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®