Truck Law

A Transportation Law Blog from TransportationAttorneys.NET

Month: April, 2018

UBER is Victorious in Independent Contractor Misclassification case and Trucking Companies should care

by G. Spencer Mynko, Esq.

Trucking Companies need to take note of this important case!

As many of you know, Uber technologies, the rideshare company, has been fighting numerous lawsuits and claims that their drivers are misclassified as independent contractors. Well, on April 11, a federal district court in Pennsylvania ruled in favor of Uber concluding that the Uber Black limousine drivers are independent contractors, and not employees. The importance of this decision, is that it is supportive of the independent contractor business model, and, If the reasoning for the decision is adopted by other courts, including the United States Supreme Court, trucking companies may benefit greatly. And that is the reason I am so interested in this decision.

The FLSA Test for Independent Contractors (adopted by the US Supreme Court)

The U.S. Supreme Court has on a number of occasions indicated that there is no single rule or test for determining whether an individual is an independent contractor or an employee for purposes of the FLSA. The Court has held that it is the total activity or situation which controls. Among the factors which the Court has considered significant are:

1.The extent to which the services rendered are an integral part of the principal’s business.
2. The permanency of the relationship.
3. The amount of the alleged contractor’s investment in facilities and equipment.
4. The nature and degree of control by the principal.
5. The alleged contractor’s opportunities for profit and loss.
6. The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
7. The degree of independent business organization and operation.

As most of my readers know, The last decade has been tough on trucking companies utilizing the independent contractor business model for drivers. Almost all of the decisions that have gone in front of the courts have concluded that the drivers were common-law employees.

However, Uber’s big win could easily help trucking companies make the case that their drivers are independent contractors. Indeed, this decision is encouraging because if drivers are in business for themselves, have considerable investment in expensive equipment, provide services to a competitor or have their own customers, they would meet their burden of proof that the drivers are independent contractors.

This is particularly important where enemies of the Independent Contractor model are disregarding whether driver’s own their own equipment, drive for other companies, can accept or reject loads and are under no significant control of the trucking company – and still claiming such drivers are employees. The judge in this case examined six factors which led to his conclusion that the Uber drivers are independent contractors.

In Razak v. Uber Technologies, Inc., No. 16-cv-573 (E.D. Pa. Apr. 11, 2018). The judge looked at six major factors.

1. Right to control: the first factor involves “the degree of the alleged employers right to control the manner in which the work is performed”. Notably, California courts rely heavily on the “right to control” test.

In this case, the plaintiff claimed that Uber controlled him by being able to terminate his Uber app, deactivate him for canceling trips, block drivers from manipulating lines at major transportation hub, and limit the number of consecutive hours that a driver may work. But the court found that these activities by Uber were “generally geared toward ensuring Safety and
Quality control”.

The Court went on to state that there was evidence that Uber does not exercise substantial control over the drivers, including the right of the drivers to hire subcontractors or helpers, to work for competing companies, to determine their own hours, to accept or reject rides offered to them, to wear anything they want, and to work anywhere they choose. Sounds a lot like an independent contractor truck driver doesn’t it?

The court concluded that this factor weighs heavily in favor of independent contractor status.

2. Opportunity for profit or loss: The judge examined “the alleged employees opportunity for profit or loss depending on his managerial skill”. The court concluded that this factor “strongly favors a conclusion that Uber black drivers are not employees”

The judge noted that the plaintiffs have taken advantage of such opportunities through their own respective companies, but that they also have the right not to accept trip requests, and are “free to make money elsewhere”, and these facts strongly indicate that plaintiffs are independent contractors pursuing their own entrepreneurial opportunities in search for profit.”

Even though Uber set the price for the trip, that did not change the “profit and loss” factor that the court looked at.

Again, you can see how this could be very beneficial to independent contractor truck drivers – the arguments are probably even stronger for IC truck drivers.

