Rumor Has It Trucking Companies Will Be At Increased Risk For Misclassification Allegations If Their Owner-Operators Apply For Unemployment Benefits.
First A Quick Review:
In my last article, I discussed how the CARES Act provides expanded unemployment assistance to individuals not traditionally eligible for unemployment insurance benefits: specifically independent contractors, including “Owner-Operators”. Under this new program, ICs could receive over $600 a week from the federal Pandemic Unemployment Assistance (PUA) program. In addition to the $600 a week offered through the end of July, self-employed individuals and independent contractors would also receive from the federal government 50% of what their state offers as unemployment pay. In an unprecedented change, independent contractors and those self-employed will be able to draw unemployment pay should they lose work because of the COVID-19 Corona-virus outbreak. Whether you are completely out of work or have experienced a substantial decline in your business, you are still eligible for PUA Program benefits. While these are Federal programs, they will be administered by State Unemployment agencies, which in California, means the Employment Development Department (EDD).
As I also discussed in my last article, nearly 50% of independent truck drivers have experienced a substantial decrease of work as a result of the COVID-19 pandemic. As a result, many of these owner operators are filing unemployment claims with the California EDD. That is to be expected, considering all of the politicians who are trumpeting about expanded Unemployment benefits for independent contractors. At least that is the theory: The reality is the EDD is woefully unprepared to administer this program and start handing out benefits under the PUA program to ICs. Indeed, the EDD has yet to update their Application for unemployment benefits to include self-employed individuals. (I will circle back and discuss this problem in a minute and what EDD is saying). As a result, independent contractors/owner operators are filing for unemployment benefits as traditional employees (and not ICs). Of course, that ain’t going to fly because ICs generally do not pay unemployment insurance premiums, but it can “red-flag” the employer for further scrutiny.
The New Old Problem
Which leads us to the “new problem” of independent contractors applying for unemployment benefits with EDD. But, this “new problem” is really an “old problem”: Will an application for unemployment benefits by an IC result in an EDD audit for misclassification of an employee as an independent contractor?
The answer to that is a resounding “maybe”. Lord knows I’ve had many a trucking company executive lament the fallout of an IC applying for Unemployment. Considering that unemployment benefit applications to EDD have been skyrocketing, and they are completely overwhelmed with the flood of applications, the risk of an audit is certainly no worse than it has been all along; and for that matter, it may actually be less since they are stretched a bit thin over at EDD these days. Admittedly, that is speculation on my part. So let’s focus on what Trucking Co.’s need to do in light of ICs applying for unemployment benefits (whether as regular employees or as self-employed workers).
The Solution For The New Old Problem
Desperate ICs are going to apply for these benefits and trucking companies can’t really do much about that. You may be able to advise your ICs to hold-off on filing for benefits until EDD updates their application for PUA benefits. But I advise against placing your fate into the hands of people who are getting conflicting information (eg.: Some people are advising ICs to go ahead and apply for unemployment as a regular employee, while others say hold off). Notably, EDD has explicitly encouraged independent contractors in both its public statements and website to file a claim for unemployment if they believe they are misclassified:
“If you are unsure if you are an independent contractor or an employee who could be eligible for benefits, then you are still encouraged to apply for Unemployment Insurance as instructed in our FAQs under the Unemployment Insurance Benefits section.”
Therefore, the better strategy is to be well prepared if EDD decides to knock on your door and start asking pesky questions.
Answer The Door
First of all, if they knock, you have to answer the door: You are going to have to respond. Ignoring contact from EDD usually ends badly – especially for you – not so much EDD. Most often, EDD will send You a “Pre-audit questionnaire”: This will likely be your initial notice that an audit is coming. While I have had some clients receive pre-audit questionnaires that never turned into actual audits, that tends to be unusual.
