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Tuesday, February 20, 2018

Big business steamrolls John and Jane

Estimated read time: 20 minutes

If you have been in the job market long enough (that is, you're old and been working all your life), somewhere along the way you probably heard of the term 1099 employee.  You may have even worked a job that classified you as a "1099 employee" and you accepted the classification as a normal alternative to the W2 employee most of us have been all of our lives.  Guess what?  There is no such thing as a "1099 employee" nor a "W2 employee", at least as far as the IRS is concerned.  There are employees and what differentiates them is how they pay their taxes. 

Most of us are paid by an employer who takes out our taxes, most notably our FICA taxes.  At the end of the year, the employer sends us a W2 form showing how much they paid us and how much taxes were taken out from our earned pay.  We then file our taxes at the end of the year using the W2 to determine if we owe more taxes or, as is the usual case, how much the government owes us for taking out too much.  (Unfortunately, we can't charge the IRS interest for the money they held all year that was legally ours, but we all know life isn't fair and the government gets to steal what it wants.)

There is a subset of employees who aren't paid by an employer.  We usually think of these employees as self employed.  Business owners and many other professionals like doctors, lawyers, consultants, and writers, are just a few of this subset of employees. 

Writers, for example, don't work for a publishing company.  The publishing company's main purpose is to publish written works.  Writers submit their work and hope to be discovered.  Some established writers (established means proven money makers) enter a contract with the publishing company promising the publishing company they have the first crack at publishing their work, but they still don't work for the publishing company.  They simply provide the writings the publishing company publishes...or might not publish.

Sticking with writers as our example, at the end of the year, the publishing company may or may not send the writer a 1099 form showing all the money they paid out to the writer.  If what they paid out was less than $600, they do not have to file the 1099 with the IRS.  Even if they paid out more than $600 to a writer, they do not have to file a 1099 with the IRS.  If they don't file the 1099, the amount the company paid the writer is simply not a tax deductible business expense. 

What is the 1099?  Technically, as far as the IRS is concerned, the 1099-MISC (the form's long name) is "non-employee compensation" paid out during the year, either to people or businesses.  In our writer example, the publishing house will send a 1099 to a writer (a person) or to a business (possibly formed by one or more writers) that supplied written material to the publishing house throughout the year.  The publishing house gets a tax write off and the recipient has taxable income to claim.

Now that we got the basics out of the way, why do we classify employees as W2 or 1099 employees?   


Beats me.  What we're really doing is classifying how employees pay their taxes and who does the paying.  W2 employees, for example, pay their FICA taxes with the rate being determined by their W4 form telling their employer how much to withhold.  1099 employees pay a self employment tax, a tax similar to a W2 employee's FICA tax, that is paid either quarterly (for those making beaucoup bucks) or at the end of the year when they file taxes (for those who make a mediocre living).

Where the difference comes in is the unemployment tax.  With the exception of three states (Alaska, New Jersey, and Pennsylvania), employers are solely responsible for the unemployment tax.  If you don't live in one of those three states, don't rejoice over not having to pay an unemployment tax.  According to the Tax Foundation, a non profit tax policy organization, you are paying the tax...in the form of lower wages.

This explanation is complicated enough and, since I'm not a tax professional, even I'm scratching my head.  One take away from all this, though, is if an employer were to change the company's workforce to all self employed workers, the company could save some on its tax bill and, with the advent of Obamacare type legislation, could save some on benefit expenses.

In steps the politicians who want their tax money.  Since there are two ways to pay an employee, the government had to define the way an employee is paid - through a W2 form where the employer matches your FICA tax and also pays state and federal unemployment tax (costs that, in reality, are passed off to the employee through lower wages) or through a 1099 form where the employer pays nothing in taxes since "1099 employees" are self employed and responsible for their own taxes.  To ensure the government maximizes its tax revenue, politicians defined which employees can be legally paid through the 1099 form.  The default payment structure is through the W2 form.

Which employees can be considered self employed? 


A lawyer specializing in tax and corporate law would be the best person to answer that question.  I can almost guarantee no two lawyers will agree on the answer.  That's why we have courts and judges to decide what the law might be saying and might not be saying.  I predicate that statement based on an informal meeting I had with a local tax attorney I know. 

So there is no misunderstanding if you read on past here, I am not an attorney nor have I studied law in any capacity.  The attorney I did talk to knows nothing of what I'm about to write as I only asked him generalized questions about the classification of employees and how one proves an employee may have been misclassified.  In short, I could've found a FAQs section on an anonymous attorney's website offering the same information.  In fact, the IRS Guidelines pamphlet offers more information than my informal meeting with the attorney.  The attorney did, however, reaffirm what I was thinking, did challenge me to dig deeper to make sure I understood the issue at least on a basic level (like look for the five characteristics that could show a misclassification), and did put me on a more objectively thinking path.

