The Act was passed with bipartisan support in the New York Legislature, purportedly in an effort to correct the perceived misclassification of many drivers as independent contractors instead of employees. In addition to increasing penalties for misclassification, New York joins a number of other states in enacting a new statutory test for determining whether a driver is an independent contractor that is far more challenging that the current common-law test being used. Ultimately, the Act will make it significantly more difficult for motor carriers to create and maintain independent contractor relationships with owner-operators in the State of New York.
The Act creates a presumption that any person operating a vehicle with a gross vehicle weight of 10,000 pounds or more and performing transportation services of commercial goods for a “commercial goods transportation contractor” will be classified as an employee. To overcome the presumption and receive classification as an independent contractor, the driver must meet one of the two following tests.
The first test is a three-pronged one known commonly as the “ABC Test” and is used in various states in their wage, unemployment, and/or workers’ compensation laws. Under the ABC Test, a motor carrier treating a driver as an independent contractor must show each of the following: (A) the driver is free from control and direction in performing its services; (B) the transportation service is performed outside the usual course of business for which the service is performed; and (C) the driver is customarily engaged in an independently established trade, occupation, profession, or business involving the transportation or delivery of commercial goods.
The second test is referred to as the “separate business entity” standard and is applicable to any sole proprietorship, partnership, corporation, or other business entity. This test has 11 prongs, each of which must be met in order to qualify as an independent contractor. The motor carrier must show, among other things, that the separate business entity that has been contracted to transport commercial goods: (1) is not subject to cancellation or destruction upon severance of the relationship with the motor carrier; (2) owns or leases the capital goods and gains the profit or bears the loss; (3) can make its services available to the general public or the business community on a continuing basis; (5) performs its services under a written contract with the motor carrier, under the business entity’s name, identifying the relationship to be that of an independent contractor; (5) pays for any necessary licenses or permits in the business entity’s, or in the alternative, pays for the reasonable use of the license or permit where permitted by law; and (6) hires and pays its employees without reimbursement from the motor carrier.
Civil and Criminal Penalties
A motor carrier utilizing an owner-operator as an independent contractor that does not meet either the “ABC Test” or the “separate business entity” test is subject to significant civil and criminal penalties. For the first violation, a penalty of $1,500 will be assessed and a penalty of $5,000 may be assessed for a subsequent violation within a five-year period. In addition, a “willful” misclassification may increase civil penalties to $2,500 per misclassified employee for the first violation and up to $5,000 per misclassified employee for each subsequent violation within a five-year period. The Act will also impose criminal liability upon employers who are found to have willfully violated the new law.
Effective Date and Notices
The Act is currently set to become effective 60 days after signature by the governor, but the effective date is proposed to be changed to 90 days after enactment, according to the proposed chapter amendments. By that date, the Act requires motor carriers to post a “Know Your Rights Notice” prescribed by the Labor Commissioner in a conspicuous location on its site.
In order for businesses to continue utilizing owner-operators as independent contractors, some degree of re-structuring and re-documentation of their relationships with their drivers will be necessary. If you are a motor carrier with New York operations, you should review your operations and agreements with owner-operators of commercial motor vehicles to ensure that your operations and documentation will comply with the Act’s new requirements. If you have any questions or need assistance in coming into compliance, please do not hesitate to contact Henry Seaton at (703) 283-4251.
By: James Kim, Esq.