Locked Out of the Dream

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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.

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“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.”

For many years, the Teamsters have targeted the local delivery/courier segment in their organizing efforts. In some cases where a driver’s status as an independent contractor has been a barrier to organizing, misclassification allegations have arisen and been taken to court. Suits against FedEx Ground operations in an estimated 20 states allege that the local drivers don’t pass the 20-point control test to determine whether contractors are independent and not employees entitled to benefits and the choice of a union contract, a charge the company denies.

Other unions have taken on courier businesses that also call their delivery people independent contractors, and Teamster organizing efforts have seen some success among local intermodal drivers in Miami, Los Angeles and ports in the northeast.
Late last year, California plaintiffs in one FedEx case won a $27 million judgment, and other suits continue. James C. Sullivan, a lawyer with Shughart Thomson & Kilroy, estimates a class-action suit on the national level could end up costing FedEx $1 billion or more.

Toward a ‘more perfect union’
President Obama has made no secret of his affinity for organized labor. Last year, he was a co-sponsor of the Employee Free Choice Act (or “Card Check”), reintroduced in the House and Senate March 10, which would make it easier for employees to obtain union representation by eliminating the secret ballot requirement for union recognition.

In 2007, Obama sponsored the Independent Contractor Proper Classification Act, which died in the Senate. Last year, a similar bill called the Taxpayer Responsibility, Accountability and Consistency Act was put forward in the House by Rep. Jim McDermott (D-Wash.). Both bills would have been a boon to union organizing efforts, as they would have instructed the U.S. Treasury Department to set new federal standards for classifying independent contractors: protecting whistleblowers who challenge their IC classification (opening up clear complainant avenues to reclassification as an employee); levying penalties for misclassification beyond current levels; and designating the IRS to referee disputes. In the 2007 bill, the long-standing “safe harbor” provision that permits carriers to defend their position by saying, “That’s the way everyone else does it,” would be repealed.

If, says Botta, a company’s ICs have been treated as employees in the past – as is the case in some trucking companies that have transitioned to a partial owner-operator model by encouraging company drivers to make the jump via lease-purchase programs or other related truck-financing options – under the terms of the 2007 bill, the IRS would have a strong mandate to investigate.

Though these congressional inquiries routinely came propped with effusive recognitions of the difference between mistaken misclassification and deliberate misclassification (the latter being the ultimate target), transportation attorneys and others see all of this as the prelude to a potential storm of investigation and litigation that could well cause carriers of all shapes and sizes to restructure their business models to guard against the risk of misclassification penalties.

The IC issue “would require every motor carrier out there to take a look at the risk of it,” says Doug Grawe, in-house counsel for heavily owner-operator carrier Dart Transit. While Grawe says he’s no doomsayer, he does see the 2007 bill as particularly stringent on employers who misclassify. “The penalties in this are quite severe,” he says. “For example, right now