Navigating the Rough Waters of Misclassification
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© Nightman1965 / Adobe Stock
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Steve Bojan
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.
Reaping success depends on an intricately orchestrated chain of events where owner-operator independent contractors move containers to and from ports; haul them to the warehouses or rail yards then to their final destination – stores and factories across the country.
Today, the relationship between motor carriers and the owner-operators has never been more complicated. A big part of truckload transportation since deregulation, the independent contractor model is dependent on whether these owner-operators are truly classified as independent contractors or actually misclassified employees, deserving of employee status which includes wages and benefits.
Owner-operators, who would like the benefits that are extended to employees, and state and federal agencies and union forces, who would like to collect wage and salary taxes, have come together to cast a shadow over this business model. This has compounded the proliferation of class action lawsuits that have piggybacked on top of government agency actions.
In the maritime industry, the movement of containers from the docks to warehouses, rail yards or consignees must be seamless and timely. When this doesn’t happen, efficiency goes down, costs go up, containers get lost, customer timetables are compromised and competition becomes stiffer.
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 cover their loss expenses and disability. And, this is only the tip of the iceberg in terms of the exposure drayage companies and other container 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 assets.
Maritime fleet companies accused of misclassifying owner-operators will face significant exposure, both legally and financially. This will open their business up to scrutiny, including questions such as: Are the owner-operators eligible for employee benefits; paid time off, salaried vacation days and short-term disability? Are they being compensated according to market standards? And, an area of particular focus because of the potentially high price tag: If there is a loss of cargo or an accident, is the independent contractor covered under the motor carrier’s workers’ compensation policy?
As a maritime owner or operator, there are a number of steps you can take to protect yourself. Here’s a list of eight best practices for maritime companies:
- Draft a proper lease agreement: The lease agreement between the motor carrier and the independent owner-operator will be the motor carrier’s 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 who you’re doing business with: Make sure you are dealing with transportation companies that are addressing the issue of misclassification so your company isn’t drawn into lawsuit due to the negligence of a third party vendor. If necessary, even include a stipulation in your contract 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 your employees and owner-operators: Take the time, effort and expense necessary to make sure your staff isn’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 your relationship with them as well. Let them know which aspects of their job they are responsible for.
- Keep an arm’s length: When it comes to tracking your 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. This also includes reprimanding the owner-operator for actions you deem inappropriate or not up to your standards. You might reprimand a non-compliant employee, but a true independent contractor shouldn’t be reprimanded. Understand that they’re not your employee and make sure your relationship reflects that in every encounter.
- Know who is on your yard: A lot of the strength in the misclassification movement is driven by unions. Do not let unauthorized people on your yard 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 quick as possible. Make sure that everybody respects the time of the truck driver.
- Make sure you have the 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 you have 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 you’re in doubt, consult an attorney to make sure you’re in the clear.
Stay Up on Local Laws and Issues
There is a thin veil between the shipping/drayage company and the owner-operator, independent contractor. If this veil isn’t held tight, the shipping company could be construed as the employer, resulting in enormous tax, salary, worker’s compensation and other insurance implications.
Several recent settlements out of California pitting trucking companies against owner-operators claiming the latter should be classified as employees have raised a red flag for many maritime employers. In fact, one of the largest drayage operators in California sought to protect itself 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 using owner-operators, and therefore closed their operations in the state.
This is just the beginning. This issue is not only likely to persist, but is likely to spread to other coastal areas around the country in the coming months. In order to survive—and even thrive—today’s shipping companies 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 you’re maintaining the right relationships from here on out.
The Author
Steve Bojan is Vice President and Transportation Practice Leader, Risk Services Division, HUB International.
(As published in the May/June edition of Maritime Logistics Professional)
