Truck Law

A Transportation Law Blog from TransportationAttorneys.NET

The “Two-Check” System: Treating O/Os as Employees and Renting Their Equipment From Them

by gspencermynko

The IRS Makes It Clear It Ain’t So Simple

The two-check system involves treating an Owner-Operator as an employee truck driver, putting him or her on payroll, and issuing a second check to the Owner-Operator (now company driver) for the use of his or her equipment from which taxes are not withheld, and a 1099 is issued for the “rental” payment.

Are the “rental” payments for the equipment wages which should be reflected on payroll?

I know on the surface it seems simple. You simply convert the former independent contractor (A.K.A. Owner-Operator) to an employee, put them on payroll, with all of the usual withholdings, and then give them a separate check for the use of the equipment, treating it like a “rental” or “lease”, where the trucking company is leasing or renting the former owner operators’ (now employees’) equipment from them. It seems simple enough, but, as I am about to explain, the IRS has other thoughts. I’m sure it comes as no surprise that the IRS would prefer the “rental“ payments be reflected on payroll, so they are taxed and the IRS gets more money. Generally, the IRS wants to collect more money than less money. As such, they have promulgated a set of rules and policies, which make utilizing the “two-check” system not so simple.

Strangely enough, California is on board with the Two-Check System

The State of California ratifies the Two-Check System: Cal. Labor Code Sec. 2781(h)(5) states: “Nothing in this subdivision prohibits an individual who owns their truck from working as an employee of a trucking company and utilizing that truck in the scope of that employment. An individual employee providing their own truck for use by an employer trucking company shall be reimbursed by the trucking company for the reasonable expense incurred for the use of the employee-owned truck.” (Emphasis added). It figures that when California is cool with something, the IRS has it to make it hard. My poor clients just can’t catch a break.

Unsurprisingly enough, the IRS is not so on board with the Two-Check System.

Our friends at the IRS subscribe to the viewpoint that any payment made by an employer to an employee is subject to payroll taxes, absent a specific exemption. The IRS operates on a presumption that any reimbursement to an employee, such as a “rental” or “lease” payment, is actually taxable income. Now, in all fairness, the IRS does allow for a deduction for an employer’s reimbursement for the business use of an employee’s equipment. However, the IRS specifically requires that there be a specific expense allowance arrangement with the employer. The IRS refers to such a reimbursement program as an “accountable plan”. The IRS requires that the “accountable plan” meets a three part test: (1) incurred expenses having a business connection, (2) substantiation of the incurred expenses, and (3) and a return of excess reimbursements.

If you fail the test, then the IRS will find that the 1099 equipment rental payment is actually payroll, and therefore subject to payroll tax, which will make you and your employee driver/equipment owner rather unhappy.

The IRS makes things even more complicated.

Unfortunately, the three part test for being an “accountable plan” is not where the analysis ends . Indeed, there is another layer of complexity, which motor carriers need to be acutely aware of.

The Escobar de Paz decision: This case addressed whether equipment rental payments add economic significance, independent of the employee relationship . This was a California case involving owner-operator truck drivers who were classified as employees by the motor carrier and put on payroll, but were separately compensated for the use of their equipment. In this case, the IRS decided that the “employee owner operators” (there’s a term I never thought I’d use), were simply involved in a single activity, by providing trucking services for the motor carrier, and the use of their own vehicles was integral to that scheme.

The owner operators made the argument that they were involved in two separate activities, being 1) employee truck drivers, and 2) leasing their trucks to the motor carrier. The IRS was not persuaded. BUT, as a result of the Escobar de Paz case, the IRS ultimately set forth a rule with a number of different factors to determine whether equipment renting or leasing is independent from the owner operators job as company drivers. So, you ask, what is that rule? Well, the rule (which is really a set of guidelines) was published in an “INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE” memo.

The IRS Factors Used To Determine if a “rental” arrangement has independent significance for tax purposes:

Here’s what the IRS Memo states:

  • Whether a worker is compensated for services regardless of whether the worker provides equipment. In other words, whether providing equipment is integral to providing services.
  • Conversely, whether the worker is paid for the rental of equipment regardless of whether the worker performs services.
  • Whether the worker retains control over the equipment.
  • Whether the worker is responsible for all operating expenses incurred while the equipment is being leased.
  • Whether there is a definite lease term, or whether the lease is valid only during the hours of employment.
  • Whether the worker is free to use the equipment in performing services for any person.
  • Whether the rental payments bear a reasonable relationship to the fair rental value of the equipment.

In addition, [the IRS] believes the following factors are relevant:

  • Whether the purported leases were put in place for some regulatory reason (other than federal taxes) such as, for example, to minimize overtime wages.
  • Whether the worker rents the equipment to another person under an arrangement that does not call for the worker’s services.
  • Whether the employer treated the activities as separate activities for reporting purposes.

So much for the simplicity of the “Two-Check” system. This is another reason why an obscene gerund and “IRS” regularly appear together in a single sentence.

The bottom line is you should contact Transportation Attorneys for legal advice on how to navigate the “Two-Check” system.


by G. Spencer Mynko, Esq.

Work Comp Auditors Are Now Applying the ABC Test In Audits of Trucking Companies and Demanding Proof that the OO has WC Insurance

Here at Transportation Attorneys, we are seeing more aggressive auditing of trucking companies by their workers’ compensation insurance companies. And as I am sure you all know, the law in California regarding classification of workers as independent contractors has undergone radical changes over the last few years. Specifically, I am talking about the “ABC test.” The ABC test is the test utilized to determine whether a worker, or “business service provider” is an independent contractor. If all three prongs of the ABC test are not satisfied, then the “business service provider” is not an independent contractor and is an employee of the “hiring entity “, UNLESS A specific exemption applies.

Unfortunately, there is no specific exemption for Trucking. Certain industries such as physicians, lawyers, accountants, dentists, architects, etc. have been granted legal exemption from the ABC test and therefore are judged according to the old Borello or “common-law” test. This is sometimes also referred to as the multi-factor test. Unfortunately, trucking companies must deal with the ABC test first.

1) Part A of the test requires that the worker is free from the control and

direction of the hiring entity in connection with the performance of the work,

both under the contract for the performance of the work and in fact; and

2) Part B of the test requires that the worker performs work that is outside the

usual course of the hiring entity’s business; and

3) Part C of the test requires that the worker is customarily engaged in an

independently established trade, occupation, or business of the same nature

as the work performed.

The insurance company auditor will essentially apply this reasoning:

You are a trucking company.

You are hiring trucking companies or “owner-operators” to move fuel

for your trucking company

The trucking companies or “owner-operators” you hire do work that

your trucking company does.

Therefore, all of these trucking companies or “owner-operators” are

now your employees.

B2B Exemption

Therefore, your only other option to “beat the audit” is to meet the twelve criteria of the business-to-business exemption. The way the business-to-business exemption works is the hiring entity must satisfy all twelve criteria of the exemption, and then whether the business service provider is an independent contractor will be determined by the old Borello standard. In other words, just because the hiring entity may satisfy all twelve criteria of the business-to-business exemption, the business service provider is not automatically considered to be an independent contractor. At that point, the hiring entity must rely upon, and satisfy, the Borello standard.

The 12 Criteria

Here are the 12 criteria along with some thoughts in bold on how YOU can satisfy the B2B exemption

(1) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.

I prepare a contract for independent contractors. This will satisfy the business-to-business exemption contract requirement, but independent contractors also need to make it clear, should they be asked, that the company does not control or direct how they do their jobs. Indeed, the independents (the Owner-Operators) determine how they actually do their jobs.

(2) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.

Because this has been litigated to the California Court of Appeals, the courts would likely rule that the independent contractors are providing services directly to the trucking company, and not its customers – double check with your lawyer on this because facts are important here.

(3) The contract with the business service provider is in writing and specifies the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services.

The contract must be in writing, and specify the payment amount and rate of pay, for services performed. It also states when the contractors will be paid.

(4) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.

If the independent contractors are incorporated, and they have an EIN number, then that would satisfy this criterion. The alternative, and a better option really, would be for all the independents to have their own motor carrier authority, even if it is simply a California motor carrier permit and DOT number.

(5) The business service provider maintains a business location, which may include the business service provider’s residence, which is separate from the business or work location of the contracting business.

The independents use and maintain a separate business address for their companies.

(6) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.

Work with experienced independent contractors, preferably who have corporations or LLCs that have been in existence for some time. But remember, simply “incorporating” or forming an LLC is not a panacea against misclassification allegations – a single owner/single shareholder company is most prone to piercing the corporate veil or an “alter-ego” accusation.

(7) The business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.

The independents must be free to work with other businesses and contract with whoever they want.

(8) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.

Having MC Authority probably qualifies as advertising, as does social media in certain contexts

(9) Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services, not including any proprietary materials that may be necessary to perform the services under the contract.

This where it’s important that the IC owns and supplies all of their own equipment (talk to an attorney about situations where the company provides the trailer, whether by lease/rental or by interchange. “Power Only” contractors create challenges.

(10) The business service provider can negotiate its own rates.

The independents need to be able to negotiate their own rates. If they decide they don’t want to do a job at a particular rate, they should be free to ask for more money. And if you can’t meet their demand, then they can freely reject the load.

(11) Consistent with the nature of the work, the business service provider can set its own hours and location of work.

IC can accept or reject loads without reprisal

(12) The business service provider is not performing the type of work for which a license from the Contractors’ State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

Generally not an issue with trucking companies utilizing OOs.

A Few Other Pearls

Work comp auditors have been demanding copies of Cab Cards and DMV registrations. While there is no legal requirement for a trucking company to keep copies of the owner operators’ registrations and cab cards, in this new era, it’s something that must be done.

Secondly, work comp auditors want to see that the independent contractors have their own work comp insurance, or if they are exempt from work comp insurance, at least they have a “certificate only“ or comp policy.

