More than a year ago, Henry E. Seaton, one of the country’s most prominent transportation attorneys, published a 23-page paper titled “The New E-Commerce/Home Delivery Retail Distribution Paradigm.” In it, Seaton highlighted the “unresolved” legal issues surrounding the final-mile delivery segment. This included the lack of experienced and “truly independent” carriers willing to execute rapid-fire deliveries at the rock-bottom rates that retailers demand, and the absence of federal safety oversight over vehicles that weigh less than 10,001 pounds gross vehicle weight (GVW), which is the sum of vehicle and cargo weight. Many vehicles used in final-mile service today fall under that threshold.
In addition, the legal strategy of using independent delivery providers to insulate retailers against various forms of legal liability can be “problematic” when the retailer’s footprints are all over the delivery operation and the provider is undercapitalized and difficult to vet from financial and safety standpoints, Seaton wrote. The implication of the last point was clear: The plaintiffs’ bar, which has been a thorn in the sides of carriers, shippers and freight brokers for 15 years, will not pursue the delivery provider in the event of an accident that occurred during a final-mile delivery, but instead will go after the deep-pocketed retailers.
What’s more, the Federal Motor Carrier Safety Administration (FMCSA) has no authority to regulate the smaller delivery vehicles that have become commonplace on U.S. roads and in neighborhoods. Vans of trucks that weigh less than the 10,001-GVW threshold are not considered commercial motor vehicles under federal safety guidelines. They aren’t subject to hours-of-service regulations, drug testing, equipment maintenance and safety measurement system (SMS) requirements. Moreover, they are required to carry only $300,000 in property damage and bodily injury insurance coverage, whereas commercial vehicles must carry a minimum of $750,000, and many carry much more than that.
The prescience of Seaton’s paper is amplified by the extraordinary events of the past week. Two investigative articles, one jointly published by The New York Times and the public interest media organization ProPublica and the other by the online platform BuzzFeed, shed a harsh light on the daily grind of companies and drivers tasked with delivering packages for Amazon.com, Inc. (NASDAQ:AMZN), the nation’s largest e-tailer. The stories illustrated the stresses felt by drivers struggling to keep up with Amazon’s delivery demands, which in a growing number of instances have been shortened to one day from two now that the company has rolled out nationwide one-day deliveries for members of its Prime service.
The stories highlighted the safety risks that drivers take to meet Amazon’s commitments on an ever-growing volume of shipments and how the race to get goods there on time sometimes ended in tragedy. They exposed the less-than-savory histories of some of Amazon’s delivery partners, as well as the shoddy condition of some of the vehicles. They also noted that the operations are exempt from any federal safety oversight as long as the vehicles fall below the minimum gross vehicle weight threshold.
Some e-tailers may claim that federal regulations wouldn’t apply anyway because the e-commerce supply chain operates within a state. However, Seaton said that many e-commerce shipments are fulfilled or even de-consolidated in one state and delivered to the end user in another, thus making those transactions interstate in nature. In any case, carriers would seem to want the protection of federal preemption over state laws rather than having to deal with a 50-state “patchwork quilt,” Seaton said.
Using delivery service providers to stand between carriers and drivers is not new. It is also a legitimate way for a company to avoid employment costs and the headaches of keeping drivers on payroll, while protecting itself against legal claims. At the same time, the relationship creates opportunities for entrepreneurial types who are willing to assume the risks. The key element is the carrier’s tolerance of providers and their drivers working with other carriers.
“The premise of hiring a (delivery service provider) and shifting the compliance burden to qualified independent contractors is a practical model, particularly when the ISP can be vetted as a carrier under federal regulatory standards and has appropriate insurance,” Seaton wrote in his paper. That is especially the case in California, where the bar is very high for carriers to prove that a worker was a contractor and not an employee, he said in a phone interview Sept. 6.
FedEx Ground, FedEx Corp.’s (NYSE:FDX) ground-delivery unit that has never used in-house drivers, adopted the model while enduring a battery of legal battles over worker classification. In mid-2015, the FedEx unit paid $228 million to settle a long-running dispute in California, where a class of drivers who worked there for seven years had sued on grounds they were managed like company employees but were still classified as independent contractors. The policy barred the drivers from access to company benefits and forced them to go out of pocket for expenses that would have otherwise been borne by the unit. FedEx Ground settled after a federal appeals court panel ruled the workers should have been classified as employees under California law.
The growth of e-commerce, the surge in home delivery and the proliferation of noncommercial vehicles that effectively handle a commercial move opens up a landscape of unforeseen challenges for business, law and policymakers. Seaton advised that stakeholders should start by closely following the “truth-in-leasing” regulations, which date back to the 1940s and which provide a road map for how carriers should treat independent contractors who lease equipment with drivers and who operate in interstate commerce. Within the past 18 months, some sophisticated shippers have begun including final-mile carrier compliance with the federal leasing standards as a condition of doing business with the carrier, Seaton noted.
Retailers that are uncomfortable with the legal nuance turn the matter often over to their third-party logistics provider partners for the appropriate compliance, Seaton said. In turn, many 3PLs will simply sidestep the problem and choose to relinquish final-mile deliveries to federally regulated carriers, he added.
Amazon is responsible for much of the change that Seaton described in his paper. Not surprisingly, he devotes much of the space to the e-tailer. The company “is the wild card in the future development of the new retail paradigm,” Seaton wrote. “How it and other shippers will ultimately frame and vet their use of (small delivery vehicle) equipment in conformance with federal and state safety, employment laws and insurance laws is yet to be determined.”