Are Your Contractors Really Independent?

Moving companies provide moving services using employee drivers or owner operators.

• A moving company withholds certain employment-related taxes (FICA taxes, income taxes, FUTA taxes) from the compensation paid by it to its employee drivers.
• A moving company does not withhold employment-related taxes from the compensation paid by it to its owner operators.
• A moving company is required to report a driver's wages on IRS Form W-2.
• A moving company is required to report payments made by the moving company to independent contractor owner operators on IRS Form 1099.
• A moving company intends for its owner operators to be legally classified as independent contractors and not as employees of the moving company.
• If a moving company is audited by the Internal Revenue Service ("IRS") or another governmental agency and the moving company's owner operators are judged to be employees of the moving company, the moving company can be held monetarily liable for failure to withhold employment-related taxes.
• Also, if a moving company's owner operators are judged to be employees, other employment laws such as the Civil Rights Act and the Americans With Disabilities Act may be applicable.

From time to time a moving company should conduct a self-audit of its relationship with its owner operators to make sure that the moving company's practices are reflective of an independent contractor relationship between the moving company and the owner operators.

The IRS has applied the following common law test to judge whether a person doing work for a company and alleged by the company to be an independent contractor is under the law an employee or an independent contractor: whether the company has the right to direct and control the person as to the details of when, where and how work is to be performed; if the company merely specifies the results to be achieved, the person is an independent contractor.

Historically, the IRS has used the following twenty questions in applying such common law test:

• Whether the worker is required to comply with instructions about when, where and how to perform the service;
• Whether training is required for the worker;
• Whether the worker's services are integrated into the business operation to the extent that operations significantly depend on the worker's performance;
• Whether the worker's services must be rendered personally;
• Whether the worker hires, supervises and pays for assistants required to perform the services;
• Whether there is a continuing relationship between the worker and the service recipient;
• Whether the service recipient sets the hours of work for the worker;
• Whether the worker is required to devote substantially full time to the business of the service recipient;
• Whether the work is performed on the premises of the service recipient;
• Whether the worker must perform services in the order or sequence established by the service recipient;
• Whether the worker is required to submit regular oral or written reports to the service recipient;
• Whether the worker is paid by the hour, week or month, or by the job, or on a straight-commission basis;
• Whether the service recipient pays the worker's business and/or travel expenses;
• Whether significant tools, materials and equipment are furnished by the service recipient to the worker to perform the services;
• Whether the worker has significantly invested in facilities used to perform the services;
• Whether the worker can realize a profit or suffer a loss as a result of the performance of the services;
• Whether the worker performs services for more than one service recipient at the same time;
• Whether the worker makes the services available to the general public;
• Whether the service recipient has a right to discharge the worker; and
• Whether the worker has the right to terminate the relationship with the service recipient without incurring liability.

A company should tell a person which the company considers to be an independent contractor "what" is to be done, but not "how" it is to be done.

Federal regulations contained in Title 49 Code of Federal Regulations Part 376 specify certain requirements for truck tractor "lease" agreements between owner operators and trucking companies including moving companies. Trucking companies which transport shipments in interstate commerce and who use owner operators are required to comply with such regulations. Such regulations state in Section 376.12(c)(1) that "The lease shall provide that the authorized carrier lessee shall have exclusive possession, control, and use of the equipment for the duration of the lease.", and that "The lease shall further provide that the authorized carrier lessee shall assume complete responsibility for the operation of the equipment for the duration of the lease." Such regulations also state in Section 376.12(c)(4) that "Nothing in the provisions required by paragraph (c)(1) of this section [paragraph (c)(1) of Section 376] is intended to affect whether the lessor or driver provided by the lessor is an independent contractor or an employee of the authorized carrier lessee." Therefore, such legal requirements contained in Section 376.12(c)(1) of Title 49 Code of Federal Regulations are not determinative of whether a moving company's owner operators are independent contractors or employees.

It is important for a moving company to have a well written independent contractor agreement which has been signed by the moving company and by the owner operator.

It is important that a moving company conduct business with an owner operator upon the basis that the owner operator is a separate business and not as if the owner operator is an employee of the moving company.

A moving company should be careful in all communications between the moving company and its owner operators to make sure that the owner operators are not addressed as employees.

