Newsletter Sign-up

By STEVE TUCKEY, who has written on insurance issues for a decade for several national media outlets.

While classifying a roofer as a file clerk clearly represents some sort of fraud on the part of the insured, the same cannot be said of the independent contractor status many companies ascribe to workers who for all intents and purposes look, walk and talk not like a duck but an employee.

A myriad of state revenues are at risk including unemployment taxes, which has caught the eye of lawmakers facing budgets ravaged by the recession.

The most noteworthy case involves the nearly 10-year effort to force Memphis-based FedEx to treat its drivers as employees rather than independent contractors. Among the most vocal proponents have been the Teamsters Union, which has lost a prime organizing opportunity due to what they believe are the anti-union sentiments behind FedEx's widespread use of independent contractors.

In addition, the practice gives the company an advantage over its heavily unionized competitor, United Parcel Service.

In more than two dozen lawsuits, FedEx ground drivers have argued that they are employees and not independent contractors. One California judge ruled that the company was engaged in an elaborate ruse in that the company had close to absolute control over the drivers, and they therefore should be considered employees and not contractors.

FedEx has also incurred IRS assessments totaling more than $300 million taxes and fines and could face more over the years.

THE DIFFERENCE

In one sense, the independent contractor ruse differs from other misclassification schemes in that such employees do not benefit from the workers' compensation system and are therefore not "free riders" as such.

But some experts fear that any ultimate adjudication in favor of the employee status could put companies and carriers on the hook for past injuries incurred under the independent contractor status.

This year FedEx has successfully appealed lower court rulings in favor of the employee status and has taken steps to ensure its drivers really are independent contractors. While securities analyst Ed Wolfe said in a research note that the victories are positive for FedEx, the company still has a long way to go.

"FedEx seemingly needs to win the cases in every venue, while even one ground contractor decision against FedEx can force it to materially change its operations like it did in California," he wrote.

The company's appellate court win prompted eight state attorneys general to write to the company, seeking a change in business practices and making the states whole for revenues lost because of the questionable status of their workers.

"State and local governments in Ohio are being cheated out of hundreds of millions of dollars each year as a result of employee misclassification," said Ohio Attorney General Richard Condray.

Rita Nowak of the Property Casualty Insurers Association of America noted that in 2009 alone revisions to laws, or new laws themselves, pertaining to independent contractor status have been enacted in Arkansas, Minnesota, Montana and West Virginia.

"Because of the concern that some employers avoid their compensation obligation by requiring employees to label themselves as independent contractors, state agencies and courts have been reluctant to rely on labels and have tended to make their own determination on a case-by-case basis," she said.

THE NEW MODEL

With that in mind the National Conference of Insurance Legislators developed a model aimed at making virtually all independent contractors in the construction industry employees, hoping to shore up the workers' comp industry in the process in the one sector where abuses are seen as most prevalent.

Among the snags the effort has faced is the possibility that homeowners hiring a painter for their homes could end up being employers with all of their responsibilities.

Susan Nolan, executive director of NCOIL, said that, once this effort is completed, the group could turn its attention to broadening the law to include other industries where the abuse is rampant.

But independent contractor proponents such as the Washington Legal Foundation, which argue that independent contractor status is essential to the free enterprise system, will not give up easily.

"The independent contractor model plays an essential role in our free enterprise system, and businesses' actual or perceived abuses of the system provide ammunition to those who want it eliminated as an option for companies large and small," wrote the group's chief counsel, Glenn Lammi in the August issue of Legal Opinion Letter. "If businesses wish to preserve this important employment option, they must take care in navigating the murky legal framework that sets the parameters for employee classification."

October 15, 2009

Copyright 2009© LRP Publications