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Class action lawsuits, independent contractor reclassifications, litigation, court decisions, and more - transcript - Session 5 Ė Additional discussions to follow.
[Speaker tracking and other annotations and enhancements to be added later. Includes multiple discussions with varying participants thus some redundancy in questions and answers.]
Moderator: Ok, so what we're going to do, for the transcript, is take today's discussion and
insert segments into the last version. That might keep things a bit
more on-topic as opposed to just appending the latest comments to the end of
the last discussion.
Moderator: Ok, so what we're going to do, for the transcript, is take today's discussion and insert segments into the last version. That might keep things a bit more on-topic as opposed to just appending the latest comments to the end of the last discussion.
question...what kind of feedback have you guys received on the earlier discussions?
There seems to have been some disconnect between assessments and industry
reaction. Do you feel better or worse about the situation?
OK, first, question...what kind of feedback have you guys received on the earlier discussions? There seems to have been some disconnect between assessments and industry reaction. Do you feel better or worse about the situation?
The same. And by that I mean it doesn't frigging matter what we say. You can talk until you are blue in the face and it won't make any difference. So it costs publishers millions of dollars. So you say to a delivery vendor, ummmm, you're going to go out of business unless you do or stop doing so and so. It won't make one bit of difference. I've seen David tell people, hey, you're printing too many books for that market. So what happens? They do nothing and those surplus books, brand new, gets delivered to a recycling station. Why? Because there's an email warning that guy but he didn't listen so now he's got to get rid of those books. And the next year? They do it again. No one did anything so they print too many again.
Q: Wow, what do you say to that, David?
He's right. We're wasting our time.
Q: What do you think? IC crisis, better or worse?
Yes, I have to finally agree with my husband. This is going to get
Yes, I have to finally agree with my husband. This is going to get ugly.
This pig just refuses to wear lipstick.
This pig just refuses to wear lipstick.
Q: Ok, pretty much everyone says worse. Why?
Q: Ok, pretty much everyone says worse. Why?
The AB-5 bill passed by a wide margin. here seems to be far more reliance upon carve
The AB-5 bill passed by a wide margin.And t
here seems to be far more reliance upon carve outs.
Q: By carve outs you mean certain groups attempting to get the legislature to exempt
their particular industry?
Q: By carve outs you mean certain groups attempting to get the legislature to exempt their particular industry?
Exactly. And I'm afraid it's going to make the industry
far more vulnerable.
And I'm afraid it's going to make the industry far more vulnerable.
Q: How so?
Two ways, passage and enforcement.
Look at it this way. When most people think about
independent contractors , they are thinking about newspaper carriers,
Avon sales reps, and such. In reality, there are a lot of well compensated
professionals and industries that operate entirely, or to a large degree, on
the independent contractor model including a bunch of doctors, lawyers, real estate folks.
Remember, Dynamex, the ABC criteria, AB5...those are all huge and extremely
disruptive developments. I think this thing is so disruptive, the gig
economy and all, that a lot of folks just assume that the government will
back down, kinda like when the government pushed to change to the metric
, they are thinking about newspaper carriers, Avon sales reps, and such. In reality, there are a lot of well compensated professionals and industries that operate entirely, or to a large degree, on the independent contractor model including a bunch of doctors, lawyers, real estate folks. Remember, Dynamex, the ABC criteria, AB5...those are all huge and extremely disruptive developments. I think this thing is so disruptive, the gig economy and all, that a lot of folks just assume that the government will back down, kinda like when the government pushed to change to the metric system.
But some things aren't like that. Look at gay marriage. It was
illegal forever. Then a few states passed it and, bam, now legal in all 50
states. Or pot. Two thirds of the population supports legalization. Never
underestimate the power of black swans and tipping points. There's a lot of
complacency, a lot of false security that nothings going to chance.
But some things aren't like that. Look at gay marriage. It was illegal forever. Then a few states passed it and, bam, now legal in all 50 states. Or pot. Two thirds of the population supports legalization. Never underestimate the power of black swans and tipping points. There's a lot of complacency, a lot of false security that nothings going to chance.
Yep. People get accustomed to things being the same for a
long time then way underestimate how much things can change and how fast.
To use your example, marriage used to be defined between a man and
a woman. Now, it can be between a man and a man or a woman and a woman or a man who used to be a woman with a woman that used to be a man.
And the thing that changed gay marriage so fast is the exact same thing
we're dealing with here and that's court decisions.
Yep. People get accustomed to things being the same for a long time then way underestimate how much things can change and how fast. To use your example, marriage used to be defined between a man and a woman. Now, it can be between a man and a man or a woman and a woman or a man who used to be a woman with a woman that used to be a man. And the thing that changed gay marriage so fast is the exact same thing we're dealing with here and that's court decisions.
But, at the same time, its also surprising how little things can
change. Take phone books, for example. They are still doing well in many
markets. I remember working on Prodigy, that joint venture between Sears and
IBM. And before that was GEnie, GE's network, CompuServe, BBS, Usenet -
though most of those were more support tools than online shopping like Prodigy.
After over 30 years, digital still hasn't replaced print advertising. Sat TV
didn't replace cable TV which didn't replace broadcast TV which didn't
replace FM which didn't replace AM which didn't replace newspapers.
But, at the same time, its also surprising how little things can change. Take phone books, for example. They are still doing well in many markets. I remember working on Prodigy, that joint venture between Sears and IBM. And before that was GEnie, GE's network, CompuServe, BBS, Usenet - though most of those were more support tools than online shopping like Prodigy. After over 30 years, digital still hasn't replaced print advertising. Sat TV didn't replace cable TV which didn't replace broadcast TV which didn't replace FM which didn't replace AM which didn't replace newspapers.
Damn, how old are you?
Damn, how old are you?
Let's just say that when I was growing up, tablets were
still made out of clay. Anyway, the point is...we have no idea how this is
going to turn out.
I 'm just saying that things can remain the same for a very long
time and the world can turn upside down overnight. The smart thing for
publishers and delivery vendors to do is prepare. for the worst.
'm just saying that things can remain the same for a very long time and the world can turn upside down overnight. The smart thing for publishers and delivery vendors to do is prepare. for the worst.
So back to independent contractors.
You've got these really huge groups of what I call professional
independent contractors. They have big, influential
lobbies, and special interest groups, and business interests that are
stakeholders, not just the ICs themselves but outside groups, too. With them
involved, there was a good chance that reclassification would
be suppressed. It was just too much change, too quickly.
You've got these really huge groups of what I call professional independent contractors. They have big, influential lobbies, and special interest groups, and business interests that are stakeholders, not just the ICs themselves but outside groups, too. With them involved, there was a good chance that reclassification would be suppressed. It was just too much change, too quickly.
But take those
groups out of the discussion with carve outs and,
all of a sudden, you now have a much greater chance of reclassification for the remaining
groups. Divide and conquer. For example, on the federal level, there's a lot
of resistance, currently at least, to reclassification. But you take out
some of those groups with exemptions and all bets are off. In a way it's unfair because of unequal rules. On the other
hand, the whole point is to look after disadvantaged groups. So the carve
outs increase the chances that the new standards go forward and spread. And
then, by dramatically reducing the number of people reclassified,
enforcement resources are concentrated.
But take those groups out of the discussion with carve outs and, all of a sudden, you now have a much greater chance of reclassification for the remaining groups. Divide and conquer. For example, on the federal level, there's a lot of resistance, currently at least, to reclassification. But you take out some of those groups with exemptions and all bets are off.
In a way it's unfair because of unequal rules. On the other hand, the whole point is to look after disadvantaged groups. So the carve outs increase the chances that the new standards go forward and spread. And then, by dramatically reducing the number of people reclassified, enforcement resources are concentrated.
Yeah , the high income type of independent contracts, they aren't at risk of netting less
than minimum wage so carving them out gives the government and attorneys
more resources to focus on industries, like ours, in which workers often net
less than minimum wage and are sometimes taken advantage of.
, the high income type of independent contracts, they aren't at risk of netting less than minimum wage so carving them out gives the government and attorneys more resources to focus on industries, like ours, in which workers often net less than minimum wage and are sometimes taken advantage of.
I've also been able to get more feedback on why more people weren't
freaking out. One attorney in California that specializes in this
stuff said that lots of companies were, indeed, putting their hopes on being
saved by getting the law changed. But, with the carve outs proposed, that
ain't working out.
Then he said a lot were just hoping they
could slip under the radar which, again with the carve outs, that's now less
likely. And, as we discussed before, this idea of slipping under the radar,
wow, that's a very
scary thing to rely upon.
I've also been able to get more feedback on why more people weren't freaking out. One attorney in California that specializes in this stuff said that lots of companies were, indeed, putting their hopes on being saved by getting the law changed. But, with the carve outs proposed, that ain't working out. Then he said a lot were just hoping they could slip under the radar which, again with the carve outs, that's now less likely. And, as we discussed before, this idea of slipping under the radar, wow, that's a very scary thing to rely upon.
I was hoping that I was pessimistic because I overlooked
something. Sometimes, I hate being right. I reached out to some people in the industry to get their feedback only
to find out they had already bailed.
I was hoping that I was pessimistic because I overlooked something. Sometimes, I hate being right.
I reached out to some people in the industry to get their feedback only to find out they had already bailed.
Q: Because of this issue?
Q: Because of this issue?
I get the feeling this issue wasn't the only reason but I
think it really weighed
heavily. I mean, when people quit and basically take a lower position, or
quit and don't have anything else lined up, that sounds
like they're ejecting. It's kinda like when you hear
about a politician on TV that resigns to, quote, spend more time with their
family. That more time with family thing really means, hey, I'm gonna quit
so can we just let that be my punishment and you go prosecute someone else?
What really struck me was that s ome of these
perople were close to retirement or close to cashing in on
some nice pension dates. I have to believe they got the hell out due to fear
of being on the hook personally for wage liabilities.
I get the feeling this issue wasn't the only reason but I think it really weighed heavily. I mean, when people quit and basically take a lower position, or quit and don't have anything else lined up, that sounds like they're ejecting. It's kinda like when you hear about a politician on TV that resigns to, quote, spend more time with their family. That more time with family thing really means, hey, I'm gonna quit so can we just let that be my punishment and you go prosecute someone else? What really struck me was that s
ome of these perople were close to retirement or close to cashing in on some nice pension dates. I have to believe they got the hell out due to fear of being on the hook personally for wage liabilities.
Q: What do you mean?
For some wage laws, the government, I understand, can hold individuals, not just their companies, liable.
I've also noticed that people were removing
themselves from boards [of directors]. It
could be coincidence but after all these years?