Finally, trucking company should be very concerned about the “co-employment doctrine”. As a trucking company, you do not want to be responsible for the work injuries of your owner operators employees. Subcontracting and trucking may involve multiple entities responsible in some way for employment conditions. When businesses are otherwise separate legal entities, they may be considered “joint” employers. Parents and subsidiaries, and sometimes even individuals, may be deemed “single employers” or “alter egos.” A primary purpose of these doctrines is to expand liability and, often, find a capitalized pocket that can finance an adverse judgment or a settlement. Hence, if your irresponsible Contractor is broke, the courts and employee’s lawyers will attempt to hold the Carrier responsible for the Contractor’s wrongdoing.

The bottom line is work comp insurers are applying the ABC test to – contact Transportation Attorneys for legal advice on how to navigate through a work-comp premium audit.

EDD Is Now Using The ABC Test

by G. Spencer Mynko, Esq.

ALERT: EDD Is Now Using The ABC Test! Will B2B Exemption Apply?

AB5, AB2257, The “ABC” Test and the California EDD

The California EDD is Now Enforcing the ABC Test Against Trucking Companies

I recently had a consultation with a client who was audited by the California EDD. By the time I was contacted, the audit was completed, and the client was given a notice of assessment by the EDD. The reason I am sharing this story with my readers is to let them know that the California EDD is now using the ABC test to determine if an independent contractor is truly independent or misclassified as an employee . If you are a trucking company, and you utilize independent contractors, you should find this story disturbing.

The Facts

A brief recitation of the facts will help put this in context. The audited trucking company moves sand, gravel, concrete, and raw building materials for construction projects. They own some trucks and trailers, and they have company drivers who drive those trucks and trailers. The employee drivers are properly classified, on compliant payroll, and covered under a Worker’s Compensation policy.

Because the company does not have enough employee drivers to meet their shipping commitments, they tender loads to other trucking companies to move the sand, gravel, aggregate, etc. The Independents own their own tractors, but utilize company trailers. All of the Independents have their own motor carrier authority, and when they move shipments they are moving the shipments under their own, not the company’s, MC authority.

When it comes to dealing with the Independents, the trucking company really is acting more like a broker. However, they only have motor carrier authority, and not broker authority. This is typical in trucking companies that move sand, gravel, aggregate, etc. because the materials are only moved within the state of California, and there is no state-based broker authority.

Unlike Freight Brokers who have federal authority and who tender loads to be moved within the stream of interstate commerce, many of the trucking companies that move sand and gravel act like brokers, but they have no brokerage authority. Nor are they legally required to have any authority, because there is no state freight broker authority that is analogous to federal Freight Broker authority.

But let me be clear, the independent contractors are actual trucking companies who move shipments under their own authority. In my mind, this makes them a step beyond your typical independent contractor who may own equipment, but operates under the trucking company’s authority.

In this case, the money paid to the trucking companies were not wages, but freight charges paid to a trucking company. The Independent trucking companies had various business forms: sole proprietors, corporations, and LLCs. At any given time, the trucking company that was audited by EDD was contracting with 8 to 10 other trucking companies to handle their overflow.

As mentioned above, the Independents supplied their own tractors, and essentially functioned as power only trucking companies.

The independent trucking companies were responsible for their own fuel, maintenance, and insurance. They were contracted on a load per load basis and had to submit proof of delivery and successful completion of any given load in order to get paid.

There was no “forced dispatch“. The independent trucking companies could negotiate rates, choose which loads they wished to move, and decline loads if they wanted to.

The Independents determined when to depart in order to comply with customer scheduling.

The Independent contractors were free to drive for other motor carriers. The independent contractors determined:

        -When to depart in order to comply with the customer's scheduling.

        -The condition and suitability of the equipment.

         -The fitness of the driver and the availability of adequate hours of 
          service within which to complete the trip.

         -Selection of routes and safety of road and climatic conditions.

         -Where the vehicle is to be fueled, maintained, repaired and operating 
          condition assessed.

          -The operators' physical condition to perform the duties undertaken.

The audited company had NO written contract with the Independents.

EDD Crushes The Audited Trucking Company With The ABC Test – Their New Weapon To Decimate Motor Carriers who use ICs

The Auditor wielded the ABC Test like a sledgehammer. The ABC Test is this:

1) Part A of the test requires that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

2) Part B of the test requires that the worker performs work that is outside the usual course of the hiring entity’s business; and

3) Part C of the test requires that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Focusing on the “B” prong, the EDD auditor essentially followed this reasoning:

             You are a trucking company. 

             You are hiring trucking companies to move freight for your trucking 

             The trucking companies you hire do work that your trucking company 

             Therefore, all of these trucking companies are now your employees. 

             FU - you owe us $400,000 for those 8 to 10 trucking companies you 
             tendered loads to.

OK, maybe the auditor didn’t say “f*** y**“, but the end result was the same.

Business-to-Business Exemption? Not here 😦

But Spencer, what about the “business-to-business exemption“ that you’ve been talking about?

Well, that crossed my mind, and I asked the trucking company if they had a written contract in place. The answer to that was unfortunately “no”. To which I replied “shit“. By not having a written contract in place, this immediately made the audited company ineligible to rely on the business to business exemption.

Remember, in order to rely on the business to business exemption, the trucking company must satisfy all 12 criteria, and then and only then can they use the “Borrello” standard or the Multi-factor test to determine worker classification. This company doesn’t have a chance of that.

As many of you know, I have been writing about the business to business exemption in AB 2257. While it is a narrow exemption, getting good legal advice on the finer points of the exemption could spare your trucking company from disaster. While it is not easy, I do believe the business to business exemption to AB5 and the “ABC” test is attainable with meticulous attention to detail. Furthermore, every trucking company should note that the business to business exemption requires a “written contract” between the company and the contractor.

The Assessment came down in late August – After the AB5 Injunction Was Lifted

Note that EDD actually initiated this audit while the injunction against the state of California from utilizing the ABC test against motor carriers was in place. However, the actual assessment was not handed down until after the injunction was lifted. As such. I think it will be hard to argue that the EDD was acting in violation of the injunction. Furthermore, They should make it clear that the utilization of the ABC test by the EDD against trucking companies is now fair game.

Now what?

The trucking company has appealed the notice of assessment, filing a petition for reassessment with the CUIAB. While I am very pessimistic that they would do any better at a hearing in front of an administrative law judge, by filing the appeal, they can apply to the EDD settlements program and hopefully reach a compromise on the assessment.

That said, if the company had done their utmost to address the business to business exemption, and made sure their business practices complied with the business-to-business exemption, they may have had a chance.

When Does AB5 and The ABC Test Apply to Interstate Trucking?

by G. Spencer Mynko, Esq.

Can Your OTR Trucking Company Avoid California Jurisdiction on AB5/ABC?

AB5, AB2257, The “ABC” Test and California Jurisdiction

Can your trucking company escape the long arm of California law?

Clients routinely ask me about how they can avoid AB 5 (now AB 2257), and the ABC test. What these questions really come down to is whether California jurisdiction applies, and whether you can rightfully be sued in Superior Court in California, face a California EDD audit, get dragged to the California Labor Board, concern yourself with defending against a work injury claim in California, in addition to other judicial and quasi-judicial forums. Another big question is will the ABC test apply to my trucking company in a Worker’s Compensation insurance audit.

Generally, these questions all involve a motor carrier utilizing an “owner-operator“ to haul freight under the motor carrier’s authority. Issues like whether the motor carrier is based in California, if the owner operator is a California resident, and where the services are provided – in or out of California – are critical to any analysis. As such, I wanted to break this down into various categories dependent upon the where the owner operator resides, where the motor carrier is based (resides), and where the work is done.

California owner operator, California motor carrier, Working in California

Well, I think this is probably the easiest hypothetical of all – obviously there’s no question that California law, including the ABC test, will apply in this situation.

California owner operator, California motor carrier, driving all over the country

Admittedly, this gets a bit murkier, but it is my opinion that the trucking company is still subject to California jurisdiction and California labor Code law, including the ABC test. There is no case law regarding the ABC test as applied to Trucking. While that will likely occur sometime in the future, based on existing law which was applied in the context of airline workers, the California Supreme Court made it pretty clear that as long as the worker performs some work in California, and is based in California, California law would apply. So again, it is my opinion that the ABC test would clearly apply to the California trucking company and they would fall within California jurisdiction. The only way I see the trucking company avoiding the ABC test in this scenario is if the owner-operator never drives in California, which only describes a few of my clients, and only partially since they usually also have drivers who drive in and reside in California.

California motor carrier, non-California owner operator, working in California.

This is a pretty unusual scenario when it comes to the vast majority of my clients. That said, let me be clear that case law on this matter extends protection to non-California residents when working in California. In such a situation, I predict the ABC Test would apply and the trucking company would be subjected to California labor law.

California motor carrier, non-California owner operator, driving all over the country.

A critical question in this scenario is where is the base of operations? If somehow the base of operations is California, then AB5 would likely apply; on the other hand, if operations were based out of state, then AB5 would likely not apply. But that begs the question: why would a California trucking company base its operations in a different state, relying on out of state drivers, instead of simply moving to that state and getting the f-outta California? That said, if the owner-operator doesn’t cross into California, that one owner-operator likely could not take advantage of California labor law, and the motor carrier could dodge that ABC bullet.

California owner operator, non-California motor carrier, driving around the country.

This is perhaps the most frequently inquired about scenario. Typically, clients will ask about moving their trucking company to Nevada, Arizona, or possibly Texas. The problem though, is that they are still utilizing California residents.

In another case that involved airline workers, the court concluded that “if employees are based for work purposes in California, that is sufficient to trigger the requirements of [California labor code] section 226, regardless of where their employer resides.“

In the case of the interstate truck driver who resides in California, A strong argument can be made that they are based for work purposes in California. For the vast majority of my clients, owner operators pick up loads within California, and then return to California with loads, and then take their mandated rest and recharge time in California. It is a very unusual circumstance, and not one that I’m aware of, where an owner operator will deadhead to Nevada, Arizona, or some other state to pick up a load, and then deadhead back. That might work out of Blythe or Needles, but seems awfully impractical when it comes to the major urban areas of California. Furthermore, the vast majority of California based owner operators return home to California when their hours of service are used up. In other words, they come home to what is for all intents and purposes, their base of operations.