Objectively thinking path - that's a clue more technical background information is coming in the next few paragraphs.  Don't say I didn't warn you.

The IRS looks at the degree of control the employer and the employee have in three major areas: behavioral control, financial control, and relationship factors.  Fortunately, the lawyers over at the blog, Strictly Business, did a fine job of breaking down what the IRS tried to explain in their pamphlet linked above.  From their blog as written by Attorney Alexander J. Davie in 2011:

Behavioral Control Factors

  • Does the worker decide their own schedule and location of work?
  • Is the company providing training to the worker?
  • Does the worker have their own employees?
  • Does the worker decide the order and sequence of services?
  • Does the worker decide what kind of reporting is provided to the company?

 Financial Control Factors

  • Will the worker submit invoices?
  • Will the worker pay their own business and travel expenses?
  • Does the worker furnish his own tools and materials?
  • Does the worker have his own business?
  • Does the worker advertise their services?
  • Will the worker recognize profit or loss based on good or bad decisions?

Relationship Factors
 
  • Is the worker retained for a specific project or are they involved in ongoing operations?
  • Does the worker have other clients?
  • Will the worker maintain independent activities?
  • Does the worker maintain his own insurance?
  • Is there a signed contract between the worker and the company specifying that they have an independent contractor relationship?
  • Does the worker receive benefits?
  • Is the relationship temporary or open-ended?
  • Are the services provided a key aspect of the regular business of the company?

While this is a good list to get one thinking about what differentiates an employee who is paid through a W2 (hourly/salaried employee) from one paid through a 1099 (self employed employee), one should look at the IRS pamphlet for further explanations.  You can't, for example, answer yes or no to the above questions, tally your score, and more yeses means 1099 and more no's means W2.  If it were that easy, we wouldn't need lawyers.

Are courier services misclassifying their employees? 

 

With all this boring, textbook buildup, that question certainly sounds odd.  If you were paying attention to all that boring textbook stuff (and got brave and read the IRS pamphlet), you'd know there are no blanket definitions to determine an hourly employee from a self employed employee, but a couple of points do stand out more than others.  One of those is the whether or not the employer-employee relationship is temporary or open-ended.  Let's illustrate this with a made up example.

Word of warning: if you own a pizza place, don't take my word that you can hire a self employed cook as described below.  Consult your lawyer or play it safe and hire an hourly employee.  Misclassifying an employee can cost you tons of money.

A pizza shop is doing well, but the owner noticed a trend.  More and more of his customers were asking if there were any good sushi bars in town.  Being shrewd, the pizza shop owner got the bright idea to test the viability of hiring a sushi chef and offering his customer the fine Asian cuisine as an alternative to the traditional salad.  A six month test would determine if the owner should keep the sushi-expanded menu or discontinue it. 

By now, you probably know the pizza shop owner can't hire pizza cooks as self employed cooks.  They are receiving either an hourly pay or a salary.  One tell tale reason is the main purpose of a pizza shop is to provide fresh cooked pizzas.  Hiring a pizza cook is an open ended assignment and the services the pizza cook provides is a key aspect of the pizza business.

A sushi chef, however, might be a different story.  A pizza cook can walk into a pizza shop, start out as the sandwich maker or fry cook or even dishwasher, and learn how to make pizzas within a couple of months during the slow hours of the restaurant.  A sushi chef takes ten years of training to become a master sushi chef and the training continues well past the ten years.  Yes, it's a lot harder and more complicated to slap raw fish on rice than one might think it is.  Well, that is, it's a lot harder than it looks if you want to serve good sushi and make a profit.

In my made up scenario, the pizza shop owner might be able to justify hiring a sushi chef as an independent contractor or self employed chef.  The pizza shop owner isn't providing any training nor tools (sushi knives), dictating how the sushi should be prepared, demanding certain procedures be followed in sushi preparation, and so on.  The pizza shop owner also isn't saying nor implying to the sushi chef that sushi services will be needed as long as the sushi sells.   All the pizza shop owner wants is a sushi chef to set up an affordable sushi sampler menu to see if the product will sell well along side the pizzas for the next six months.  After the six months, if the pizza shop owner decides to keep sushi on the menu, the sushi chef may need to be reclassified as an hourly or salaried employee because now sushi would be a key aspect of the pizza business, at least for this one shop.