I've also noticed that people were removing themselves from boards [of directors]. It could be coincidence but after all these years?
I feel bad for the people that have no idea any of this is going on.
You know, a lot of ICs hire ICs. For example, a guy owns a van. He takes
a route as an IC. He, in turn, hires a couple ICs. So he drives the van
while one guy delivers one side of the road and the other guy delivers the
other side of the road. Maybe the only reason that the van owner is in the
business is because he can hire his own IC laborers. Maybe he isn't
physically able to hand deliver door to door himself. Maybe he does this
only because he can make a reasonable income with the help of the two other
guys. lse, that guy, the van owner, is certainly providing
more tools, the van, providing more direct supervision, controls the hours,
etc. etc. In other words, the ICs working for him are far closer to being employees than the
van owner himself.
I feel bad for the people that have no idea any of this is going on. You know, a
lot of ICs hire ICs. For example, a guy owns a van. He takes a route as an IC. He, in turn, hires a couple ICs. So he drives the van while one guy delivers one side of the road and the other guy delivers the other side of the road. Maybe the only reason that the van owner is in the business is because he can hire his own IC laborers. Maybe he isn't physically able to hand deliver door to door himself. Maybe he does this only because he can make a reasonable income with the help of the two other guys.And, if nothing e
lse, that guy, the van owner, is certainly providing more tools, the van, providing more direct supervision, controls the hours, etc. etc. In other words, the ICs working for him are far closer to being employees than the van owner himself.
And I bet no one is telling him. ey slip under the radar?
And I bet no one is telling him.Any chance th
ey slip under the radar?
With a quarter or half a million dollars or more on their 1099s? I wouldn't count on it.
With a quarter or half a million dollars or more on their 1099s? I wouldn't count on it.
How common are these van crews?
How common are these van crews?
Maybe not that many in numbers but, in terms of industry volume,
a very big deal. Those van crews really pump out the books. Y eah, the numbers are elusive. A publisher hires a delivery vendor who
then hires ICs who then hire their own ICs. It's kinda like multi-level
marketing except with labor instead of product.
Maybe not that many in numbers but, in terms of industry volume, a very big deal. Those van crews really pump out the books. Y
eah, the numbers are elusive. A publisher hires a delivery vendor who then hires ICs who then hire their own ICs. It's kinda like multi-level marketing except with labor instead of product.
Q: Where do the counts of independent contractors come from?
They don't use their vendor AP record counts since there will be vendors that may be inactive for a while, you know, skipping an edition or two. They usually use the number of 1099's issued but that understates the count by quite a bit. No 1099 is required under $600 so a worker would have to deliver a minimum number of routes to be counted at all. There are some people that don't finish their route who may not be paid at all. There are a ton that do just one route, realize how little they are paid, and never deliver another route. And ICs hire their own ICs so those wouldn't be known by the publishers and delivery firms. So if a delivery company issues, say 5,000 1099s, the actual number of ICs could be some unknown, much bigger number.
There was one survey, of the people that tried delivering books, only about half would be willing to do it again. So that group, the ones that didn't deliver enough routes to trigger a 1099, is probably pretty big.
Q: What is the crisis?
There is a push to reclassify thousands and thousands of independent contractors [ICs] as employees. Since the vast majority of phone books are circulated by independent contractors, the impact could be big. In addition to increases in ongoing costs, reclassification would probably be retroactively applied for years which could mean huge liabilities for back wages, benefits, taxes, as well as possibly penalties and litigation costs.
The worry is that it could put some of the few remaining directory delivery vendors out of business. Publishers need to make contingency plans asap. The industry also needs to clean up its act, the unfair practices, things that could cause a disgruntled IC to file a complaint or narc on a vendor and trigger wide-spread reclassification.
Q: Is this a problem for just directory delivery vendors? Or are yellow page publishers also vulnerable?
Both. Obviously a tiny publisher that mails all their books can sleep well but thatís the exception. Most of the industry needs to jump on this. Higher costs will flow to everyone. Critical vendors could close overnight. And there was at least one class action lawsuit in which the publisher didnít hire independent contractors but their vendors did and the plaintiffs tried to hold the publisher liable as a ďjoint employer.Ē Since then, I think the joint employer risks have decreased but people should be aware that the concept is even out there.
Q: Which publishers are most vulnerable?
Obviously the ones with formerly telco books because of the number of markets.
On the independent publisher side, exposure varies widely. On the extreme, Valley Yellow Pages, AGI, is obviously the most vulnerable since 100% of their volume is in California. Meanwhile, HIBU only has a few markets in the state. User Friendly has only one. Names and Numbers, Brock Publishing, has zero.
But those are current markets. For example, HIBU, Yellow Book, had bought out TransWestern. If I recall correctly, TWP was California based so HIBU may have had a bunch of additional California books that could have been since discontinued. The retroactive range most cited is 4 years. Of course, it's the publishers and delivery vendors with current California markets that are the most vulnerable.
Q: Why does the industry rely so much on independent contractors?
Obviously to avoid payroll taxes, healthcare, and other costs but also because employees require so much regulatory record-keeping and rules.
Q: Do most publishers hire their own delivery workers or go through delivery vendors?
There was a time when virtually everyone used delivery vendors. There's a shortage of vendors specializing in yellow pages so a few publishers, most notably HIBU, have taken distribution inhouse. Almost all use independent contractors.
Q: How many books are mailed?
In the independent market, almost all are delivered by independent contractors. Small, telco books may be mailed. In the independent market, it's almost exclusively hand delivery with the possible exception of really rural, sparsely populated ZIP Codes that might be mailed because otherwise the delivery vendor would lose money in those areas.
If it is clearly determined that delivery vendors are not common carriers and thus may not provide publishers with sale and use tax exemptions on print orders, possibly more books would be mailed.
Q: Do publishers save money by doing distribution inhouse?
Most could save an average of 28% but they don't. According to the data we have, the cost variance averages within just 4 percent. But, in a few states, including California and New York, delivery vendors are used by some publishers in an attempt to not pay sales and use taxes on print orders.
Q: So if those publishers delivered their own books, they would have to pay sales and use taxes on them?
Some publishers have their warehouses put in the vendors' names and just reimburse the vendor for all the expenses. I'm not sure that approach would fly if it was noticed by the tax authorities but I could be wrong. And I get the impression that the only way to avoid the sales and use taxes is to have delivery by common carriers such as the U.S. Postal Service. Directory delivery vendors are not common carriers at least according to one court. Again, that's my impression and I could be wrong. I don't know much about the details of sales and use taxes. And there's some risk that those warehouse employees, many of them continuing to be employed in the exact same role while the vendors change, might be classified as joint employees.
So then, if the independent contractors are reclassified as employees, could they be similarly classified as joint employees? It's a longer stretch with the independent contractors but still... it's like murdering your ex-wife yourself versus hiring an independent contractor to murder your ex-wife. At least if you murder your spouse yourself, you might argue that it was in the heat of the moment. But if you hire an IC to murder your partner, that's premeditation. Using a third party as a moat, as an agent, sometimes it works, sometimes it doesn't.
Q: Why is this a problem now? Havenít independent contractors been used for a long time? What changed?
The big thing that changed was this. California Supreme Court, unanimous decision, Dynamex, last summer or spring. It radically changed the criteria, with the new ABC test, by which workers are classified as employees or independent contractors. The new rules makes it far more likely, some argue absolutely certain, that thousands of those directory delivery workers were employees instead of independent contractors all this time.
And it's not just California. Some other states also use the ABC test that was the center of the Dynamex case. Yeah, Dynamex is big. Not Feist big or Telco Act of 96 big but, still, itís a huge deal. If I was some people, Iíd be crapping my pants.
And another thing, I believe, that has really shoved this issue to page one is Uber. All those Uber and Lyft drivers you see on the news every day, they are pushing the issue.
Correct. And the other things that changedÖ Well, I donít know if these were recent changes or, if, in researching the implications of the Dynamex case, I just stumbled on these things so it could be new or it could be just new to me. Anyway, that other issue is enforcement, in particular, the governmentsí efforts to sort of deputize the public in enforcing wage laws.
Thatís right. Dynamex and the new ABC tests. Those enforcement measures you just mentioned that will weaponize it. And Uber and other gig economy workers pushing it in the news every day. Itís a perfect storm.
Q: Can any of you elaborate on the enforcement measures that are so worrisome?
Well, itís like this. You take the Dynamex case. Letís say Dynamex is a pit bull. You strap some sharp spikes to that dog. They you dip those spikes in poison. Then you release that pit bull in a fenced-in, pre-school playground. Itís kinda like that.
There's this legal thing called PAGA. It encourages workers to file lawsuits kinda like class action lawsuits because the plaintiffs donít just include that worker who happens to file. The other plaintiffs include other workers, sometimes thousands, and the government. And I think the person that files gets a cut of the penalties. So when you have thousands of workers, all with a financial incentive to file, what are the odds of a delivery vendor or a publisher slipping under the radar?
At least one state, California, has an ongoing marketing campaign to encourage anyone to report violators. And by ďanyoneĒ they mean anyone: workers, members of the public, even competitors. A citizen of Mexico, working illegally in California, can report a company. Theyíll launch an investigation and they are legally prohibited from turning in any undocumented workers that file complaints. They know that illegals are sometimes taken advantage of so they look out especially for that. And not just illegals, theyíll go after anyone that even threatens retaliation. Theyíll also take anonymous tips. All you have to do is fill out a form on their website.
[ http://wagetheftisacrime.com/ by the California Department of Industrial Relations, California Labor Commissioner's Office].
This is an important thing to emphasize. In most legal things, I think, you have to be an alleged victim. In legal terms, I think it is called standing. That really, really restricts who can file a claim. That really minimizes the chances a company will be hit with something. With PAGA, I think you still have to be a party to the alleged violation but you can act on behalf of a lot of other people, like someone mentioned, kinda like a class action lawsuit. So the stakes are much, much bigger. And by being rewarded a percentage of any penalties, thereís a huge incentive. Thereís a lot of pissed off delivery workers out there and it only takes one to pull the pin on that grenade.
Q: Such as?
Independent contractors that earned less than minimum wage. People that werenít paid at all, that actually, because of gas and mileage, had expenses but didnít get a single cent because, right or wrong, it was claimed that some delivery stops were missed. Or because the GPS tracking unit supplied by the vendor failed or wasnít charged or the battery was worn out and wouldnít hold a charge. A lot of these workers were down and out. They were trying to make money for baby formula.
