Declaring Independence
By Henry E. Seaton

December 2007
Reprinted from

Q What can be done to preserve the owner-operator as an independent businessman in view of the current trends in federal and state law?

A This is the third and final installment in a series dealing with the status of owner-operators as independent contractors and the classification issue in general. In the past articles, we have seen the importance of the classification issue in reducing the welfare tax burdens attendant to employee status, including worker’s compensation premiums, unemployment compensation, overtime pay, withholding, etc. We have seen that state laws are in flux and that an owner-operator classified as an independent contractor under one state’s law may be entitled to worker’s compensation and other employee benefits in an adjacent state.

I understand that last year there were 72 different bills before state legislatures that affected the classification issue, and there are continuing legislative efforts to force employers to reclassify independent contractors as employees in California, Connecticut, Illinois, Minnesota, New Hampshire, New York and Rhode Island.

On the federal level, we have seen that the Democrat-controlled Congress is not apt to grant relief and that the currently well-settled treatment of owner-operators as independent contractors for federal taxation purposes may be threatened by legislative initiatives in the name of workers’ health and safety.

There are no easy solutions, either for carriers who use owner-operators or the small businessmen who comprise the owner-operator industry. But some things are clear. Trucking companies cannot fight the political battle alone; owner-operators and small fleet owners must make the compelling case that they are not “prisoners of camp,” but rather are owner-operators by choice who seek to grow their small businesses free from the economic burden imposed upon their employee counterparts. The truth-in-leasing regulation, 49 C.F.R. §376, is an owner-operator bill of rights that prohibits carrier abuse.

In state legislative efforts thus far, the Owner-Operator Independent Drivers Association and organized trucking have not forged an alliance, although it would be in both groups’ mutual benefit to do so.

Carriers and their owner-operators are using a number of strategies to avoid uneven application of the classification issue and state law. These include contract forum selection clauses, arbitration and mediation provisions, warranties by the owner-operator that it has worker’s compensation coverage where required by state law, and indemnifications tied to those warranties. All are used frequently, yet none offer a satisfactory remedy.

At a minimum, most sophisticated carriers require their owner-operators or fleet operators to provide as part of the contract evidence of worker’s compensation coverage or occupational accident insurance as a precondition for contracts. Available in many markets is contingent worker’s compensation coverage that offers indemnity to the carrier in the event it loses a classification fight over an owner-operator in a given jurisdiction. The combination of occupational accident insurance and contingent liability coverage often is far less of an economic burden than straight worker’s compensation because, based upon experience rating, owner-operators have far fewer claims than employee drivers. This system also works in combination because owner-operators are required to have protection against on-the-job injury and thus are less likely to sue the trucking company for cut-through liability when losses occur.

Some carriers prefer that their owner-operators contract with them as an LLC or Sub-S corporation, making sure the warranty that each driver used will have the appropriate worker’s compensation. State laws often exempt small business owners and fleet operators employing only a few drivers from worker’s compensation compliance. This strategy – although not eliminating the possibility of cut-through liability for the authorized motor carrier – at least inserts a statutory employer other than the trucking company into the relationship.

Finally, sophisticated carriers with owner-operators must work closely with insurers to craft coordinated solutions. The last thing a carrier wants to see is its own worker’s compensation insurer conducting an after-the-fact post audit to demand full payment of premiums for owner-operators because of confusion over state law issues. Any carrier with owner-operators and company drivers should (1) clearly explain the full scope of its operations to its agent and the insurer; (2) conduct a risk assessment with insurers and arrive at a cost-effective solution; and (3) monitor the changing state of the law, particularly in high-exposure states.
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