But pizza shops aren't courier services and made up examples are just that - made up


No, pizza shops are not courier services, but two real live "independent couriers" hired for their delivery services are not a made up example.  This is where you get to decide the answer to the question, based on the real example I'm about to detail: are courier services misclassifying their employees?

For obvious reasons, the two couriers do not want to be named.  They still need to find a new job and don't want a potential employer stumbling on this article and denying them a job for being troublemakers or something.  They have, however, shared their stories, their original contract, and emails between them and the courier company that hired them so I could write this story.  To protect the privacy of those two individuals, no, I will never divulge their identities.

The first courier, Jane Doe, worked for a company (which I won't divulge since it's irrelevant to the story) in a courier position as an hourly employee of that company.  After five years, her company decided to outsource her position to a third party vendor, Medifleet.  The company insisted that Medifleet offer their existing couriers a position so they wouldn't end up on the unemployment line.

The selling point for Jane was Medifleet told her she would be self employed and had the option of not only running her route she knew, but could take on additional routes and hire whomever she wanted to run those routes.  She could build her own medical courier route.  The opportunity sounded appealing and she took it.

She trained her husband to run her route so whenever she needed a day off, he could run it for her.  Three years later, a courier on another route wanted out so her husband, John Doe, took over that route.  He had already proven himself reliable and had all the OSHA training.  He was the logical choice to run the second route.

John and Jane ran the two routes reliably.  When one couldn't run the route, the other would combine the two routes and get both done to the customer's satisfaction.  Medifleet never worried about those two routes being vacant due to a no show.

Recognizing a need for a relief driver in case they both wanted to take time off together, they decided to expand their business by hiring a friend that would learn both routes.  By this time, Medifleet had merged with Fleetgistics.  Fleetgistics clamped down on the definition of independent contractor.  Any new driver had to pass their training and standards before they could be allowed to run any routes.  This was Jane and John's first indication they weren't really self employed running their own courier service.

This was also the year that neither had to sign a new contract.  Under Medifleet, the year anniversary of being awarded a contract meant signing a new contract for the following year.  Signing the contract wasn't a negotiating opportunity.  It was sign it or go on you merry way endeavor, but at least it was a binding contract of what each party could expect for the next year. 

When Fleetgistics took over, there were no annual contracts to sign.  That never prevented dispatchers and employees of Fleetgistics threatening their independent contractors like John and Jane with comments like "What does your contract say?" whenever there was a conflict.  In Fleetgistic's eyes, the last three years (going on four, now) the annual contract last signed was still in force.  Their second clue they weren't independent contractors any more reared its ugly head.  They were expected to work without a contract.

Two years later, Fleetgistics sent someone to talk with all the independent contractors and try to fix the problems with the account.  One insistent point he made to all the couriers was they needed to wear a shirt with the Medifleet logo as part of the uniform described in their contract, a contract no one had signed in at least three years.

In that now expired contract, there was a uniform clause.  When Medifleet took over the routes, the company still wanted the independent couriers to follow their company guidelines for a "uniform," which is why the contract contained a vague uniform clause.  As Jane described, the uniform when she was a company employee was a loosely defined dress code prohibiting jeans and a preference for khaki or dark blue pants and white or dark blue shirt - no tee shirts.  Fleetgistics morphed that definition into "dark blue shirt with a Medifleet logo."

As Jane emphatically stated, "If I'm a self employed courier, why am I required to wear a uniform advertising another courier company, a company that, in effect, is my competitor?  I accepted the contract because they didn't have their own couriers to meet their obligations.  I'll be damned if I'm going to advertise their services." 

Jane and John's real objection?  To comply with the new uniform definition meant spending seventeen dollars per shirt to get a dark blue shirt with the Medifleet logo.  From experience (both John and Jane did purchase five shirts each), the shirts had no pockets (a necessity for that cell phone they had to carry to do their route) and only lasted about two months before beginning to rip.  They could purchase the same style shirt with pockets for five dollars each at Wal-Mart, and the Wal-Mart shirts lasted a year and are still being worn.

This was John and Jane's third clue they weren't independent contractors.  They had to purchase another company's shirts to run their routes and weren't allowed to advertise themselves as independent couriers.

By now, Jane and John had their fourth clue they weren't independent contractors.  They were expected to run their routes based on a manifest digitally produced by a third party vendor and not how they saw best fit to run it.  They had to forgo their privacy rights by enabling location tracking on their personal phones and they had to follow the times on the manifest, a manifest more fraught with errors than the latest Windows 10 update.