The labor enforcement folks are specifically targeting industries such as ours. Theyíre focused on low wage industries. Check. In industries with lots of workers. Check. Preferably concentrated with just a few hiring companies instead of tons of hiring entities. Check. That, according to some, employs and abuses illegal immigrants. Check. That, in at least some cases, abuses the independent contractor status. Check. In which using independent contractors creates an unlevel playing field for other vendors using employees. Check. And employs some child labor. Check.
Yeah, its Uber and Lyft thatís making all the noise and getting all the attention but our industry might be the poster child for this issue. With the drive sharing apps, the drivers have to have a relatively nicer car, a smartphone with unlimited, speak English well, in other words a better off group socially and economically. They are far less likely to be exploited, far less in need than your typical phone book delivery workers.
True, the wage enforcement people come along. They get one of these tips. They Google it. Theyíll see that it wasn't a one off thing. Thereís incidents described on discussion forums, blogs, etc. of first hand accounts of delivery workers not getting paid at all or netting under minimum wage. They'll see how the industry is dominated by just a few companies employing thousands of low-income workers. And then theyíll bring the hammer down.
Then thereís delivery vendors that have been shut out because of unfair business practices including, for example, kickbacks. They donít feel like they have much to lose. Before Dynamex, they were powerless to do anything but that's changed. They may narc on their competitors - especially the ones using employed workers instead of ICs. And some of these state wage enforcement divisions, part of their charter is to do just that, to level the playing field between companies using employed workers versus those that may be using misclassified independent contractors.
Q: Someone mentioned child labor.
Q: Someone mentioned child labor.
Yes but not THAT way. Some parents use delivering phone
books to teach their kids a work ethic .
I think that is a good thing. And phone book delivery is often used as
fundraisers for Boy Scouts and other youth groups.
. I think that is a good thing. And phone book delivery is often used as fundraisers for Boy Scouts and other youth groups.
But, if you Google it, you'll find incidents of parents using or being urged to employ children in order to make an acceptable hourly rate or to meet the hiring vendors' deadlines. And some parents will use their children's social security numbers in order to circumvent the earnings threshold for reporting to the IRS. For example, a couple with 3 kids can make up to $3,000 collectively before a cent is reported to the Internal Revenue Service.
Q: Have any of you brought any of these things, the kickbacks, the bad business practices, to the attention of the industry?
Q: And what was the response?
Mostly crickets. We've published a number of articles on our own websites, newsletters, professional and trade forums, and so forth. Most of that content was on logistics and marketing but some of that content has addressed ethical issues within our industry. But let's face it. The yellow pages industry is a sales-dominated business. Few in the industry really care about distribution. And the few that really need to hear our message, the founders, the owners, the CEOs - they're busy - as they should be - flying around the country, diversifying their portfolios, trying to get a handle on digital media which, by itself is a full-time task, hopefully enjoying the fruits of their long and successful careers.
So we pushed harder. Now, we can't come out and say, hey, one of your key managers is in cahoots with a vendor which is costing you millions of dollars. But people really don't want to believe stuff like that. So they don't. Human nature. But there was a situation in which things were spelled out extremely clearly. It was in their own best interests to do the right thing but the reaction was crickets. Maybe it was a bizarre outlier case but it doesn't look like it.
Look, we all make mistakes. Sins of commission. Sins of omission. But hereís the thing. When someone points out something that is clearly wrong, clearly within a person's ability to fix it but they choose not to. And the problem is brought to their attention repeatedly. Wow, it's hard to feel sorry for them when it hits the fan.
And the t
And the thing is, if stuff like that is happening at the highest levels of management, imagine what's happening at lower levels. Good people leave the industry. People that are shut out leave the industry.
Q: So if all the previous complaints were ignored, why even bother mentioning it now?
Youíre probably right. Weíre probably wasting our time. On the other hand, things have changed. For most of history, there was nothing those little guys could do. But with ABC and those enforcement resources we talked about, the tables have flipped.
OK, to illustrate that point, and sorry for not being concise but this is funny as hell. There was this one guy, his complaint, the lawsuit complaint, was hand-written by him. The pdfís online. Check it out on LexisNexis, Westlaw, or PACER. Might have been a single page or two. This guy didnít have a lawyer. Pro se. You know, Iíve read hundreds and hundreds of pages of court documents. And you know the language, legalese that goes on and on for even the simplest detail. Well, this guyís complaint, or it might have been a statement in an exhibit, canít recall, thereís a few of them. ďAsshole this, asshole that.Ē Something about burning in hell. Epic. If I had the time, I would gather those kinds of statements in a book, get Samuel L. Jackson to narrate the Audible.com version. Anyway, to the point, this guy winds up as plaintiff number one in a multi-state class action. He probably didnít finish high school. No one probably took him seriously. Now thereís a gaggle of tall building attorneys working on his behalf. Never underestimate an opponent.
The problem isÖthere are good people in this industry. A lot of them. Many of them work for publishers. Many of them work for delivery vendors. So if a disgruntled worker or vendor burns down the house in frustration, a lot of innocent people are going to have their lives disrupted. And us meeting here today, to try to prevent the collateral damage, yeah, probably isnít going to do jack. A year from now, no one will at least be able to say we didnít warn them.
Q: You guys sound like itís inevitable that delivery companies will get hit with independent contractor claims?
No, I wouldnít say that. Well, youíre right, it sounds bad. But we may be way, way off on the risks. Human beings are horrible at estimating risks. We evolved to be hyper-vigilant for risks and often over-estimate. Shark attacks, razor blades in Halloween candy, for example.
The odds could even be extremely low. Look at how rarely IC cases have come up in the past. Large delivery vendors can issue tens of thousands of 1099ís per year and those may be just the ones over the $600 reporting threshold. A medium sized directory distribution vendor, 5,000 1099s or so per year. So in the decades Iíve been in the industry, how many times has one of those contractors filed for unemployment or something else, you know, the type of thing that could trigger a reclassification. Astonishingly few. Then do the math. Take the few incidents divided by the number of those tens and tens of thousands of Independent contractors and the probability percent turns out to probably a tiny fraction of a single percent, extremely low.
Itís like airline flights. Think about that. Youíre taking a few hundred people. Essentially sticking them in an aluminum tube like a beer can. Then slinging them 500 miles per hour at 6 miles up where oxygen is low and the temperatures are freezing. Each trip hundreds or thousands of miles in distance. Youíd think something would go wrong pretty frequently but it doesnít. And depending upon whether youíre counting all flights or just airline flights, the number of flights in the U.S. is somewhere between 40,000 and 100,000 per day. But lots of people are terrified of flying when, in fact, itís really hard to wrap your head around how few go bad.
So, bottom line, who knows? The industry may very well slip under the radar if not for the remainder of the industry, until maybe laws are changed to accommodate the gig industry.
Q: What would happen to a delivery company if it gets hit with an employee versus independent contractor case?
Over 100,000 directory delivery workers were invited to participate in class action lawsuits, one in California and one in Texas, against Directory Distributing Associates. DDA was the 2nd largest directory delivery vendor in US history. They operated for what, 60, 70 years? They ceased operations and are now in bankruptcy. And that was before the recent California court rulings. That gives you an idea.
So what happens next? What happens if another one of the bigger vendors gets hit or the entire industry is targeted? Will publishers hire their own delivery employees? In some states, and I think that includes California and New York, if the publisher takes possession of the books, the publishers may have to pay sales and use taxes on all those print orders. Yeah, sales and use taxes on free phone books. Doesnít sound fair but thatís the way it is. Just like changing independent contractors retroactively. Also not fair.
And thereís another problem. A delivery vendor can fold overnight. Itís happened. Then, unless youíre a tiny pub, itís not a matter of renting a few vans and calling a temp agency to hire some day laborers. Weeks of lead time are needed. Delivery routes have to be designed, opt-outs processed, maps printed, temporary warehouses reserved, stuff like that. A lot of that stuff, we, DirectoryDistribution.com, do - the pre-delivery routing, mapping, data processing. Thatís all we do. But there only so much additional volume we could take on overnight. Thatís why publishers need to take steps now.
Q: Is mailing an option?
Much higher costs. Millions and millions of dollars.
And thereís other barriers to switching to mail besides costs. The USPS is losing billions of dollars every year. To save money, the postal service is trying to convert as many deliveries as possible to centralized neighborhood cluster mail boxes, like those found at many apartments, condos, and high-rises. Thereís usually big trash cans next to those cluster boxes. People go through their mail, pull out the important stuff, if any, and chunk the rest in those big garbage cans. There were studies done to show what percent of mail gets inside homes when delivered door-to-door versus those cluster boxes. The difference is huge. And all those local newspapers, radio and TV stations, SEO consultants that love to publically criticize the yellow pages, and have a financial incentive to do so, those huge trash cans full of discarded phone books are going to make wonderful photo ops for proving that people donít use the yellow pages anymore.
And there are other issues with mail related to advertisers, opt-outs, targeted delivery, and so on.
What makes this thing really worrisome is the likelihood of litigation or enforcement Ė especially in California which is the epicenter of the industry. Itís not like, say, the odds of an IRS audit. The IRS randomly chooses some percent of tax returns to audit. So if you make a mistake, say by using an outdated depreciation schedule, the error may get caught and they will correct it and you might get a penalty. This is way different. An IC can file for unemployment or workerís comp and trigger an investigation. Anyone, and I mean literally anyone on the planet including competitors, could go to that California employment division website [WageTheftIsACrime.com] and narc on a company using independent contractors.
Then thereís Californiaís PAGA which stands for something like Private Attorney General Act, I think. If I understand it correctly, with PAGA, those folks could get a cut of the penalties. Thatís like a commission for narcíing on companies.
Thatís right. And rip off an undocumented worker and donít think they will report ya because of the risk of them being deported? Think again. The state of California will investigate their claims and will not report the undocumented workers to immigration. Workers and the general public can trigger investigations without revealing their identity.
Q: So investigations and enforcement actions can be triggered anonymously?
Absolutely. And not just can, the state of California encourages it. They have an advertising budget to get the word out, to encourage tips. And I think that a portion of the penalties goes towards promotion and enforcement so thereís built-in incentives and, in that way, they have an unlimited budget. And thatís fine. The problem is that the rules for determining who is an employee and who is an IC has changed Ė retroactively. Thereís a lot of confusion and panic.
Q: So how serious is this?
Weíre talking the possibility of even more of the few remaining directory delivery vendors possibly going out of business. Weíre talking higher costs going forward most likely. There could be huge judgements or legal settlements. There could be big changes for directory publishers and yellow page vendors both financially and operationally.
Q: That sounds really bad. Someone mentioned ďindividual employees.Ē How so?