Non-California motor carrier, non-California owner operator, working at least primarily, if not entirely, in California.

This is another very unusual case and one that I don’t tend to see – that said, the ABC would likely apply in this scenario. This is because of the substantial amount of work being done in the state.

Non-California owner operator, non-California motor carrier, driving around the country.

This is another no-brainer situation and California law and the ABC test would not apply – but if this your case, you’re not reading this article and you’re not a client of mine. Congratulations!

The bottom line is that if your are pondering ways to avoid the dreaded ABC Test and California jurisdiction, contact Transportation Attorneys for legal advice on whether your proposed business plan is out of reach of the long arm of California law.

US Supreme Court Denies Review Of AB5 Lawsuit – ABC Test Now The Law of the Land :

by G. Spencer Mynko, Esq.

“ABC” Test Applies To Trucking Companies (CTA Loses Appeal To Supreme Court)

14 Months Ago I Wrote an Article With This Headline:
Ninth Circuit Appeals Court Rules AB5 and ABC Test Are Not Preempted by Federal Law!

California Trucking Companies Who Use ICs Are Now Easy Targets: Court Rules AB5 Not Preempted By Federal Law.

I lamented this decision back then: As some of you may recall, AB5 codified the “ABC“ test to determine whether a worker is an independent contractor. For those of you coming out of a 3 year hibernation, here’s the dreaded ABC Test:

1) Part A of the test requires that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

2) Part B of the test requires that the worker performs work that is outside the usual course of the hiring entity’s business; and

3) Part C of the test requires that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Of course, trucking companies using ICs flipped out because the B prong made it impossible for motor carriers to legally utilize IC “Owner-Operators”.

AB5 went into affect January 1 of 2020. On New Year’s Eve of 2019, The California Trucking Association (CTA) filed a lawsuit and asked the federal district court to grant an injunction stopping the state of California from enforcing the “ABC” test against trucking companies. The district court granted the CTA’s motion for injunction : this effectively put the brakes on the application of the ABC test against trucking companies. And while that was good while it lasted, The State of California appealed to the Ninth Circuit US Court of Appeals which overruled the district court, and upheld applying the ABC test against trucking companies.

Here is an excerpt from my article 14 months ago:

Appeals Court Rules AB5 and ABC are A-OK!

“The Ninth Circuit, in a 2 to 1 split decision, reversed the District court’s injunction order. The majority stated that the district court “abused its discretion” in ordering the injunction. Unfortunately, this doesn’t really surprise me – when I listened to the oral arguments, I could tell that one judge was on the side of trucking, another judge was against the trucking industry, and a third judge was better suited to handing out Halloween candy.

The case, now referred to as California Trucking Association v. Bonta (The new Attorney General since Xavier Becerra was called to Washington by the Biden administration to run the Health and Human Services department), has taken a serious turn for the worst. In a decision that is detached from reality and basically filled with a bunch of legal bullshit, the two judge majority stated that “AB5 is a law of general applicability“ and therefore is not preempted by federal law, specifically the Federal Aviation Administration Authorization Act (F4A). “Because AB-5 is a generally applicable labor law that impacts the relationship between a motor carrier and its workforce, and does not bind, compel, or otherwise freeze into place a particular price, route, or service of a motor carrier at the level of its customers, it is not preempted by the [FAAAA].” The majority came to the absurd conclusion that the ABC test is “not sufficiently related to the price, route, or service of any motor carrier… with respect to the transportation of property“. The majority stated that the ABC test “merely” affects the classification of workers, and does not compel a motor carrier to implement a “particular price, route or service that a carrier would otherwise not provide“.

You heard that right: The majority opined that converting all of your independent contractor drivers to employees will not affect the prices you have to charge to move freight around this country. Unfortunately, their bullshit will severely expose trucking companies to millions, if not billions, of dollars in fines, penalties, judgments, etc., if they hire independent contractors and, at the same time, destroy the livelihood of owner-operators that contract with motor carriers as independents. I ask, does ANYONE reading this think converting all of your Owner-Ops to Employees isn’t going to affect freight charges?”

That was then – Now we Fast Forward to today for some really bad news:

CTA Loses Appeal To US Supreme Court To Overturn The Ninth Circuit Ruling. US Supreme Court Denies Their Request for Review:

On June 30, 2022, the U.S. Supreme Court handed a huge loss to the transportation industry by declining to review the California Trucking Association’s challenge to AB5. Here’s the CTA’s press release:

(SACRAMENTO) — The California Trucking Association (CTA), issued the following statement today in response to the U.S. Supreme Court’s decision at its recent conference to deny cert in CTA v. Bonta, the Association’s case challenging California’s Assembly Bill 5 (AB 5) law:
Gasoline has been poured on the fire that is our ongoing supply chain crisis.”
“In addition to the direct impact on California’s 70,000 owner-operators who have seven days to cease long-standing independent businesses, the impact of taking tens of thousands of truck drivers off the road will have devastating repercussions on an already fragile supply chain, increasing costs and worsening runaway inflation.
“We are disappointed the Court does not recognize the irrevocable damage eliminating independent truckers will have on interstate commerce and communities across the state. The Legislature and Newsom Administration must immediately take action to avoid worsening the supply chain crisis and inflation.”
Also, remember that the Ninth Circuit left in place the District court’s injunction pending a determination by the US Supreme Court. Now that review was denied, you can count on the injunction being lifted and trucking companies being liable retroactively for their conduct back to January 1, 2020 when AB5 went into effect.

But let’s go back to what I wrote 14 months ago:

What Can California Trucking Companies Do?

Going to your window and yelling “I’m mad as hell and I’m not going to take it anymore” isn’t going to help. Neither will calling Ghostbusters. But you can, and should, call Transportation Attorneys.

As many of you know, I have been writing about the business to business exemption in AB 2257. While it is a narrow exemption, getting good legal advice on the finer points of the exemption could spare your trucking company from disaster. While it is not easy, I do believe the business to business exemption to AB5 and the “ABC” test is attainable with meticulous attention to detail. Furthermore, every trucking company should note that the business to business exemption requires a “written contract“ between the company and the contractor. My proactive clients have been anticipating a negative decision from the Ninth Circuit Court of Appeals, and therefore made certain that their business practices satisfy the business to business exemption, and their independent contractor operating agreement is up-to-date. They are moving forward with confidence.

Obviously, I want you to contact my law firm to get advice on how to satisfy the business to business exemption and hire my law firm to draft your independent contractor operating agreement. There is the faintest of light at the end of the tunnel. If you are a California trucking company using independent contractors, the question is whether you are going to make it to the light or crash in the darkness.

That was Then, but This is Then, Then is Now, and Now is Then, except you no longer have 14 months to pray for a rescue from the Supreme Court. In fact, you probably have 7 days until the injunction is lifted.

Other Shitty Options

You may want to explore things like switching to an employee based business, operating as a freight broker, utilizing a “two check” hybrid business model, etc. Or you can just be an outlaw. That said, none of these options are great, all of them have problems, and I’m not selling miracles. I’m happy to talk to you about any of this, but nothing I have to say is legal Prozac. That said, I can put my doctor hat on and prescribe actual Prozac, but I want to be clear that I don’t make a habit of treating clients for depression.

Anyways, I think it goes without saying that you should Contact Transportation Attorneys for legal advice on how to comply with the laws and regulations that confront your company.

Arbitration Update : US Supreme Court Forces PAGA Claims To Arbitration: CA Employers Rejoice!

by G. Spencer Mynko, Esq.

The United States Supreme Court Rules That Individual PAGA Claims Can Be Compelled To Arbitration
This ruling will have profound effects on arbitration clauses and class action waivers in California. The United States Supreme Court held in Viking River Cruises, Inc. V. Moriana that claims brought pursuant to the California Private Attorney General Act (PAGA) can be split into individual PAGA claims and non-individual PAGA (i.e class or representative claims), that are brought on behalf of others. Furthermore, the employee’s individual PAGA claims may be compelled into arbitration, and as a result, prevent the employee from participating in representative (class) actions.

What is particularly striking about this opinion is that once an employee‘s individual PAGA claims are compelled to arbitration, the class action PAGA claims brought on behalf of others cannot be maintained in court and must be dismissed. In other words, to put it simply: this decision effectively forces PAGA claims to individual arbitration IF the employer’s arbitration requirement is properly drafted.Prior to this decision, the California Supreme Court ruled that PAGA claims could not be compelled to arbitration. In Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014), The California Supreme Court held that under PAGA, individual employee’s claims were precluded from arbitration. But then, the US Supreme Court In Viking held that the federal arbitration act (FAA) preempts the rule in Iskanian and ruled that individual PAGA claims can be separated from non-individual PAGA claims, and therefore individual PAGA claims can be compelled to arbitration. But then the court went a step further, which in my opinion is a very huge step. The United States Supreme Court went on to rule that because of “standing requirements”, when an individual‘s PAGA claim is compelled to arbitration, the employee cannot maintain their position as class representative, and therefore the non-individual PAGA claims, or class representative or class action claims, brought on behalf of others must be dismissed. Therefore logically, no individual can be a class representative, because the arbitration clause will force them into individual arbitration, and because they are forced into individual arbitration, they cannot act as a class representative, and the rest of the class gets dismissed. So, any employee that is subject to the arbitration agreement is unable to be a class representative, because they can be compelled to individual arbitration, which likely will include every employee, and because No employee can be a class representative, no class actions can proceed under PAGA.Admittedly, it took me a minute to sort this out, but if we discuss the facts in the the Viking case, the legal mumbo-jumbo makes more sense.

What Happened In The Viking Case?

