VOLUME 30 • NUMBER 10 • SEPTEMBER 2015

Back to the classroom on independentcontractor misclassification

By: Mimi Geswein, Esquire

Editor's Note: The pro-union bias of President Obama is welldocumented. White House records revealed that Obama's sin-gle most frequent visitor during the first year of his adminis-tration was a labor leader, the chief of SEIU. Since 2009, theNational Labor Relations Board has been particularly activein support of regulations that would make it easier for unionsto organize workers in private industry. Only a few decadeshave passed since nearly all logistic service providers wereorganized by an international union. Because it could happenagain, the content of Mimi Geswein 's article deserves yourvery close attention. KBA

September marks back-to-school time and a return tothe classroom for our students. While students are brush-ing up on their study skills, now is the time for you tostudy your independent contractor relationships to ensurethat these individuals are truly functioning as independ-ent contractors, rather than as employees. Truck drivers,delivery personnel and warehouse employees are allamong groups frequently treated as independent contrac-tors in the transportation and warehousing industries.A long legal debate

Independent contractor misclassification is at the fore-front of legal debate for several reasons. First, it is an im-portant economic issue. Independent contractors are notsubject to the requirements of the Fair Labor StandardsAct (“FLSA”), which requires employers to pay overtimecompensation and minimum wages. Independent contrac-tors are typically responsible for paying for their own in-surance, medical benefits and taxes. Thus, the independ-ent contractor status typically results in a reduction of la-bor costs for employers.Presidential politics

Misclassification has also become a political issue.The Obama Administration has made it a priority by in-creasing its focus on middle class wage earners, resultingin heightened scrutiny from governmental agencies andfederal and state regulators.

For example, the U.S. Department of Labor (“DOL”)created the “Misclassification Initiative,” with the mis-sion of investigating and rooting out independent contrac-tor misclassification. According to the DOL, “misclass-

ified employees often are denied access to critical bene-fits and protections to which they are entitled, such as theminimum wage, overtime compensation, family and med-ical leave, unemployment insurance, and safe work-places.” The DOL’s Misclassification Initiative is notpurely altruistic, but is clearly economically motivated.The DOL’s website explains that “employeemisclassification generates substantial losses to the fed-eral government and state governments in the form oflower tax revenues, as well as to state unemployment andworkers’ compensation funds.”

Internal Revenue Service is involvedThe DOL is working with the IRS and many states to

share information and coordinate enforcement. Accord-ing to the DOL, this collaboration resulted in the recoveryof more than $79 million in back wages for more than109,000 misclassified workers in fiscal year 2014. Sev-eral states have also passed laws imposing large penaltiesupon employers who misclassify employees.

LitigationThe misclassification debate has made its way into the

courts, where misclassified workers have recently wonseveral major victories. Courts across the country havebroadened the definition of “employee” under the FLSA,and have relaxed the legal standards for finding that indi-viduals are, in fact, acting as employees, rather than as in-dependent contractors.

The recent Fed Ex litigation has gained notoriety andresulted in potentially major economic consequences forthe transportation industry. Fed Ex drivers have filed law-suits across the country alleging that Fed Ex misclassifiedthem as independent contractors, when they should havebeen treated as employees.

On July 8, 2015, the Seventh Circuit Court of Appealsruled that the delivery drivers are employees, not inde-pendent contractors. The case was remanded to the courtbelow, which will likely result in a very significant dam-age award for the drivers. In California, for example, FedEx paid nearly $230 million to settle a class action filed bydrivers who claimed to be misclassified. There are over 20similar cases pending against Fed Ex across the country.

