One of the single most important things to remember when thinking about
independent contractor issues is that the status of the law is dynamic.
Far too many companies view the situation as static and continue to do
what they have always done, even in the face of the changing legal landscape.
One must consider the context of state and federal litigation, statutory
revision, changing guidelines, and changing tests being applied in their
In the coming issues, I will endeavor to provide specific examples and
analysis of changing case law, regulatory guidelines, tests, and statutes
that I hope you will find of value. While not every example will apply
to your business, and there may be issues from outside of the carrier/courier
field, the trends in the application of the law provide real guidance.
To that end, the most important piece of advice that I can provide is
that you have your independent contractor agreements reviewed by a knowledgeable
attorney. When it comes to legal expenses, an ounce of prevention costs
so much less than a pound of cure.
One important change of note in recent years is the test used by the Internal
Revenue Service. I am certain that you have all heard of the “20
factor test” previously employed by the IRS. It simply provided
20 factors, some of them rather redundant, without much in the way of
weight or organization. More troubling was the lack of any advice as to
how many factors could or should be found in each direction in order to
make a determination.
Now, the IRS has attempted to simplify and refine the test, trimming the
twenty factors into eleven, and organizing them into three groups: behavioral
control, financial control, and relationship of the parties.
This test considers facts which tend to show whether the company
has the right to direct and control how the worker does the task it was hired to perform.
[emphasis mine]. It is important that this factor is not whether there
has been control exercised, but the right to do so.
The considerations here focus on instruction and training. Instruction
of the when, where, how, with whom, and order or sequence of events are
considered tenets of instructing an employee. Obviously, basic instructions
on what the job encompasses – the object of it, are necessary, but
when one is explicit as to how that objective is to be accomplished, the
appearance is that of employer and employee. In our context, this may
include order of events, route selection, etc. In a similar vein, training
is something that an employee will ordinarily receive. An independent
contractor uses his skill and knowledge to determine his own methods.
This test looks at how the worker is paid, whether the worker can make
a profit or suffer a loss by his actions and choices, whether the services
can be offered throughout the market, and whether there is any reimbursement
These factors are all straightforward, and they are the simplest, in my
opinion, to control for. It is essential that one not run afoul of the
simple to follow factors such as these, because others are a much tougher
Type of Relationship
The first three factors considered under this test are similarly straightforward
and must be abided: A written contract showing the intention of the parties
in regard to their choice of relationship; benefits like insurance, sick
pay, vacation pay, or retirement planning, and permanency of the relationship
(fixed or indefinite). This is where I break the rule that lawyers never
say “always” or “never”: Always have a good IC
Agreement, never give benefits, and always have a fixed period in the contract.
The final factor in this section is the single worst factor used, and the
most troubling both in the courier, and long-haul carrier industry: “The
extent to which services performed by the worker are a key aspect of the
regular business of the company.” While I loathe this factor, it
should be noted that its purpose is supposed to go to the issue of control.
The idea is that if a worker is performing a key aspect of your regular
business you are more likely to actually exercise control over that employee.
However, the carrier model demonstrates the inefficacy of this factor.
While the factors have been consolidated and organized in the new test,
they still boil down to just one thing: control. How much control over
the service provider does your company have? This is why in every client
consultation, one of the first questions I ask is whether you are sure
that what your company actually wants is an independent contractor relationship
with its drivers. There are clearly benefits and burdens to each model.
One final parting tip: I strongly discourage mixed use of employee drivers
and independent contractors under one corporation. It will work against
you in state or federal litigation. Moreover, far better than winning
a court case, is not getting sued in the first place, and a mixed model
sends mixed messages. The grass is always greener, and a disgruntled independent
contractor driver might look at the employee driver and think, he’s
got so much better of a deal. Having a mixture does not mean that you
will get sued or lose that case, but it makes both more likely and makes
my job as defense counsel that much more difficult.
For further information on the IRS test, see IRS Publication 15-A.
David W. Smith is a partner at Roberts & Associates, a full service
transportation law firm that has served the industry for nearly two decades.
This article is for informational purposes only, is not intended to serve
as legal advice, and does not imply any attorney client relationship with
between the author and any reader. The content is not intended to be used
as a substitute for specific legal advice or opinions. Contact the author at Dsmith@lrobertsandassociates.com
or visit www.lrobertsandassociates.com
for further information about the firm.