The plaintiff, Angie Moriana, was a sales representative for Viking River cruises, and in the course of her employment agreed that any employment disputes would be resolved in individual arbitration and further agreed to not participate in class action and PAGA representative actions pursuant to a waiver. Despite agreeing to the class action and PAGA waiver, she sued Viking on behalf of herself and other employees “similarly situated” under PAGA. Her lawyers relied on the Iskanian case which held that PAGA waivers are unenforceable. Viking attempted to compel arbitration, but the trial court denied their motion and the denial to compel arbitration was upheld on appeal.Subsequently, Viking appealed the case to the United States Supreme Court, which not only granted review, but overturned the California court of appeal. The Court stated “[u]nder PAGA’s standing requirement, a plaintiff can maintain non-individual PAGA claims in an action only by virtue of also maintaining an individual claim in that action…[w]hen an employee’s own dispute is pared away from a PAGA action, the employee is no different from a member of the general public, and PAGA does not allow such persons to maintain suit.” Specifically the court stated “that PAGA actions cannot be divided into individual and non-individual claims” is preempted by the FAA, and therefore “Viking [was] entitled to compel arbitration of Moriana’s individual claim.” And because Moriana was forced into individual arbitration of her employment dispute with Viking, she could no longer be a PAGA-rep and the PAGA class action case must be dismissed.

Relief For California Employers

This decision provides California employers with some relief from onerous PAGA class action lawsuits. Because the FAA preempts California law so “individual clams” brought by an employee against an employer under PAGA can be forced to arbitration. Also pursuant to the FAA, “Representative claims” cannot be forced into arbitration: The FAA preempts or overrides California law that denies enforcement of arbitration agreements requiring consumers to waive any right to bring a class action unless the agreement also provides for class arbitration. In AT&T Mobility LLC v. Concepcion, 2010 U.S. LEXIS 3367 (Apr. 27, 2011) the US Supreme Court held the FAA precludes arbitrators from imposing classwide arbitration; the Supreme Court essentially stated that any attempt to impose classwide arbitration violates the FAA.So again, once an individual brings an employment claim under PAGA and is forced into arbitration pursuant to an arbitration agreement, the employee can no longer participate in representative PAGA lawsuits because the employee lacks standing to participate in non-individual PAGA claims.

Now Is The Time To Revisit Your Arbitration Agreements

The US Supreme Court essentially provided California employers with a roadmap on how to draft arbitration agreements to eliminate or minimize the risk of exposure to representative or class action claims brought under PAGA. Now is the time to speak with an experienced transportation attorney to ensure that your company‘s arbitration agreements are enforceable. 

One Caveat

In New Prime v. Oliveira, the U.S. Supreme Court ruled that a Trucking Company’s Arbitration Agreement is unenforceable against workers in interstate commerce under the Federal Arbitration Act (FAA). In New Prime, the United States Supreme Court ruled that a trucking company cannot compel arbitration in a wage dispute brought by an independent contractor truck driver. Generally speaking, employers can insist upon arbitration agreements in contracts with subcontractors. However, The US Supreme Court decided that an exception to the Federal Arbitration Act (FAA) applies to independent contractor truck drivers and anyone one else working in interstate commerce.That said, an arbitration agreement pursuant to state (not federal) law may be a way around this obscure exception to the FAA.

Contact today to discuss Arbitration Agreements and Class Action and PAGA Waivers!

Employment Practices Liability Insurance (EPLI)

by G. Spencer Mynko, Esq.

Are You An Employer? Do You Have Employees? If You Answered “Yes” To Both Of These Questions, Your Transportation Company Should Consider Employment Practices Liability Insurance

The COVID Pandemic Aftermath Has Made Things More Difficult For Employers By Increasing Their Risk of Employee Related Disputes

I’m sure everyone reading this is aware of the significant labor shortages affecting employers in general, and trucking in particular. And it’s not just drivers, but employees along every step of the chain. A combination of the Covid pandemic, the “Great Resignation“ and the demand for higher wages has led to greater turnover, difficulty filling positions, overworking existing staff, and employee dissatisfaction. Furthermore, employee loyalty is another victim of the current labor market, with employees more than willing to burn bridges on the way out the door. Quite frankly, I think this also increases the likelihood of employees contacting plaintiffs‘ lawyers in their effort to extract a pound of flesh on their way out the door.

If things weren’t bad enough in the state of California for employers, now they are worse. We live in a very pro-employee state – I know you know that – yet, even when employers do everything right, they are still subject to “Shake Down” letters from unethical “Employee Rights” lawyers who know even unmeritorious cases are worth something because employers will pay the extortion fee to avoid litigation. But what if you had an insurance policy in place where you can tender claims of workplace violations to your insurance carrier like a cargo claim and let your insurance company and their lawyers handle the matter? This is where EPLI comes in.

What is EPLI?

First of all, let’s start by defining “EPL”: “Employment Practices Liability is an area of United States labor law that deals with wrongful termination, sexual harassment, discrimination, invasion of privacy, false imprisonment, breach of contract, emotional distress, and wage and hour law violations. It may be categorized as a form of professional liability. Employment practices liability insurance (EPLI) is sold as a type of management liability insurance, which is related to professional liability insurance.

Most commonly, employment practices liability deals with laws and protections brought under Title VII of the Civil Rights Act of 1964, the ADA (Americans with Disabilities Act) of 1990, the Civil Rights Act of 1991, ADEA (Age Discrimination in Employment Act) of 1967, and Family and Medical Leave Act (FMLA). The Equal Employment Opportunity Commission (EEOC) interprets and enforces these laws.

The EEOC recognizes eleven types of employment practices discrimination: age, disability, equal pay/compensation, genetic information, national origin, pregnancy, race/color, religion, retaliation, sex, and sexual harassment” See

EPLI is the Insurance that protects the employer: it is a type of policy that business owners can buy to protect their organizations against employee suits for rights protected under acts above. Id.

What does EPLI cover?

Traditionally, EPLI covers “-isms” related to allegations of wrongful hiring, employing, and firing. For example, sexism, ageism, racism, etc. In other words, typical EPLI claims include: Discrimination, Hostile environment, Lack of advancement, Sexual harassment, Wrongful termination, etc. It’s no secret that allegations of sexual harassment, racism, workplace hostility, unlawful firing, discrimination based on gender, sexual preference, and age, flow freely these days and, because the way the laws in the state are written, employers often get stuck in a situation where they are “presumed guilty, until proven innocent“ . Of course, The proof of innocence comes at a great cost of time and money. Your business is vulnerable to claims of employee mistreatment, real or perceived.

Will your EPLI policy cover “wage and hour” Claims?

The short answer to that is “Maybe”. While EPLI insurance traditionally provides broad protection for businesses facing costly litigation and potential liability for claims brought by employees, former employees and job applicants. But, these policies almost always excluded wage and hour claims—for example, claims for the failure to pay overtime, failure to pay minimum wage and failure to provide meal and rest breaks Typically, EPLI insurance does not cover fair labor standards act (FLSA) violations and similar state law claims, and therefore employers should not assume that there EPLI insurance will cover wage and hour claims. That said, some EPLI policies will pay for attorney fees and defense costs in wage and hour claims, but not judgments or settlements. therefore, employers must be clear that their policy, will cover wage in our claims. know that this may require the business to purchase a specific rider that covers such claims.

California, however, has wage and hour provisions with no parallel in the FLSA. This has led to disputes between insurance companies and their insureds as to the exclusions in EPLI policies, and often in favor of the insured employer. Indeed, despite insurance company contentions, recent court and arbitration decisions have held that EPLI policies do not bar EPLI coverage for claims alleging failures to reimburse business expenses incurred by employees, provide accurate wage statements, and pay wages timely.

Insurers are fighting back by drafting policies which state which claims— like state wage and hour claims—are excluded from EPLI coverage. Employers take note: when faced with claims alleging violations of the FLSA and/or California state labor codes, insured employers should fight back against denial of coverage.

Will Southern California Pizza Help Employers?

Sorry folks – I’m not talking about the stuff you eat, but instead a court case: Southern California Pizza Co., LLC v. Certain Underwriters at Lloyd’s, London Subscribing to Policy Number 11EPL-20208. Again, while EPLI typically excludes wage and hour claims, this decision narrowed the definition as to what is a wage and hour claim, and also increases the chance that your insurance company will cover wage and hour claims in lawsuits that also allege failure to reimburse employees for business related expenses. The Court of Appeal held that claims brought under California Labor Code Sections 2800 and 2802 for failure to reimburse employee expenses did not fall within the wage and hour exclusion in a Lloyd’s of London EPLI policy that excluded coverage for claims “based upon, arising out of, directly or indirectly connected to or related to, or in any way alleging violations of any foreign, federal, state, or local, wage and hour or overtime law(s), including, without limitation, the Fair Labor Standards Act.”

Again, employers who hold these policies may be able to force the insurance companies’ broad defense obligations and obtain indemnification for certain claims. Of course, insurance companies have reacted to this decision by expanding the language of their wage and hour exclusions to specifically avoid coverage for reimbursement expenses.

So again, it falls upon you, the employer policyholder, to carefully analyze your insurance policies to clearly understand any exclusions so you are not met with an unpleasant denial of coverage letter after tendering your claim to your insurance company.

Gratuitous Pizza Joke: Sex is like pizza: when it’s good, it’s good, and when it’s bad, it’s still pretty good.

The Conclusion

If you didn’t die laughing from that joke, you can turn your attention to minimizing risk: trucking companies can protect themselves by incorporating well drafted employee handbooks and policies and procedures manuals, account for all time worked, properly classify employees, comply with regulatory changes, and talk to your lawyer about all of this.

If feasible, purchase wage and hour insurance that includes coverage for (in addition to defense costs), monetary remedies such as back-pay. MAKE SURE YOU KNOW YOUR EXCLUSIONS.

Contact today to discuss Employment Practices!

A Bill Of Lading Is A Contract – And Why That’s A Problem. Don’t Be Stuck Relying On A BOL As Your Only Contract

by gspencermynko

A Bill Of Lading wears many hats: It is a contract determining the rights, duties and liabilities of the parties involved with the transportation of freight. It is a receipt for the goods containing the description, quantity and condition of the property to be transported. As such, it carries significant legal consequences.