VOLUME 30 • NUMBER 10 • SEPTEMBER 2015

Defining "independent" contractorsNotably, the Fed Ex drivers prevailed notwithstanding

their operating agreement, which clearly defined the driv-ers as independent contractors. The Court employed the“economic realities test,” which focuses on whether theworker is economically dependent on the business towhich he or she renders service. This test includes the fol-lowing factors:

� The degree of control exerted by the alleged em-ployer over the worker;

� The worker’s opportunity for profit or loss;� The worker’s investment in the business;� The permanence of the working relationship;� The degree of skill required to perform the work;� The extent to which the work is an integral part of

the alleged employer’s business.The Court also considered whether the employer has

the power to hire and fire employees, supervises and con-trols employee work schedules or conditions of employ-ment, determines the rate and method of payment, andmaintains employment records. None of the individualfactors are dispositive; instead, the Court employs a total-ity of the circumstances approach.

After balancing all of these factors, the Court foundthat FedEx’s actions spoke louder than its words. TheCourt was persuaded that Fed Ex has directed the mannerand means of the drivers performing their jobs including:directing delivery days and times; delivery methods; re-porting requirements; vehicle identification, specifica-tions, and maintenance; and driver appearance (down tothe color of their socks and even the style of their hair).

It has been reported that Fed Ex has reduced its laborcosts by as much as 40% by classifying its drivers as inde-pendent contractors rather than as employees. The Fed Exlitigation will undoubtedly have a significant impact onconsumers across the country – namely, in higher ship-ping costs.

Will the court decision be overturned?There is a possibility, and probably a likelihood, that

FedEx will file a writ of certiorari requesting review bythe U. S. Supreme Court. However the US Supreme Courthas discretion to accept or reject appeals. So even if a peti-tion is filed, there is no guarantee that the Supreme Courtwill review the case.

If Obama is succeeded by a Republican in 2017, wemay see a backslide in the US Department of Labor’s en-forcement. The next president can effect change throughnew appointments, policy and legislative changes. Butthe court's decision cannot be altered solely by a changein the White House.

What you should doFed Ex is learning an expensive lesson. The takeaway

is clear — do your homework now and review the rela-tionships which you are treating as independent contrac-tors. Take steps to audit your current practices to ensurethat your contractors are truly independent. Employingsound risk management practices on the front end is cru-cial to avoiding potentially costly misclassification law-suits down the road.

Mimi Geswein is a partner at thelaw firm of Ice Miller. Mimi repre-sents public and private companiesboth regionally and nationally incomplex business litigation mat-ters. Mimi focuses her practice onproviding legal counsel to clients inthe transportation and logistics in-dustry. Mimi advises clients acrossthe supply chain, including manu-facturers, shippers, distributors,3PL’s, retailers, and supply chainconsulting companies.

“You can’t outsourceemployee relations

Gordon Bethune is the man who turned around Conti-nental airlines in the mid-90s. He turned loss into profitwith the same people and the same airplanes. “So it wasn’tanything wrong with the employees: it was the manage-ment and it always is.” When Bethune was at Continental,he practiced MBWA (management by walking around).He visited employees in the crew room, the break roomthe baggage room and the aircraft cockpit. His purposewas simply to say hello and thank you. On the high stressdays of Thanksgiving and Christmas, Bethune went to anairport and loaded bags, worked behind the counter, andgreeted customers. “You can’t imagine how much good-will that you earn when your team knows that you’re will-ing to give up your holiday because you are asking themto give up theirs.”

Labor board rules inBrowning-Ferris case

The NLRB published a decision during the last week ofAugust that will affect logistics service providers. An em-ployer and a third party temporary employment/labor ser-vice company may now be considered joint employers ofa single workforce for the purpose of collective bargain-ing. The suit against Browning-Ferris was filed by theTeamsters Union. The New York Times on 29 August ob-served that the ruling "could significantly change the re-lationship between companies and their subcontrac-tors....The decision could threaten the business model ofstaffing agencies and other firms that provide theircustomers with temporary workers."

Mark Ford, an attorney close to this case says "as anemployer, you have just heard the other shoe drop."

Wholesale distributors and logistic service providershave many things in common. One of them is that they arethreatened by corporate giants who might replace them.The wholesalers watch as Amazon announces industrialdistribution activity. Smaller logistic service providersare concerned about the capabilities of global operatorswho offer multi national coverage.

