Since I first started law school in 1998, and for all the time I have been a practicing attorney up to today, I have read thousands of judicial opinions. But few of them have struck me with such fear and apprehension as Precedent Decision P-T-511 handed down by the California Unemployment Insurance Appeals Board (CUIAB). If you own a trucking company, and you work with owner-operators, you will share my shock when you read Precedent Decision P-T-511.
Before I get into why you have so much to fear, allow me to provide you with some background on the CUIAB and their Precedent Decisions.
Who is the CUIAB, and why should you care?
“The CUIAB is an independent administrative court system for workers and employers seeking to challenge decisions made by the Employment Development Department (EDD) . Typically, and this is certainly the case with all of my clients facing an EDD audit, if you are assessed by EDD for misclassifying truck drivers as independent contractors, and you disagree with that assessment, you file an appeal and ask for the matter to be heard in front of an Administrative Law Judge (ALJ) who works for the CUAIB. If the ALJ rules against you, and in favor of EDD, and agrees that you in fact misclassified drivers as independent contractors (in other words, EDD and the ALJ agree that the drivers are “common law” employees) , your next step of appeal is to a five-member board of the CUIAB. If you don’t like what the board’s decision is, you can appeal that to California Superior Court (But only after paying the assessment – if you win in Superior Court, you get a refund of the assessment).
As one can see, the CUIAB is a court system, unto itself, that makes up its own rules and decides matters of law based on its own interpretation of the law. While I have heard some cynical people refer to it as a “kangaroo court”, they do wield tremendous power over California employers who run afoul of the EDD, including trucking companies.
CUIAB makes law through issuance of “Precedent Decisions”. Precedent Decisions are a body of case law developed through the “adjudicatory process at the CUIAB and contains the Appeals Board’s definitive expression on unemployment, disability, and tax matters. The CUIAB, it’s Administrative Law Judges, and the EDD director are controlled by these Precedent Decidions, except as modified by judicial review.
Which brings us to Precedent Decidion 511. This matter originated back in 2014 when EDD audited RWI Transportation LLC (RWI). EDD ultimately determined that RWI had misclassified drivers as independent contractors, and therefore had not paid contributions or deductions based on wages paid to them as employees. RWI was assessed almost $2.4 million.
RWI works with drivers who own their own equipment: according to the decision, The drivers own their own tractors, but use RWI trailers . The drivers are ultimately responsible to make the lease or purchase payments, and they bear the consequences of nonpayment, lease termination or own the tractor if or when paid in full.
Here are a few other facts that the Appeals Board noted:
“Petitioner (RWI) could not conduct its business without the services performed by drivers.”
“The act of driving a tractor does not differ, whether a driver is an employee or an independent contractor.”
“Petitioner requires individuals…to submit an ’employment’ application”.
“The contract between petitioner and each driver is effective for a period of one year but renews automatically unless terminated by either party”
“Petitioner offers driver assistance in purchasing and maintaining a tractor via a relationship it maintains with a third-party financing company.”
“If petitioner learns from (the) driver or another motor carrier that driver is going to operate under the other motor carrier’s USDOT authority, petitioner terminates its own contract with that driver.”
“Petitioner requires drivers to possess a Worker’s Compensation policy or acceptable occupational accident policy”
“Petitioner typically requires and pays for the various necessary state permits and plates for drivers running under its authority”
“Drivers can hire other drivers but per regulations petitioner has to clear and authorize them to run under petitioner’s authority.”
“Drivers are not required to begin or end work out of, or report to, the petitioner’s California terminal/trailer yard ”
“Drivers can accept or decline assignments without consequence”.
“Drivers are often offered regular or repeat assignments.”
“While drivers are enroute with a delivery they are contractually mandated to contact petitioner twice each day during specified hours to communicate regarding the status of delivery. Petitioner monitors tractor location and driving activity by satellite through the install device.”
“Petitioner only pays drivers based on the mileage determined by the software program.” (petitioner pays drivers by the mile based on a route determined by its chosen software program).
“Many drivers covered by the assessment had a long history of driving exclusively for petitioner”
These are just the highlights of some of the facts the CUIAB relied upon. But The bottom line is they determined the drivers were employees.
In regard to the issue of control, The CUIAB stated that despite the fact the drivers use their own trucks, paid for some of their own expenses, and could decline dispatches, the evidence revealed that the petitioner directed drivers where and when to pick up and drop off produce, subjected drivers to a twice daily check in requirement, required them to submit paperwork beyond what was required by the USDOT, and mandated the use of certain stations drivers had to submit paperwork which was required to complete the job and to receive payment. The CUIAB concluded Petitioner retains control over significant details of the work, which strongly indicates employment
The CUIAB went on to say that RWI had a right to discharge at will.
The CUIAB went on to say that the drivers were not engaged in a distinct occupation and business. “The only business drivers were engaged in was the petitioners business”
The CUIAB went on to say there’s no difference between independent contractor drivers and employee drivers.” Thus, the CUIAB felt this factor supported a finding of employment.
Because petitioner paid for or advanced funds to drivers for almost everything necessary for them to perform services, and later deducting payments, drivers did not have to “possess, acquire or bring any significant resources into the relationship with petitioner“. This supported a finding of employment.
The fact that the drivers were engaged indefinitely indicated an employment relationship.
The CUIAB disregarded the fact that the drivers were paid per job.
The CUIAB disregarded the fact that the parties related to each other as independent contractor.
Finally, the CUIAB went into a long and torturous analysis as to why the drivers work was a part of the “regular business of the principal”
There are other issues that were discussed in the course of the opinion, and I encourage everyone to read the decision. Read P-T-511 here
So what should a trucking company do if audited by EDD?
I believe there are ways to distinguish the business practices of certain motor carriers from RWI, and this is critical if you are to fall under the scrutiny of EDD regarding classification of your drivers. So while I’m not quite ready to pronounce the independent contractor model dead, it has taken a major hit. And there are some strong take-home messages: lease purchase agreements are dead in the water; if you basically have a person who simply shows up and drives a truck, and the company provides the driver the manner and means by which they get into the truck, you are seriously at risk for a misclassification assessment. According to the CUIAB, RWI provided for their equipment which they paid back over time, by way of a settlement deduction. Controlling or dictating the route a driver must take, and tracking them, and requiring them to check in, are also factors that can add up to hurt you.
One factor trucking company should be aware of is that the Precedent Decision is only binding upon EDD matters. It cannot be cited as authority in Superior Court. However, other courts can borrow from its reasoning, but that is probably cold comfort to those trucking companies facing an EDD audit.
Please note that the final chapter has not been written in this episode: RWI is appealing this decision, and this will likely end up in Superior Court for judicial review. I will keep track of developments.
EDD is using Precedent Decision 511 and beating trucking companies over the head with it. Because of the significance of the decision, and how it is being used as a weapon by EDD against trucking companies, I urge all trucking companies who use independent contractors to consult with a transportation attorney to determine their risk of exposure if confronted with an EDD audit.