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Independent Contractor vs. Employee

Most of us are aware of the push the Department of Labor (DOL) has made to thoroughly examine the working relation of “Independent Contractors” and employees in our world of trucking.  A lot of trucking companies (carriers) hire “Owner Operators” and come to terms of employment through an Independent Contractor Agreement. 

Most carriers think that alone is enough, but the DOL and the courts will look far beyond any contract, and drill down to the day-to-day relationship between carrier and contractor. Most of us have an idea of what an employee is and what it is not, so this article will focus on the consequences of misclassifying employees and contractors as well the “rules” for who is and who isn’t.

When carriers add up payroll taxes, workers compensation insurance, benefits, paid time off on top of wages, they will find the true cost of employment to be well above base wages forcing them to determine if they should hire a prospective driver or lease an independent contractor.  The relationship the company has over the driver is often what is overlooked in the test to determine status of employment but also the most important because it is illegal.

Some of the tests and factors used to determine employment status:

  1. Level of Control -The more control a company has over an independent contractor, the more likely that the driver will be deemed an employee.

  2. Ownership of Equipment/Vehicles – If the company owns the truck, more times than not that driver will be deemed an employee

  3. Who dictates pickup/delivery? Who can change routes? If the company sets work schedule, pick up times and routes to travel, the driver will likely be deemed an employee.

Now that we have an idea of who is an employee and who is not, let’s look at some of the penalties for misclassification.  Under the Fair Labors Standards Act, any employer who violates the act is liable for back pay from when the courts deem the driver an “employee”, plus an additional equal amount as liquidated damages. Employers will also be exposed to back pay of mandatory payroll taxes, Social Security and Medicare (FICA), unemployment insurance and workers compensation insurance. The lost revenue from those businesses that misclassify can add up to billions of dollars as well as lost tax revenue and the added costs of providing social services to uninsured workers.   

Employers who misclassify are not responsible for providing health insurance and are able to bypass requirements of the Fair Labor Standards Act, as well as the 1986 Immigration Reform and Control Act. Employers who play by the rules are disadvantaged by higher labor and administration costs relative to employers who misclassify.

Misclassified workers are ineligible for unemployment insurance, workers’ compensation, minimum wage, and overtime, and are forced to pay the full FICA tax and purchase their own health insurance.

It is important to understand that there is more to determining the classification of independent contractor than just having a signed Independent Contractor Agreement between a company and an individual.  If an individual is misclassified as an independent contractor, but is determined to be an employee, there is a potential for significant fines to a carrier along with paying potential back taxes and further scrutiny of how your other independent contractors are classified.



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