A DDRESSING T HE T HREAT T O T HE IC M ODEL

1. ADDRESSING THE THREAT TO THE IC MODEL

2. ATTACKS ON THE USE OF ICs Presented by: Scott Grandys Contractor Management Services

3. SCOTT GRANDYS Biography Scott is the Vice President of Sales for Contractor Management Services (CMS), the leading full-service consulting firm that works with companies utilizing the services of Independent Contractors. He has over 12 years experience in the transportation industry, performing or supervising every function of operating a transportation/courier company. Prior to CMS, his experience was in managing and owning operations that utilized the services of ICs as well as implementing IC programs into the Air Freight Forwarding Industry. Scott works hand-in-hand with CMS’ Legal, Compliance and Sales Departments to coordinate education on the proper use of ICs by transportation and courier companies. Two of Scott’s primary responsibilities at CMS include: (1) analyzing existing courier and transportation companies to recommend, and assist with the implementation of solutions for the companies to ensure they are protected when utilizing the services of ICs, and (2) analyzing and critiquing audits of transportation and courier companies conducted by CMS’ Audit Division to ensure on going quality and thoroughness (an internal audit of the Audit Divisions work). Working with companies across 43 states and with an Independent Contractor base of over 10,000 members, Scott is well aware of the problems and attacks against the use of ICs that have been increase around the country, and is well versed in the proper way to handle the IC Model

4. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Attacks On the Use of ICs FACT: IRS, Department of Labor, state agencies, courts, Workers’ Compensation Carriers and ICs themselves. PAST: IRS 20 Factors, Safe Harbors PRESENT: Ever-Changing Requirements. Several different tests, case studies, state agency interpretations

5. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Attacks On the Use of ICs • IRS Safe Harbor Provision • File all required 1099’s for worker • Consistently treat worker and all doing similar work as independent contractor • Reasonable basis for treating worker as independent contractor Warning: IRS Safe Harbor only applies to Federal Taxes. It does not provide any help for state (UI or WC) or other Federal (FLSA, NLRB, EECO) law

6. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Legislative Attacks on the Use of ICs Legislative Attacks

7. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Legislative Attacks on the Use of ICs • Massachusetts • 2004 – Altered B prong of ABC test under the MA Independent Contractor Law, which impacts discrimination, minimum wage, over-time claims. • ABC Test • Control and direction of the work (Control Test) • Outside service • Outside usual course of firm’s business; or • Outside firm’s usual places of business. • Engaged in independently established trade, occupation, profession, or business • Does not impact Massachusetts tax withholding requirements or UI

8. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Legislative Attacks on the Use of ICs • New York 08686 and 5626 • ABC test modified (Massachusetts) • B: Services performed outside the employer’s usual course of business • Only Construction industry right now. • Originally Introduced in June 2005. Not moving fast. Not dead; still in committee • Creates criminal sanction, including jail time • If employer knew or should have known the worker whom the employer classified as an IC should have been classified as an employee

9. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Legislative Attacks on the Use of ICs • Illinois (Criminal Sanctions) • Illinois 5002 (Employee Classification Act) • Originally introduced to apply to all independent contractor scenarios, but amended to apply to only the construction industry • As originally introduced, any employer who willfully failed to properly designate a worker as an employee was subject to misdemeanor criminal sanctions

10. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Legislative Attacks on the Use of ICs • Criminal Sanctions • Criminal and civil sanctions (first offense) • Imprisonment of not more than one year and/or fine of not more than $25,000 • 5 Year debarment from public projects • Any combination of penalties and fines above

11. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Legislative Attacks on the Use of ICs • Texas • Proposed in 2005. Creates one definition for independent contractor for all state purposes. Appears to leave out the specific exemption in the UI law for delivery services. • Meet all of following: • Business separate from that of the firm • Holds Federal Employer ID Number • Contract that provides worker performs specific work for a specific amount • IC Controls means of performing work • Incurs main expenses related to work • Pay on commission, per job or competitive bid basis Classification under statute cannot be altered or waived by parties. Just calling person independent contractor in contract not enough.

12. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Regulatory Attacks On the Use of ICs Attacks by Regulatory Agencies

13. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Regulatory Attacks On the Use of ICs California EDD Although guidelines have been issued for newspaper distribution, product demonstrators, process services and several other industries, so far the EDD has refused to issue any guidelines for the courier industry. Even if they do, it’s doubtful it will be very useful. Although their top people attend meetings telling groups that ICs in the courier industry are legal if done properly, the minions of auditors approach the audits with the obvious intent to merely find out how much to assess. The approach is that the workers are assumed to be employees and the courier company has the burden of appealing the assessment to overturn the workers being classified as employees. However, so far in only one case, involving just seven drivers, has the EDD’s determination been overturned on appeal. And those seven complained loudly that they wanted to be ICs

14. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Regulatory Attacks On the Use of ICs Department of Labor Gives lip service to following the common law test in applying the Fair Labor Standards Act. But, focus of its approach is more in line with economic reality test: Is worker an integral part of the companies economic survival.

15. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Regulatory Attacks On the Use of ICs National Labor Relations Board Fighting IC Model. If IC, NLRB has no jurisdiction. If can establish Employer-Employee, NLRB has jurisdiction Florida case. NLRB determined worker to be an employee because: required to wear a uniform, required to have company name on side of vehicle, dedicated by company to provide services to just one of companies customers (which precluded him from doing work for others), and he was paid by the hour (although contract said 55% commission) because company charged customer by hour, worker received 55% of hourly rate for number of hours he worked.

16. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Regulatory Attacks On the Use of ICs Texas Workforce Commission Historically, the Texas Workforce Commission (TWC) would just look at the contract to see if on paper an IC relationship was established. If so, the TWC took the position that adults should have the right to decide what contracts to enter into, and even to enter into contracts that are not favorable to them. The idea of a protective and paternalistic government has started to take seed in Texas. The TWC digs deeper. In a recent case, even though the driver signed a contract as an IC, the hearing office dug deeper and found that all the worker did was use the company tractor to move the trailers around the company yard. Even though the contract stated he was an IC, the TWC determined he was an employee. Also, consider legislation proposed in 2005.

17. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Workers’ Compensation Carriers Attacks On the Use of ICs Workers’ Compensation Carriers

18. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Workers’ Compensation Carriers Attacks On the Use of ICs Looking for additional premiums. The Carriers are auditing companies and assessing premiums, for up to three years, for workers the company classified as ICs and who were not reported to the Carrier. Also, some Carriers charge a 1/3 rate for ICs. Theory is that 1/3 represents what the driver’s actual wages would have been after excluding all expenses a driver has to pay directly. Problem: Even though receiving a 1/3 premium, some Carriers maintain a worker is not covered and charges the company for all costs the Carrier has to pay for a driver determined by ALJ or court to be an employee and entitled to workers’ compensation insurance. Caveat: Don’t expect your carrier to argue very forcefully for you that the driver was an IC rather than an employee. They get premiums for employees, not ICs; and if a worker is designated an employee so that the Carrier has to pay, they can recover all they pay from the company.

19. How is the Industry Responding to these Attacks?

20. GUIDELINES, LEGISLATION and JUDICIAL BATTLES

21. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • Massachusetts • The Coalition • The Massachusetts Society of Certified Public Accountants (MSCPA) were instrumental in forming a coalition • NFIB • Associated Industries of Massachusetts (AIM) • Retailers Association of Massachusetts • New England Council of the American Electronics Association • Contractor Management Services (CMS) • The Smaller Business Association of New England • The Massachusetts Association of Insurance Agents • The Neponset Valley Chamber of Commerce

22. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • Massachusetts • The Advocacy • The advocacy efforts were two-fold • Raising awareness of the issue since most people had no idea that the problem even existed in the first place • Creating a sense of urgency about why something needed to be done • Restoring the original definition or; • Remove some of the ambiguity associated with it

23. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • New York • Guidelines for determining worker status: Messenger Courier Industry • The guidelines are used by the Unemployment Insurance Division, the Division of Labor Standards and the Division of Safety and Health to determine a workers’ status • Developed by the MCAA and NYSMCA • Effective January 1, 2006 • Status determined by Indicators of Independence & Neutral Factors for On-Demand and Route Drivers • Provides clarity on the IC Model

24. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • Illinois • Successful Lobbying Efforts • A local Illinois Messenger Association, in conjunction with various industries and Contractor Management Services (CMS) successfully changed the Criminal Sanction to only apply to the construction industry through successful lobbying efforts

25. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • California • Three-Prong Approach • The California Delivery Association working on the Guideline approach • MCAA and IC Steering Committee working on appealing a precedent setting case in CA regarding IC Status • Legislative action: a third group is currently working with a lobbyist to change legislation in CA to add clarity to the IC Model

26. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • Georgia • Legislative Change • A local group facilitated a change in Georgia Legislation through the collective efforts of a law firm and lobbyist • Services performed for a common carrier of property • The individual is free to accept or reject assignments • The Individual is paid on a commission basis • Such individual personally provides the vehicle used • Such individual has a written contract with the common carrier • The written contract states expressly and prominently: • Individual is responsible to pay social security, state and federal taxes • The SS tax is higher than what they would pay as an employee • The work is not covered by the unemployment laws of GA • The written contract does not prohibit the individual from providing services to multiple common carriers

27. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • Connecticut • Declaratory Ruling, In the Matter of Connecticut Messenger & Courier Assoc., dated June 7, 1994, addressing the application of the ABC test to the Messenger and Courier Industry • The driver is not personally supervised by a representative of the company • Drivers are not required to render the contracted services personally • The drivers are in a position to realize a profit or suffer a loss • The drivers are paid on a per-job or per-delivery basis and not on an hourly or salaried basis • The drivers provide their own vehicles • The drivers select their own routes and order of delivery • The driver’s contracts are of a fixed duration with specified renewal dates • The contract includes an explicit understanding of the parties that the driver is an independent contractor

28. ATTACKS ON THE USE OF INDEPENDENT CONTRACTORS Guidelines, Legislation and Judicial Battles • Summary • Keep Your Eye On the Ball • Change is inevitable. Make sure it is always favorable • Hire a professional to watch the potential changes and make sure you are safe • State • Case Law • Federal • Associations: Very important in keeping the status quo • ALWAYS be proactive in your approach • “An ounce of prevention is worth a pound of cure”

29. Q & A