The Interstate Commerce Act (ICA) requires motor carriers to “issue a receipt or bill of lading” for property received for transportation, 49 USC § 14706. (In practice, the shipper usually prepares a bill of lading on its own form and presents it to the driver for signature.) Theoretically, this requirement can be waived, if the parties expressly agree in writing, 49 USC § 14101, but it is always a good practice to have a written receipt for shipments. While various forms of Bills of Lading exist, the function served by a bill of lading is even more significant when attempting to resolve a dispute. Bills of lading can serve as contracts of carriage, receipts for goods, documents of title, or any combination of the foregoing. Thus, the significance of any particular bill of lading is context-dependent, and not every bill of lading serves all of the aforementioned functions. Yet, this humble document with hard to read wording crammed in a small space is often overlooked and given short shrift.

The Law

The ICA does not specify any particular form of the receipt or bill of lading, but the Federal Motor Carrier Safety Administration regulations prescribe the minimum requirements, (See 49 CFR Part 373). 373.101 Motor Carrier bills of lading: “Every motor common carrier shall issue a receipt or bill of lading for property tendered for transportation in interstate or foreign commerce containing the following information:

  1. * Names of consignor and consignee.
  2. * Origin and destination points.
  3. * Number of packages.
  4. * Description of freight.
  5. * Weight, volume, or measurement of freight (if applicable to the rating of the freight).”

In the U.S., the multi-part, non-negotiable UNIFORM DOMESTIC STRAIGHT BILL OF LADING is the most commonly used form. Shippers often use preprinted forms which often contain not only a description of their commodities and applicable class(es) but, in addition, make a reference to the carrier’s filed tariff. Since the filing of tariffs is no longer mandated by law, Shippers and carriers have since had the opportunity to negotiate the terms and conditions of the bill of lading contracts since this deregulation took place. Individual shippers and carriers as well as shipper and carrier trade organizations hire lawyers to draft Bills of Lading that protect their interests first. While the “filed rate doctrine” has been abolished with deregulation, compliance with the carrier’s tariff and the terms and conditions of the bill of lading can still be required under ordinary principles of contract lawThis is why it is so important for shippers and carriers to understand the terms of the their agreement regarding hauling freight AND beware of the traps associated with BOLs that reference Tariffs!

Carmack Amendment and Other Laws Affecting BOLs

The governing statutes are the Carmack Amendment of 1906 (“Carmack Amendment”), the Motor Carrier Act of 1980, the Trucking Industry Regulatory Reform Act of 1994, and the Interstate Commerce Commission Termination Act of 1995 (“ICCTA”). Carriers can provide either Section 14706 (common carrier) carriage or Section 14101(b) (contract) carriage within the United States.
a. Section 14706 (Common Carrier) Carriage

  • A carrier in today’s period of deregulation need not file tariffs with DOT’s Surface Transportation Board. Under Section 14706, carriers are liable to the person entitled to recover under a motor carrier bill of lading or a receipt for the goods. The liability regime is a Carmack Amendment liability regime. Under this liability regime, a carrier is liable for the actual loss or damage to the cargo caused by the receiving carrier, the delivering carrier, or an intermediate carrier over whose route the cargo is transported either:

(1) in interstate transportation within the United States or
(2) from a place in the United States to a place in Canada or Mexico, provided the transportation takes place under a through bill of lading.

The Carmack Amendment prohibits a carrier from limiting or exempting itself from liability, except under certain specified circumstances prescribed by the Motor Carrier Act of 1980. A carrier may limit its liability if that limit would be reasonable under the circumstances surrounding the transportation of the goods. The ICCTA is not specific as to who determines reasonableness. Consequently, this issue has been left to the courts to determine. A civil action can be brought either in a federal or a state court against the delivering carrier or the carrier that caused the loss, damage or delay. Claims must be filed within 9 months, and the law suit must be brought within 2 years.

The General Rule of Bills of Lading

Regarding bills of lading, 49 U.S. Code § 80107 applies a general rule. Under the general rule of bills of lading the person who negotiates or transfers a bill warrants that the bill is genuine; that the holder has the right to transfer the bill and title to the goods described in the bill; the holder doesn’t know of anything that would adversely affect the value of the goods; that the goods are fit for their purpose when merchantability and fitness would have been implied in an agreement for transfer of the goods without a bill of lading.

  • “The mere delivery of the goods to a carrier for transportation does not necessarily import an absolute promise by the shipper to pay the freight charges. To ascertain the contract, the bill of lading must be looked to primarily, as this serves both as a receipt and a contract. Ordinarily the person from whom the goods are received for shipment assumes the obligation to pay the charges, and this obligation is ordinarily a primary one. The shipper is presumably the consignor, and the transportation ordered by him is presumably on his own behalf, and a promise to pay may be inferred therefrom. This inference may, however, be rebutted, and it may be shown by the bill of lading or otherwise that the shipper was not acting in his own behalf, that this fact was known to the carrier, and that the parties intended not only that the consignee should assume an obligation to pay but that the shipper should not assume any liability whatsoever, or that he should assume only a secondary liability.” New York C. R. Co. v. Frank H. Buck Co., 2 Cal. 2d 384.

Why Every Motor Carrier, Broker, Shipper, Freight Forwarder and anyone else needs to understand BOLs

A major concern these days is that there is no uniform or standard form of bill of lading used throughout the industry. Every carrier, shipper, broker, freight forwarder and other party involved in transportation often will use their own form of bill of lading. Many of these bills of lading are deficient because they do not contain a nonrecourse provision (or any terms and conditions for that matter), a Section 7 box, or places to mark if the shipment is “prepaid” or “collect.” Transportation contracts generally avoid these problems by demoting bills of lading to receipts. Which is why you should contact a Transportation Attorney to draft those transportation contracts.

Parties also must take care in preparing their own form of bill of lading and using it whenever there is no contract. Finally, parties must know how to protect themselves if a different, deficient bill of lading is used. If a nonnegotiable bill of lading is not conspicuously marked “nonnegotiable,” a holder who purchased the bill of lading for value supposing it to be negotiable may treat the bill of lading as imposing upon the bailee the same liabilities it would have incurred had the document been negotiable. As you can see, this simple and commonly used document can be a source of traps for the unwary.

Get with your Lawyer so you are not stuck with a BOL as your only contract.

I draft contracts: Contracts for motor carriers, freight brokers, freight forwarders, warehousers, shippers, etc. These long-winded multi page documents – that are so dry they make dust seem succulent – are designed to protect my clients, regardless of the role they play in the transportation chain. I think My clients’ business partners quickly sign my contracts to spare them the torture of actually having to read them. Which of course, is all the better for my clients. With that in mind, don’t back yourself into a corner by relying on a few paragraphs of boiler plate language found on a typical bill of lading. I assure you, if you find yourself with a problem, you do not want that BOL to be your only contract.

The bottom line in all of this is that parties involved in transportation and shipping of freight need to consult with competent counsel to review, revise or prepare their contracts to protect your business from unexpected liabilities. Contact today to discuss tariffs, bills of lading and contracts today.

Annual Year End Corporate Maintenance

by G. Spencer Mynko, Esq.

Get Your Company Tuned Up For The New Year

Annual Year End Corporation and LLC Maintenance Issues

As 2021 draws to a close, it’s a good idea to think about California corporate compliance requirements. California corporations have a number of annual requirements that must be fulfilled with the California secretary of state and in accordance with California Corporation Law.

California corporations must abide by the California corporations code, which require corporations to:

Adopt Bylaws(Section 212)
Maintain a copy of the bylaws at the corporate office(Section 213)
Issue Stock
Hold annual meetings of directors and shareholders
Pay the annual corporate (franchise) tax
Abide by annual reporting requirements.

In order to comply with California corporation laws, Bylaws must be adopted, business accounts set up, Shareholder and Director meetings need to be held, Minutes need to be recorded/drafted, Stock certificates need to be executed and any other Corporate records need to be maintained.

These matters are critically important for officers and directors of California corporations to meet as they are legal requirements regarding annual corporate compliance. And while this is critically important, too many people – owners of corporations and LLCs – disregard these requirements or procrastinate in their responsibilities.

Let me be blunt: if you want to make it easy for a plaintiff’s attorney to pierce your corporate veil and hold you personally responsible for the liabilities of your corporation, blow this shit off. If, on the other hand, you want to protect your corporate entity, keep reading.

Annual Statement of Information

Every year, a California corporation must file an annual statement of information on an SI-200 form that reports your address, officers, directors, and the registered agent for service of process.

Pay the Tax Man

Hopefully you have accountants dealing with this, but you should still be aware of that C corporations and S corporations are subject to franchise taxes. C corporations are taxed at 8.84% of net income, and S corporations are taxed at a rate of 1.5% of net income. Of course, there is the $800 minimum franchise tax, which requirement is waived for first year corporations. First and foremost, anyone who has a corporation or LLC should be working with a competent accountant, and preferably a CPA. Federal taxes, state taxes, state income tax returns, franchise taxes, sales taxes and other various taxes all need to be dealt with and addressed properly.

Pay the State

I can’t tell you how many times I’ve looked up corporations on the Secretary of State‘s website only to find that they are “FTB suspended”. I’ve had clients that didn’t even realize their corporations or LLCs were suspended (“Hey, you got a problem, Bro”). This usually means the business didn’t pay its taxes, including the $800 minimum corporate tax, and now because their charter is suspended, their charter doesn’t exist, and there is no corporate protection. The business cannot sue anyone, nor can it defend itself in a lawsuit. Therefore, make sure your annual reporting and fees are up-to-date with the California Secretary of State.

Contracts, contracts, contracts

While you are addressing your annual corporate requirements, you may wish to do some housekeeping on all of the contracts you have in place. This is definitely a good time for you to review every contract your business is using: employee handbooks (a de facto contract), contracts with brokers, carriers, independent contractors, and anyone else your business is contractually engaged with.

Corporate bylaws and shareholder agreements often require annual business valuations. Now is a good time to go through your bylaws and shareholder agreements to make sure you comply with their requirements. I can’t stress enough how important it is to follow corporate formalities to protect your corporation and avoid piercing of the corporate veil.

Employee handbooks should always be reviewed on an annual basis and updated accordingly. As my readers know all too well, California labor law is constantly changing and new traps are being set for employers all the time. December is a great time to review and modify your employee handbooks as needed, especially since new laws generally go into effect January 1.