There are four questions that you and your companymust answer to survive in a competitive marketplace.

� What makes you different and better than anyonein your field? Selling your unique special magiccan be the key to continued growth.

� Are you doing the same thing you’ve always done?If you aren’t innovating, how will you competewith those who are?

� Are your sales people distinctive communicators?Sales in 2015 is not just about providing informa-tion, it is about providing insight.

� Can you market experiences rather than transac-tions?

The last question is toughest, since distribution has tra-ditionally been a transactional business. Yet the ultimatecustomer relationship is based on something far deeperthan a series of smooth transactions. If you and your com-pany are trusted vendors, available to deal with an emer-gency on Sunday afternoon and always interested in thewelfare of your client, then the corporate giant cannotcompete with you.

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Is perception versus reality afactor in the talent shortage?

Consultant Chris Elliott insists that the scarcity of tal-ent in the supply chain field is the result of unrealistic ex-pectations. If he is correct, those who believe the drivershortage can be corrected by painting a glorious picture ofthis occupation are mistaken. A better strategy would beto realistically describe the frustrations and difficulties oftruck driving while looking for people who will acceptthe job as it is, not as they dream that it might be.

Our society has always had occupations that were rela-tively unattractive and sometimes even unhealthy or dan-gerous. Yet we have always found people willing to ac-cept those jobs. Those people were motivated either byrelatively attractive pay and benefits, or by the inability tofind a better career.

Others say the problem is the inability of the older gen-eration to work with “the millennials”, but we wonder ifthe same complaints were not made 500 years ago!

There are no easy answers to the shortage of people tofill certain occupations such as truck driving. It is easierto say what won’t work than what will.

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Saying farewellIn some organizations, a person who leaves the com-

pany suddenly ceases to exist. Perhaps the departure is anembarrassment, or occasionally it may be a disciplinarytermination. Regardless of the circumstances, there issomething to be said for providing an opportunity to sayfarewell. Tourists in post-Soviet Russia will note the scar-city of any photos or other references to Karl Marx orVladimir Lenin. It seems that many in the Russian scenefound it prudent to erase any traces of the individuals whocreated the Soviet system. As a tourist several years ago, aguide apologized to me while showing a tourist site in Si-beria that still had statues of these two men. She ex-pressed shame at the fact that the images of these two hadnot been removed. Marx and Lenin played an importantpart in world history, and there is no reason why theyshould be completely forgotten. Recognition does not im-ply approval.

On a much smaller scale, when someone leaves yourwarehousing organization, do you always provide the op-portunity for that person to say farewell? There can betimes when the process could be awkward, but in mostcases it provides a closure which is healthy for everyonein the organization.

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Can you pay temporary workerson a piece work basis?

Consultant Steve Mulaik makes the case for payingtemporary workers on a per unit basis rather than anhourly rate. We agree, but it is important to note the dan-gers of a rate that is either too high or too low. If it is toolow, a worker who is devoting extraordinary effort willend up without being fairly compensated. If the rate is toohigh, the worker may go at half speed and still be verywell-paid. If your staffing supplier offers per-unit rates,recognize that a great deal of engineering is required to besure that the per-unit fee is neither too high nor too low.

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Convergence: Is it déjà vu allover again?

We are amused by several essays about dissolving thesilos between carriers, warehouse operators and freightbrokers. There was a time, long before the development ofsupply chain management, when freight companies did alittle bit of everything. The first company I worked in wasfounded early in the last century as a “truck and storagecompany” in a small town. Its services included house-hold goods storage, trucking, industrial warehousing,customs bonded storage and cold storage. Convergencewas not an issue, because a small company in a small townhad to be a generalist in order to survive.

Standing outin a crowded

market

CILT and the driver shortageLogistics & Transport Focus, July 2015, pg. 20.

