The Slow, Steady Death of the Owner-Operator Model

About 125 year ago, the heyday of the classic American cowboy ended.  The open plains gave way to fenced-off ranches, and railroad expansion eliminated the need for long cattle drives to remote railheads to transport cattle to Northern meat markets.

Today, we face the slow extinction of our modern cowboys of the open road, the independent owner-operator. These self-reliant business owners are now dealing with a myriad of regulations that will soon make the owner-operator model impractical, and its survival improbable.  

Of the 3.5 million truck drivers in the U.S. (ATA), about 350,000 are owner-operators (Owner-Operator Independent Drivers Association). If you are a shipper that is directly or indirectly dependent upon owner-operators to move your freight, shifting sands in the trucking industry puts you at risk. To understand why, let’s examine the regulations and legal decisions that are impacting owner-operators.

Regulations Squeezing Already Low Profit Margins

Trucking is a commodity business. Transportation companies squeeze independent drivers for the lowest cost and these businesses, in turn, must operate at razor-thin margins. Government regulations are now making it even harder by limiting their earning potential and adding operating costs.

Hours of Service regulations are reducing potential earnings and the government is strictly enforcing these HOS rules with mandatory electronic logging devices.

Cost pressures from the trucking companies that hire them lead owner/operators to opt out of available workman’s comp coverage. Providing such coverage would add 20% to the trucking company’s cost to cover the load, so drivers forgo the important coverage to maintain favored status.

But it’s really the expense line of owner-operator’s income statement that is under the most pressure from regulators. To meet new emissions standards, the EPA estimates about $12,800 in additional upfront costs to upgrade to the most fuel-efficient tractors.

Because of the high concentration of trucks around port operations, ports have been particularly aggressive in phasing out older, “dirtier” trucks – the very trucks that many independent dray operators use to stay competitive on these price-sensitive runs. Beginning in 2017, The Port of New York/New Jersey won’t allow trucks with engines older than 2007 to be used for drayage. At California ports, that 2007 limit has been in place since 2012.

All of these regulations, whether they reduce revenue or jack up overhead expenses, combine to paint a bleak picture for future owner-operator profitability.

Misclassification of Drivers as “Independent” Will Threaten Carriers as Well as Shippers

Carriers hire drivers as independent contractors to avoid federal and state tax withholding, healthcare coverage and other employee-related overhead. They depend on this model to be profitable, and the owner-operators are happy to get the business, so it works for all parties - including shippers, who pay a reasonable rate.

While most owner-operators value and protect their status as independent, a segment of that community believes they are anything but, and have fought and won in court to re-classify them as company drivers. Their arguments center around the fact that carriers, and even shippers, dictate what runs they accept, what clothes they wear, what decals are on their trucks, even what routes to take to arrive at their destination – essentially treating them exactly as employees.

And guess what? The courts agree. The most prominent example is the $228 million settlement by FedEx, which used the independent contractor model as a foundation of its business model.

Drivers for Pacific 9 Transportation and other short-haul companies went on strike several times demanding to be given all the rights and benefits of employees, including the right to bargain collectively as part of a union. In 2014, the National Labor Relations Board declared that these drivers were indeed employees subject to labor laws and the right to organize.

If you are a large shipper, you may feel a step removed from these events since you may not have a director contractual relationship with the owner-operator.

You’d be wrong.

Witness Macy’s, which contracted with two logistics companies to provide Dedicated Contract Carriage (DCC) services for home delivery. The court agreed with the independent drivers that they should have been classified as employees of the logistics companies they drove for, and then went a step further, declaring that they should have been classified as Macy’s employees (see Fuentes V. Macy’s West Stores, Inc., No. 2:14-cv-00790 (C. D. Cal. Mar. 16, 2015)).

The logistics companies and Macy’s had to settle for $6.8 million. And Macy’s ended up paying the bulk of that settlement because it asked for things like Macy’s decals on truck doors, a driver dress code and adherence to Macy’s-defined routing.

Most of us in the logistics industry understand that such requests are common practice in DCC. But we have entered a new era of labor law that may upend formerly accepted and routine practices. As a result, you, the shipper, could be the one responsible for driver misclassification settlements – especially if you’re the one with the deepest pockets. 

Silver Lining: More Independent Owner-Operators Will Join the Ranks of Company Drivers

The end of the open range in the late 1800s signaled the demise of the traditional American cowboy. Owner-operators are being driven to extinction by a different set of factors. And frankly, that may not be a bad thing. 

From a shipper’s perspective, it would lessen risk. If the courts continue to side with independent drivers on re-classification as company employees, financial liability could extend to the BCO, particularly for drayage and dedicated contract carriage. This amounts to a ticking time bomb. Is it worth it?

For the independent driver, regulatory pressures may induce more to become company drivers. Sure, they would lose a degree of independence. But they would gain greater security, a benefits package, a retirement fund, and maybe even an employee stock ownership plan, which some carriers are now offering to spur recruitment and retention.

The cowboy of old hasn’t disappeared completely. He, or she, still manages a herd, but may do so from a pick-up truck or even an airplane. Similarly, owner-operators won’t go away completely. You just may need to look a little harder to find them. 

SalSon Logistics is a leading third-party logistics company that helps large retailers and consumer brands speed distribution cycle time -– from port to store shelf. SalSon provides a single-source, fully asset-based solution for drayage, customs inspection, transloading, value-added warehousing, and final TL and LTL delivery services.