Itís been many, many years since my last law class, so I canít cite exact details but individual employees can be held personally liable for some employment law violations. Officers, directors, managers, employees, all could be personally held liable, I believe. And with wage law, you could be talking about back wages, benefits, taxes, penalties, not to mention the legal costs. I mean that would really suck. You could be living paycheck to paycheck yourself. Youíre not the one financially gaining, for example, by hiring independent contractors that the government later reclassifies as employees. Itís your employer that profited by initially saving on wages and other stuff but you, personally, could be on the hook. I personally know of individual employees that have been named as co-defendants in lawsuits.
One of the co-defendants was a part-time field manager. He wasnít even full-time.
And itís not just employees. Say you own a company but itís incorporated. For some employment laws, I donít think being incorporated will protect you. Iím not even sure bankruptcy is a way out.
Yeah, thatís the problem with legal stuff. Itís the stuff that you donít know that can get you. And you donít know what you donít know.
And Iíd add that what you donít know is probably more than what you do know.
And what you do know could be changed. Retroactively.
Boy, weíre getting philosophical.
Donít forget, cynical.
But, no, youíre right. And thereís another aspect of all this. Well, actually, a couple that makes it really difficult. First, this stuff is largely a matter of judgment. Itís not like 2 plus 2 equals 4. Addition is factual. There are no ifs and or buts about it. But the old tests used to determine whether someone is indeed an independent contractor was based upon about 20 things. You look at those 20 things and one person could say independent contractor but another person could rule employee. But now itís worse than that because the new rules, it looks like they are going to be applied retroactively.
And even, even if you ultimately arenít held personally liable, the toll can be horrible. I, and my companies, American Trend and DirectoryDistribution.com, have never lost a single legal case but, especially if you are the defendant, litigation can be all consuming and drag on for years. The legal costs, stress, time, opportunity costs can be massive. It can suck all the oxygen out of the room, 24/7. Itís no way to live.
There are things this industry does very well but it is horrible at litigation. But don't take my word for it. Log on to PACER and read the cases. Compare costs with benefits. In one recent case, the delivery vendor should have won, slam dunk. They had an opportunity to walk away for low 4 figures but it ended up costing them over 10 times as much. They had to pay their own legal fees, the other party's legal fees, and inflated damages, not to mention their own time and travel costs.
And another case, that same vendor could have settled for a fraction of their own minimum legal fees. Instead, it may cost them a few million, probably put them out of business, personal and corporate bankruptcies, and it will also cost the publisher an additional low seven figures per year. Why!?! All the lawyers were shaking their heads in disbelief. And it wasn't like they just overlooked the obvious, it was spelled out repeatedly. Thing is, insanity is a valid albeit rare defense in criminal cases but this is civil court.
For anything bigger than small claims court, the rule of thumb we use is a quarter of a million dollars through trial. Just for legal fees. Win or lose. And thatís a medium sized case. Big cases can very easily go into the millions. I read court filings for competitive intelligence. Try it. Hundreds and hundreds and hundreds of pages. All written by attorneys costing hundreds of dollars per hour, then reviewed by supervising attorneys at an even higher bill rates, and then analyzed by opposing counsel who then respond likewise. I married into a family of overachieving lawyers and the stories are incredible. Itís insane.
Even if youíre 100% innocent, you might be better off writing a six figure check to settle than not settle and end up writing checks for a much bigger six figure for legal costs. But a lot of people canít swallow that so they go down the rabbit hole. And the further in you go, the more likely you are to stick to your ill-fated trajectory. Itís psychology. Risk aversion. Tunnel vision. Thereís another word for it but I canít remember it. Itís like summit fever.
Q: What is summit fever?
Itís been in the news a lot lately. Well, they [media stories] may not mention it explicitly, that word, but it applies. This is the time of the year when itís the best, most favorable time of the year to try to summit Mt. Everest. So these guys, well, women too but guys are probably worse. They spend a good chunk of change, usually years of climbing other summits as training. They may spend weeks waiting for good weather at base camp. They make the grueling trek up the mountain. They are, say, a couple hundred yards from the summit. They can see it. So close. But, because of encroaching nightfall, bad weather, running out of oxygen, fatigue, whatever, they should turn back, abort. But they are so close that they donít turn back. And many of them do summit but some donít, they die trying to summit or they die on their way off the mountain. ďGoals Gone BadĒ was the title of a paper, I think, on the subject.
ďGoals Gone BadĒ Öa pun of those TV commercials for ďGirls Gone Bad?Ē
Bingo. A scholar with a sense of humor.
Well, the same thing happens with litigation. People are horrible with litigation. And itís not just plaintiffs and defendants. Itís their lawyers, too. And Iím not one of those that diss lawyers. Yeah, there are some bad apples. But all the ones Iíve known and worked with were smart, good people. There are problems in the system so I think lawyers take the heat. Anyway, so even lawyers in a case are horrible at case assessment. Thatís not just my opinion. Itís based upon an analysis of thousands of cases. Quantitative, historical analysis, predictive testing. Read everything by Randall Kiser. Beyond Right and Wrong: [The Power of] Effective Decision Making for [Attorneys] and Clients, or something like that. Iíll get the exact title for ya. The book costs over a hundred bucks but literally worth millions if you have a big enough case. Iíve read it two or three times. Should be required reading in every law and MBA program.
Sorry. I might have gotten off track. No. I take that back. It is extremely relevant given that publishers and delivery companies are going through so much infighting including lawsuits recently. Which might be a symptom of declining industries, Iíd guess. You know, fighting over a shrinking pie. Money grabs in the end times. And these wage laws, it might not be a situation where a stateís employment division just gives you a bill. There has been and probably will continue to be a ton of litigation on this independent contractor versus employee issue. Was it FedEx or Uber? I canít remember. Over 360,000 independent contractors in a class action seeking employment status. In our own industry, over 100,000 directory delivery workers were invited to participate in a similar class action against DDA [Directory Distributing Associates]. I think that one ended up between 10 and 20 thousand plaintiffs. So, yeah, getting up to speed with litigation is a really important thing for our industry right now. Of course, you can do everything perfectly but if your opponent doesnít understand litigation or game theory or expected value or is just nuts, others can be collateral damage.
Q: So what can that book help people with?
Well, hereís an example or two.
People often say that trials are crapshoots. And sometimes they are. Sometimes the verdict is unexpected. Sometimes the law requires an unexpected or even unfair conclusion. But this gamble aspect, I think, leads people, a lot of times, to incorrectly equate trial outcomes with flips of the coin, you know, where both sides have a 50-50 chance. But thatís not true.
The ramifications are huge. For example, it leads people to settle lawsuits rather than take the risks. And settle they do. The most quoted figure is 95%. But, for plaintiffs, that can be a huge mistake. Thousands of cases, comparing settlement offers with final judgments. You canít argue with the data. Even including attorney fees, plaintiffs tend to settle for far too little. Of course thatís with thousands of cases. If you have just one case, which is more likely, your mileage may differ. A lot. Still, the research is compelling. And donít rely on the attorneys. The book makes a compelling arguments that, due to bias, both defense and plaintiff attorneys, and their clients, are terrible at case evaluation. Again, not because they are stupid. Far from it. Mock juries and outside panel evaluations can really help cut through the inherit bias although it does add a bit of cost.
Iíve seen lawsuits in which the defendants had nearly zero chances of prevailing. But they didnít settle - even after being offered settlements less than their guaranteed legal costs. Thatís a no brainer, right? My guess is that their attorneys didnít discourage them to continue either for the fees or incompetence or bias. Or they assumed the other side didnít have or wouldnít risk a quarter million to see it through trial. Or they just arenít too bright Ė which might also explain why they were defendants in the first place.
So back to the book and the odds of prevailing. The odds may indeed be 50/50. I know. That contradicts what I just said. But thatís all lawsuits. The key is to break it down by type of case. That is the biggest factor. And you can add in a few known case factors for additional odds.
What might make the overall odds 50/50 is that medical malpractice lawsuits bring the average down for plaintiffs. Thatís because medical malpractice lawsuits are often contingency lawsuits so more plaintiffs can bring more case and more risky cases. The payouts in medical malpractice claims also tend to be very high so just winning even a minority of cases can still pay off big. With medical malpractice claims, juries can be swayed by sympathies of personal tragedies against big insurance companies so more incentive to roll the dice. So what is the average win rate for medical malpractice? Just 21%.
But what are the odds that the plaintiff will win an imminent domain case? Thatís virtually 100%. So, there you have it. The odds of winning any lawsuit might be 50/50 but only because the average works out that way. If you look at the type of case, though, the odds can range from 21% with medical malpractice to virtually 100% with imminent domain with other types of cases also differing quite dramatically.
Q: What are the other known factors that can impact the odds?
Letís take an example from the research. And this is a good example because most of our listeners are likely to be a plaintiff or defendant in this type of lawsuit, breach of contract. The odds of the plaintiff winning in a breach of contract is 73% - way higher that the often assumed 50/50. But it gets better. If you have multiple causes of action, plaintiffís odds improve. I forget exactly how much so letís just say 10%. If there is a claim for punitive damages, the odds increase. So what are we at now? Those are great odds. Thatís why plaintiffs in breach of contract cases should think twice before settling. The research shows they leave a ton of money on the table.
And the author provides a ton of incredibly valuable research on settlements and judgement dollars. When people make decision errors, there are clear trends. I wonít get more off topic with details, but take the just mentioned breach of contract cases. Plaintiffs are, in general, tremendously better off by going to trial. Defendants are better off settling. And the chances of winning punitive damages? They are surprisingly higher than most people think. And because of the sizes of punitive damages, defendants should take note.
So read the book. And, if it is in your interests, you might even want to share it with the opposing side. Otherwise, itís just their opinion versus yours. Their defense team against your legal team. Those opinions could cancel out. For example, in that breach of contract case. Slide the book over and point out that 73% odds. Then mention the multiple causes of action. Now, weíre, Iím guessing, 83% odds. Then mention the punitive damages so, where are we now, 90%? And why share that? Well, the less they spend on litigation, the more money theyíll have to pay to settle, the quicker the thing will end which will probably be in everyoneís interests.
Q: OK, thatís great information. What are the odds for prevailing in employment cases like the ones we are discussing today?
That one, if I recall correctly, is actually about 50/50 but I would dig into the details. That average could very easily be hiding some very wide disparities. For example, employees often think they are wronged when fired and feel justified in suing. But then they discover they live in an at will state.