Clean Your House Before Your “Guests” Arrive
However, Trucking companies do not want to wait for a notice from EDD before getting prepared for a worker classification audit. Indeed, you should act today as if EDD is going to knock on your tomorrow. By and large, EDD audits center around the proper classification of independent contractors. In an audit situation, the employer has the burden of proving that their independent contractors are properly classified. (In California, the burden of proof is always on the employer to make the case that independent contractors are properly classified. And yes, you are presumed guilty until proven innocent). Therefore, you always want to be prepared to defend yourself and be ready with solid and substantial evidence that your independent contractors are properly classified. That is nothing new – but the tsunami of unemployment applications by ICs makes it clear that now is the time to get prepared.
Help Me, Mr. Wizard!
When I am hired by a Trucking company to prove their Owner-Ops are properly classified as ICs, my job is to marshal the evidence and apply that evidence to the rule of law to support the finding that the ICs are properly classified. So where do we start? Actually at the end! The first thing I do is let everybody know that the O-Os are properly classified as ICs! Unfortunately, it generally doesn’t end there and I have more persuasion to do. The next thing to do is state what the rule of law is.
Remember our old friend, Borello?
Despite the passage of AB-5 and codification of the “ABC” Test, a friendly federal judge specifically told EDD they cannot apply and use AB-5 and the “ABC” Test against trucking companies. Here is what we need to know:
“Whether certain laws and regulations in the California Labor Code apply to truck drivers, generally, depends on their status as employees or independent contractors. S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 350 (1989). For nearly three decades, California courts have used a test, based on the Borello decision, to determine whether workers are correctly classified as employees or independent contractors. The Borello standard considers the “right to control work,” as well as many other factors, including (a) whether the worker is engaged in a distinct occupation or business, (b) the amount of supervision required, (c) the skill required, (d) whether the worker supplies the tools required, (e) the length of time for which services are to be performed, (f) the method of payment, (g) whether the work is part of the regular business of the principal, and (h) whether the parties believe they are creating an employer-employee relationship”
The ruling makes it clear that AB-5’s ABC test is preempted by the FAAAA, and restores the multi-factor Borello test as the standard to determine whether a truck driver is an independent contractor or employee. The Court ruled that the FAAAA preempted Prong B of AB-5’s ABC test because it effectively prohibits motor carriers from utilizing independent owner-operator truck drivers. Hooray again.
Now We Apply The Law To Your Facts
NOW is the time to collect all of the necessary information and documentation for every IC that currently drives for you and has driven for you in the last 3 years (EDD can go back 3 years in a misclassification audit). This starts with your Independent Contractor Operating Agreement. Then we gather numerous documents (some obvious – some not so much), and others that need to be created, that will tip the scales in your favor. Then I make the case that the facts satisfy the Borello standard. Notably, EDD has a Audit Guideline that essentially follows the Borello standard that auditors use and that I rely on to help my clients.
Back To The Conclusion
Then, I return to my conclusion that the IC’s are indeed properly classified. But let me be clear: THESE DOCUMENTS NEED TO BE COLLECTED AND FILED FOR EVERY IC YOU HAVE EVER WORKED WITH GOING BACK 3 YEARS. Not all trucking companies are created equally which is why it is critical to sit down with an experienced Transportation Attorney ASAP and get your game plan together. That way, if EDD knocks on your door, you can answer with a smile on your face.
An Apology To ICs
My previous article touted the new CARES program and PUA program to help Owner-Ops get desperately needed benefits. In theory, that sounded great: The reality has been nothing but frustrating. EDD is simply unable to currently help Owner-Ops out: Go to EDD’s website on the PUA program which provides their excuses for not being able to implement it here.
“You see, in this world there’s two kinds of people, my friend: Those with loaded guns and those who dig. You dig.”
What does that have to do with this article? Not a damn thing. But I watched “The Good, The Bad, and The Ugly” over the weekend and that is my favorite Clint Eastwood quote in the movie. And nowadays, I can think of worse ways to kill 3 hours.