Some of the practical factors which can evidence an independent contractor relationship between a moving company and an owner operator are:

• An independent contractor owner operator pays his(her) own expenses.
• An independent contractor owner operator chooses the route to drive unless the law requires a certain route.
• An independent contractor owner operator is paid for the job - not by the hour or a salary.
• An independent contractor owner operator provides the equipment required such as a truck tractor (it is okay for a moving company to provide the trailer).
• An independent contractor owner operator provides tools required for the job.
• An independent contractor owner operator has a significant investment in the owner operators' business - a purchase or provision of a truck tractor.
• An independent contractor owner operator hires his(her) drivers and helpers.
• An independent contractor owner operator is not prohibited from providing services to others (for example, by using another truck tractor).
• An independent contractor owner operator can either make a profit or incur a loss.
• An independent contractor owner operator is not provided company benefits such as employees of a moving company are provided.
• An independent contractor owner operator does not have a permanent relationship with a moving company (the independent contractor agreement has a specific term).
• The independent contractor owner operator or the moving company must give notice in order to terminate the written independent contractor agreement.
• The independent contractor owner operator or the moving company must give notice of a breach of the written independent contractor agreement.
• The written independent contractor agreement between the owner operator and the moving company should not be automatically renewable.
• The written independent contractor agreement should specify all applicable regulations.
• An independent contractor owner operator should be liable for any damages caused by him(her).
• The moving company should not provide continuous training to the owner operator (it is okay to provide an orientation to the moving company's policies and to the requirements of the moving company's customers).
• The independent contractor owner operator should be able to turn down loads from the moving company without incurring punishment.
• Independent contractor owner operators should be treated differently and separately from the moving company's employee drivers.
• It is best if the independent contractor owner operator has formed a business entity such as a corporation with whom the moving company enters into the independent contractor agreement.
• An independent contractor owner operator should obtain and pay for permits and licenses which are required for them to provide his(her) services.
• A moving company does not hire an independent contractor owner operator, but rather enters into an independent contractor agreement with the owner operator.
• A moving company does not "fire" an independent contractor owner operator, but rather terminates the independent contractor agreement with the owner operator.
• A moving company should not include owner operators in the same trip pool with the moving company's employee drivers.
• An independent contractor owner operator's tax forms should state that the owner operator is "self-employed" or is employed by the owner operator's business entity.
• The written independent contractor agreement between an owner operator and the moving company should provide that the owner operator will indemnify the moving company for damages caused by the owner operator.
• The independent contractor owner operator should have a separate business bank account.
• The independent contractor owner operator should be paid by the moving company by the job, and not every week or every two weeks.
• The moving company should train its dispatchers and other employees that have interaction with the moving company's owner operators as to how the dispatchers and other employees of the moving company should interact with the owner operators.
• Independent contractor owner operators should not be given a drivers manual, but rather may be given a moving company's policies book.
• An independent contractor owner operator should be responsible for paying any of the owner operator's drivers.

In 1999 the IRS issued a market segment understanding ("MSU") covering "van operators in the moving industry." The MSU provides guidance to the moving industry as to how the IRS would judge whether a moving company's owner operators are, under the law, independent contractors or company employees.

IRS' MSU for the Moving Industry

Potential for Profit or Loss

• Whether the van operator has a substantial investment in equipment.
• Whether the van operator pays the business and traveling expenses.
• Whether the van operator's compensation is based on a percentage of revenue or on miles driven.
• Whether the van operator hires and pays assistants.

Significant Facts

• Whether the van operator is free to set the work schedule.
• Whether the van operator determines the manner of performing the details of daily activities.

Other Relevant Facts

• Whether the moving company requires the van operator to make oral or written reports.
• Whether the moving company requires the van operator to attend training.
• Whether the van operator has a choice to accept or reject jobs.
• Whether the van operator's services must be rendered personally.
• Whether the van operator works for more than one firm at a time.
• Whether the moving company has the right to discharge the van operator at will.
• Whether the van operator has the right to terminate services without liability.

