Q: We have a fairly large and active private trucking operation that we manage very tightly, although we use owner-operators.
When we bring an owner-operator on-board, we put him or her through a short but intensive training program. The main focus is safety, in order to reduce our potential accident liability, but we also train in our company’s procedures.
We maintain operational control by specifying the routes our drivers must use; we require them to install GPS tracking systems, and any deviation is grounds for immediate termination. There are three reasons for this: safety, minimizing mileage (and therefore cost), and ensuring on-time performance.
Our contracts with each owner-operator call for mileage compensation for the tractor (we have our own fleet of trailers) plus a flat rate per trip. An owner-operator isn’t required to accept every load we tender to him or her, but turning down loads often is, again, grounds for termination. We also compensate for overnight stays when required, with documentation. The owner-operator is required to maintain his or her own equipment, pay for fuel, etc., out of the stipend we provide. We also require the owner-operator to work exclusively for us during the contract period (although they can at any time opt out of the contract if they find better opportunities; mostly, they don’t).
And, of course, we also perform the Department of Transportation-required drug testing on these drivers.
Our contracts specify that the owner-operator is an independent contractor. Some people in our legal department, however, have begun questioning this, and telling us that at least for tax purposes we should treat our drivers as employees — withholding taxes, etc. We certainly don’t want to do this if we don’t have to, and the employee status also would carry other potential liabilities for us.
Can you help clarify this situation?
A: If it looks like a duck, walks like a duck and quacks like a duck ... you know the rest.
I can’t give you a definitive answer, but despite your contract language to the contrary, you’re coming perilously close to employee status with these drivers. If I were your legal department, I’d be worried, too.
There are a number of tests the Internal Revenue Service and the courts apply to such questions, and a lot of them come down on the employee side of this question for you. Let me mention a few:
— Training. You train these men and women, not only for safety purposes but to inculcate them into your company’s corporate standards — just as you would an employee.
— Operational control. They have to follow your prescribed routes, again more like an employee than an independent contractor, who’d likely select his or her own. There’s also the drug testing, but that doesn’t carry much weight in light of DOT regulations.
— Work selection. You let them turn down the occasional load, but not often without retribution. That’s closer to employee than independent contractor status.
— Expenses. You cover some (though not all) expenses, as one would with an employee.
— Equipment (or tools, as the IRS calls it). You provide the trailers, and you pay the owner-operator a specified rate for use of its tractor. In other words, the equipment lease and the driver’s services are compensated separately. You also provide the GPS devices and require their use.
— Termination. You’re both free to terminate the relationship at any time without penalty. That’s a lot closer to an employment contract than an arm’s-length contractor relationship, which would usually entail some sort of penalties for termination without cause.
— Exclusivity. An owner-operator can haul loads only for you for the duration of the contract — the same kind of relationship one might have with an employee and not with a “hired gun.”
To be sure, there are aspects of your practices that don’t match up with the legal definition of employment, but even these aren’t as clear-cut as they might be. For example, the requirement that the driver maintain, fuel, etc., his or her tractor can be written off as part of an equipment lease agreement separate from driver services.
All in all, I wouldn’t like to try defending that “independent contractor” language of your contracts against a challenge. And a challenge is what you might well get — either from the IRS or if one of your drivers is injured on the job and wants workers’ compensation (or a terminated driver seeks unemployment money).
I’d recommend that you review the rules and take steps to regularize your drivers’ status, one way or the other.
Consultant, author and educator Colin Barrett is president of Barrett Transportation Consultants. Send your questions to him at 5201 Whippoorwill Lane, Johns Island, S.C. 29455; phone, 843-559-1277; e-mail, BarrettTrn@aol.com. Contact him to order the most recent 351-page compiled edition of past Q&A columns, published in 2010.