At the same time, I’d encourage all of my readers to review not only their own business contracts, but the contracts prepared by companies you are contractually doing business with. Undoubtedly, this is always well advised so you can intelligently evaluate risk and potential liability.

This applies to LLCs too!

Don’t be fooled into thinking that LLCs do not require annual maintenance and that Articles of Organization filed with the secretary of state is all you need. An LLC is not a “set-it-and-forget-it” deal: “Low Maintenance” is common misconception of running an LLC. LLC owners and managers have their duties as well, and annual maintenance is a must. Just as with corporations, when owners of LLCs do not perform their annual maintenance, they put their LLCs at risk of piercing of the corporate veil: as such, the owners personal assets are placed at risk and are fair game in a lawsuit.

At a bare minimum, LLCs should be completely formed with all proper supporting documents such as operating agreements and other agreements/contracts as needed.

Examples of critical LLC documents are the articles of organization, operating agreement, organizational resolution between the members, the corporate book, and your EIN certificate.

And just as with corporations, annual meetings need to be held and recorded in your corporate book, statements of information need to be filed with the secretary of state, and state and federal tax filings need to be maintained. Again, it’s always good to sit down with your accountant to make sure all of the boxes are being checked to maximize your audit protection with the IRS or state tax agencies.

Minutes of Annual meetings need to be recorded and placed in the corporate book. Matters to be recorded include annual sales for the prior year, what the business purchased, what the business sold, who was hired, who was fired, and business plans for the following year. The importance of this is that it shows that the corporate entity is being respected as an independent entity and properly governed.

Get With Your Lawyer

Too many owners of too many corporations make the mistake of returning to “business as usual“ after their articles of incorporation are filed. Corporate formalities need to be followed: file a statement of information, provide notice of annual meetings to all shareholders and directors, actually have annual meetings to discuss the business, and record all of the annual meetings with corporate minutes. To ignore or disregard these requirements can result in the owners of the corporation losing their personal assets to satisfy a business liability or judgment.

This list is by no means exhaustive, but Owners, Directors and Executives of Companies (Corporation, LLC or Otherwise) need to sit down with a trusted advisor to make sure critical maintenance matters are completed. Now is a good time to contact a transportation attorney to get ready and gear up for 2022.

January 1, 2022 Will Bring In A Slew Of New California Labor And Employment Laws

by gspencermynko

These New Laws Will Make Your Life Harder – And More So If You Kick Off The New Year With A Hangover.
California can always count on its politicians to justify their existence protect their constituents by passing new laws. Because complicated regulations screw business make life better for everyone, Californians everywhere can look forward to January 1 for new laws created in the cauldron of hell our noble legislature. While I probably shouldn’t complain too much because it gives me something to do, my readers have my sympathy.

Wage Theft is now “Grand Theft“

Yup, if you thought dealing with some moron at the labor board was bad, dealing with a prosecutor will be 10 times worse. AB 1003 adds a new section to the California Penal Code where the definition of “grand theft“ will include intentional theft of wages, including gratuities, in excess of $950 from any one employee, or $2350 from a group of employees. Furthermore, trucking companies should realize that the law defines an “employer“ to include the “hiring entity of an independent contractor.“ If 1 million reasons to be careful about classifying truck drivers as independent contractors wasn’t enough for you to take this seriously, you now have 1,000,001 reasons. 

Pursuant to California law, grand theft can be classified as a misdemeanor or felony and carries the potential for up to one year in jail for a misdemeanor, or up to three years in jail for a felony. I’m sure all of you can appreciate the seriousness in this: it is one thing to be able to pay money to get out of trouble, but it’s another thing to have your liberty taken away from you. This reminds me of a quote from a good friend of mine, who once told me “Spencer, anytime you can pay money to get out of trouble, it’s a good deal.” This changes that.

While it is true that certain labor code violations can be prosecuted as misdemeanors, actual prosecutions are rare, save for the really bad actors the state wants to make an example of. Whether the new law changes how the Labor Code will be enforced remains to be seen: My astute opinion is that, in general, California wants your money, and doesn’t want to spend money warehousing your ass in jail.

On the other hand, this could be beneficial to plaintiffs’ lawyers. In a criminal case, the prosecutor has to prove the matter beyond a reasonable doubt, which is a high legal standard. Plaintiffs’ lawyers who sue based on labor code violations merely have to prove their case by a preponderance of the evidence (a far lower standard than BRD). Conceivably, plaintiffs lawyers could simply sit back and let the state prosecutors do the heavy lifting, because if the state gets a win in a criminal case, the civil case is basically a foregone conclusion / slam dunk. While this is an interesting legal question, we shall see if this ends up having any real world relevance.

Employment Discrimination Legal Settlement Agreements

SB331 expands upon the existing law which prohibits a settlement agreement from preventing disclosure of factual information related to sexual assault, harassment, workplace harassment or discrimination based on sex, retaliation for reporting such acts, etc. SB 331 expands the restrictions to prevent the use of non-disclosure provisions in any case involving employment discrimination, which would include discrimination on the basis of race, religion, creed, disability, marital status, etc., etc. 
So companies need to be on notice that under SB 331, any provision in a settlement agreement that violates these restrictions is void and unenforceable. In other words, if there is a settlement of a case involving employment discrimination of any type prohibited by the Fair Employment and Housing Act (FEHA), any non-disclosure clause in the settlement agreement will be unenforceable against the claimant. Note to businesses: there is zero tolerance for discrimination in California. Act accordingly.

Employment Severance Agreements

SB 331 also limits the use of non-disclosure agreements in employment severance agreements. Specifically, this law makes it unlawful for an employer to put in a severance agreement any provision that prohibits disclosure of information about unlawful acts in the workplace. In other words, if the business was acting unlawfully in anyway, a nice severance package with a non-disclosure agreement cannot stop a former employee from dishing the dirt on your company. 

Furthermore, SB 331 requires that the employer notify the employee that they have the right to consult with an attorney before agreeing to a severance agreement. The soon to be former employee has a minimum of five business days to consult with a lawyer.
SB 331 goes on to state that severance agreements do not apply to settlements of lawsuits, labor board claims, arbitration disputes, or an employer‘s internal dispute process.  

The law provides sample language for a general confidentiality clause exception which states: “Nothing in this agreement prevents you from discussing or disclosing information about unlawful acts in the workplace, such as harassment or discrimination or any other conduct that you have reason to believe is unlawful.”

As is the case with so many regulations in California, this is a treacherous regulation filled with traps for the unwary. Employers who rely on severance agreements should consult with their lawyers in anticipation of the new law going into affect January 1.

Leaves of Absence

Under the California Family Rights Act, employees may take 12 weeks of leave per year to care for family members, including parents. The new law expands the definition of “parent” to include “parents-in-law”. Remember as well that the California Family Rights Act, or CFRA, applies to businesses with five or more employees..Record Retention
Pursuant to SB 807, employers are required to maintain personal records for four years. If a lawsuit has been filed, the records must be maintained until the statute of limitation runs or the litigation concludes, which ever occurs later.

Workplace safety

Pursuant to SB606, Two new types of workplace violations have been created: enterprise wide violations, and “egregious” violations.

In these cases, if an employer has a written policy or procedure that violates Cal OSHA rules or a law, or if there is a pattern or practice of those violations committed by the employer involving more than one worksite, a “enterprise wide violation” may be found. This is true even if some locations committed no violations. In other words, employers cannot tolerate “rogue outposts” who like to do things anyway they want.

Egregious violations are where the employer “intentionally, through conscious, voluntary action or inaction, made no reasonable effort to eliminate a known violation, or if a violation result in worker fatalities, a worksite catastrophe, or a large number of injuries or illnesses.”

Needless to say, these violations come with severe penalties. Disclaimer: I am barely scratching the surface of SB606 – I simply want you to be aware of this and get proper legal advice.

Independent Contractors

As far as trucking and transportation is concerned, there are no significant changes or amendments to the laws. AB5 / AB2257 are still churning their way through the courts.

Port Drayage Motor Carriers

Since 2019, the California Division of Labor Standards Enforcement, or DLSE, has maintained a webpage list of “port drayage motor carriers“ who were busted for violating wage and hour laws. Port Drayage companies who hire motor carriers on the naughty list can be held jointly liable for labor law violations of those motor carriers.

SB 338 amends of the law to now include joint liability for employment tax assessments (new work for EDD?) and failure to comply with health and safety laws.  Beware: if you operate in the ports, be sure to check the naughty list before you hire a trucking company. 

Finally, a new law involving COVID-19.

According to AB 654, employers must notify all employees who were on the premises at the same worksite and who came into close contact with a person infected with COVID-19. To make things more confusing, the employer must notify the employees present within the “infectious period” of the infected employee. Considering the fact that the CDC has constantly changing standards regarding contagiousness and quarantine periods regarding COVID-19, I have no idea how employers will be able to clearly comply with this provision. That said, you may want to consult with me while I put my doctor hat on to discuss this (the clinic I work has constantly evolving standards and recommendations about Covid-19). Personally, I don’t think COVID is going away anytime soon, and the virus will continue to mutate and evolve and be a part of our lives for a long time.
So those are the highlights for California labor and employment law changes for 2022. Now is a good time to contact a transportation attorney to get ready and gear up for 2022.

FMCSA Issues A New Rule To Ban Drivers With Drug And Alcohol Violations

by G. Spencer Mynko, Esq.

The FMCSA Enlists The States (and Their DMVs) In Their Battle To Keep CDL Holders With Drug And Alcohol Violations Out Of CMVs. The new rule goes into effect November 8, 2021

Pursuant to a new rule issued by the Federal motor carrier safety administration, truck drivers with a history of positive drug or alcohol tests will have their CDL‘s downgraded. States have until November 18, 2024 to come into compliance with the new rule. This rule has been published in the October 7 federal register. Furthermore, the FMCSA is amending its regulations to establish requirements for state drivers licensing agencies (SDLAs) to access and utilize the drug and alcohol clearinghouse.

