Corporate Magic: Turning Employees Into Contractors

“Want to avoid paying half of your employees’ Social Security tax? Reclassify them as ‘independent contractors’ so they pay it all themselves. Make them fill out a 1099. ‘That’s not a fulltime busboy, that’s Juan Co., LLC. Don’t forget to invoice us, Juan Co.’”

(John Stewart, The Daily Show, November, 2012)

As far back as 1989, a Government Accounting Office study found that 38 percent of the employers examined misclassified employees as independent contractors. As a labor lawyer for the past two decades, I’ve represented hundreds of bakery drivers who deliver and shelve bread and chips for grocery stores. In that industry, some companies use employees, some use independent contractors, and some use both, yet I have seen a steady shift away from employees. Why? By labeling workers “independent contractors,” bakeries (and grocery stores), like the Port of Los Angeles, avoid dealing with unionization and such employee obligations as contributing to Social Security.

The bakeries call these workers independent contractors – even though they essentially perform the duties of a bakery driver employee. The companies have the drivers fill out IRS Form 1099s (used for non-employee compensation) and set up corporations – or LLCs as John Stewart joked. Yet, plainly, these bakery drivers are employees, not independent contractors. Many of these “independent contractors” become wage slaves controlled by the threat of losing their livelihood – without the wages, without protection against discrimination, access to vacations, rest breaks and paid lunches, or any other benefits associated with being an employee. Unfortunately, because of the profit in labeling employees as independent contractors, companies are increasingly following this course.

Recently, for example, after acquiring all of Sara Lee Corporation’s baked good brands, Grupo Bimbo is laying off many of its unionized drivers (who delivered Oroweat, Roman Meal and Weber breads) and will apparently be shifting delivery of its new lines to “independent distributor” drivers. As part of the Sara Lee/Bimbo deal, the U.S. Justice Department had Bimbo spin off some of the Sara Lee brands to Flowers Foods (to avoid monopolizing the bread market).

Now, Flowers’ “independent” drivers will carry products formerly delivered by Sara Lee’s independent contractors and employees.

Meanwhile, as bakeries profit by shifting to nominally independent contractors, unionized bakeries such as Hostess Brands (makers of Twinkies and Wonder Bread), go bankrupt or are dissolved. The press covered Hostess blaming the unions (which dared to demand living wages), but it failed to look below the surface to see the detrimental effect of this industry’s race to the bottom through misclassification of employee workers. Probably, Hostess Brands will be bought by their unfair competitors and its products delivered by non-union “independent distributors,” driving a low-wage economy.

For nearly 20 years, I’ve won and lost cases based on whether bakery drivers are independent contractors or employees. The biggest difference has not been the drivers; it’s been the judges. One, who decided in favor of Gruma Corporation (the world’s largest tortilla maker), was a Club for Growth donor (though he never disclosed that fact). The law remains pliable and the companies profit – while the public loses billions of dollars to underpayment of taxes for workers misclassified as independent contractors.

Yet aggressive and imaginative unions do not have to surrender. California courts recognize that unions can include employee and independent contractor drivers. Particularly given the churning of brands and pressures in the industry, many of these so-called independent contractor drivers want group representation. A 1950’s-era case pitting a bakery against a union working to raise drivers’ wages acknowledged that, because all of the drivers essentially do the same work, a “union may take into membership ‘businessmen-workers’ who operate in an industry, field or trade in competition with organized workmen.” (Los Angeles Pie Bakers Asso. v. Bakery Drivers Local (1953) 122 Cal.App.2d 237, 238-239.)

These are American jobs that cannot be offshored. It’s imperative that the labor movement, politicians and progressives use all weapons at our disposal to keep them unionized and part of a more inclusive and fair economy.

Jonathan Weiss is a labor attorney. He started the ongoing Community Outreach Program at Southwestern Law School to engage Hoover Street Elementary School children with law students and faculty.