How Worker Demands are Changing the Transportation Industry
By: David A. Napper and Neil A. Eddington
April 24, 2016
Total Transportation Services, Inc. (“TTSI”), a prominent drayage hauler out of the Los Angeles and Long Beach ports, recently filed for Chapter 11 bankruptcy. The bankruptcy filing is the direct result of workers’ demands for employee designation.1
For many years, drayage hauling – the short-distance transport of goods from local ports –functioned primarily through an “owner-operator” business model where drivers contracted to perform services using trucks they either own or lease. As a result, the drivers had always been characterized as independent contractors not employees. However, in 2010, after the IRS ruled a single TTSI driver was an employee, other TTSI drivers began to resist the model, filing their own suits to garner employee designation.2 For companies like TTSI, litigation expenses have piled up and led to bankruptcy; for the drayage hauling industry, the viability of its business model is in doubt.
Under California law, employee and independent contractor designations are well-distinguished. In 1989, the California Supreme Court articulated the key issue between the two is the degree of a hirer’s right to control how the end result is achieved, specifically, whether the hirer retains all necessary control over its operations. S.G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, (1989) 48 Cal. 3d 341, 356 (emphasis added). Courts will consider other factors, such as who supplies the tools and place of work, whether the work is part of the regular business of the principal, and whether the person performing services is engaged in a distinct occupation or business. Ayala v. Antelope Valley Newspapers, Inc., (2014) 59 Cal.4th 522, 532; see also http://www.dir.ca.gov/dlse/FAQ_IndependentContractor.htm. When a hirer exhibits a high degree of control over its workers, they are more likely to be employees than independent contractors. The Court held that the inverse is also true. When a hirer exhibits a low degree of control over its workers, they are more likely to be independent contractors than employees.
The lawsuit award that finally forced TTSI into bankruptcy came in December 2015, when the California Labor Commissioner’s office awarded 37 drivers nearly $7 million collectively as previously-misclassified employees.3 In holding for the drivers, the Labor Commissioner weighed TTSI’s control over the truckers’ daily operations and the integral nature of the truckers’ labor to the principal business as sufficient to find they were employees, not contractors.4 Of note, the fact the drivers leased their trucks did not weigh in favor of holding they were contractors because the court held these trucks were being leased from TTSI.
However, the impact of the Labor Commissioner’s ruling may not be as dire as portrayed. The suit was brought by 37 employees, a fraction of the drivers TTSI had contracted with. Furthermore, TTSI and business advocacy groups maintain that a large majority of drivers wish to remain independent contractors because they make more money under such designation.5 Taken together, there are indications that future litigation may not be as inevitable as feared.
There are steps drayage haulers can take to protect themselves against litigation like that which forced TTSI to declare bankruptcy. First, they can only hire drivers who either own trucks themselves or lease them from a source other than their hirer. By requiring drivers to lease or own their trucks without assistance from the drayage hauling company, companies can more persuasively argue they do not exercise necessary control over their drivers above the employee threshold. Second, they can cut off any potential litigation costs by transitioning to an employee-based workforce as exercised by the company Eco Flow Transportation (“Eco Flow”). Founded almost one year ago, Eco Flow has shown early signs of success through an employee-employer model on pace to hire 500 employee drivers by the summer of 2016.6
As an industry leader, TTSI’s bankruptcy is sure to warn other drayage haulers that their industry is changing, yet, it should also advise the desired ends sought by drivers and unions. For example, in 2014 Hub Group, Inc. converted hundreds of its contractor drivers into employees after litigation commenced alleging similar misclassification claims.7 By February 2016, Hub Group announced its complete withdrawal from the Los Angeles and Long beach ports due to unsustainable costs, in effect removing much-needed jobs and revealing practical barriers to driver and union demands.8 The sustainability of cost-efficient drayage hauling services depends on finding market-optimal solutions to this dispute. This issue is one to keep an eye on as companies look for ways to adapt in this strict, regulatory climate.