Here is the Summary of the FMCSA’s New Rule:

“FMCSA is amending its regulations to establish requirementsfor State Driver’s Licensing Agencies (SDLAs) to access and use
information obtained through the Drug and Alcohol Clearinghouse (DACH or Clearinghouse), an FMCSA-administered database containing driver-specific controlled substance (drug) and alcohol records. SDLAs must not issue, renew, upgrade, or transfer a commercial driver’s license (CDL), or commercial learner’s permit (CLP), as applicable, for any individual prohibited under FMCSA’s regulations from performing safety- sensitive functions, including driving a commercial motor vehicle (CMV), due to one or more drug and alcohol program violations. Further, SDLAs must remove the CLP or CDL privilege from the driver’s license of an individual subject to the CMV driving prohibition, which would result in a downgrade of the license until the driver complies with return-to-duty (RTD) requirements.”

The rule requires state agencies to stop issuing, renewing, or upgrading commercial drivers licenses or commercial learner permits to drivers with a history of drug and alcohol violations, as well as downgrading drivers CDL‘s within 60 days of notification of a violation.

According to the FMCSA “The CDL downgrade requirement rests on the simple, but safety critical, premise that drivers who cannot lawfully operate a CMV because they engaged in prohibited use of drugs or alcohol or refused a test should not hold a valid CDL“. In other words, zero tolerance here. And I mean zero tolerance as generally speaking MOST ALL drug tests (blood alcohol levels being a notable exception) detect inactive metabolites and not active drug, so at best they reveal past drug use, but do not prove being under the influence while performing a safety sensitive function. “I smoked a joint at my cousin’s bachelor party in Vegas 2 weeks ago” is not an excuse.

State DMVs, Meet The FMCSA Drug And Alcohol Clearinghouse. Uncle Sam Drafts State DMVs Into Its War Against Drivers Accused Of Drug And Alcohol Abuse

The FMCSA goes on to say that “the rule closes that knowledge gap by ensuring that all SDLAs are able to determine whether CMV drivers license in their state are subject to the FMCSA’s CMV driving prohibition. The rule facilitates enforcement of the driving prohibition by requiring that SDLA‘s deny certain commercial licensing transactions and remove the commercial driving privileges of individuals who are prohibited from operating a CMV and performing other safety sensitive functions, due to drug and alcohol program violations.” Furthermore, the new rule puts more teeth into the FMCSA’s drug and alcohol clearinghouse by making SDLAs aware of substance abuse violators and keeping them out of commercial vehicles by enlisting them in enforcement efforts.

As a result of the new rules, police will be able to readily identify banned drivers with a simple driver’s license check during a traffic stop or roadside inspection. Therefore, all law enforcement officers will be able to easily identify prohibited drivers by conducting a license check and subsequently take them off the road.

Trucking Companies Are Brought Into The Cause As Well

Trucking companies who know of a driver’s use of drugs or alcohol based on a DUI citation are required to report “actual knowledge” of the violation to the clearinghouse. Such a violation will remain in the clearinghouse for five years or until the driver has completed the return to duty process, which ever is later, and regardless of whether the driver is convicted of the DUI charge. While there is a mechanism to allow drivers to document a non-conviction, in my opinion, once it’s been reported that a driver has been accused of DUI, they are guilty and really don’t have a meaningful opportunity to prove their innocence.

Will this rule make the driver shortage even worse?

There are approximately 90,000 drivers in the clearinghouse return to duty process, with approximately 70,000 in prohibited status. Of the banned or prohibited drivers, approximately 75% have not started the return to duty process. Furthermore, over the last two years, the clearinghouse has logged over 100,000 positive tests and very few of those drivers have completed the return to duty process. The question is, will this trend continue where 100,000 drivers are taken off the road every two years?


Marijuana is by far and away the most frequent drug of abuse found in the course of drug testing. I doubt I need to tell my readers that marijuana use is becoming more and more acceptable, yet a single positive test for marijuana, which does not mean the driver was under the influence of marijuana at the time of the test, would result in disqualification from commercial driving. Furthermore, a “prescription” or excuse from your doctor won’t make a difference.

A Suggestion For Motor Carriers

Motor Carriers may want to implement hair follicle drug testing prior to hiring CDL Holders to determine if regular or frequent drug use has been ongoing. Most new hires can stop using long enough in anticipation of a preemployment urine test for drug use to turn up clean – that’s much harder with hair testing where a 3 month window is detectable.

IRS Adopts More Stringent IC Test

by G. Spencer Mynko, Esq.

IRS Adopts More Stringent Independent Contractor Test

While California Goes “ABC”, The IRS Does a “123”
While California and the Trucking Industry continue to battle it out in the courts, the IRS has revised the way they evaluate classification of independent contractors

While I am certain that my readers are quite familiar with California’s “ABC“ test to determine whether someone is an independent contractor, and probably sick and tired of hearing about it, I haven’t talked about the IRS in quite some time. While that may not make you feel all warm and fuzzy, the reason I’m bringing it up now is because the IRS has also changed its method for determining whether a worker is properly classified as an independent contractor. Of course, trucking companies and the transportation industry in general shouldn’t forget that the IRS could knock on your door, so let’s see what they’re up to.

What was once 20, is now three.

That’s a little bit of an exaggeration, but a long time ago – ok, 4 1/2 years ago – I wrote an article about the IRS 20 factor test which has been reduced to three general categories the IRS considers when determining classification:

Behavioral control; Financial control; Relationship of the parties

The IRS looks at three main factors in determining whether and to what extent the employer exerts control over the worker and to what extent the worker is independent in performance of duties. Instead of my paraphrasing what the IRS says, I’ll simply quote it:

Behavioral Control: A worker is an employee when the business has the right to direct and control the work performed by the worker, even if that right is not exercised. Behavioral control categories are:
Type of instructions given, such as when and where to work, what tools to use or where to purchase supplies and services. Receiving the types of instructions in these examples may indicate a worker is an employee.

Degree of instruction, more detailed instructions may indicate that the worker is an employee. Less detailed instructions reflects less control, indicating that the worker is more likely an independent contractor.

Evaluation systems to measure the details of how the work is done points to an employee. Evaluation systems measuring just the end result point to either an independent contractor or an employee.
Training a worker on how to do the job — or periodic or on-going training about procedures and methods — is strong evidence that the worker is an employee. Independent contractors ordinarily use their own methods.

Financial Control: Does the business have a right to direct or control the financial and business aspects of the worker’s job? Consider:
Significant investment in the equipment the worker uses in working for someone else.
Unreimbursed expenses, independent contractors are more likely to incur unreimbursed expenses than employees.
Opportunity for profit or loss is often an indicator of an independent contractor.
Services available to the market. Independent contractors are generally free to seek out business opportunities.
Method of payment. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time even when supplemented by a commission. However, independent contractors are most often paid for the job by a flat fee.

Relationship: The type of relationship depends upon how the worker and business perceive their interaction with one another. This includes:
Written contracts which describe the relationship the parties intend to create. Although a contract stating the worker is an employee or an independent contractor is not sufficient to determine the worker’s status.
Benefits. Businesses providing employee-type benefits, such as insurance, a pension plan, vacation pay or sick pay have employees. Businesses generally do not grant these benefits to independent contractors.
The permanency of the relationship is important. An expectation that the relationship will continue indefinitely, rather than for a specific project or period, is generally seen as evidence that the intent was to create an employer-employee relationship.
Services provided which are a key activity of the business. The extent to which services performed by the worker are seen as a key aspect of the regular business of the company.

See Understanding Employee vs. Contractor Designation

Here’s some more elaboration courtesy of the IRS:

Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:
The extent to which the worker has unreimbursed business expenses
The extent of the worker’s investment in the facilities or tools used in performing services
The extent to which the worker makes his or her services available to the relevant market
How the business pays the worker, and
The extent to which the worker can realize a profit or incur a loss

Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:
Written contracts describing the relationship the parties intended to create
Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
The permanency of the relationship, and
The extent to which services performed by the worker are a key aspect of the regular business of the company

See Topic No. 762 Independent Contractor vs. Employee

So even though the 3 major factors have been broken down into a number of sub-factors, the 20 factor test is still lurking in the background, and still provides some guidance on determining whether a worker is properly classified as an independent contractor. Assuming you are still awake, I think you get the point. Even though they break things down to “three” categories, what you are really dealing with here is the old “common-law” test, not much unlike California’s Borello test.

Consequences of Misclassifying an Employee

Obviously, if the IRS determines that a trucking company has misclassified an individual, they are probably not going to say “Aww, gee-shucks, just don’t do it again, ya’ hear?” Indeed, the IRS states “Classifying an employee as an independent contractor with no reasonable basis for doing so makes employers liable for employment taxes”. Beyond that, chances are the trucking company is going to have to deal with a number of penalties, including a $50 fine for each W-2 the trucking company failed to file, a penalty of up to 3% of the misclassified employee’s wages, plus up to 40% of FICA taxes that were not withheld from the misclassified contractor, and up to 100% of the matching FICA taxes the trucking company should’ve paid. Furthermore, if the IRS determines that the employer intentionally and willfully misclassified its employees, the penalties are even greater.

Burden Of Proof

Just as in California, the IRS presumes a worker is an employee, so the burden falls upon the employer to prove that the worker is properly classified as Independent.

Ask The IRS!

If you’re really chomping at the bit to establish a relationship with the IRS, you can ask them to give you an opinion by filling out form SS-8 and let them help you figure it all out. Or, you can call me. While I may be ever so slightly biased, it’s probably a better idea to call me first.

Gratuitous Humor

All this talk of ABC and 123 made me think of the Jackson 5. Take it away Michael! ABC-123

Contact Transportation Attorneys for legal advice on how to comply with the laws and regulations that confront your company.

Work Comp Premium Audits

by G. Spencer Mynko, Esq.


Unfortunately, trucking companies may go into “shock” when they receive an audit bill for a recently expired Worker’s Compensation insurance policy. Of course, this is due to an unexpectedly high increase in premium from an audit. What is particularly troubling is that the increase in premium can be so high, that the viability of the trucking company is threatened. Hence the term “shock audit”.