And again, I want to emphasize, these statistics are incredibly valuable but they donít hold a candle to the facts and the law in your particular case. And thatís why weíre having this discussion today. The California Supreme Court just changed the odds tremendously in their recent ruling. And people need to know that so that they can discuss it with their attorneys and not rely upon outdated assumptions.
And again, donít take my word for any of this. Talk to your lawyer. Better yet, talk to a bunch of lawyers because of bias issues and because a lot of this isnít cut and dry.
The problem is Ė or should I say Ė one of the problems is that no one really knows how this is going to turn out. The results could range from nothing much changes to apocalyptic for some yellow page vendors. If I were certain vendors, Iíd be worried. Everything may turn out fine but, even if it does, I could see a lot of sleepless nights. And it may take a while for everything to sort out.
Q: Does this impact yellow page publishers or just vendors?
For the most part, both. There are a few relatively small publishers, the few that mail all their books, they will probably not be impacted at all. But, for the vast majority of the industry, publishers and delivery vendors, this isnít going to be fun.
Q: For the publishers impacted, will all of them be impacted the same or will some be hit harder than others?
Some will be hit much harder than others.
California is the ground zero, the epicenter of this thing. So publishers Ė and delivery vendors Ė with big presences in California are the most vulnerable but it isnít just California.
For yellow page publishers struggling with a lot of debt or unprofitable markets, the added costs of this will may help accelerate the contraction that they are already going through. Other publishers are doing just fine financially and they should be able to weather this thing relatively easily.
All publishers that rely upon independent contractors [ICs] for distribution Ė and thatís the vast majority of the yellow pages industry Ė they need to immediately evaluate their exposure and make contingency plans. And thatís not just for the relatively few publishers that hire independent contractors directly, you know, the ones that donít use outside delivery vendors. Publishers that rely upon delivery vendors that, in turn, use independent contractors Ė and again, thatís most of the industry Ė they need to pay attention.
Q: What do you mean by disruptions?
A small publisher with just a few markets may be able to improvise and get by relatively easy. But if a delivery vendor closes shop overnight, larger publishers could be in a fix. Itís not a matter of renting a few vans and calling a temp agency to hire some day laborers. Weeks of lead time are needed. Delivery routes have to be designed, opt-outs processed, maps printed, temporary warehouses reserved, stuff like that. A lot of that stuff, we, DirectoryDistribution.com, do - the pre-delivery routing, mapping, data processing. But there only so much additional volume we could take on overnight.
And in some states, Iíve heard, California, New York, others, if the publisher takes possession of the books, they have to pay sales and use taxes. If their vendor folds overnight and the publisher has to take over distribution, bam, sales and use taxes.
Q: What changed to bring about all of this so suddenly?
Pay close attention to Uber and Lyft. Their stock prices have declined after their IPOs. I have to believe that a big part of that is their use of ICs and the expectations of reclassifications sooner or later. Over 360,000 of their drivers joined a class action to be reclassified as employees instead of independent contractors. They are protesting and striking for higher pay. The drivers have huge facetime exposure with a sympathetic population. That is what changed.
The independent contractor issue has been a sleeper for, well, forever, but now itís front page news. You now have an army of people pushing for reclassification and the recent court decisions are bombshells, not as big as Feist or the Telecommunications Act of í96 but still pretty big. As weíve seen before, court decisions and legislation can cause huge mega-changes literally overnight.
The issue has already hit the industry. Hard. DDA, which was the 2nd largest phone book delivery company in US history, was hit with a huge IC versus employee lawsuit. They said that was a big factor in their decision to cease operations. Over 100,000 workers were invited to participate in that class action lawsuit. And DDA has been around for what? 60 or 70 years? Think about that. And that was BEFORE the recent court rulings.
Meanwhile, the government is getting involved. Itís now political. There was a study done in New York that said a majority of Uber and Lyft workers in the state drive full-time so itís not just about people earning a few extra bucks. Half of them support families with children. 40% earned so little they qualified for Medicaid and other public support. So legislatures and courts have huge incentives to reclassify independent contractors as employees so that minimum wage, overtime, and health insurance benefits are available for a lot of people. Otherwise, the government and taxpayers have to pick up the tab for public housing, food stamps, health care.
Q: So can delivery vendors survive?
They have long been dying off even before the latest setbacks. The 2nd and 3rd largest phone book delivery companies, along with a bunch of smaller firms, have already gone out of business. Many of the rest are struggling. Cut markets, reduced print quantities, targeted instead of saturated delivery, lawsuits, changes in management, tight labor marketsÖnow this.
On the other hand, there are some delivery firms that have long been employee-based. They could enjoy a huge windfall if this knocks out IC-staffed competitors. I would expect them to push the government to force a level playing field. For them, this is like Feist and the telecom act that boosted independents. The problem is that most of the industryís delivery workers are IC-staffed.
Yes, a limousine company sued Uber because Uber had an unfair cost advantage by using independent contractors. It's called the California Unfair Practices Act. I think the limo company was demanding that Uber switch from independent contractors to employed staff.
So now it's Dynamex, AB-5, and the Unfair Practices Act. Good luck dodging all those bullets.
So if a company is relying upon independent contractors, they don't just have to worry about a worker filing for unemployment, for example. They could be targeted by the government or a competitor.
The IC-based vendors are going to get hit twice. Reclassification means higher costs going forward. Thatís a big issue just by itself. But, much, much worse is a ruling earlier this month that sounds like the reclassification could be retroactive for years. That could mean liabilities for back wages, benefits, and taxes not to mention legal costs and any penalties.
Q: How big will be the liabilities for back wages and penalties?
Good question. Maybe someone who knows more will chime in.
The Dynamex ruling applies to a subset of state wage laws. How in the world will they be able to determine who and how many hours were worked under minimum wage? Or overtime? Or missed meal or rest breaks? If the action is brought about by a stateís wage division, Iím not sure how thatís done. With lawsuits, maybe they would make estimates or guesses and negotiate a settlement. But will those amounts be accurate or fair? The settlements so far, with FedEx, Uber, and so forth have been massive so thatís discouraging. Thereís GPS records with time stamps. Maybe theyíll use that.
NowÖI hope Iím totally wrong. And anyone listening to this or reading the transcript that thinks Iím wrongÖPLEASE comment, email, or call me and let me know what Iím missing. I would love to be wrong. I have an entrepreneurial background and being entrepreneurial typically means being an optimist. On the other hand, I married into a family of lawyers. And attorneys tend to be hyper-vigilant, always preparing for worst case scenarios soooooÖ.I could be way off. I would love to know what others think.
Q: What started this?
The Uber and Lyft issues have been building up for a while. But Dynamex changed things overnight.
Q: Did the California Supreme Court ruling include phone book delivery workers as plaintiffs?
Dynamex was a delivery company but not for phone books. That ruling has a tremendous potential impact on any industry relying upon independent contractors. The trucking industry, real estate sales, Uber driversÖthose are among the big ones. Meanwhile, there are other two class actions, one in California and another in Texas, that specifically target phone book delivery workers.
Q: So the yellow pages industry isnít the only ones fighting this? The industry has allies like Uber?
Iíd say thatís a problem rather than a benefit. If it was just phone books, maybe no one would have noticed. Maybe we would have slipped by using the old rules. But with the gig economy, Uber, Lyft, other app-based IC-dependent platforms, the government is worried about all those people making less than minimum wage, having access to health insurance, and so forth.
And youíd think companies like FedEx, Uber, Lyft would have a lot of clout but theyíve been clobbered with hundreds of millions of dollars of settlements. FedEx is spending a fortune to shift to employee-based contractors. If those big companies are crying uncle, what chance do we have?
And thereís another problem. Everyone isnít working together. Specific industries are pushing for exemptions for their own industry, leaving everyone else high and dry. There is even a push to except app-based companies like Uber Ė which isnít fair to the rest. I suppose a vendor could quickly develop an app but that loophole would probably be closed.
Q: Are people freaking out?
Many in the industry may not even be aware of the recent developments Ė which is why weíre discussing it now. Others seem to be putting on a brave face. Is it because fears are overblown? Or they just donít want to panic the troops? Are they still evaluating the situation? Are they assuming that independent contractors are too numerous, you know, the gig economy that has been so popular in the news lately, is too big to fail? Is it denial? Thereís this thing, when airliners crash land and are on fire, some people just sit in their seats instead of evacuating. Itís as if their brains canít accept the reality. So maybe some of the calmness is just because people canít or choose not to mentally deal with it. Maybe their hoping for appeals or legislation.
Q: Among the delivery companies, who will turn out to be winners and losers?
Publishers and delivery vendors that are heavy in California markets, of course, will be hit the hardest.
Vendors stuck in multi-year contracts will be at the mercy of publishers.
Obvious winners will be the delivery companies that have long used employees instead of ICís. They wonít have to make any changes. They wonít face higher costs. They wonít be hit with lawsuits, back pay, litigation costs, penalties, and such. So they may actually come out way ahead. They may be loving this.
In general, larger companies usually have huge advantages over small firms. This could be the opposite. The larger the company, the ones using independent contractors in a zillion markets, the larger the potential liabilities for back pay. Meanwhile, small vendors, the ones with just a few heavy-hitter van crews, might come out much better.
The larger firms with their bigger accounting and HR staffing should make it easier for them to handle the heavier administrative loads that come with adding a bunch of employees. Theyíll have better economies of scale when it comes to litigation costs. They should have bigger cash reserves to cover settlements. So, with those advantages but with higher potential liabilities, who knows?
Q: Is changing the laws an option?
There have been and continue to be efforts to solve it with new laws. Some bills have been introduced. And some industries have asked for exemptions. You might have pro-business decisions at the federal level but that can change with the next administration. And with 50 states, not to even mention local laws, some pro-business, some pro-labor, there will probably be a mish-mash of different regulations for different markets.
Q: Why is the phone book industry so dependent upon independent contractors?
To deliver the phone books for a city typically only takes several days up to 3 or 4 weeks out of the entire year. Thatís not conducive for using employees. The nice thing about using independent contractors was the ease of it. The contract can be oral or, if written, fit on just a post card or a single page. The workers get a 1099 at the end of the year. Thatís about it.
Now compare that to hiring employees. With employees, youíve got overtime rules, meal breaks, rest breaks, health insurance, eligibility for retirement programs, withholding, FICA, unemployment, quarterly reports, annual reports; itís endless. Also remember that most publishers and delivery vendors are multi-state. The administrative burden for employees in just one state is a pain. Now multiply that for each state.
A lot of the high-volume workers and crews travel from state to state. So now you could have the same worker being an employee in one state and an IC in another, or being an employee for some state wage laws but being an IC for other laws within that same state. The administration and record keeping could be a nightmare.
