Locked Out of the Dream
Leased owner-operators face threat in battle over independent contractor classification- by Todd Dills and Max Kvidera
When New Jersey owner-operator Thomas Lemon leased to Arkansas-based Oakley Transportation last year to run long-haul, he was transitioning from six years pulling containers as an independent contractor with Container Port on a dedicated account.
As a shorter-haul intermodal driver, he’d stood on the trucking industry’s front lines in a battle that’s been brewing for years. At the heart of the matter is the legal distinction between employees and independent contractors.
Recently, considerable momentum has built behind the issue. In addition to stepped-up union organizing efforts among independent drivers at the ports and in other areas, two federal bills, one sponsored in 2007 by President Barack Obama when he was a Senator, have broached the subject. Also, some states have increased penalties for misclassification of independent contractors and targeted companies in industries where the misclassification problem is deemed rampant with new workers’ compensation requirements for ICs and other administrative hurdles. And given the current economic environment, with growth stagnant and government expenditures rising, some analysts and industry stakeholders suggest the long-haul sector may soon be on the defensive as carriers fight for their business models and thousands of leased owner-operators like Thomas Lemon try to preserve their livelihoods.
“You’ve got what is sort of an ocean wave building in 2007,” says transport attorney Frank Botta of Eckert Seamans Cherin & Mellott. “It’s getting larger in 2008, and you’re about to be overcome by a tidal wave because of the economic dynamics of today.”
On the crest of the wave
Carriers of all sizes are uncertain about what changes might be coming. Leased long-haul owner-operators, who in large part cherish the independent status of their businesses, are between a “rock and a hard place,” Botta says. They are not entirely sure what they should do to preserve their status relative to the motor carriers they haul for.
“This is a small-business issue,” says Henry Seaton, a prominent transportation lawyer and partner at 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. Constituency building is going to be necessary. Trucking doesn’t need to be tarred along with some other industries.”
Seaton points out that long-haul trucking is attractive to many drivers’ entrepreneurial spirits because of the self-directed nature of the work. The independent contractor classification allows those drivers and their carriers to reap the benefit of the lower self-employment tax rate and lets drivers assume responsibility for their businesses. For many start-up and, for that matter, longtime owner-operators, leasing to a larger carrier is the best way to make the most efficient use of time and skills, while relying on the carrier’s sales engine in acquiring freight.
Seaton also emphasizes the federal recognition of the relationship between leased owner-operators and their motor carriers as a special one due to the interstate nature of long-haul trucking, governed primarily by the federal truth-in-leasing regulations.
But the Internal Revenue Service specifies criteria for determining who’s a valid independent contractor and who should actually be treated as an employee for tax purposes. Most states have adopted the criteria in whole or in part. Generally, if the carrier exerts control over the independent contractor (see “The 20-Point Common Law Test,” p. 26), by a strict interpretation of the criteria the IC should be reclassified as an employee.
The challenges to IC classification have come from several directions. Most of the legislative attention has been directed on the state level at local delivery companies and construction businesses, where classifying illegal workers as independent contractors is common. Over-the-road trucking companies and owner-operators who are signed on to them have mostly avoided problems, the exception being the occasional disgruntled owner-operator who calls out a carrier while attempting to obtain jobless benefits, entering the aegis of state and federal labor departments.
Seaton tells of a Texas owner-operator who filed for unemployment. An employment office representative directed the leased operator’s former carrier to fill out a questionnaire and told the carrier’s rep that the information would be shared with the IRS and the state’s workers’ compensation department. Says Seaton, “The carrier said, ‘Do I send them my keys now or later?’ These are troubling developments. The labor constituency and the people who think owner-operators are welfare burdens can be a powerful constituency.”