Substantial Investment in Equipment

The van operator can have a substantial investment in the truck tractor even if the van operator obtains the truck tractor from the moving company, from a party related to the moving company or from a third party unrelated to the moving company. The terms of the arrangement, the substance of the transaction as a whole and the parties' intent must all lead to the conclusion that the van operator has a substantial investment in the truck tractor. The parties must document the transaction appropriately (that is, a title in the van operator's name in the case of a purchase and a note or other evidence of indebtedness if the purchase is financed, or a lease agreement in the case of a lease). The purchase price or the valuation used to determine payments, in the case of a lease, must reflect a reasonable valuation for the truck tractor. The van operator must be personally liable for payments if a purchase is financed or for lease payments in the case of a lease. If a purchase is financed, the amount of the payments must reflect a reasonable interest rate and reasonable amortization. In the case of a lease, the amount of the payments must reflect a reasonable interest rate. If a purchase of the truck tractor is financed, the amount of the payments must reflect a reasonable amortization. The van operator must be free to select the entity from which the van operator obtains the power unit. The van operator must be responsible for the vehicle, including maintenance, fuel, liability insurance, and risk of loss from damage or destruction. If the lessor performs standard maintenance, the cost of maintenance must be included in determining the van operator's periodic payments and must be clearly shown as a separate cost item in determining the payment amount. In the case of a lease, the arrangement must generally have a duration of at least one year. The agreement must provide for financial remedies against the van operator in the event of default.
  

Business and Traveling Expenses

Payment by the van operator of a substantial majority of business and traveling expenses, in terms of total dollars, indicates right to control by the van operator. Advances by the moving company that are repaid or debited against the van operator's account are considered to be paid by the van operator. The van operator is considered to bear the cost of public liability and cargo insurance if the van operator is liable to the moving company for the van operator's share of the insurance cost and if the share reasonably approximates the van operator's percentage of the risk.
  

Manner of Compensation

If a van operator's principal compensation is based on a percentage of revenue collected on individual shipments or per mile compensation for miles driven, this indicates right to control by the van operator. Indications of the moving company's right to control are paid vacations, sick leave and health insurance (unless the van operator pays the cost of the insurance).
  

Assistants

If the van operator decides whether to hire helpers, selects them, and takes full responsibility for compensating them, without reimbursement, this indicates the van operator's right to control. In some instances, the van operator elects to use temporary employment agencies to obtain helpers or to hire and pay helpers provided by the moving company. Obtaining helpers by these means does not diminish the degree of the van operator's right to control. Similarly, obtaining only helpers who meet the general moving company or customer standards does not diminish the degree of the van operator's right to control. Examples of general standards for helpers include requirements that they be neat and clean in appearance, wear an item of apparel with the company logo (for example, a T-shirt), treat customers with courtesy and carry some form of identification.
  

Set Hours of Work

If the van operator can freely select his or her own work schedule, such freedom indicates the right to control by the van operator. If, however, the moving company mandates that the van operator work on a specified schedule, this indicates the right to significant control over the van operator. The van operator's freedom to select his or her own work schedule will not be considered diminished because the van operator is required to comply with federal and state limits on driving hours. A moving company requirement that the van operator pick up and deliver shipments within reasonable time periods is not considered to infringe on the van operator's freedom to select his or her own work schedule.

Instructions

If a moving company requires workers to comply with rules established by a third party (for example, the U. S. Department of Transportation), then little weight should be given to the fact that the business enforces those rules with respect to the workers. Accordingly, the moving company can and must require a van operator to follow all governmental regulations covering such areas as inspection, repair and maintenance of the truck tractor, driving of the vehicle, maximum driving and on-duty time, weighing procedures and testing for alcohol and controlled substances. The van operator must be told the day or days the customer has requested pick up and delivery and any special handling requirements. If the moving company merely relays this information to the van operator, this does not indicate a right to control. If, however, the moving company provides detailed instructions to the van operator as to how to comply with the customer's requirements, this indicates the moving company's right to control the van operator. Moving companies commonly establish policies and procedures relating to minimum standards of quality service. When standards are general in scope and the details of meeting the standards are left to the discretion of the van operator, imposition of the standards does not indicate the right to control by the moving company. Rather, it merely shows that the moving company must establish service levels that are acceptable to the customer. Examples of general quality standards include the following: courtesy, professionalism and/or acting in a business-like manner; on-time pick up; on-time delivery; satisfaction with loss or damage and/or reducing claim costs; and responsiveness to customer inquiries. In some instances, a moving company may instruct a van operator to exceed state or federally required standards in the interest of enhanced safety. Imposing this type of additional or heightened safety standard does not significantly increase the moving company's right to control so long as the moving company does not instruct the van operator on the details of how to meet the standard. If a van operator occasionally requests information from the moving company to assist in the performance of some detail of the work, the moving company's response is not considered an instruction. For example, a van operator in unfamiliar territory may ask the dispatcher for advice on selecting an efficient route of travel, and the dispatcher may suggest a possible route. If the van operator may reject the suggested route, then the dispatcher is not considered to have given an instruction. Commonly, a moving company instructs the van operator and helpers to wear a uniform imprinted with the moving company's name or insignia in the presence of the customer. Instructions on wearing uniforms or insignia generally originate with the moving company's desire to assure the customer that the van operator and helpers are who they purport to be and may be trusted to enter the customer's home. Thus the instruction ordinarily is intended to ensure customer security rather than to control the van operator. In view of the underlying purpose, an instruction to wear a uniform in the customer's presence is a neutral fact.

