The “settlement model” of the relationship between carriers and independent owner-operators has been growing as trucking companies deal with the complexities of court decisions and other regulatory steps involving the classification of contractors. Changing operations toward this model is a possible way to adjust.
That was a key observation of Kelli Block, a partner with the trucking law firm Scopelitis Garvin Light Hanson & Feary, who spoke at the annual conference of trucking analysis firm FTR held in Indianapolis, Indiana on Sept. 10.
Block, in her remarks and in comments afterward to FreightWaves, said the settlement model is not new. But it is increasingly finding new interest among businesses looking to protect themselves as the definition of independent contractor continues to change – a trend that picked up steam earlier this week with the California Senate voting to codify the ABC tests of the 2018 California Supreme Court decision, Dynamex Operations West Inc. v. Superior Court of Los Angeles.
Under the settlement carrier model, the carrier operates as a property broker or freight forwarder. It also only engages with federally authorized for-hire motor carriers, also known as settlement carriers, hence the term.
When they are a property broker, the trucking company is “just acting as an intermediary and the independent owner-operator has the opportunity to serve multiple firms,” Block said.
It seems simple on its face: A trucking company operates as a broker or freight forwarder when hiring outside capacity. The goal is to draw a clearer delineation between what the trucking company does – moving freight –and what the contractor does (providing a truck and driver under interstate motor carrier laws to get the load delivered). Block said that this should provide more clarity regarding the classification of drivers.
If the company hiring the contractor is acting as a broker or freight forwarder, it can then be argued that the hired driver is performing work that is “outside the usual course” of the company’s activity as a property broker or freight forwarder. By doing this, it is looking to avoid falling under the so-called B prong of the ABC test, which holds that an independent contractor engaged in the primary activity of the hiring entity can be seen as an employee, not as a contractor.
The ABC test is the broad set of guidelines that spells out whether a contractor is truly an independent or an employee. The test is not new in the U.S. but is new in California due to the California Supreme Court holding in the Dynamex decision.
Going to the settlement model does have drawbacks to a carrier, noted Block. Federal law puts different burdens on brokers than on trucking companies. “They no longer have the same amount of information regarding compliance, the quality of equipment and other things shippers look for,” Block said.
Another drawback to switching to a settlement model is that it might be more expensive. Once contractors obtain their own authority and incur the associated expenses, “you will have to pay them in a manner that reflects those expenses, and that will drive a higher price,” Block said in comments after her address. She also clarified there are savings that might offset part of the higher price.
Block said that the settlement carrier model differs from the traditional model of a carrier hiring owner-operators that do not carry their own authority because in the usual setup, the carrier remains just that: a carrier. It maintains all the traditional obligations of the carrier.
The settlement carrier model is not a perfect solution. Ironically, even though it likely clarifies issues of driver classification, Block said it is “not ideal.” Yet it could help trucking companies and small independent business owners, particularly in a state that has legal precedents or is moving toward codifying the ABC test into law, like California. It can help a company meet all three prongs of the ABC test.
As far as the legality of the settlement model, Block said it has had “some challenges” but “we don’t have a lot of bad case law.” She conceded that “it is a difficult transition for a lot of carriers.”
In her remarks to the FTR conference, Block noted that while the headlines about decisions regarding the status of independent contractors have been mostly unfavorable to the trucking industry, there have also been plenty of decisions that have flown under the radar that are more to trucking company managements’ liking.
“Is the sky falling? I don’t think so,” Block said, ticking off a long list of cases, some of which are in jurisdictions – like the Ninth Circuit of the U.S. Court of Appeals – that she said tended to be sympathetic to the classification of contract workers as employees. Specifically, there have been decisions under federal wage and hours of employment law in some of “the most difficult jurisdictions” that went in favor of management.
The National Labor Relations Board (NLRB) recently handed down a decision that the misclassification of employment was not by itself an “unfair practice.” Under the Obama administration, the NLRB had been moving in the direction of deciding that the misclassification was an unfair practice on its own, Block said.
Nevertheless, she acknowledged, there is “quite a lot of danger.”
Block made reference in her remarks to a broader interpretation of the B prong, noting that the biggest consequences of labeling various workers as employees when they were previously contract workers might be in the areas of workmen’s compensation and insurance.
One trigger that could bring an investigation into the legal status of a company’s independent owner operators is purchase/leaseback deals. They are “highly scrutinized,” Block said. “I’m not saying all of them are bad but it is something that can flag the attention of a regulator or a plaintiff’s attorney.”