When you think things can’t get any worse in California for trucking companies who use ICs, they do.
I hate to be the bearer of bad news, but this is serious business that can easily ruin trucking companies and their owners. California trucking companies need to be acutely aware of these two major setbacks.
Federal Appeals Court Rules Dynamex ABC Test Applies Retroactively
The Federal Ninth Circuit Appeals Court ruled in Vazquez v. Jan-Pro Franchising International, Inc. that the California Supreme Court’s ruling in Dynamex Operations West, Inc. v. Superior Court applies retroactively. In Dynamex, the Supreme Court adopted a new standard for determining whether a California worker is an employee or independent contractor under the California Industrial Welfare Commission’s (“IWC”) wage orders. The Ninth Circuit’s ruling in Vazquez should be of particular concern to trucking companies, who now face potential liability for their past decisions to classify owner-operators as independent contractors rather than employees under a standard that did not exist at the time. Prior to Dynamex, the “Borello” or “Common-Law” test applied.
In Vazquez, a case that had been pending for almost 10 years prior to the Dynamex decision, the employer, a janitorial cleaning business, prevailed in their motion to dismiss minimum wage and overtime claims stemming from allegations that janitors had been misclassified as independent contractors. The employees appealed. The Dynamex decision was issued while the case was on appeal.
The employer argued that Dynamex did not apply retroactively. But of course, The Ninth Circuit disagreed. The Ninth Circuit ordered the lower court to apply Dynamex’s “ABC” test retroactively.
The California Labor Board (known formally as the Dept. of Labor Standards Enforcement, or DLSE) dramatically expands the scope of the Dynamex ABC Test.
The DLSE – my favorite kangaroo court – handed down a written “Opinion Letter” that essentially requires their deputy commissioners (the non-lawyer, non-judge individuals who decide your fate) to give the death penalty to any and all trucking companies who utilize independent contractors. This is no exaggeration: If you are a trucking company and you hire independent contractors (who are truly and genuinely independent in the sane world – i.e.: anywhere besides California and Massachusetts), you are going to get your ass handed to you at the California Labor Board to the point where it is highly unlikely you will survive unless you switch to an Asset-Based, Employee-Model Trucking Company. Let’s say you own no trucks and you rely on Bonafide Owner-Operators who bring their own equipment to the table: Well, those Owner-Operators are – that’s right – YOUR EMPLOYEES! Congratulations! You are now liable for Payroll, Withholdings, Unemployment Insurance, Disability Insurance, and Workers’ Compensation Insurance. And because you weren’t doing any of those things, you are now on the hook for every conceivable Labor Code violation for not treating these Independent Contractors as employees, including BIG penalties and BIG (10%) interest going back to the “start” date of the violations.
The day after the Ninth Circuit Court of Appeals ruled that Dynamex applies retroactively, the DLSE released an opinion letter concluding that Dynamex’s ABC test applies to both IWC Wage Order claims and the Labor Code provisions that enforce Wage Order requirements. The California Supreme Court ruled that Dynamex applies only to claims brought under the IWC Wage Orders: But not according to the DLSE, whose recent opinion letter seems to expand what that means.
The DLSE’s opinion letter reflects the way that agency (and their lackey commissioners) will be interpreting Dynamex moving forward. This will impact trucking companies who face DLSE wage claims where owner-operators contend they were improperly classified as independent contractors.
Here’s the background:
In its opinion letter, the DLSE stated that, because wage order provisions are not independently actionable, “the obligations imposed by the wage orders do not appear only in the wage orders themselves. Wage order obligations are also imposed by certain Labor Code provisions, which serve to enforce the wage orders.” Therefore, the DLSE concluded that Labor Code provisions that implicate or “derive” from employer obligations under the IWC Wage Orders are also subject to Dynamex’s ABC test. The opinion letter specifically mentions the following Labor Code provisions:
minimum wage (Labor Code sections 1182.12 and 1197);
overtime (Labor Code sections 510 and 1194);
liquidated damages (Labor Code section 1194);
meal and rest periods (Labor Code sections 226.7 and 512);
itemized wage statements (Labor Code section 226); and
expense reimbursement claims (Labor Code section 2802).
