Law Offices of Seaton & Husk, LP

Winds of Classification Changing
By Henry E. Seaton
April 2008
Reprinted from etrucker.com

Q We are a small Midwest carrier that uses owner-operators. I read your recent articles on the classification issue. A disgruntled owner-operator we terminated filed for unemployment compensation and triggered an audit by our state. The auditor says that if we fail the state test, we will owe for back state unemployment taxes and that they share information with the federal government, exposing us to liability for back withholding, Social Security taxes, etc. Do I close my doors now?

A Obviously you need a good lawyer, and I have given you the names of several in your state. The three-part series to which you refer (CCJ October, November and December 2007) was intended to alert readers to the unsettling developments in the owner-operator status at both the federal and state level. Unfortunately, your letter and other recent developments suggest that “the winds of change” are reaching gale-force capacity.

The Government Accounting Office estimates there are 30 million “independent contractors” across all industries, and that independent contractor status is to blame for significant unreported taxes and holds in the social welfare system. (Independent contractors are not subject to the Civil Rights Act, Americans with Disabilities Act, Family Medical Leave Act, etc.)

State legislatures in New York, Illinois, Oklahoma, New Jersey, Connecticut, Massachusetts, California, Michigan, Georgia and other states have passed tougher standards for evaluating the independent contractor classification and/or have developed intergovernmental enforcement task forces. Clearly, you have been caught up in this. At the federal level – at the urging of the Democratic Congress – the Department of Labor, in coordinated efforts with the Internal Revenue Service, is investigating and punishing employers who misclassify workers.

Owner-operators in over-the-road trucking traditionally have been recognized as independent contractors because of the owner’s substantial investment in equipment. The safe harbor was expanded to include equipment made available by the carrier under lease/purchase to the owner-operator as long as the owner-operator’s financial stake was preserved (see www.irs.gov/pub/irs-utl/van-ops.pdf).

Unfortunately, this safe harbor has been put under attack by the Obama-Durbin-Kennedy Bill, introduced as the Independent Contractor Proper Classification Act of 2007 (S. 2044). This bill, if passed in this Congress, would authorize the Treasury Department to issue new criteria for determining independent contractor classification. Whistleblower protections would be imposed to encourage disgruntled owner-operators to contest classification, and the IRS would adjudicate the disputes. The safe harbor provisions allowing carriers to rely upon industry standards would be repealed.

Passage of this or similar legislation clearly is a scary proposition. Hopefully your question will be a wake-up call to the motor carrier industry, which I fear is metaphorically “asleep at the wheel.” I believe that if the effect of change is to suppress free enterprise and discourage truck ownership and operations by individuals in small business, our industry and country will be worse off.

To hedge their bet and preserve their independence, owner-operators may need to incorporate or even acquire their own operating authority, entering long-term contracts with broker affiliates of asset-based carriers. Owner-operator representatives – rather than trolling on XM Radio for class-action volunteers to sue carriers for violation of the truth-in-leasing regulations – should recognize that the real threat to the independent contractor comes from organized labor and social welfare advocates, and not their business partners.