3. Investment: The third factor looked at by the court was “the alleged employee’s investment in equipment or materials required for his task, or his employment of helpers”. Here, though plaintiffs did purchase or lease expensive vehicles, which was “strong evidence that they are not employees” they argued that Uber deduct money from the drivers for “vehicle finance payments” however, the court stated “just because a driver chooses to lease a vehicle from Uber does not convert Uber into an employer under the FLSA”.

I find this particular part of the decision to be amazing, because if this were to spread and be adopted by higher courts, including United States Supreme Court, California trucking companies could actually get a break if they lease trucks to drivers. I’m not saying that lease-purchase agreements will return to acceptance anytime soon, however, the judge’s reasoning is encouraging, and this could be adopted by higher courts, including the US Supreme Court which, of course, trumps all.

4. Special Skills: the fourth factor was “whether a service rendered requires special skill” and court concluded that driving is not a special skill, but ultimately held it doesn’t carry much weight. Interesting, because there are other cases that hold that professional truck driving is a special skill, and I think truck drivers have the advantage here in making the case that they are independent contractors. In other words, if this factor is neutral for Uber drivers, I think it could be positive for professional truck drivers.

5. Relationship permanence: The next factor that court looked at was “the degree of permanence of the working relationship”. Here, the court concluded that the Uber Black drivers “have basically complete freedom regarding how long they wish to serve in this capacity and the hours in which they serve.” As a result, the court found that “there is no permanence of the working relationship whatsoever unless a driver wants it” and therefore, this factor “weighed heavily in favor of independent contractor status”. Again, this could easily be argued to support the trucking company use of independent contractors.

6. Integration of service: The final factor the court looked out his “whether the service rendered is an integral part of the alleged employer’s business.” The court did note that Uber could not conduct its business without the drivers, however, this “only favors employee status to a slight degree”.

I know some state agencies like EDD and the labor board like to use this factor to beat trucking companies over the head, but hopefully this represents a turning point in rejecting that argument as de facto proof of an employer- employee relationship. My counter argument to that analysis is if the driver is free to accept or reject loads as he pleases, and is free to work for other companies as he pleases, you can hardly say that the driver is “an integral part of the alleged employer’s business”.

I will be watching this decision carefully as it makes its way through the appeals court. While things remain bleak here in California, perhaps this case represents a shift in the pendulum which has swung wildly out of control against the IC business model. Talk to an experienced Transportation Attorney about misclassification.

Corporation Vs. LLC in Trucking and Transportation

by G. Spencer Mynko, Esq.

Should Your Trucking, Transportation, or Logistics Company Be A Corporation or Limited Liability Company (LLC)? 

A major decision for anyone involved in transportation is what business form they should choose. Almost without exception, I advise clients to form a business entity that will protect the owners from being personally liable for the business’s debts. In this article, I will focus on “S” Corporations vs. LLCs.

I’m specifically not discussing C-Corporations and Sole Proprietorships. Many business owners choose S Corps because they’re generally exempt from income tax and there is no double taxation. A C Corp is taxed as a separate entity from the shareholders. Shareholders report and pay taxes on what the corporation pays them. An S Corp is taxed like a partnership with a “pass-through” structure. It’s not doubly taxed because the corporate entity can pass corporate income, losses, deductions and credits to its shareholders for federal tax purposes, hence simplifying accounting.

One drawback of the sole proprietorship is that the owner is personally liable for all debts, obligations, and liabilities of the business, so the sole proprietorship is discouraged as a form of business. A sole proprietorship may have low start-up costs and may have an advantage with lenders because the owner is personally liable for business debts, but this personal liability may create difficulty in raising capital. I almost universally advise anyone in transportation operating as a sole prop.

So let’s focus on S-Corp. vs. LLC, because this is the choice the vast majority of transportation related businesses will make.

Ownership Requirements:

S-Corp.:

One to 100 shareholders. With limited exceptions, only US individuals (citizens or residents) and certain trusts and tax-exempt organizations can be shareholders. Only eligible US entities can make an S-corporation election. Only one class of shares.