With respect to waiting time penalties under Labor Code section 203, the DLSE said applying the ABC test to those claims would be appropriate “[w]here section 203 serves to enforce the underlying minimum wage and overtime obligations of the wage orders.”
Please note, the IWC Wage orders do not address liquidated damages, waiting time penalties, wage statements, among other matters: But the DLSE is basically saying “So What”. So again, if your a trucking company and you are being dragged to a Labor Board Hearing, prepare to die.
The California Labor Board – Your Guilty Until Proven Innocent
This statement could easily be dismissed as the ramblings of a bitter and cynical lawyer, if they unfortunately weren’t true. Here’s how it works: A driver decides he or she wants to screw you. They file a Labor Board complaint making all sorts of allegations, usually without proof. (Proof is optional at the Labor Board). You deny the allegations and put forth evidence that the driver was properly classified and fairly paid. The result? YOU LOSE! Because if a claimant says something at a labor board hearing, it MUST BE TRUE. Some of my readers may be rolling their eyes, but if I hadn’t witnessed this myself, I too would be skeptical of such a statement.
One client’s nightmare.
I recently represented a trucking company at a labor board hearing in Sacramento. Unfortunately for my client, things did not go well. Here’s the background: my client, a trucking company, tendered loads to another trucking company, who then hired independent contractors to actually deliver the loads. While I realize my client was “double brokering”, that was not an issue at the labor board hearing and had no relevance to the proceedings.
The trucking company (I’ll refer to them as trucking company X) my client tendered the loads to had valid operating authority, and as I stated above, relied on owner operators to deliver the loads. Indeed, under the old common law or Borello test, these drivers were genuine independent contractors. They owned their own equipment and were responsible for its maintenance, insurance, and fuel, and operated as bona fide independent drivers. Some of them drove for other companies. They could accept or reject loads as they pleased. You get the picture.
What is important about this case is that my client had no direct dealings with the owner operators hired by trucking company X. My client had no involvement in determining who trucking company X hired to deliver the actual loads. Indeed, my client was completely removed from the business operations and trucking operations of trucking company X.
The result? The labor Commissioner decided that the owner operators/independent contractors who were contracted with trucking company X, were also employees of my clients! WTF?
The deputy labor Commissioner completely disregarded the law on co-employment and determined that somehow, magically, trucking company X’s owner operators were my client’s employees.
What was particularly disturbing about this, was that my client and I put forth credible evidence that my client had no control over the activities of trucking company X, and had no input on who actually delivered the loads. Furthermore, my client put forth credible evidence that they believed trucking company X was actually delivering the loads.
The Claimant came down to the labor board with no evidence whatsoever. He simply made a bunch of allegations without any proof, the deputy commissioner asked him some questions, and that was all that was required for this guy to win his case. Remember – this guy drove for trucking company X and had no direct dealings with my client!
The labor Commissioner went out of her way to give him more than what he was asking for. She tacked on interest, penalties and awarded him money for stuff he wasn’t even asking for. This was the most ridiculous and unfair experience I’ve ever had as a lawyer.
Notably, this case is now being appealed. However, in order to appeal, My client had to put up a bond for the (substantial) amount of the award in order to pursue the case in Superior Court, where hopefully justice will be served.
My advice: if you want to use independent contractors, get out of California. If you want to stay in California, buy your own fleet of trucks and only work with employee drivers. There is no in-between. The State of California is on a mission to crush you out of business if you hire Owner-Operators.
Labor Board judgments can easily reach hundreds of thousands, if not millions of dollars. Furthermore, the DLSE can hold the owners, directors and managers personally liable for a judgment you cannot discharge in bankruptcy.