Executive Briefings

Navigating the Roadblocks of Personnel Misclassification

Over the last few decades, international trade has exploded, driven in large part by tremendous improvements in efficiency and transportation cost reductions related to the containerization of freight. However, success depends on an intricately orchestrated chain of events where the drayage fleets move containers from the shipyards to inland warehouses and from rail yards to consignees across the United States.

Navigating the Roadblocks of Personnel Misclassification

While this model has maximized efficiency and lowered costs for all along the supply chain, the relationship between motor carriers and owner-operators has never been more complicated. That's because the independent contractor model is dependent on whether these owner-operators truly operate as independent contractors or are actually misclassified as employees.

The owner-operators, who would like the benefits that are extended to employees, as well as individual province authorities and federal agencies that would like to collect wage and salary taxes, have come together to cast a shadow over this business model. The result is a tremendous risk and exposure for many along the supply chain.

Your Line of Defense

When owner-operators are not being treated as an independent transportation vendor, they are more likely to challenge the motor carrier or maritime company they’re working for in a court of law to compensate for lost wages and disability payments. This is only the tip of the iceberg in terms of the exposure motor carriers could face. Once an independent contractor is reclassified, all of the issues and exposures associated with an employee come into play. This will be a significant financial shock to an operation that has previously had very few employee-related expenses.

Companies accused of misclassifying owner-operators will face significant exposure, both legally and financially. This will open their business up to scrutiny, including questions like: Are the owner-operators eligible for employee benefits, like paid time off, salaried vacation days and short-term disability? Are they being compensated according to market standards? Another big area with a potentially high price tag is worker’s compensation. If there is a loss of cargo or an accident, is the independent contractor covered under the motor carrier’s workers’ compensation policy?

There are a number of steps any company on the supply chain can take to protect themselves. Here’s a list of seven best practices to minimizing the risk of doing business with an owner-operator independent contractor:

Draft a proper lease agreement. The lease agreement between the motor carrier and the independent owner-operator will be the first line of defense if a lawsuit should arise. Lease agreements should be drawn up and regularly reviewed by an experienced attorney. The lease agreement should clearly spell out that the owner-operator is an independent contractor and not an employee, and include numerous other provisions to support that assertion. For example, it might specify that when the motor carrier leases a vehicle to an independent contractor, the independent contractor is still free to do business with other motor carriers; the independent contractor has the ability to refuse loads or choose his own routes or that the independent contractor is required to hire any person they need to help in performing the duty of their job. The lease agreement should also spell out requirements for injury insurance, responsibility for cargo claims and equipment specifications.

Know whom to do business with. Make sure all partnering companies address the issue of misclassification so no lawsuits due to the negligence of a third-party vendor arise. If necessary, even include a stipulation in contracts with all third parties to ensure they are dealing appropriately with their owner-operators, as there are a number of organizations out there that still haven’t adopted improved labor practices.

Educate employees and owner-operators. Take the time, effort and expense necessary to make sure staff members aren’t treating owner-operator port-truckers as employees. For example, institute policies and procedures that avoid telling owner-operators how exactly to complete tasks or provide with them specific rules, like where to fuel up or what route they should take to deliver a load. Educate the owner-operators on the relationship as well. Let them know which aspects of their job they are responsible for.

Keep them at arm’s length. When it comes to tracking product along the roadways, keep an arm’s-length relationship with the owner-operator. For example, independent contractors could be deemed employees if they buy tires where and when the company requests; fuel up at locations the company requests; don’t pay their own escrow or are paid by the hour or salaried, instead of being paid by the load. An arm’s-length relationship extends to reprimands for actions you deem inappropriate or not up to the highest standards; while a company might reprimand a non-compliant employee, a true independent contractor shouldn’t be reprimanded. Make sure the relationship reflects this in every encounter.

