Independent Contractor Fleets in North American Trucking Greg Feary Jason Smith

Independent Contractor Fleets
in North American Trucking
Presented by:
Greg Feary
Scopelitis, Garvin, Light, Hanson & Feary
Jason Smith
TrueNorth®
Independent Contractor / Owner Operator
Historical Context
1. Pre-1980 interstate environment
• Authority grant process
• Geographic barriers/authority rights
• Financial strength requirements
•Business stability or volatility based on shipper predictable
peaks and valleys
• Few IC laws/statutes
Independent Contractor / Owner Operator
Historical Context
2. Pre-1996 [ICC Termination Act] environment – same
for intrastate shipments
• Closed architecture
• Minimum shipment and/or dedicated equipment contracts
• IC laws still emerging
Independent Contractor / Owner Operator
Historical Context
3. Post-1980 interstate and post-1996 intrastate growth
•Deregulation means open architecture and freight/shippers available to
all – peaks and valleys more dramatic
• Shippers desensitized by new motivated “Intranet era” drivers
• Emergence of greater certainty in the law of IC status
• Volatile economic cycles create recap strategy for company trucks
• Associations and advisors of ICs proliferate
• Conventional lenders soften as success stories grow
Independent Contractor / Owner Operator
Federal / Interstate Compliance
•Federal Leasing Regulations (“FLR”) don’t apply to private
carriage/single source leasing
•Shipment via for-hire carrier trip leasing evokes FLRs
C.F.R. 376.22)
• FLRs require:
9 Disclosure of compensation items and chargeback items and documents
9 Contractual specialized language
9 Escrow rules and interest payments
9 Insurance disclosures and no forced purchase
(49
Independent Contractor / Owner Operator
Federal / Interstate Compliance
•IRS 530 Safe Harbor rules
•DOT safety regulation compliance as if driver is employee – IC is
statutory employee for public liability
• For-hire motor carriage determination:
9 3rd party freight (e.g. backhauls) vs. intercorporate hauling (exception)
9 FLR compliant leases with owner operators
• Federal placarding required
Independent Contractor / Owner Operator
State Intrastate Compliance Issues
•IC statutes might be limited to for-hire motor carriers
•Single source leasing might be regulated at state level (e.g. Indiana)
• California (and possibly North Carolina) requires authority for ICs
• FLR-like regulations might exist
• Intrastate haulage requires change of placards
• Case law IC vs. employee issue
9 ABC Test
9 Right of Control Test
9 Entrepreneur Test
Independent Contractor / Owner Operator
Creation and Expansion of Fleets
•Profit center
•Cost reduction via backhauls and employment costs
• Sales tax exemption via for-hire motor carriage
• Recapitalization of equipment
• Stem peaks and valleys
• Augment captive insurer
Independent Contractor / Owner Operator
Audit Checklist
•Do FLRs apply – if so, are leases compliant?
9 State or single source leasing regulations might also exist
9 Trip lease to for-hire motor carrier
9 Transport of 3rd party freight / for-hire motor carriage
• Does placarding protocol exist?
• Do ICs have authority in certain states?
Independent Contractor / Owner Operator
Audit Checklist
•Do contract and affiliated documents (e.g. applications, handbooks and
HR-type forms) have IC language?
•Do forms for federal and state tax support IC status
• (1099 vs. W2 and no I-9)?
•Does an insurance coverage requirement exist?
9 Non-trucking Liability
9 Occupational Accident and / or Workers’ Compensation
9 Passenger Accident
9 Physical Damage
9 No or properly structured health insurance
Why do drivers choose to become ICs?
• Better Compensation
• Improved Lifestyle
• Cultural Values
• No Clear Reason
Why do MCs choose to utilize ICs?
• Daily & weekly “flex capacity”
• Easier seasonal downsizing
• Quicker new customer ramp-up
• Not susceptible to unionization
• Avoid exposure to equipment resale value
• MC cost of capital is high (or unavailable)
• Less expensive to operate (sometimes…)
Although many MCs frequently utilize ICs,
individual strategies do vary
2003 DOT F&OS
2008 Public Truckload MCs
• 2,137 large for-hire
trucking carriers
•
•
•
•
•
•
•
•
•
•
•
•
•
• Of these, 69% utilized ICs
• Of these, IC fleet size
averaged ~40%
Celadon
Covenant
F.F.E
Heartland
J.B. Hunt
Knight
Landstar
Marten
P.A.M.
Quality Dist.