Both John and Jane knew their routes and knew the flexibilities built into them.  If something happened on the route, like an accident that held them up, they had the phone numbers of their stops to give them a heads up or instruct them to leave anything they were supposed to pick up in the box outside, so the manifest times, despite often being incorrect, also weren't critical.  They had to run their route against the manifest Fleetgistics created else risk being marked as "failure to meet commitments."  Dispatch often called wanting to know why they weren't meeting their commitments. 

The final straw for John and Jane came in January shortly after Fleetgistics merged with USPack.  Without warning, the operations manager for the region approached John and gave him a heads up of the addendum that was going to be attached to the contract (an unsigned contract going on four years old) and to watch his email for it.  Sure enough, the email came through three days later.

Notice the employee is threatened with
"deactivation", not termination of contract.
The gist of the email outlined new "fees" to continue working the routes.  A 3.9% brokerage fee would be assessed to the routes to cover the cost of obtaining and maintaining the accounts with the customer.  A $12/week fee would be assessed for use of the software provided (that third party software in the courier phones) to effectively carry out the route requirements.  And a half percent charge would be paid to couriers to wear that Medifleet shirt, defined as an "advertising fee."  Instructions stated to carefully review the new requirements and sign the addendum to be added to the courier's contract else face deactivation - yes, deactivation like a robot - not fired like a person.

For Jane, who was going on eight years with no pay raise nor negotiating power to argue for a pay raise, and John, who was going on five years with no pay raise nor negotiating power to argue for a pay raise, this was the fifth and final straw.  The "advertising fee" amounted to a whopping seventy-six cents per day pay increase for John and a sixty cents per day increase for Jane.  Those increases were offset by a 5.5% decrease in the route pay (over three hundred dollars per month pay decrease between the both of them) and they didn't bother to calculate the cost of the new shirts every two months to honor the "advertising clause" USPack threw in.

John offered one last gallant fight to no avail.  He demanded a pay raise in both routes that, after the new fees were deducted, would minimally impact their take home pay.  The operations manager told him to trust him, he'd make his request happen, just sign the new agreement.  John and Jane stood fast and told him to make the pay hike permanent, in writing, and they would sign.  Three days later, on Sunday night, the operations manger called them and said, "Sign else you have no route tomorrow."

Neither John nor Jane signed.

After eight years, both left Fleetgistics without a job and unable to collect unemployment since they were "self employed." 

For Jane, eight years later after being outsourced, she holds no harsh judgments on her old employer who outsourced her.  Like most companies, she was a business expense to be shuffled around and not much more, but she understands her old employer had their bottom line to protect.  

For both Jane and John, their last almost eight years of experience with Fleetgistics is just more business as usual.  The bottom line and greed rule.  Whether or not Fleetgistics broke any laws by classifying them as independent contractors remains to be seen, but it's hard to deny they acted in a less than honorable manner and probably acted unethically.  And while we can understand John and Jane's sentiments, the question remains - did Medifleet, Fleetgistics, and USPack misclassify them?  Should they have been hired as hourly or salaried employees instead of independent contractors?

Now for the bigger question

 

Jane and John are looking for work.  They know delivery and courier services and they have the experience to learn what to avoid.  As they search for jobs, they haven't encountered any company that charges a "brokerage fee."  Most courier companies they've looked at have minimal requirements for type of vehicle, licensing, and insurance.  Until they actually work for these companies as an independent contractor, they have no way of knowing if they'll be treated as truly self employed contractors or employees - employees who only become self employed when it's convenient for the hiring company.

One lesson that can be deduced - delivery and courier services companies need to be looked at closer.  The opportunity for job classification abuse is great and there's little recourse for those caught up in the classification.  It wasn't easy for John and Jane to walk away from their routes with only a few days notice.  Fleetgistics and USPack strong armed them out of business.

The sad part is both Jane and John knew back in 2015 Fleetgistics operated their business under less than honorable rules.  In the 2015 class action lawsuit, Fleetgistics, without admitting guilt, settled a $3.5 million class action lawsuit that alleged they misclassified drivers as independent contractors, denied overtime compensation and forced drivers to pay for Fleetgistics' business expenses.  Jane received just short of a thousand dollars in the settlement (four years of work) and John received just short of three hundred dollars in the settlement (two years of work).  Because of the class action suit, they have no further recourse to the law.  Jane and John got pennies, the lawyers got rich, and business as usual continues for Fleetgistics.


TL;DR Folks:
Ok, you go to work nine to five and get paid hourly.  Should you get paid hourly?  This article won't answer that question.  It will answer how a company might be abusing its authority over you, especially with regards to how you are getting paid.  If you don't care to read the article, ok, welcome to the machine.


For your listening pleasure:
Please note, this is a fan's interpretation of Pink Floyd, and a good interpretation


Posted by Five Drunk Rednecks

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