States Target Carriers on Driver Classification

John Anderson Contracts, Regulations, Taxes, Transportation

Reclassification is a nationwide effort by the federal government and states to challenge the treatment of workers as independent contractors rather than employees. Even President Obama has called attention to this “problem” by stating that the federal government is losing vast sums because of misclassification. By treating workers as contractors rather than employees, businesses avoid the obligation to pay various taxes (e.g., FICA) and required participation in insurance programs (e.g., worker’s comp and unemployment). As a result, both the feds and states are auditing businesses, reclassifying contractors as employees, and making assessments to recover previously unpaid employee related taxes and charges, together with penalties and interest. Since trucking companies frequently use owner operators, who they classify as independent contractors, they are a target for these audits.

The state of Washington has been very aggressive in auditing trucking companies and reclassifying owner operator contractors as employees. These audits are conducted by the Washington Employment Security Department and focus on the specific terms and conditions of the equipment lease being used. If the equipment lease does not contain all of the correct (“magic”) words and provisions, then the owner-operator contractors are reclassified and an assessment made.

However, even if a carrier’s equipment lease may have been deficient for purposes of the audit period, it can be changed going forward. That is, a carrier may be required to pay an assessment for the past audit period, but is free to change its written equipment lease and operations to properly classify the owner operator drivers as contractors and thereby avoid reclassification in the future. Washington’s administrative rules specifically state what terms and conditions must be in an equipment lease and followed on a day to day basis in order for a carrier to properly classify its owner operators as contractors.

Similarly, the federal law is fairly well settled in regard to what is required to properly classify owner operators as contractors. The “tests” are known, although not always easy to apply. There is never a guaranty that the feds or states will accept a carrier’s classification of owner operators as contractors, and there is always a risk that they will reclassify a carrier’s contractors as employees. The only way to avoid all risk is to treat all workers as employees. However, if a carrier is willing to assume the risk of an audit and possible reclassification, then there are specific contractual terms and conditions and methods of operation that can be implemented to minimize that risk.