Understandably, these audits can result in serious distress and frustration for the owners of a trucking company. And while outrage is a common reaction to being on the receiving end of such an audit, a cool, methodical, and specific analysis of the facts, along with supporting evidence, are what you will need to successfully dispute an unfavorable audit.

Finally, I want to make you aware of a trucking company that is facing CRIMINAL LIABILITY FOR FRAUD in a work comp audit for improperly classifying drivers as ICs.


The procedures involved in disputing a work comp audit are specific, detailed and deadline driven. Here is information directly from the WCIRB’s website:

Disputing Your Insurer’s Decision

To dispute a decision made by your insurer, the dispute must be in writing and sent to your insurer’s designated office. Contact information for your insurer’s dispute process is found in a policyholder notice attached to your policy titled “Your Right to Rating and Dividend Information,” under the paragraph “Our Dispute Resolution Process.” Issues disputed with your insurer may include classification assignments or premium issues. Claims-handling issues are not addressed in this procedure and should be directed to your claims adjuster.

Disputing the WCIRB’s Decision

To dispute a decision made by the WCIRB, such as the classification of the operations assigned on a WCIRB inspection report or the calculation of your experience modification, follow the process explained in the
California Workers’ Compensation Uniform Statistical Reporting Plan – 1995, the California Workers’ Compensation Experience Rating Plan – 1995 and the Miscellaneous Regulations for the Recording and Reporting of Data – 1995 under a section titled “Inquiries, Complaints and Requests for Action, Reconsideration, and Appeals.”

Appealing to the Insurance Commissioner

If you have exhausted either your insurer’s dispute process or the WCIRB’s dispute process, and you are still not satisfied with the outcome, you have the right to appeal the issue to the Administrative Hearing Bureau at the California Department of Insurance. When responding to your dispute, your insurer or the WCIRB should provide you with contact information for filing your appeal with the Department of Insurance. The information is also found in the “Your Right to Rating and Dividend Information” policyholder notice attached to your workers’ compensation policy; Part 1, Section V of the California Workers’ Compensation Uniform Statistical Reporting Plan – 1995; and Section VIII of the California Workers’ Compensation Experience Rating Plan – 1995. The appeals process is also found in the California Code of Regulations, Title 10, Chapter 5, Subchapter 3, Article 9.7. When filing an appeal, you should be as specific as possible concerning your issue and include any supporting documentation. You should also clearly explain why you believe your insurer or the WCIRB acted (or failed to act) in error.”

If you happen to be insured by State Compensation Insurance Fund (SCIF), The dispute resolution process is very specific:

A written statement detailing the specific information claimed to be inaccurate must be submitted to the dispute department. Any claim of inaccurate audit information must be supported by a detailed explanation of what is believed to be incorrect and what the correction should be. Copies of original financial and/or other records that support the discrepancy must cover all disputed information. All information needs to be received within 10 CALENDAR DAYS, if not SCIF will consider the matter closed. (You may wish to referred to SCIF’s Premium Audit Guide which is available online.)

Obviously this may seem intimidating and unfair: try to keep these things in mind if you feel your audit is incorrect:

Do not wait until the last minute to respond to the audit; Do not procrastinate. You have to get in front of this! If your account is turned over to a collection agency or a lawsuit is filed against you, you have very limited ability to negotiate directly with the insurance company.

Be proactive at correcting your audit. mistakes occur in a high percentage of audits. Insurance carriers know that. Be proactive at correcting those errors!

Follow the rules established by your insurance carrier for filing a workers compensation audit dispute. And be sure to be aware of the various deadlines in place for filing disputes and the appeal of any unfavorable decision. Again, do not delay.

So what do auditors look for and what are they interested in?

First and foremost: Do the drivers on their own trucks? AB5 and the ABC Test be damned, I have always stated that if the driver owns his own truck, and the truck is registered in the independent contractor’s name, this will get the Company 90 yards down the field toward being successful in their argument that the drivers are properly classified as independent contractors. One of the tests of whether someone is an independent contractor is whether they have made a substantial investment into their business: because a truck clearly qualifies as a “substantial investment”, owning a truck and have it having it registered in the driver’s name goes along way toward establishing that they are independent contractors. However, and many trucking companies may find this frightening, simply because the drivers own their own trucks does not guarantee the Work Comp auditor will agree that they are independent contractors. I have actually had Work Comp auditors decide that the drivers were independent contractors despite the fact that they owned their own trucks.

Who pays for fuel, insurance, and maintenance: Work Comp auditors will almost universally be interested in who is responsible for paying for fuel, insurance, and maintenance. More often than not, independent contractors will purchase fuel and insurance through the company. The critical issue though, is whether the drivers are free to pay for their own insurance and get fuel wherever they choose. As long as the driver is not forced to purchase fuel, maintenance, and insurance through the trucking company, the scale will tilt toward independence.

Work Comp auditors will ask whether the drivers drive for other companies. Obviously, if you work with independent contractors who actually drive for other companies, you want the work comp auditor to be aware of that. If they don’t drive for other companies, then you need to make it clear to the auditor that they have the freedom to drive for any company they choose to, but simply choose to only drive for your company. Again this is a huge issue.

Work Comp auditors will always ask whether drivers are free to accept or reject loads. If the driver accepts 100% of the loads they are offered, the work comp auditor maybe skeptical of their true independence. That is why it is so important to convince the auditor that the drivers are truly free to accept or reject loads as they please. Furthermore, there can be no reprisal for rejecting a load. It also needs to be made clear to the auditor that there are no guaranteed number of loads, and just because the driver gets a load this week, doesn’t mean he will get another load next week or for that matter, ever again.

Operating authority: Work Comp auditors always ask whether drivers have their own operating authority. While it is common industry practice for independent contractor drivers to drive under the companies’ authority, and I think it’s proper to do so, they still ask whether they have their own authority. This is why I always advise clients to work with drivers who do have their own authority, even if it is simply a CA number. Obviously, it’s nice if they have their own MC or DOT number, but some authority is better than no authority.

Contracts: Work Comp auditors always ask whether the independent contractor driver has a written contract establishing that the driver is in an independent contractor relationship with the company. While having a contract in place stating that “I am an independent contractor” is necessary in my opinion, it is not sufficient, nor will it guarantee, that a driver is an independent contractor. Auditors will always look beyond the contract and scrutinize the actual conduct of the parties.

Instructions and training. Remember, an independent contractor decides how to do the job and will establish his or hour and procedures, and act without supervision. So as far as a trucking company is concerned, the trucking company should only be concerned that the driver gets the freight from point A to point B The “how” that happens is entirely up to the driver. A company should never admit to providing the driver with “training” . Again, the driver uses his own methods and receives no training from the trucking company. Nor should the driver be required to attend meetings

Does the driver have any proof or indicators that he or she is truly in business for him or herself. Things like business licenses, incorporation, business cards, website, etc. are all important indicators that the driver is genuinely in business for himself. This is another reason I encourage companies to work with drivers who are incorporated. I’ve had work comp auditors clear drivers if they are incorporated and the 1099 that the company issues is attached to an EIN number as opposed to a Social Security number. Remember, an independent contractor is supposed to be in business for him or herself, and hold him or herself out to the general public as a professional driver who is free to drive for any company he or she chooses.

Membership in Owner Operators Independent Drivers Association. Membership in OOIDA helps make a driver look as if he’s truly independent.

Occupational accident Insurance: I have always felt it is a great idea to work with contractors who carry their own occupational accident Insurance . First of all, it makes them look independent if they purchase insurance to protect themselves against injury. Secondly, it protects the company if, God forbid, something horrible happened.

Understandably, these audits can result in serious distress and frustration for the owners of a trucking company. And while outrage is a common reaction to being on the receiving end of such an audit, a cool, methodical, and specific analysis of the facts are what you will need to successfully dispute an unfavorable audit.

The starting point in your fact-finding mission will include the original policy, the audit billing statement, and the audit worksheets.

A company will need to examine how the estimated original premium was calculated. Critical to this analysis are two important considerations: 1) what classification codes were used, and 2) how much payroll was assigned to each classification. For example, this frequently becomes an issue where the auditor assigns clerical workers into the higher risk “truckmen’s” classification. Another example is where independent contractor truck drivers are considered to be company or employee truck drivers. If the auditors misunderstood the nature of work done by some employees, the auditor may have misclassified certain workers into the wrong classification.

Certainly, estimated payroll on the original policy will need to be compared with the payroll used in the audit. Furthermore, any increase in additional premium will need to correlate with an increase in payroll. If you receive a significant audit bill, but any increase in payroll does not justify such a large additional premium bill, there may be a problem. Furthermore You must also compare the experience modification factor on the policy to the experience modifier on the audit.

What About Those Criminals You Mentioned Earlier?

OK, first of let me say I’m referring to “alleged” criminals since everyone is presumed innocent until proven guilty beyond a reasonable doubt. Here’s the link to the story: California Trucking Firm Owners Charged in Alleged $450K Workers Comp Fraud

“Trucking company owners were charged this week with multiple counts of insurance fraud after allegedly misclassifying employees as independent contractors in a scheme to underreport payroll by more than $1.4 million, resulting in a $234,000 loss to their insurer and a $220,000 loss to the Employment Development Department. [The owners] were doing business as Trust Transport Inc., a long-haul trucking company based out of their residence in Sacramento and a separate trucking yard in West Sacramento. From Feb. 25, 2014 through Oct. 20, 2016, Trust Transport maintained workers’ compensation insurance coverage with State Compensation Insurance Fund and reported $105,811 in payroll.”

“SCIF conducted audits to confirm the payroll and found that several workers were issued 1099s and had been misclassified as independent contractors.

California Department of Insurance detectives served a search warrant at Trust Transport’s bank for financial records and discovered roughly $1.4 million in unreported payroll from the misclassified “independent contractors.” The investigation reportedly revealed [the owners] fraudulently misclassified these employees in order to avoid paying higher workers’ comp insurance premiums.”


Don’t be those guys.

Finally, if you are unsure as to what you need to do, contact someone who does. If you find yourself at risk for undergoing a workers compensation premium audit or you are in the midst of one or you have been assessed, call Transportation Attorneys ASAP.