Q: So why do some states push for employees instead of independent contractors?
Companies are far more reliable than independent contractors in paying taxes, keeping health insurance, setting aside money for retirement and unemployment, and so forth. So when independent contractors fail at those things, the workers suffer, and taxpayers end up picking up the tab via welfare, food stamps, etc. The government also wants to prevent workers from being abused and that, unfortunately, has been a problem in our industry.
Q: What kind of abuse?
Paying what amounts, in some cases, less than minimum wage. Not paying some delivery workers at all. Exploiting the independent contractor status. Hiring illegal aliens.
There are accounts posted online of vendor-supplied GPS units failing, usually bad batteries or not charged, and the delivery managers refusing payment unless the worker goes back and re-traces their route in order to replace the missing GPS tracking data. So the delivery worker is forced to re-drive and re-walk the entire route Ė or not get paid at all. The publisher gets fake delivery verification. All because, in many cases, the vendor provided a defective GPS tracker or the trackerís memory got reset.
On the illegal immigrant issue, itís not just the government that complaining. As you can see in the news, that is a big issue to a lot of citizens and political groups. With employees, a worker canít just hire their cousins from, say, Mexico. But any independent contractor is 100% free to hire other independent contractors who, in turn, are free to hire their own independent contractors who may or may not be legal. Directory delivery is pretty much a very simple, off-site, unsupervised activity so it is extremely conducive to hiring illegals compared to many other industries. Thereís no building for ICE to raid. Jobs move from city to city. No periodic reporting or withholding. 1099ís are only required at $600 plus. The penalty for not issuing a 1099 is, or used to be, just $100 each so thatís not much of a deterrent. A lot of Americans are loudly complaining that hiring undocumented workers takes jobs from Americans and suppresses wages. And the delivery firms that use employees instead of ICís are at a competitive disadvantage.
And if an illegal alien isnít paid for delivering a route because the vendor or the delivery manager claims the route wasnít properly delivered? What is the undocumented worker going to do? Probably nothing. The manager could pocket the money. The state of California, however, will prosecute those cases. By law, they wonít report the undocumented reporter and they specifically look for this type of abuse against illegal aliens. And rightfully so because that is a real dick thing to do. But donít me wrong. There are a lot of good people in this industry. A lot of them under-appreciated and under-paid but we also have a disproportionate share of bad apples.
How big of a problem it isÖthe use and abuse of undocumented workersÖI donít know. Some think it is less now because of the border crackdown. Others say that, because employment is so high and itís so hard to find legal workers that more illegals are being hired.
Q: You mentioned unpaid workers and pay lower than minimum wage. How is that possible?
Itís not only possible, itís a feature. Itís built into the system.
Look, I support the industryís use of independent contractors for a number of reasons. But, by abusing contract workers in this way, the industry is begging for a government clamp down. And itís not just the workers that are hurt. Yellow page publishersí reputations are also hurt because people see the publishersí names on the books. People blame the publisher.
Check out the websites and ads used to recruit delivery workers. One of the few requirements listed is that workers have access to a vehicle. But what you really need is a larger vehicle, a van or truck Ė not a regular car. A regular car will be damaged by the weight of the books. A regular car doesnít have the space for a lot of books which means the driver will have to make multiple trips to the warehouse to re-fill which means they could end up making less than minimum wage. Everybody in the industry knows this. But donít take my word for it. Google it. The problem is documented in discussion forums and blogs.
Delivery workers are usually told that if they donít finish their routes, they wonít be paid. At all. So someone comes in driving a small car. No one says anything. They are given a route, say 1,000 stops. After part of the route is completed, the worker does the math and sometimes realizes he or she isnít going to net even minimum wage. Now, they have a choice: finish the route and do more work at less than minimum wage or quit and not get paid anything. Actually, itís worse than not getting paid anything. Theyíll get zero mileage re-imbursement, nothing for gas, nothing for wear and tear on their cars. They also wonít get paid anything for bagging all those books. But the delivery company will get paid for those deliveries. Theyíll get a windfall. Free labor. The size of many routes Ė especially in California Ė have been dramatically increased specifically for this purpose, to coerce workers to deliver more books than they would otherwise, often at less than minimum wage, sometimes for free at their expense.
And itís not just the contractors with small vehicles. If the delivery manager prices the piece rate too low, those with bigger vehicles could face the same problem Ė especially in rural areas and areas with lots of long driveways.
And delivery companies usually require the routes to be completed within 3 days. And so that puts more pressure on the worker given more trips to refill.
Actually, it's much worse than that. A lof of workers have complained that they returned to the delivery station to refill but the station was closed. They would have to wait for particular days to pick up more books - which means they may not finish their routes on time which then could jeopordize their getting paid at all.
Q: What is the rationale for not paying anything if the route isnít completed?
Iíve heard only 2 excuses but there must be others because they donít fly.
The first one was that the delivery manager wouldnít know what parts of the route were delivered and what parts were not delivered. But thatís bogus. All of our delivery maps say to mark off road segments as they are delivered. Other companies provide address ranges or address lists, usually with instructions to also mark each delivery. And then thereís the GPS tracking which is really detailed.
The other thing wasÖthey didnít want to write too many checks. Sorry. How does hand-delivering hundreds of stops in the heat and cold compare to the few seconds it takes to write a check?
The reason I was explicitly told was to force workers to finish routes because of the shortage of workers. Of course the most cited reason for not finishing routes is the amount of work in relation to pay. No one has ever explicitly said that they are trying to avoid paying workers anything butÖ
Q: How common of a problem is this?
If I recall correctly, every ad and website that I have personally seen have just specified a vehicle. None of them that I have seen have stressed the need for a larger vehicle to earn minimum wage or more or to prevent damage to the vehicle. Now, I have seen a couple websites that have suggested larger vehicles but that was included, if I recall, among the tips to maximize productivity, not a warning.
Now, it may very well be that some field managers are taking it upon themselves to warn, say, a little old lady driving a Prius that she may want to reconsider. On the other hand, given that door-to-door delivery is physically demanding, in often freezing or hot temperatures, and typically for low pay and, probably more significantly, unemployment is at record lows Ė which means it is far more difficult to recruit workers Ė the abuse may very well be at an all-time high.
Q: But arenít independent contractors free to re-negotiate their piece rate?
Absolutely. And the old-timers do and sometimes even refuse bad routes. But tons of people arenít assertive, especially the first-timers. When I design a delivery route, I can easily calculate stops per mile which is a decent proxy for hourly earnings. But an independent contractor canít. Many have never delivered before. Vendors have a huge edge. New delivery workers have no idea how many books they can deliver per hour. They donít know how many books will fit in their car. They donít know the capacity of their carís suspension system. Read the blogs, the posts. Lots of people underestimate the work involved. Itís really up to the industry to be fair and, quite frankly, weíve failed.
I sympathize with the difficulty in finding enough workers. I feel bad that they [delivery vendors] underbid so much that they feel compelled to use such tactics. Instead of not paying the worker at all for not finishing a route, be more selective in hiring contractors, pay a bonus for completing routes, re-negotiate with the publisher. All it takes is one disgruntled worker Ė or even a relative or a friend of that worker or a competitor Ė to report the vendor and, with the new rules, have thousands of workers retro-actively reclassified as employees resulting in millions of dollars of back wages, penalties, and legal fees as well as some major headaches for publishers.
And itís not just the government. Some delivery companies use employees instead of independent contractors so that means they, the ones using employees, are at a significant cost disadvantage compared to the vendors using independent contractors. They canít compete. So you do have some delivery companies that are encouraging the government to force other delivery firms to use employees, to level the playing field.
And that issue, the lack of a level playing field, goes far beyond just the use of undocumented workers and independent contractors versus legal employees.
Q: What do you mean?
It appears that this industry, the phone book delivery business, seems to have a great deal of corruption. Vendors have complained about being locked out of contracts because of kickbacks, gifts, that sort of thing. So now, with the government actively soliciting the public for wage law violators, I wouldnít be surprised if there was some payback. Vendors that have been locked out could narc on other vendors.
Q: Have you seen corruption yourself?
Well, I havenít been an eye witness to brief cases full of cash being exchanged. I have seen and heard enough to believe it is a very big problem.
Q: Such as?
I finished my MBA over 30 years ago and started working as an IT contractor for a very large publisher in their distribution department. There were complaints about the delivery vendor so I asked one of the executives why they put up with it, why not change vendors. His answer was that the contract was awarded for gifts so there was nothing they could do.
Years later, I was sitting in a VPís office, the headquarters of a distribution vendor. The president walked in and commented that ď[Redacted] sure does bid low.Ē I asked him how he knew since bids were supposed to be secret. He said a publisher executive emailed him a copy of the other vendorís bid prices. He said it was an accident. Itís not uncommon for people to forget to attach a file they intend to email but to accidently attach a secret bid file and then send it to the bidderís biggest competitor?
Same two companies. Head of distribution flies to the other side of the country to visit the vendor. They go shopping? Why? West coast doesnít have decent shopping? Who flies to the south to go shopping?
Our primary business is delivery media but we also help distribution vendors with marketing and sales so I often know many of the competing bids and the lowest often donít win. Heck, Iím not sure how many bids actually make it up through the chain of command. And weíve done quality surveys so it shouldnít have been performance issues.
Here is another example: The owner of a publishing business complains about delivery fees. Tells his distribution manager to get bids. That manager calls me up, asks for a list of delivery vendors and proceeds to tell me what the current vendor is charging. Why would he do that in a bid environment? He tells me that the current rate is, say, 70 cents a book so that I will relay that info to the delivery vendors we work with. Those vendors then bid 60 to 69 cents per book when, the whole time, the current rate was 59 cents, not 70 cents. The manager then takes those 60 to 69 cent bids to his boss as proof that the current vendor, that he is in cahoots with, is not overcharging when, in fact, they are.
And then thereís the requests not to carbon the president on any emails because, you know, one email per month is too burdensome. Now, yellow page publishers are sales organizations. They employ hundreds of sales people to bug the heck out of business owners to get them to buy ads. So it seems a big hypocritical to ask not to receive one email a monthÖor is it because someone doesnít want the owner to be carboned on bids?
Department head gets romantically involved with a sex worker. She cleans him out. Vendors change overnight. No explanation whatsoever. Coincidence?
Another one loses his wifeís 401k in bad investments. Strange business decisions ensue. Asked for explanations. Silence.
Then people wonder where all the vendors went. Some went out of business but others just gave up.