Oral or Written Reports

A requirement that the van operator make oral or written reports regarding day-to-day activities indicates the right to control by the moving company. For example, if the moving company requires the van operator to report regularly regarding the specific routes chosen, all expenses incurred, the manner of loading the trailer, or other matters demonstrating accountability for the specific details of performance, this indicates the moving company's right to control. Such reports are distinguishable from oral telephone reports to the moving company's dispatcher to apprise the moving company of the van operator's location and availability for jobs. These oral reports are needed for scheduling purposes and do not indicate a right to control by the moving company. Federal and state law require certain types of reports. These primarily include reports of vehicle inspections and maintenance, accidents, convictions of certain traffic violations or crimes, and logs of driving time. Satisfaction of government requirements to provide reports and information is given little weight. If the moving company requires more numerous or more detailed reports than the governmental regulations, customers and general quality standards require, this indicates the right to control by the moving company.
  

Training

Training during the term of the independent contractor agreement can be an indicator of the right to control by the moving company. Some training, however, is often necessary so that a van operator will be able to understand and fulfill contractual obligations and does not indicate control by the moving company. The following five questions help weigh the significance of training provided by the moving company:

1. After entering into a contractual relationship with the moving company, is a van operator's participation in training optional or mandatory?
2. Does the training concentrate on administrative procedures and/or policies with regard to compliance with federal and state safety, operational and consumer protection regulations, general quality service standards and customer requirements, or does it concentrate on the mechanics of loading and unloading and/or driving techniques?
3. How long is the training period?
4. How frequently is training required?
5. Who pays for the training, the moving company or the van operator?

Some level of training may be necessary for a van operator at the beginning of a contractual relationship to familiarize the van operator with the moving company's administrative procedures relating to governmental regulations, general quality service standards and customer requirements. Additional training may be offered occasionally to update the van operators on changes or to help them with compliance problems. Such training does not indicate significant right to control by the moving company unless it is mandated on a recurring, periodic basis.

Services Rendered Personally

If the moving company requires the van operator to perform the services personally, with the aid of helpers for loading and unloading, this indicates the moving company has the right to control the manner of performance. If the van operator may use substitutes or employees of his or her own choosing, right to control by the van operator is indicated.
  

Working for More Than One Firm at a Time

It is unusual for a van operator to work for more than one moving company at a time. Thus the fact that a van operator does not work for more than one moving company is normally of little relevance. Where a moving company prohibits a van operator from accepting jobs from other firms or individuals, right to control by the moving company is indicated. If a van operator has multiple truck tractors available to lease and uses the truck tractors in hauling independently to multiple moving companies, this indicates that the van operator has the right to control.
  

Right to Discharge

If the moving company may end its relationship with the van operator at will, this indicates that the moving company has the right to control. The ability to discharge the van operator at will or without cause or notice increases the moving company's leverage to enforce instructions and its right to control details of the van operator's performance. Conversely, if the moving company may end its relationship with the van operator only upon the van operator's failure to meet the terms of the contract, at the end of the contract term, or following the notice period given in the event of early termination, this indicates that the van operator has the right to control.
  

Right to Terminate

If the van operator can be held liable for failing to complete the duties assumed under the independent contractor agreement, this indicates assumption of the risk by the van operator and the van operator's right to control. Commonly, a van operator's independent contractor agreement does not require the van operator to accept jobs the moving company offers. But once a job is accepted, the independent contractor agreement may require completion and subject the van operator to potential liability if the job is abandoned.
  

Furnishing Tools and Materials

The moving company commonly furnishes the van operator with dollies, ramps, padding and wrapping and tying materials, requiring the van operator to pay for any damages to this equipment. Logically, the moving company provides this equipment since it is carried in the trailer which also is usually provided by the moving company. The moving company's providing of this equipment is not likely to lead to the right to control the van operator.

     
STRASBURGER & PRICE, LLP  •  DISCLAIMER