Q We are a small carrier with owner-operators. I have just read the article on the FedEx decision in California. Should I be worried about the reclassification of owner-operators as employee drivers?
A This question and the recent FedEx decision in California afford me the opportunity to discuss the owner-operator classification issue over the next three months. The FedEx case – an attention-getter because of the company’s marquee name and the size of its owner-operator base – hopefully is not a precedent setter. (FedEx has this and other litigation ongoing, and the fight is not over.) Yet the California decision is consistent with a number of state court and administrative tribunal elsewhere that have concluded that owner-operators are employees for state law purposes.
This month, I will address the nature of the conflict, the opposing views about the owner-operators, and what economic impact such classification has on the use of owner-operators in the trucking industry. In later articles, I will discuss inconsistencies in how federal and state laws address the issue, as well as best practices and the need for a comprehensive and consistent solution.
Traditionally, the trucking industry has considered owner-operators to be independent contractors who, through ownership and/or control of their power units, operated their own independent businesses. They are free to work for any one of hundreds of competing carriers and, through hard work and proper asset management, can become a small business success.
The federal truth-in-leasing regulation, 49 C.F.R. 376, establishes detailed contractual requirements intended to protect owner-operators against carrier abuse. Under the independent contractor model, the owner-operator is supposed to be free to succeed and free to fail, unfettered by unnecessary carrier control. As independent contractors, they are unprotected by the state law benefits extended to employees and unburdened by the attendant cost. Unlike the employer driver, the independent contractor does not receive workers’ compensation benefits or state unemployment compensation.
Favoring the notion that owner-operators should be classified as independent contractors are the values of economic freedom, small business advocacy and the ability to elect not to participate in state-mandated employee benefits. Supporting the contrary stance are “blue state” labor laws and the view of some state policy makers that motor carriers use owner-operators as nothing more than a tax dodge intended to deprive the driver of state-mandated benefits.
Depending on which view of the owner-operator prevails, the economic impact can be significant. Mandatory workers’ compensation premiums in high-risk states, particularly for truck drivers, can be significant. Yet, when owner-operators are classified as independent contractors and obtain comparable occupational accident insurance coverage, the premiums are reduced substantially. Owner-operators as a whole have fewer workers’ compensation claims than company drivers, are not malingerers, and on an experience-rated basis deserve cheaper premiums. These rate differentials alone can result in thousands of dollars per year per driver that can be passed by the company through to the owner-operator in settlement.
In addition to the workers’ comp differential, pro-labor states increasingly are passing other restrictive work rules that arguably apply to their employee drivers regardless of whether intra- or interstate services are provided. Some states claim that state overtime rules apply after 40 hours a week, requiring overtime pay; the courts have held that unlike the federal Fair Labor Standards Act, such state laws are not trumped by the federal hours-of-service regulations. It is rumored that California is even enforcing a mandatory 30-minute lunch break for employee drivers.
Finally, although union activity increasingly is confined to Rust Belt legacies and large LTL carriers, the threat of organized labor always has an effect upon the political dynamics of this issue. Together with an opportunistic plaintiff’s bar, this is a political factor militating against the finding of independent contractor status for owner-operators.
Fortunately, on the federal level, after years of uncertainty, there are safe harbors protecting the independent contractor status for owner-operators against reclassification for purposes of federal taxation. As will be shown in next month’s article, though, there is great inconsistency in state law treatment of this classification issue that defies uniformity.