Now, Iím not saying that every one of these examples is a case of corruption but when thereís that much smokeÖ When something doesnít make sense at all. But donít take my word for it. If youíre the owner of a company, make up a fake vendor profile, email, website, phone, and send your own C-level execs and department heads some fictitious proposals at competitive or below-cost rates. See how many get through. Listen to the explanations as to why the deals ďfell through.Ē Test people. Especially the ones youíve known a long time, the ones you trust the most. Itís just like crime and affairs. The person most likely to cheat on you probably lives under the same roof.
Q: How in the world do you know all this stuff?
We help delivery vendors with their marketing and we help them with sales and bids. When they win those bids, we get the mapping work so we have strong incentives to do competitive intelligence. The really, really big thing and a huge advantage is that this business, directory circulation, is relatively tiny so it is easy to scour social media for not just the participants but also of their family and friends. Photographs, real estate transactions, court documents, legal depositions. Your Linkedin profile says you saved x percent amounting to y dollars which we then use to determine unit prices by adding up quantities from IRIS. So itís not just data collection. Itís also cross tabulation, analysis, and testing. Itís a lot of work, but itís very profitable. Itís also fun and challenging.
Q: So with all this knowledge of corruption, why not disclose it to the CEOís or owners?
We have posted articles on our website, Linkedin, and mentioned the general problem in discussions. But we and no one else is likely to give specifics or name names. First of all, no one wants to believe that one of their best friends, someone they worked with for many years is ripping them off. More importantly, I can put the pieces together and be very confident of the truth but thereís a whole different standard legally. If you were to accuse someone, you could get hit with a lawsuit for slander, libel, defamation, whatever. And with legal costs, as a rule of thumb, of a quarter of a million dollars per lawsuit, not even counting the risk of a judgement, it isnít worth it. We will use the information internally. Weíll advise our partners accordingly, for example, whether or not, in our judgement, they should even bother responding to specific RFQs. Weíll advise them how they might circumvent any corruption or other barriers and that has been spectacularly successful.
Q: How do you do that?
Well, for example, and this is a case of circumventing a barrier Ė not an example of corruption, I believe, but one publisher sent out an RFQ. We knew it wasnít sincere because it was only a few pages. They are usually much longer than that. I had helped win that account on previous occasions so I was already familiar with critical details. For example, this publisher used the same warehouse for the last few vendors so an obvious question was whether they, the publisher, owned or leased the warehouse themselves. So a couple of extremely critical questions isÖshould the bids include the costs of a warehouse and the postage for secondary? I called. They said it was in the RFQ. It wasnít - thus it wasnít a sincere bid. Again, I donít think this was an issue of corruption. They were probably just pretending to send distribution out to bid to discourage the current vendor from increasing rates. So we obtained historical winning bid data and emailed management with an estimate of how many millions of dollars they could save if they switched to our partner. That got their attention. All of a sudden, it went from a completely insincere RFQ to a serious RFQ. We won the multi-year contract.
Weíve had to beg delivery vendors to bid on contracts. It could be a reasonable issue like the one just described or it could be hanky-panky. Letís say a VP has worked many years for the owner of a publishing company. He makes low six figures. The owner has made many, many millions of dollars. The VP personally feels justified in taking some gratuities. And, indeed, the ownerís lifestyle isnít going to be noticeably impacted. The real victim is the delivery vendor and his or her employees that were shut out from a shot at the account. So, between insincere RFQs or outright corruption, you end up with some frustrated vendors. And itís those vendors that may cooperate with state wage enforcement agencies in turning in other vendors.
Anyway, weíve gotten a bit off topic. The point of all this is that there is a lot of pent up frustration. Vendors have been shut out whether it be because of lazy managers, managers not willing to take the risk of switching vendors, corruption, bad business practices, whatever. So, as a result, you probably have vendors that are now willing to try extreme measures to finally get a shot at business that they feel that theyíve been unfairly denied. Now, all of a sudden, with the Dynamex ruling and state wage enforcement agencies, those folks now have a lot of power to disrupt the entire industry, to turn it upside down. Itís an interesting situation because, normally, the biggest competitors have a huge advantage. In this situation, larger size can be used against a company.
Q: But wonít smaller vendors also have reclassification liabilities?
Some of them, maybe. But some have been using employees instead of independent contractors.
Q: Why did those delivery companies use employees instead of contractors? Isnít it more expensive?
It is more expensive. The ones using employees tend to be local delivery companies and they tend to deliver more than just phone books. They also deliver other things like coupons, flyers, door hangers, newspapers, magazines, TMC publications. For those kinds of things, you have more frequency Ė unlike phone books which are once a year. Newspapers are daily. Magazines monthly. Flyers and door hangers as often as they can sell them. So when you have the same guys delivering the same local routes over and over again, that is more conducive to employees. There is more direct supervision. With those kinds of things, itís much harder to classify the workers as contractors Ė even by the old standards that were much more lenient.
Q: What were the changes in standards by which workers are classified as either employees or independent contractors?
The old standard, which is still in use by the feds and most state employment laws looked at about 20 things to judge classification. The ABC standard, the one adopted in the California Dynamex case and some other states, focuses on 3 prongs, hence the ABC name.
Q: So two sets of standards? That has to generate a great deal of confusion?
The uncertainty is a huge problem just by itself. How should a vendor bid on new businessÖshould they bid based on IC rates or based on the higher costs of employees? Bid based on ICs and you may accrue liabilities. Big high to cover the costs of employees you risk losing bids. What about the multi-year contracts that are in effect? Imagine being an owner of a delivery company, going to work every day knowing that, instead of earning a living, you might just be running up a bigger liability tab. I really feel for them.
And itís not just the owners. Directors, officers, and managers, Iíve heard, can personally be on the hook for some wage liabilities. They say incorporation might not even shield individuals from personal liability. The government seems to take wages and tax liabilities a whole lot more seriously than other liabilities and debt. Iím not even sure bankruptcy offers protection. I recall at least one part-time field manager being listed as a co-defendant on a lawsuit. This uncertainty is horrible for business and on a personal level. Some vendors and even individual managers and supervisors could just say, hey, the risk isnít worth it and they could decide to quit overnight. It really doesnít seem fair that, for decades, it was pretty much universally accepted Ė including by the government Ė to use independent contractors on a massive scale but now there is a threat that the government could go back in time and retroactively change the rules and hold individuals personally liable.
Q: So what did the Dynamex case do?
The old standard, which had been used for decades, looked at 20 or so factors. Dynamex reduced it to 3 and makes it much harder to rationalize independent contractor status for huge numbers of independent contractors. I wonít go into too much detail; Iíd suggest folks read the actual ruling and consult their attorneys.
The A in the ABC standard is closer to the original tests. One problem, some say, is that even by the old standards, the industry has crept a bit further away from IC standards. I disagree but thatís not even close to being the biggest problem.
The ruling earlier this month means that any reclassifications will most likely be retroactive. That means that publishers and vendors that used independent contractors for distribution could be on the hook for years of back wages, benefits, and taxes not to mention possible litigation costs and penalties. FedEx, Uber, and Lyft have already agreed to hundreds of millions of dollars in settlements for misclassified workers so that gives you an idea of the scale of this thing and the odds of prevailing.
Q: How will this impact companies in the yellow pages industry?
Well, for us, directly, we have zero exposure to the contractor issue. We arenít a delivery company. We just do the delivery scoping, routing, mapping, opt-out processing Ė basically the data-processing portion of the distribution process. We produce the delivery kits that are used for distribution but we donít actually deliver any books ourselves. Those kits can be used by anyone whether employees or independent contractors.
For the actual delivery companies, from the outside, at least, it appears as business as usual. On the inside, I donít know. They may be freaking out. They may be in denial. I feel sorry for them. Maybe they are still accessing the situation. Maybe they are hoping that they will slip under the radar. Maybe, they are counting on the laws being changed.
Some of the [delivery vendors] are stuck in multi-year contracts so what do they do? Will publishers be willing to bail them out, to renegotiate those contracts?
Q: How much will costs increase if one has to switch from contractors to employees?
An important thing to remember is that, as of now, the ABC rules from the Dynamex case appears to apply only to a subset of California state wage laws. The feds are still using the old criteria, at least, for now. I havenít seen any estimates for the selected state wage law additional costs. Now, I have seen numbers for the additional costs to convert independent contractors to employees for ALL state and federal wage laws. That range is 25 to 40% with 30% being the rule of thumb. So that gives you an idea of worst case scenario, that is, if workers eventually have to be reclassified for federal as well as all state wage laws. Again, Dynamex applies to a subset of state laws, so the actual additional costs should be much smaller.
The problem is the hit for back wages. Publishers have high margins and distribution is a small percent of their operations so they can easily survive the hit. For most delivery vendors, itís a different story. Back wages could kill them. Higher costs going forward could do them in. Back wages plus higher costsÖpretty depressing.
Q: If directory delivery vendors go out of business, what are the options?
Delivery companies focused on phone books tend to be based upon independent contractors but there are some delivery firms that are employee-staffed. Those tend to be local companies like coupon and door hanger firms that deliver the same routes throughout the year. The disadvantage of those is that they tend to be small, without the capacity of regional or national directory delivery vendors. However, since they deliver coupons for local businesses, publishers might be able to trade part of their fees for ads.
Mailing is an option but it would be much more expensive than employee-based hand delivery. One option is to switch to mail until employee-based delivery crews can be put in place.
There have also been complaints about mail delivery, particularly slow deliveries, or deliveries not made at all. I donít know how common those problems are. And I donít think that the complaints are motivated by hand-delivery vendors dissing the competition. They donít see the postal service as a competitor because of the higher costs and they are quick to push for mail delivery for ZIPs that are sparsely populated.
There is certainly a huge issue with mail delivery that is getting worse. The US Postal Service is losing billions. To save money, they are trying to convert as many home deliveries as possible to centralized neighborhood cluster boxes. They are like those cluster mail boxes found at many if not most apartments. The problem with those is that thereís usually big trash cans next to those cluster boxes. People go through their mail and chunk most of it in those big garbage cans. There were studies done to show what percent of mail gets inside the home when delivered door-to-door versus cluster boxes and the difference is huge.
Q: David, you're involved a bit in delivery robotics. How far off is that?
Robotics can certainly solve the problem eventually. No labor costs. No healthcare costs - which is pretty significant, between 15 and 20% of GDP. No lawsuits. The technology is far, far more advanced than most people realize. And there are some big players pushing it, Ford, FedEx, Amazon, WalMart and so on.
Now, there is a common perception, I'd say misperception, that robots will be too expensive. I think that comes from the idea of the first robots being Department of Defense prototypes costing millions of dollars each but that would be a huge mistake. No one says cars are too expensive and robots will be far cheaper in volume. The players involved are get-big-fast players so the initial costs will be subsidized.
