Feds Take the Wheel on Drayage

By Bill Mongelluzzo
Published in the Journal of Commerce on July 16, 2012

Federal and state regulators reportedly are visiting drayage company offices and requesting voluminous amounts of documentation, seeking to demonstrate the companies are intentionally misclassifying drivers as independent contractors. The increased government audits of harbor trucking companies are especially acute in Los Angeles-Long Beach, where the Harbor Trucking Association said the effort has been under way for six months; 25 drayage companies were visited in May alone. “It seems to be coordinated, with visits from both the state and federal level,” said Alex Cherin, executive director of the association. Regulatory oversight of companies that classify workers as independent contractors, rather than employees, isn’t new. In the 32 years since the trucking industry was deregulated in 1980, harbor drayage companies at most ports have signed contracts with owner-operators specifying the drivers are independent contractors, and regulators have looked into claims by drivers or labor unions that the workers were being misclassified so companies could avoid taxes and other obligations of an employer. What is new in the government audits, according to trucking executives, is a feeling that the Obama administration and some state regulatory agencies are going after the companies rather than waiting for drivers or the Teamsters union to file complaints charging misclassification. Trucking is just one of the industries being targeted in a broad government effort to crack down on employee misclassification, they say.

Although most drayage companies attempt to follow best practices intended to keep owner-operator drivers at arm’s length, the legal line between an employee and an independent contractor is neither bright nor constant. “You don’t want to step over the line, but the line is moving,” said Curtis Whalen, executive director of the intermodal conference of the American Trucking Associations. The stakes are high for the companies and drivers. Companies that misclassify employees as independent contractors face large fines for avoiding payment of taxes and workers’ compensation. Drivers believe they are being denied the benefits and protections that employees in any industry are routinely given. In California, the misclassification law that took effect last Jan. 1 stipulates an employer who is found to have intentionally misclassified workers is subject to a civil penalty of $5,000 to $15,000 per violation. An employer found to have engaged in a pattern of misclassifications faces penalties ranging from $10,000 to $25,000 for each violation. With so much potential revenue at stake, the rash of audits in California was to be expected, Los Angeles attorney Cameron Roberts said. “It could be a six-figure number,” he said. According to TJ Michels, spokeswoman for Change to Win, an organization backed by community groups and labor unions such as the Teamsters, drivers engaged in harbor trucking have been shortchanged for more than 30 years. Misclassification results in a loss of revenue for the federal government, state governments and taxpayers, so government action is warranted, Michels said. “It’s government’s job to enforce the law,” she said.

The regulators’ demands for records are especially burdensome for harbor drayage companies, most of which are small businesses, Cherin said. The audits impose an “undue administrative and financial burden” on these smaller companies, many of which don’t have the staff to gather all of the records requested, he said. The state and federal regulators don’t have hard evidence of misclassification on the part of the companies being audited, but rather are using a “shotgun approach,” Cherin charged. Some companies receive advance notice that they will be audited, but in many cases, the approach is a knock on the door and a request for information, he said.  After six months of investigations by government agencies, Cherin said he knows of no company that has been formally charged with misclassification. The federal agencies involved in the audits are usually the Department of Justice, Department of Labor and Internal Revenue Service; at the state level, it’s the California Labor Commission.  The American Trucking Associations has begun to receive calls from truckers in other parts of the country about alleged misclassifications, although “California has been most blatant,” Whalen said.

Harbor drayage companies suspect the Teamsters union is at least partly responsible for encouraging the stepped-up audits. Whalen suggested the union’s efforts are part of a larger plan that includes recent legislative attempts in New York, New Jersey and Washington to classify harbor truck drivers as employees. Labor unions, by law, can’t organize independent contractors, but they are able to organize direct employees. Lawsuits aimed at specific companies believed to be misclassifying employees are also part of the strategy. The U.S. District Court in Newark in late June dismissed a lawsuit in New Jersey charging that drayage operator Ironbound misclassified its drivers as independent contractors (see sidebar.). Cherin said the “smoking gun” in California was an April 3 letter from Teamsters General President James P. Hoffa to Gov. Jerry Brown commending the work the California Labor Commission was doing in the area of misclassification. “We believe the port trucking industry is one of the biggest culprits,” Hoffa said. “I’m glad to know that California, in collaboration with the U.S. Department of Labor, is seeking to end this practice.” Brown began to look into the misclassification issue when he was California’s attorney general. With the battle line drawn between drivers and the Teamsters on one side, and the trucking industry on the other, each side has plotted a strategy. The Teamsters has sponsored or at least supported legislation at the state and federal levels to have harbor drayage drivers classified as employees.

The union also has supported lawsuits by drivers against specific companies, although misclassification suits are so fact-intensive that a decision for or against labor is usually considered non-precedent-setting in other locations. The Teamsters believes it also is scoring points at the federal agency level. Secretary of Labor Hilda Solis in December discussed the administration’s efforts and coordination with the IRS to combat employee misclassification, Michels noted. The ATA won a significant victory last year when its lawsuit against the Port of Los Angeles resulted in a ruling by the U.S. Court of Appeals for the 9th Circuit that the employee-mandate in the port’s clean-trucks program was illegal. The ATA and the Harbor Trucking Association in Southern California are educating their members what they should and should not include in their contracts with drivers in order to demonstrate a lack of control by the companies.