LLC:

One or more members. Two or more members required if an LLC wants to be taxed as a partnership. Separate entity from its members (Cal. Corp. Code § 17701.04(a)). No restrictions on the types of owners.
May become a member without making or being obligated to make a contribution (Cal. Corp. Code § 17704.01(d)).

 

Form of Equity and Restrictions:

S-Corp.:

Shares are held by one or more shareholders. Only one class of shares is permitted (common shares). Differences in voting rights among shares are permitted. Shares are generally transferable unless restricted in the articles of incorporation, bylaws, or a separate shareholder agreement or by securities laws

LLC:

Membership interests are held by one or more members. Articles of organization or operating agreement may provide for more than one class of members. Unless otherwise provided by the operating agreement:
The right to receive distributions (transferable interest) is transferable (Cal. Corp. Code § 17701.02(aa)).
The transfer of a transferable interest does not entitle the transferee to vote or otherwise participate in the LLC’s management.
After formation, a person may become a member:
As provided in the operating agreement.
By unanimous member consent.
As a result of a merger or conversion.
If designated (and consented to) by the last person to have been a member (or the member’s legal representative), within 90 days after the LLC no longer has members.

Formation Document & Filing Fees:

S-Corp: Articles of incorporation filed with the SOS for $100. An eligible US entity makes a timely S-corporation election on Internal Revenue Service (IRS) Form 2553, no more than two months and 15 days after the beginning of the tax year.

LLC: Articles of organization filed with the SOS for $70.

Governing Documents:

S-Corp.: Articles of incorporation and bylaws Initial bylaws are typically adopted by incorporators or initial directors. The shareholders or board of directors may adopt, amend, or repeal bylaws, but the board’s authority may be restricted by the articles of incorporation or bylaws.Shareholders of a close corporation may enter into a shareholders’ agreement as a governing document (Cal. Corp. Code § 300(b)).

LLC: Articles of organization and operating agreement, which may be written or oral.

Liability:

S-Corp.: Shareholder liability is generally limited to the amount of consideration agreed to be paid for shares Shareholders are typically not responsible for the corporation’s liabilities. But beware Piercing the Corporate Veil.

LLC: Unless otherwise provided by the operating agreement, a member or manager is not liable for the LLC’s debts, obligations, or other liabilities solely by reason of acting as a member or manager. A member will be personally liable under the common law governing alter ego liability.

Management (Governing Authority):

S-Corp:
An S-corporation is typically governed by a board of directors. Corporation must have a chairperson of the board or a president (or both), a secretary, and a chief financial officer and may have additional officers as set out in the bylaws or determined by the board.

LLC:
An LLC is managed by its members unless the articles of organization contain a statement that it is manager-managed.
There are important differences between Member Managed and Manager Managed LLCs.

Fiduciary Duties:

S-Corp.: Directors owe a fiduciary duty of care and duty of loyalty. Directors must perform their duties in good faith, in a manner believed to be in the best interests of the corporation and its shareholders.

LLC: Members in a member-managed LLC and managers in a manager-managed LLC owe the fiduciary duties of loyalty and care to the LLC and the other members.

 

Employee Incentive Considerations:

S-Corp.: Stock options can be granted to employees

LLC: Profits, interests, or non-qualified options (to acquire a membership interest) can be granted to employees.

Distributions:

S-Corp: Distributions to shareholders are typically dividends paid in cash or in property (other than the corporation’s own shares).

LLC: Members are not entitled to demand or receive distributions in any form other than money (Unless provider for in the Operating Agmt.).

Other Considerations:

S-Corp.: More regulated and more record keeping requirements than LLCs.There is a well-developed body of corporate case law and statutes that provides greater certainty but less flexibility than other entity forms. In California, you can use a relatively new, simplified procedure that allows you to convert your business from a corporation to an LLC largely by filing a single document with the Secretary of State.

LLC: Has benefits of partnership regarding flexibility in management structure, fewer record keeping requirements, and the option for pass-through taxation, and also the benefits of a corporation regarding limited liability. Easily converted to an S-Corp. in CA