Q: What do you mean?
The directory delivery business is perfect for endurance field testing so companies like we just mentioned, the robotics companies, Ford, Amazon, FedEx, WalMart, will subsidize the costs of directory publishers wishing to jump into robotic circulation.
Robots can provide100% photo and GPS verification - which isn't insignificant since some are cheating with the current use of GPS verification. A bit of additional revenue might be available for collecting door-precise GPS-like data.Tag-along inserts could provide a bit of additional revenue and can be done with much greater sophistication. More address-specific options are available compared to meatware deliveries whether by independent contractors or postal workers.And given the high-tech premium image, what publisher wants to be left out of early trials? There's some big Pr benefits.
Q: You mentioned that vendors shouldnít count on slipping under the radar. Why is that?
People have used misclassified workers forever and often gotten away with it, for example, with domestic helpÖwith the exception of people running for office that are busted for not withholding for an undocumented maid. But there is a huge difference between getting away with a single helper versus an army of workers. There is a very good chance that the IRS wonít notice that you misclassified a single worker individual as a 1099 worker instead of a W2 employee. But a medium-sized directory delivery vendor could issue 5,000 1099ís per year, the largest, maybe around 25,000 per year. Over 100,000 workers were invited to participate in the DDA lawsuit. It only takes one worker to file for unemployment or workers comp to trigger an investigation.
Then again, historically speaking, it was surprisingly rare that an independent contractor would pursue unemployment benefits or workers comp. So maybe vendors could slip under the radar for a long time. The problem is that, when it does come up, the ABC standard has drastically changed the odds of the outcome.
But, again, it gets worse. The government is actively advertising for anyone Ė and I mean ANYONE Ė to narc on companies that have used independent contractors Ė including lawfully in the past Ė that would, because of the new ABC standard, now very likely be classified as employees. They advertise and have a website, WageTheftIsACrime.org or something like that. Many legal actions require one to have standing, to personally be a victim, before filing a claim. Not so with wage laws. Anyone can trigger a reclassification. And, quite frankly, some delivery vendors, have grossly abused their workers and so have just begged for karma. The industry has used independent contractors for decades and so they [delivery vendors] probably figured nothing would change. But it did.
Q: What is the chances that the government will step in and save independent contractors?
I get the feeling that a lot of people arenít panicking because they expect the government to swoop in and fix this situation. I think that stems from the thought that the gig economy is too big to fail. That could happen but, boy, I wouldnít count on it.
True, the gig economy is huge and with some high-profile players such as Uber and Lyft. And a number of huge industries, trucking for example, are heavily dependent on the independent contractor model. So, yeah, they may be too big to fail. But among the concerns of the government is social security, healthcare, and unemployment funding and those are also too big to fail. And, yes, independent contractors are required to pay into social security, for example, but their compliance is far less than big corporations. And even if the federal government embraced independent contractors, thereís still 50 states and many other entities that have the authority to impose regulations. And even if current administrations are IC friendly, the next might not be. So, yes, switching hundreds of thousands of workers from independent contractors to employees is incredibly disruptive but the current high employment and good economy might just incentivize the government to bite that bullet now. Plus, remember that the ABC rule does not make ALL independent contractors employees, just a huge percent. Already, companies such as FedEx and Uber have paid hundreds of millions of settle claims. If FedEx canít win this battle, what are the chances for a phone book delivery company?
Q: What does the ABC criteria do differently?
The California Supreme Courtís new ABC test appears to presume that ALL workers are employees and now places a much tougher burden on companies to demonstrate otherwise.
The A of the ABC test has to do with the level of worker control and supervision that has always been an issue in evaluating workers as either employees or contractors. In this area, the industry has slipped a bit towards employee status. Specifically, with GPS monitoring.
Before GPS, the standard quality control was telechecking, telephone verification. Telechecking was usually performed by employees and/or machines, IVR, and included only a relatively small amount of spot checking, typically a sample size of just 2%. As such, telechecking comprised only the bare minimum of oversight to ensure that delivery contractors actually performed some of the work for which they were contracted.
In contrast to telechecking, GPS tracking, the new industry standard, could be more problematic than telecheck in arguing independent contractor status. Delivery companies typically provide the workers with the GPS units, the tools, and, with active versus passive tracking, the cell service and tracking infrastructure. The steps involved, charging the units, click on delivery, are dictated to the worker. And real-time, 100% online tracking could be interpreted as a very high level of direct supervision.
ButÖI donít think that going from 2% to 100% verification should be held against delivery vendors in using independent contractors. The reason is that there were other reasons to switch from phone verification to GPS. People switched from land lines to cell phones so that was a huge problem with phone verification. GPS is easier, cheaper, and better and other reasons.
The fact that the GPS units and infrastructure was provided by the vendorÖinsignificant. Units about $35, tracking maybe $15 a month.
I'd have to disagree. I think the GPS tracking thing could be a bigger issue than some think. For example, if you work in someone's building, you're more likely to be classified as an employee. And one of the rationalizations for using ICs in the directory delivery business is that the workers are always out in the field. There was no way to supervise them. But with the GPS tracking that is now pretty much standard in the industry, hiring companies are virtually supervising every step the worker takes. And they can do it in real time. So now, with technology, the showing up at the office thing isn't relevant. GPS, cameras, tracking...employees can be supervised directly, 100% of the time, no matter where they are.
You've got a point there. Yeah, you're probably right.
For now, letís skip the B part of the ABC test since that is the biggie. Weíll come back to it.
The C part regards whether or not the IC has a real business. Part of that is the number of customers. If an IC works for multiple publishers and delivery vendors, the argument for a real business is enhanced. But if the IC only works for a single publisher or delivery vendor, it will appear more like an employer-employee relationship.
Our industryís current lifecycle has slashed the number of available hiring entities. Consolidations and closings reduced the number of publishers and delivery vendors. Fewer publishers mean fewer delivery vendors. Publishers have been busy dropping markets, abandoning companion directories, combining multiple volume sets into fewer books, and cutting circulation.
In earlier times, California-based TransWestern Publishing encouraged and sustained delivery vendor startups; TWPís successor did the opposite by taking distribution in-house. With fewer available vendors, some small publishers also brought distribution in-house. And the decline isnít limited to distribution vendors specializing in directories; multi-product delivery vendors such as door hanger companies have also declined dramatically. The industryís trade group, the Association of Alternate Postal Systems (AAPS), has gone dark. These changes slashed the number of available hiring entities. More workers are tied to a single "client" thus increasing risk for losing independent contractor status.
Publishers could also go back to doing what TransWestern was doing in the old days. And that was helping to incubate new delivery vendors. It had the added benefits of reducing costs and improving performance. Itís probably too late for that now though. I mean, who in their right mind would get into this business now!?!
Years ago, we introduced a project called The National Registry of Independent Contractors. The NRIC was meant to be a centralized database of directory delivery independent contractors. It would have made it easy for workers to find delivery jobs and it would have made it easy for delivery vendors and publishers to find delivery workers. For the publishers and vendors, it would have reduced recruitment advertising costs. It also meant that the independent contractors would work for more companies which would have enhanced their legitimacy as independent contractors. Unfortunately, delivery vendors have a lot of bad blood between them and didnít want to share IC databases. Publishers, though, have a lot of clout and might be able to get the vendors to work together. They could revive the NRIC.
Hold on a second. I think this C part is bigger than previously thought also. Since we're going from the 20-issue test down to the 3-issue ABC test, exclusiveness is now a much bigger factor.
Also, delivery companies usually require that routes be completed in 3 days. That pretty much demands that the worker not have a regular job, not be able to do work for any other companies even as an independent contractor. So if you're gonna demand that the worker work exclusively for you, bam, you're their employer. How else can that worker get benefits?
Good points. I didn't think of that.
Here's another thing. The typical market delivery is 2 to 4 weeks. If
the delivery company was truly letting the IC make their own decisions, why
not let that IC take as little or as long as he wants to finish the route?
The vendor is requiring exclusiveness and actually is setting hours.
Here's another thing. The typical market delivery is 2 to 4 weeks. If the delivery company was truly letting the IC make their own decisions, why not let that IC take as little or as long as he wants to finish the route? The vendor is requiring exclusiveness and actually is setting hours.
Just curious, what
happens if the worker takes longer than the required 3 days?
happens if the worker takes longer than the required 3 days?
Breach of contract. They don't get paid at all?
In which case, they aren't being paid even minimum wage? They aren't being paid anything?
I don't know.
Q: OK, so weíve covered the A and the C, whatís the B?
The B is the killer B. This one is, by far, the most problematic.
B says that independent contractors canít do the same activity as the hiring company. This is the most devastating requirement in the ABC standard. The ABC rules prohibit work that is the same as the hiring entity's main business activity. Delivery workers, distribution vendors, and yellow page publishers ALL share the primary activity of circulating print ads and thus appear to fail this standard miserably.
In MBA case-study classes, the first question is always "What business are we in?" Are publishers in the business of circulating print ads or can publishers define themselves as sales organizations? Based on distribution's low percent of a publisherís total costs, publishers may justify defining themselves as sales organizations. If authorities buy that argument, publishers might then be able to use independent contractors to deliver books. However, Uber tried to define themselves as a technology company so that they could continue using independent contractors but that redefinition attempt failed to convince authorities. Directory distribution vendors are unlikely to prevail using the redefinition game given the simplicity of delivering door to door.
Q: So publishers might be able to use independent contractors but not delivery vendors?
I wouldnít count on it. If publishers can convince authorities that they are sales organizations, maybe they can hire independent contractors to deliver books. But, that would seem odd since why would it be OK for publishers to hire delivery workers as independent contractors when delivery firms canít hire the exact same people as independent contractors?
Seriously though, this idea that one canít hire independent contractors to do the same line of work is problematic. Lots of businesses have spikes in volume. As an example, retailers need more store clerks around Christmas. It would be nice to have some means of hiring additional help without having to go through all the paperwork and other requirements of formal employment.
And a similar need exists when talking about not spikes in volume but the exact opposite. Say a delivery vendor needs someone is some far off state just to deliver a handful of books to stops that were missed during the regular delivery months ago. Why canít they just cut someone a check, you know, casual labor? They have to actually make that person an employee?
Many questions remain. Will vendors be willing to even try an employee-based business model this late in the industry's lifecycle? Will publishers switch immediately to employee-based vendors? How many independent contractors are willing to become employees - especially since many seek work only for limited periods or to fit irregular schedules? A lot of workers donít want to be employees. They prefer the freedom and independence of being independent contractors.