Know who is in the yard. A lot of the strength in the misclassification movement is driven by unions. Do not let unauthorized people into private company yards and avoid having drivers or others congregate so that agitators can misrepresent the current structure.

Minimize wait times. Long wait times at the ports can be a potent driver of dissatisfaction among owner-operators, resulting in relatively low pay for long hours, causing drivers to become disgruntled and initiate conversations about fairness. It’s in your best interest to do everything in your power to minimize wait times. Creating good processes that move people in and out quickly keeps owner-operators happy. Have a scheduling process in place that lets drayage companies plan effectively. Educate dock workers that truckers should be in and out of their facilities as quickly as possible. Make sure that everybody respects the time of the truck driver.

Make sure there’s enough capacity to move the product. As the owner-operator, independent contractor model of business is increasingly challenged, and legal suits become common place, more and more fleet carriers may move out of the space. This will increase demand and therefore, it’ll be critical to make sure each member of the supply chain has the necessary capacity to move the product.

When in doubt, consult an attorney. Each state and local region will have their own new and existing regulations and unique labor climate when it comes to working with the owner-operator independent contractor. When in doubt, consult an attorney to make sure all policies and relationships are in the clear.

Know Local Laws and Issues

There is a very thin veil between the status of a company employee and an independent contractor. If there is not continuous vigilance in sustaining that veil, the shipping company could be construed as the employer, resulting in enormous tax, salary and other insurance implications.

Several recent misclassification cases on the West Coast found that drayage companies misclassified drivers as owner-operators. These have raised a red flag for many along the supply chain. In one of the more extreme examples, a large drayage operator in the state of California sought to protect itself from the challenges of the owner-operator model by converting to an all-employee model, with only company-owned units. Just over a year after the switch, the company found it could not compete with pricing from port-trucking companies still using the owner-operator model, and therefore closed all their state-wide operations.

This is just the beginning. This issue is not only likely to persist, but is likely to spread in the coming months. In order to survive—and even thrive—companies all along the supply chain must evaluate their relationships with owner-operators. Review the list of best practices above, consult a local regulatory compliance attorney and create policies and procedures to ensure every policy is aimed at maintaining the right relationships from here on out.

Source: HUB International

While this model has maximized efficiency and lowered costs for all along the supply chain, the relationship between motor carriers and owner-operators has never been more complicated. That's because the independent contractor model is dependent on whether these owner-operators truly operate as independent contractors or are actually misclassified as employees.

The owner-operators, who would like the benefits that are extended to employees, as well as individual province authorities and federal agencies that would like to collect wage and salary taxes, have come together to cast a shadow over this business model. The result is a tremendous risk and exposure for many along the supply chain.

Your Line of Defense

When owner-operators are not being treated as an independent transportation vendor, they are more likely to challenge the motor carrier or maritime company they’re working for in a court of law to compensate for lost wages and disability payments. This is only the tip of the iceberg in terms of the exposure motor carriers could face. Once an independent contractor is reclassified, all of the issues and exposures associated with an employee come into play. This will be a significant financial shock to an operation that has previously had very few employee-related expenses.

Companies accused of misclassifying owner-operators will face significant exposure, both legally and financially. This will open their business up to scrutiny, including questions like: Are the owner-operators eligible for employee benefits, like paid time off, salaried vacation days and short-term disability? Are they being compensated according to market standards? Another big area with a potentially high price tag is worker’s compensation. If there is a loss of cargo or an accident, is the independent contractor covered under the motor carrier’s workers’ compensation policy?

There are a number of steps any company on the supply chain can take to protect themselves. Here’s a list of seven best practices to minimizing the risk of doing business with an owner-operator independent contractor:

Draft a proper lease agreement. The lease agreement between the motor carrier and the independent owner-operator will be the first line of defense if a lawsuit should arise. Lease agreements should be drawn up and regularly reviewed by an experienced attorney. The lease agreement should clearly spell out that the owner-operator is an independent contractor and not an employee, and include numerous other provisions to support that assertion. For example, it might specify that when the motor carrier leases a vehicle to an independent contractor, the independent contractor is still free to do business with other motor carriers; the independent contractor has the ability to refuse loads or choose his own routes or that the independent contractor is required to hire any person they need to help in performing the duty of their job. The lease agreement should also spell out requirements for injury insurance, responsibility for cargo claims and equipment specifications.

