Fractured freedom

| March 25, 2009

In recent years, the long-standing relationship between employers and independent contractors has come under fire. Private organizations and public officials – even Barack Obama before he became president – have challenged the independent contractor classification.

While long-haul trucking hasn’t always been the target of these efforts, the industry nonetheless is feeling the pressure. Carriers and owner-operators are uncertain about what changes might be coming and what they should do to preserve their independent status.

“This is a small-business issue,” says attorney Henry Seaton of Seaton & Husk in Vienna, Va. “The viability of the owner-operator model as encouraging small business in America is under attack and it’s coming from different directions.”

For many years, the Teamsters have targeted the local delivery/courier industry by suing FedEx Ground operations in an estimated 20 states, alleging the local drivers are employees rather than independents. Other unions have sued courier businesses that also use independent contractors.

Late last year, plaintiffs in California won a $27 million judgment against FedEx, as the other suits continue. James C. Sullivan, a lawyer with Shughart Thomson & Kilroy, estimates defeat in a class-action suit on the national level could cost the company $1 billion or more.

One challenge has come from President Obama, who as a senator sponsored two bills that addressed the labeling of independent contractors. The first, the Independent Contractor Proper Classification Act, was defeated in the Senate in 2007. Last year, he signed on to a bill led by Sen. Edward Kennedy (D-Mass.) that would amend the Fair Labor Standards Act.

The ICPC would have instructed the U.S. Treasury Department to set new standards for classifying independent contractors, protect whistleblowers who challenge the independent contractor classification, and designate the IRS to referee the disputes. The safe harbor provision permitting carriers to argue “that’s the way everyone else does it” would be repealed.

In many ways, individual states pose a greater threat to upsetting the independent contractor position. Certain legislatures have voted for more stringent standards in various industries, including construction and local trucking. In many cases, states want to reclassify independents as employees to generate additional tax revenue and to give operators workers’ compensation and unemployment insurance coverage. In some instances, the states are establishing intergovernmental task forces to share audit information.

The potential loss of the independent contractor model that has served the trucking industry well over decades could hurt owner-operators in different ways. They might lose valuable tax deductions, such as writing off expenses and equipment depreciation. They could be much more limited in determining how much money they make and how much their business grows through their entrepreneurial skills. They could lose revenue if carriers begin paying worker’s compensation premiums to cover them.

In California, the attorney general has sued small drayage operators working Los Angeles-area ports for “misclassification” of independent contractors. The ports, with the support of local mayors, are pushing for independent operators to be considered employees of drayage companies as part of a program to replace older, more polluting vehicles.

Organizations that support the owner-operator point of view include the National Federation of Independent Business, the Truckload Carriers Association, the American Trucking Associations, the Small Business Administration and the National Association of Small Trucking Companies.

David Owen, NASTC president, says he’s wary of Obama’s plans regarding independent contractors, but “the agendas of many of the individual states are more frightening than anything the federal government would do. I think the federal government eventually will come closer to getting it right and realizing they’re meddling with a business model that has worked legitimately for more than 50 years in the transportation industry.”

Seaton says he’s surprised the Owner-Operator Independent Drivers Association “hasn’t realized its constituency’s chestnuts are in the fire.” OOIDA says it is monitoring developments affecting relationships between independent contractors and carriers.

“We will protect owner-operators’ right to stay independent contractors by making sure that any new laws or regulations that affect trucking apply only towards situations where motor carriers are overstepping their bounds with inappropriate lease requirements on owner-operators,” a spokesperson says in a prepared statement.

Most of the fury over independent contractors has been directed at local delivery companies and construction businesses, where classifying illegal workers as subcontractors is common. Despite the occasional disgruntled owner-operator who calls out a carrier to obtain jobless benefits, most over-the-road trucking companies and their leased owner-operators have avoided legal problems.

If independent contractor legislation heats up, Seaton says the long-haul trucking industry should be able to differentiate its business type from “the lawn care people and those who want to hire people for the graveyard shift and call them independent contractors.”

Both Seaton and Sullivan see the owner-operator as fitting the definition of an independent contractor under the 20-part “right-to-control test” used by the Internal Revenue Service to determine if an individual qualifies as an employee or independent contractor. Seaton says two of the significant factors in legal cases that help define an owner-operator as an independent contractor are the ability of the owner-operator to accept or reject a load and provide his or her own tools, such as a truck.

Sullivan says, “You’re talking about people who are out on the road for weeks at a time, managing their own fuel, managing their own insurance and managing their own hours.”
As Seaton sees it, carriers and owner-operators have five approaches to help counter the attack on independent contractors. Both parties can work through political channels.

Carriers could phrase lease contracts in ways that bolster owner-operator status, and they can recruit owner-operators in states that clearly recognize independent contractors. Owner-operators could incorporate, or they could file for their own operating authority and then provide excess capacity through brokers.

To help protect the owner-operator business model, Seaton says, carriers should review their contracts with owner-operators to ensure they meet truth-in-leasing regulations and applicable state law. As corporations, owner-operators, even if they operate only one unit, accept full corporate responsibility for state and federal tax compliance.

Despite the challenges, Sullivan doesn’t foresee the legal environment changing. “I don’t think from a long-haul perspective that these guys have much to worry about in the next two to three years,” he says, partly because the economic downturn discourages meddling in proven business models. Nevertheless, the potential ripples from the battles in the courier/delivery segment remain unknown.

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