By Miles L. Kavaller, Esq.
The independent contractor trucker is a mainstay of the trucking business. In the last issue of _______________________, the consequences of mischaracterizing the relationship between an employer and an independent contractor truck driver were addressed in the context of an IRS investigation for federal taxes. That is one of several areas of concerns in the trucking business. There are others.
Trucking firms, like any other employers, are required to carry workers’ compensation insurance. Employee truck drivers are classified as “truckmen”. Their rate is in the neighborhood of .33, pretty high.
Many trucking companies use “sub-haulers” or “contractors” and treat them as independent contractors. No deductions are taken from their compensation and they receive an IRS Form 1099, not a W-2 which is given only to employees. Their compensation is not included in the monthly wages reported for “truckmen” to a workers’ compensation insurance company.
Generally speaking for a trucker to qualify as an independent contractor, at a minimum, they should who own and operate their own trucks, pay their own operating expenses (fuel, maintenance and repairs, insurance) have an interstate Federal Motor Carrier Safety Administration certificate and/or an intrastate California Motor Carrier Permit (MC-P) and be free to accept or reject loads the trucking firm may offer.
A workers’ compensation insurance company audit may pick up the IRS Form 1099s issued to the independent contractors and include their compensation in the computation basis for premium and issue an invoice. This can get a little tricky so be especially careful with your workers’ compensation insurer if the issue is raised and by no means fail to address it diligently.
It starts with you and your insurance broker and the application to the workers’ compensation insurance carrier. If you do use independent contractors, that must be included in the application so the insurance underwriter is aware of it. Make sure the broker understands that these independent contractors own their own trucks, pay their own expenses, have their own automobile liability insurance and have their own FMCSA and CA (or other intrastate certificates if they do local hauling). This information should be in the application or an addendum.
When you provide shipments to independent contractors, even if they are under a written lease (which they should be if the bill of lading identifies your company as the carrier and the consignor or consignee is your customer) be sure to have a file for each driver or trucking firm–see 49 CFR Part 376. These records are needed to establish that the payments were made to independent contractors.
Mischaracterization of what are really employee truck drivers as independent contractors in this context can be as serious as it is with the IRS. A post-policy premium audit by the workers’ compensation insurance company will pick up compensation paid to IRS 1099 recipients and will include it in the basis for the premium for “truckmen” if your company has incorrectly classified those it should know to be employees as independent contractors (for example those who do not own their own trucks or who perhaps those who have entered into “sham” truck purchase arrangements). Your policy contract obligates you to give the auditor access to your company records so company financial materials along with government reports such as California Employment Development Department Form DE-6s for example are available to the auditor. You have the burden of proving the persons who received the compensation that the auditor picked up are independent contractors. If you cannot do so, a balance due invoice which includes the compensation paid to these “independent contractors” multiplied by the “truckmen” rate will be presented to you for payment and you will be sued if payment is not made.