Know whom to do business with. Make sure all partnering companies address the issue of misclassification so no lawsuits due to the negligence of a third-party vendor arise. If necessary, even include a stipulation in contracts with all third parties to ensure they are dealing appropriately with their owner-operators, as there are a number of organizations out there that still haven’t adopted improved labor practices.

Educate employees and owner-operators. Take the time, effort and expense necessary to make sure staff members aren’t treating owner-operator port-truckers as employees. For example, institute policies and procedures that avoid telling owner-operators how exactly to complete tasks or provide with them specific rules, like where to fuel up or what route they should take to deliver a load. Educate the owner-operators on the relationship as well. Let them know which aspects of their job they are responsible for.

Keep them at arm’s length. When it comes to tracking product along the roadways, keep an arm’s-length relationship with the owner-operator. For example, independent contractors could be deemed employees if they buy tires where and when the company requests; fuel up at locations the company requests; don’t pay their own escrow or are paid by the hour or salaried, instead of being paid by the load. An arm’s-length relationship extends to reprimands for actions you deem inappropriate or not up to the highest standards; while a company might reprimand a non-compliant employee, a true independent contractor shouldn’t be reprimanded. Make sure the relationship reflects this in every encounter.

Know who is in the yard. A lot of the strength in the misclassification movement is driven by unions. Do not let unauthorized people into private company yards and avoid having drivers or others congregate so that agitators can misrepresent the current structure.

Minimize wait times. Long wait times at the ports can be a potent driver of dissatisfaction among owner-operators, resulting in relatively low pay for long hours, causing drivers to become disgruntled and initiate conversations about fairness. It’s in your best interest to do everything in your power to minimize wait times. Creating good processes that move people in and out quickly keeps owner-operators happy. Have a scheduling process in place that lets drayage companies plan effectively. Educate dock workers that truckers should be in and out of their facilities as quickly as possible. Make sure that everybody respects the time of the truck driver.

Make sure there’s enough capacity to move the product. As the owner-operator, independent contractor model of business is increasingly challenged, and legal suits become common place, more and more fleet carriers may move out of the space. This will increase demand and therefore, it’ll be critical to make sure each member of the supply chain has the necessary capacity to move the product.

When in doubt, consult an attorney. Each state and local region will have their own new and existing regulations and unique labor climate when it comes to working with the owner-operator independent contractor. When in doubt, consult an attorney to make sure all policies and relationships are in the clear.

Know Local Laws and Issues

There is a very thin veil between the status of a company employee and an independent contractor. If there is not continuous vigilance in sustaining that veil, the shipping company could be construed as the employer, resulting in enormous tax, salary and other insurance implications.

Several recent misclassification cases on the West Coast found that drayage companies misclassified drivers as owner-operators. These have raised a red flag for many along the supply chain. In one of the more extreme examples, a large drayage operator in the state of California sought to protect itself from the challenges of the owner-operator model by converting to an all-employee model, with only company-owned units. Just over a year after the switch, the company found it could not compete with pricing from port-trucking companies still using the owner-operator model, and therefore closed all their state-wide operations.

This is just the beginning. This issue is not only likely to persist, but is likely to spread in the coming months. In order to survive—and even thrive—companies all along the supply chain must evaluate their relationships with owner-operators. Review the list of best practices above, consult a local regulatory compliance attorney and create policies and procedures to ensure every policy is aimed at maintaining the right relationships from here on out.

Source: HUB International

Navigating the Roadblocks of Personnel Misclassification