Univ. Truck
USA Truck
Werner
van
van
reefer
van
van
van
van
reefer
van
flat
flat
van
van
50% IC
3% IC
20% IC
5% IC
9% IC
5% IC
100% IC
8% IC
2% IC
60% IC
98% IC
6% IC
9% IC
Private fleets are less likely to utilize ICs than for-hire MCs
Fleet Owners provide instant capacity,
but involve many tradeoffs
• Dilute fleet drivers’ compensation
• Result in higher voluntary turnover rates
• More likely to encounter cash flow problems
• Require higher insurance premiums
• May put customers service at risk
• May lease trucks to multiple carriers
• May influence on boarding of “borderline” fleet drivers
Voluntary IC turnover is typically higher
than for employee drivers…
Key Metric
Fleet
Driver
IC
Employee
Overall
Fleet
Voluntary
Terms
382
1303
102
1405
Avg. # Drivers
316
1756
226
1982
% of Fleet
16%
89%
11%
100%
Voluntary
Turnover
121%
74%
45%
71%
…but the cost of replacing an IC is
typically lower than for employee drivers
Cost Element
IC
EE
Incremental Profit Lost
$ 2,000
$ 2,000
Sign-on Bonus / Advertising / Direct Mail
$
500
$
500
Recruiting & Training Staff
$
500
$
500
Administrative Staff
$
150
$
150
Orientation Supplies
$
150
$
150
Marketing Collateral
$
100
$
100
Lease Payment & Insurance
$ 1,000
Physical, Drug Test, Inspection, MVR
$
250
Driver Orientation Pay
$
150
TOTAL
$ 3,400
$ 4,800
About half of ICs are recruited through
word of mouth and referrals
Most ICs that terminate voluntarily do so
because of insufficient compensation
Recruiting and retention lessons-learned
• Perceived IC capacity shortages are a myth – freight
moves when ICs are paid a “market” rate.
• Drivers are retained through consistently adequate
compensation.
• It’s less expensive to retain an IC than onboard a new one.
• Re-hires are the best source of new capacity. Contact 30
days after lease rejection and/or quitting is ideal.
• Clear accountability and performance metrics are required.
Risk Management Considerations
American Trucking Trends (ATA) 2008-2009 reports:
• 432.9 billion miles were logged by trucks for business
purposes in 2006
• 8.9 million Americans were employed in truckingrelated jobs in 2007; nearly 3.5 million were drivers
• Total estimated population of ICs in 2007: 175,000
Risk Management Considerations
Risk Management Considerations
Eliminating Risks and Shifting Costs:
• Third-Party Liability
• Work-Related Injury
• Benefit Insurance Programs
Without proper structure and management new risks will
arise.
Risk Management Considerations
Requirements outlined in ICOA – Independent Contractor
Operating Agreement
• $1M Non-Trucking Auto Liability Insurance
• Three Forms – need to determine best fit:
1. Non-Trucking
2. Bobtail
3. Unladen
Risk Management Considerations
Requirements outlined in ICOA – Independent Contractor
Operating Agreement
• Occupational Accident and/or Workers’ Compensation
Insurance
• What is Occupational Accident?
• When does Occupational Accident apply?
• Development of an Occupational Accident Program
• Occupational Accident coupled w/ Contingent Liability
Risk Management Considerations
Occupational Accident Coupled w/ Contingent Liability
• Two Layers of Protection:
1. Occupational Accident for IC paid for by IC
2. Contingent Liability for MC paid for by MC
9 Defense of Contract
9 Settlement Agreement
9 Payment of Workers’ Compensation Reward
Risk Management Considerations
Requirements outlined in ICOA – Independent Contractor
Operating Agreement
• Occupational Accident and/or Workers’ Compensation
Insurance
• When does Workers’ Compensation Insurance apply?
9 State Requirements
9 Shipper Requirements
9 Multi-Unit IC’s – Fleet Owners
Risk Management Considerations
Effectiveness of IC Risk Mitigation Models
R I
S K
* No Requirements,
No Program
* Require Occ/Acc or
WC, No Sponsored
Program
E
G
A
R
E
V
C O
* Cover All IC’s Under
Corporate Work Comp
Program
Total
Solution
* Require Occ/Acc or WC,
* Require Occ/Acc or WC,
Sponsor Occ/Acc Program With Sponsor Occ/Acc Program
With Contingent Liability
Solid Contingent Liability
Protection, An IC Work Comp
Protection
Option & Corporate Comp
Built Together
C O M P L E X I T Y
Risk Management Considerations
Possible Additional Requirements outlined in ICOA –
Independent Contractor Operating Agreement
• Auto-Liability
• Excess Liability
• General Liability
• Cargo
• Physical Damage on MC’s Equipment
Profitability Considerations
• Administrative fees for facilitation of programs
• In-house Insurance Agency = Co-Broker Arrangements
• Captive Insurance Company
• Technology
• Safety and Loss Prevention Measures
• Service Providers: Risk Advisor, Broker and Administrator
Final Tips & Traps
Presented by:
Greg Feary
Scopelitis, Garvin, Light, Hanson & Feary
Mike Raue
Fleet Risk Solutions
Jason Smith
TrueNorth®
Questions & Answers
Presented by:
Greg Feary
Scopelitis, Garvin, Light, Hanson & Feary
Jason Smith
TrueNorth®