPEATED DEFAULTS, CANCEL THE CONTRACT WITH THE INTERMEDIATE COMPANY THAT HIRED THE DOWNSTREAM DRIVERS.

• 4. Do you think that absent of an LLC having an EIN and DBA is helpful? SOMEWHAT BUT NOT ENOUGH.

THE IDEA HERE SEEMS TO BE TO SET UP AN INDEPENDENT BUSINESS WITHOUT THE COST AND (MINIMAL) COMPLEXITY OF FORMING AN LLC OR CORPORATION. RATHER USE DBA AND EIN. HOWEVER, TELLING IS THAT IN MANY CASES, JUDGES EXCLUDE FROM EMPLOYEE STATUS DRIVERS WHO HAVE FORMED AN LLC OR CORPORATION. IT IS NOT AS COMMON TO EXCLUDE A SOLE PROPRIETOR WHO HAS A DBA AND EIN. THIS MAY NOT BE THE MOST LOGICAL APPROACH, AS EIN AND DBA ARE CONSISTENT WITH HAVING YOUR OWN BUSINESS. HOWEVER, OFTEN IT IS THE CASE THAT JUDGES ONLY EXCLUDE DRIVERS WHO HAVE AN LLC OR CORPORATION. I’D PRESS FOR DRIVERS TO FORM AN LLC, CORPORATION, OR PARTNERSHIP.

• 5. When the I/C forms their own business entity, do you feel it's necessary that they obtain their own auto

liability insurance and operate under their own hauling authority to meet the B prong of the ABC test? IN THE BEST WORLD, YES. HAVING THEIR OWN AUTHORITY IS PARTICULARLY HELPFUL. OFFERING FLEET INSURANCE OR THE OPTION FOR DRIVER TO GET HIS OWN INSURANCE (WITH NOTIFICATION FROM B BROKER TO YOUR COMPANY OF LAPSE) IS A GOOD WAY TO GO. USUALLY THE FLEET INSURANCE IS CHEAPER SO DRIVER STICKS WITH FLEET INSURANCE.

• 6. If our ICs work for Uber/Lyft, does that count as doing work for a "separate" company? YES. BE SURE TO

TAKE EFFORTS TO OBTAIN PROOF OF SAME.

• 7. Can you talk about how the Broker business model compares to the different business models that were

mentioned? BROKER LISTS/OFFERS TRIPS TO INDEPENDENT DRIVERS AS OPPOSED TO THE ACTUAL

• TRANSPORT. BROKERS DEAL WITH MOTOR CARRIERS BUT ARE NOT MOTOR CARRIERS. AN ANALOGY IS

THE FEDERAL MOTOR CARRIER SAFETY ACT: “A motor carrier transports passengers or property for

• compensation. A broker is a person or an entity which arranges for the transportation of property by a

motor carrier for compensation. A broker does not transport the property and does not assume responsibility for the property.” (FROM THE FMCSA WEB PAGE). MOST DELIVERY COMPANIES ARE NOT HANDLING LOADS LARGE ENOUGH TO COME WITHIN THE FEDERAL MOTOR CARRIER REGISTRATION. IN OTHER WORDS A COMPANY DEALING IN SMALLER LOADS AS DO MOST DELIVERY COMPANIES, CAN HOLD THEMSELVES OUT AS A BROKER WITHOUT HAVING TO REGISTER AS A BROKER UNDER THE FMCSA. A DELIVERY COMPANY CAN HOLD ITSELF OUT AS A BROKER OR OFFEROR OF DELIVERIES TO INDEPENDENT DELIVERY COMPANIES/DRIVERS. THE INDEPENDENT COMPANIES THEN HAVE A CHOICE RE WHAT DELIVERIES/LOADS TO ACCEPT FROM THE BROKER AND THE DRIVERS TYPICALLY WORK FOR MULTIPLE

• COMPANIES. ALTHOUGH NOT A COURIER COMPANY, FOR EXAMPLE OF A COMPANY SET UP THIS WAY,

GOOGLE “CR ENGLAND BROKER” AND FOLLOW THE DISCUSSION ON THEIR WEB PAGE AS THEY DISCUSS ARRANGING TRANSPORTATION OPPORTUNITIES FOR MOTOR CARRIERS. THIS IS FUNCTIONALLY THE WAY A DELIVERY COMPANY BROKERAGE WOULD OPERATE – AND MOSTLY THE DRIVERS TO NOT NEED ACTUAL FMCSA RGISTRATION (GIVEN LOAD SIZE). FMCSA REGISTRATION IS A BIG + BUT MORE COMPLEX.

• 8. Regarding Co-op or Franchise, can an employee-based company successfully transform to a Co Op or

Franchise based company or does the main company need to disband and a new company formed? YES, IT CAN SUCCESSFULLY TRANSFORM. THE MAIN COMPANY DOES NOT HAVE TO DISBAND. A LOT OF PLANNING, CARE AND DETAIL IS NEEDED. MOREOVER, ALTHOUGH NOT REQUIRED, IT MAY BE WISE FOR THE MAIN COMPANY TO USHER IN NEW ENTITIES; I.E.; IN A CO-OP STRUCUTRE, A NEW TYPE OF CORPORATOIN (“MUTUAL BENEFIT” OR “COOPERATIVE”) HAS TO BE FORMED FOR THE DRIVERS. FOR LIABILITY PROTECTION PURPOSES, THE MAIN COMPANY MAY WANT TO DO AN ASSET ONLY SALE (INCLUDING BUSINESS NAME) TO A NEW FRANCHISOR ENTITY, AND/OR MANAGEMENT ENTITY CO-OP HIRES.

• 9. What happens if you assist the driver forming an LLC and EIN? TROUBLE. DON’T. I HAVE BEEN IN CASES

WHERE COMPANY MANAGERS FILLED OUT PAPERWORK FOR DRIVERS AND TOLD DRIVERS WHERE TO

• SIGN. CONCEPT OF “SEPARATE BUSINESS” FELL APART IN FRONT OF THE JUDGE. THERE ARE LOW COST

“BUSINESS ADVISORS” WHO DO THIS WORK. REFERRING DRIVERS TO SUCH AN INDEPENDENT ADVISOR WOULD BE FINE.

• 10. What about having only an EIN? An EIN without an LLC? SEE ANSWER TO #4 ABOVE. I DON’T THINK IT
• WORKS. AN ENTITY IS NEEDED. THIS SEEMS LIKE A HUGE HURDLE, BUT IT IS NOT, IT CAN BE DONE.
• 11. We (A Broker) contract with ICCs who have their own, LLCs - Corps, EIN, Insurance, Trucks, etc.. It doesn't

stop the co-employment suits, can you explain? PLAINTIFF LAWYERS ARE PLAINTIFF LAWYERS. THEY WILL ALWAYS SUE. HOWEVER, THE PROTEECTIONS OF THIS STRUCTURE ARE FAR BETTER THAN A TRADITIONAL INDEPENDENT CONTRACTOR STRUCTURE – LESS PRONE TO GET SUED, FAR MORE DEFENSIBLE. MAKE SURE YOU HAVE AN ENFORCEABLE ARBITRATION CLAUSE AND CLASS ACTION WAIVER TO ENHANCE THIS PROTECTION MORE. FEEL FREE TO DIRECT ANY FOLLOW UP TO pmarron@marronlaw.com|(562) 432-7422