Contracts are (still) important! Recently, I was consulted by a shipper who contracted with a carrier to deliver several loads to the ports. Unfortunately, as so often happens in this industry, problems arose. For whatever reason, the carrier was unable to deliver the containers to the ports for overseas delivery. They literally missed the boat.
Unfortunately, The relationship between the shipper and the carrier deteriorated to the point of name-calling, the use of inflammatory language, accusations of fraud, conversion, theft, bad faith, and general criminality. “Call the cops?” Forget about it: the cops said this is a “civil” matter, which is basically cop-speak for “fuck off”.
Unfortunately, the shipper’s cargo is being stored in an undisclosed location by the carrier, who is now demanding an exorbitant (if not extortionate) fee for return of the cargo. So the shipper is not in possession of their cargo, and even worse, their customer, a secured creditor, does not have the cargo they bargained for.
But most unfortunately, there was no contract between the shipper and the carrier: not only was there no shipper – carrier contract, there is not even a bill of lading that exists regarding this fairly valuable cargo. So this unethical carrier can take advantage of their possession of cargo, and may exert an illegal lien to sell the goods. And to add insult to injury, because there was no contract in place, the shipper is unlikely to be awarded attorneys fees in the event of litigation, which is what they are looking at now. And by the time litigation is done, the amount of money they spend in lawyers fees will easily approach the value of the cargo.
Had the shipper had in place a clearly and strongly worded contract in place, they probably could have avoided all of this (eg.: lien rights), and, in the event of litigation, get their legal fees paid. Don’t let this happen to you. I don’t care if you’re a shipper, broker, carrier, independent contractor, freight forwarder, etc., etc. If you are in the transportation business, regardless of your role, and you are conducting business without a contract in place, you are a goddamn fool and you deserve to get your ass handed to you in a dispute.
Long Live The Independent Contractor Operating Agreement
So with that pleasant musing, let’s revisit the independent contractor operating agreement, and why it is still so important. Before I address independent contractor agreements, I want to address AB5 and the “ABC test”. It’s my opinion that Federal law preempts AB5 and the state of California has violated the laws of the United States in their attempt to destroy the independent contractor business model in trucking. While the cases are making their way through the courts and many issues are still in dispute, I am optimistic that, in the context of Trucking, AB5 will fall. Hence, the ICOA still is important.
ICOAs Define the legal status of both parties.
While an ICOA cannot guarantee that a worker will be considered an independent contractor under the law, an ICOA does provide powerful evidence that the independent contractor entered into a contract accepting and understanding their status as an independent contractor, and that the work they perform complies with the legal requirements of independent contractorship.
The ICOA also makes clear of the duties and responsibilities, and expectations and rights, of both the contractor and the principal.
ICOAs put the parties on the same page.
A clear ICOA helps avoid misunderstandings and makes clear the terms of a contract. So again, should a dispute unfortunately arise, the first document you’ll go to will be the contract between the parties.
Critical clauses that must be included in an ICOA:
The contract needs to state that this is a “independent contractor operating agreement” and needs to make it clear the date when the contract goes into effect.
Both the principal and the independent contractor need to put down their legal names, including the legal names of their companies. Again, if the contractor is an LLC or Incorporated, the contract needs to make it clear that the principal is contracting with a business entity, and not a sole proprietor. As a sidenote, I still believe that working with independent contractors who are incorporated or operate as an LLC moves the needle closer to proving independent contractor status.
The contract needs to define the agreement and the parties: again, the independent contractor is knowingly entering into the agreement as an independent contractor. This always helps should someone try to backtrack and claim that they thought they were an employee.
The duration of the contract clearly needs to be stated in the agreement, as well as the provisions for termination. It is important that an independent contractor operating agreement include details on how either party can terminate the agreement at any time.
The scope of the independent contractors duties need to be clearly described and stated in the independent contractor operating agreement. Again, details are important, because it makes clear what the contractor is in control of, and what the principle is in control of. Remember, the concept of “control” is always critical in any independent contractor/misclassification analysis.
The independent contractor agreement should make it clear that the independent contractor provides the “instrumentalities of the trade“. In other words, the independent contractor provides the materials and labor, and is responsible for their cost. And in Trucking, of course, that means actually bringing a truck, and associated costs such as insurance, maintenance, and fuel, along with professional driving skills, to the table. No ICOA should be without these critical details.
How the IC is compensated, and how the amount is calculated and when it is due is critical. This must be expressly stated in the agreement.
The contract needs to make it clear that the independent contractor does not have the rights of an employee, nor does the company have the right of control over the contractors schedule, manner and means of work, and the moment to moment decisions that a contractor is responsible for.
Furthermore, the terms and conditions of the contract need to be kept confidential, and any confidential or proprietary information may not be disclosed or misappropriated by the contractor. This is critical, if a contractor decides they want to form their own business, and try and steal your customers.
An Indemnification clause is a critical part of any independent contractor operating agreement. indeed, this is perhaps one of the most critical parts of an independent contractor operating room.
Of course, all of the miscellaneous stuff, such as attorney fees provisions, choice of law clauses, venue and forum selection clause is, are all critically important in any independent contractor operating agreement.
California Budgets Over $17M To Enforce Misclassification Law
Now is NOT the time to let your guard down: the California state legislature has reached an agreement that will see $17.5 million allocated toward enforcement of AB-5 in the 2020-2021 budget year. That’s right kids: the Department of Industrial Relations will receive $17.5 million to fund over 100 positions to ensure compliance with misclassification law. Yikes! The funds will primarily be used to conduct audits, carry out prosecutions, and charge penalties on employers.
One Last Time: Contracts Are Critical
For all parties in the chain of the transportation of goods, there should be a contract in place. There should be a contract between the shipper and the carrier or broker, there should be a contract between the broker and the motor carrier, there should be a contract between the motor carrier and the independent contractor who may be driving under the motor carrier’s authority. Furthermore, if the shipper and carrier are working together directly, there should be a contract between the shipper and the motor carrier. If freight forwarders are involved, whoever is dealing with them should have a written contract in place with them. When brokers tender loads to other brokers, there should be a contract in place. Similarly, if the freight has to be warehoused for a while, whoever is entrusting the cargo to a warehouser, should have a contract with the warehousing company.
These documents are critical because they determine the rights, duties, and obligations of all of the parties. One of the first questions out of my mouth, when someone calls me up about a dispute, is “was there a written contract in place?” Too often, I hear “no”, which automatically triggers my mind to say, “ah, fuck”, because I know they are in a tough spot.
Don’t let yourself get into this situation: having proper contracts in place with the entities you do business with can go along way toward protecting your interests and the well-being of your company.