Chartered Institute of Logistics & Transport is theBritish equivalent of CSCMP. This article reports theproceedings of a task force convened to address theshortage of truck drivers. 74% of respondents indi-cated that they are experiencing a current drivershortage, and 80% believe that it is private industrythat must find a solution. Improvement in pay and im-provement of the industry image are the most widelymentioned things that industry can do to attract newdrivers. Some firms are using advertisements in for-eign languages to attract immigrants. The task forcethat was convened was the first, and we anticipatenews as additional meetings are held in Britain.

� � � � � � � � �Partnering with an energy services companyfor energy use managementBy Jack Kramer, 3PL Americas, summer 2015, page25.

The author is founder of Cambridge EngineeringInc. This article points out that an experienced energyservices company can identify true owning cost andpotential ways to save with existing heating, ventilat-ing and lighting systems. At the same time, the firmcan identify grants and rebates available from munic-ipalities and utilities that reward users for improvingenergy usage. Kramer suggests that studying thepresent system is best done before it breaks down andforces the owner to make a quick decision.

� � � � � � � � �Technology to regulate blunt force objectBy Eric Johnson, American Shipper, August 2015,pg. 16.

While many motorists think of the 18 wheeler as ablunt force object, the newest rigs are essentiallycomputers with steering wheels. The regulatory bodyis FMCSA(Federal Motor Carrier Safety Administra-tion). The trucking industry is largely self-regulatingwhen it comes to safety. Accidents are bad for busi-ness, and no carrier wants a bad safety record. Carri-ers complain that FMCSA is driven by politics, sincethe agency is accountable to Congress.

� � � � � � � � �Logistics Academy opens in LiverpoolLogistics & Transport Focus, August 2015, pg. 5.

We have noted that the UK is taking steps to dealwith the talent shortage in the logistics field. Most re-cently, the city of Liverpool has sponsored a trainingschool to help students acquire the skills they need topursue a career in logistics. The city of LiverpoolCollege is working with a training firm, TranslineGroup and three major employers. With the develop-ment of Liverpool as a super-port, experts predictthousands of new jobs.

7 ways to optimize an existing WMSBy B. McCrea, Logistics Management, July 2015,pg. 42.

Here are the seven different ways:P Use the WMS as an analytics tool to predict

future volumes.P Support the omni-channel trend.P Adapt the WMS as a mobile information tool.P Use the WMS for directed put away and re-

plenishment.P Use the system to enhance warehouse auto-

mation, such as robotics.P Use WMS for better workforce optimization.

The system can make warehouse work moreattractive in a tight labor market.

P If you have a labor management system(LMS), fold the two systems together.� � � � � � � � �

3PLs can deliver big benefits tosmall companiesBy M. Grayson, Inbound Logistics, July 2015, pg. 54.

The author is a vice president of a logistics serviceprovider. He describes ways in which small busi-nesses can bring in a service provider to act as ship-ping manager. This can mean the management offreight claims, insurance, and even rate negotiation.E-commerce has fundamentally changed and ex-panded the number of customers small businesses canreach. However, many smaller companies lack the re-sources to provide the kind of service offered by retailgiants such as Walmart and Amazon. The logistic ser-vice provider can fill this gap.

� � � � � � � � �A peek into Goodyear’s ergonomic sandboxBy B. McCrea, Modern Materials Handling, June2015, pg. 30.

The company has a demonstration materials han-dling area in Fayetteville, NC. There are few, if any,widely used consumer products that have as littlemechanization of handling as passenger tires. Eventoday, most are moved by hand, one tire at a time. Themain goal of the experimental facility is to reduce er-gonomic incidents. Little detail is provided about thetechniques that are used.

� � � � � � � � �Goods- to- person automation: the basicsBy Mark Dickinson, Supply Chain Brain, August 2015,pg. 27.

Conventional picking systems produce 60 to 100lines per hour, but a goods to person system can sup-port picking of 500 to 600 lines. The systems elimi-nate the need to travel up and down aisles. The authorpredicts that these systems will be particularly suitedfor e-commerce fulfillment. The carousel is perhapsthe oldest technology, and there are several newervariations.