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Deregulation of the trucking industry, which began with the federal Motor Carrier Act of 1980 and was furthered by additional legislative changes in 1994 and 1995, greatly changed the trucking scene. Competition for shipments increased, and many large trucking companies went bankrupt. New trucking corporations sprang up. These corporations operated with either non-union drivers or independent contractors to save money. In recent years, there has been a tendency for fleet owners to downsize the number of trucks they own, subcontracting hauls to independent contractors while retaining control over customer freight invoices.
- Payroll costs are reduced.
- The owner operator is responsible for maintaining and repairing his own truck.
- The owner operator pays for his own fuel.
- The driver, as owner of the truck, must carry liability insurance.
- Due to the competitive nature of the trucking industry, fleet owners who make use of the bidding process before offering a contract to an owner operator may be able to enter into an agreement at a rate that is quite favorable to the fleet owner.
Points to Ponder
A ratio showing operating expenses as a percentage of revenue is often used to indicate a company's profitability. Such a ratio is known as an operating ratio or "OR." If a company's OR is 85, it means that company's income is 15 percent greater than its operating expenses. Trucking companies operate on a very thin margin, averaging about five percent.
With such a high operating ratio, fleet owners must be vigilant in order to keep from going bankrupt. At times the cash flow does not keep up with the bills. If the company does not plan ahead so that employees and owner operators are paid on time, it will not survive. One funding option is factoring trucking freight invoices. Factoring companies buy, at a discounted rate, invoices that are current but not yet paid.
Truckers who operate their own trucks usually contract with larger companies to haul freight. Such truckers are self employed. Although one often hears the term "hiring" in speaking of entering into a contract with owner operators, legally if someone is hired he is an employee.
Fleet owners sometimes lease trucks and contract with the drivers holding the leases to haul freight for them. This practice has led to many lawsuits to determine whether certain drivers were employees or independent contractors. The courts have looked beyond the contracts to consider the actual circumstances pertaining to each driver's work and any requirements related to the truck or the haul. A few questions asked were:
- Does the driver have the freedom to accept or turn down hauls?
- Is the leased truck marked with the fleet owner's logo or colors?
- Who pays for the fuel?
- Does the driver determine, within federal regulations, when to drive and when to rest?
- Who determines the route?
- Who chooses where the driver buys his fuel?
- Who maintains insurance policies on the truck?
- Who determines what company will provide insurance coverage?
- Who determines when, where and how repairs and maintenance on the truck will be performed?
- Does the driver have all required federal permits to be a business owner in the trucking industry?
- Can the driver determine his own substitute driver if one is needed?
- Can the driver use the leased vehicle to haul loads for other companies?
- Does the company require the driver to wear company uniforms when hauling loads for that company?
- Does the company pay hourly rates to the driver at any time?
- Is all work performed by the driver to the benefit of the company that leased the truck to him?
- Is there a collective bargaining agreement that includes the driver?
- Does the driver receive W-2 forms from the company?
- What are the conditions surrounding the termination of the lease agreement?
Who controls the driver's work is the basic question. In order for the driver to be an independent contractor, he must have the freedom to contract with other companies. He must be able to determine his own hours and the routes he drives to deliver loads. He also must maintain insurance policies on the leased truck, have all required business permits and licenses, and be able to determine his own substitute driver if one is needed.
Payment of hourly wages by the fleet owner or issuance of a W-2 form rather than a W-9 form at the end of the year is proof that the driver was employed by the fleet owner. This makes his earnings subject to payroll taxes and his hours subject to overtime wage rules. Courts have determined that driver membership in the Teamsters Union or other unions normally reserved for employees is proof that the driver is an employee rather than an independent contractor. Company uniforms and truck markings also signify that the driver is the fleet owner's employee.
Subcontracting - An Individual Choice
While contracting with owner operators is beneficial for some fleet owners, it may not be the right choice for others. Trucking companies that have major investments in brand recognition might find that deliveries made with trucks that do not display the familiar markings of their brand negatively impact their clients. For example, think of the marking and color combination one sees and instantly recognizes as a United Parcel Service truck.
Loyalty is another factor. Trucking companies that pay wages fairly and on time, provide training and education for their employees, have a good benefit package and assign each driver a particular truck gain the respect of the drivers. Such drivers are motivated to take good care of the truck. They do everything they can to ensure that loads arrive safely and on time and that all clients are happy with them. They help build a strong company image through their steadfastness, dedication and positive attitude.
Mixed loads that require on-loading and off-loading at various locations often are better executed through fleet owner drivers. It can be very difficult to maintain accountability for safe, timely delivery of all freight when such loads are transported by subcontractors, especially if the completed delivery of all goods is carried out by more than one subcontractor with each new subcontractor dependent on the one before him. Accountability in case of improper or untimely delivery as well as damaged freight can be hard to track.
One-time hauls present an opportunity for fleet owners to subcontract with owner operators, as do periodic full-load hauls. When a trucking company has a client whose freight is outside the parameters best suited to the trucks in that company's fleet, subcontracting to an owner operator who owns the right equipment for the haul makes sense. The equipment will be well matched to the load, reducing risk of accidents as well as damage to the truck from hauling a load not suited for it. A driver who owns his own truck is motivated to take excellent care of that truck.
With careful planning, fleet owners can save money through the use of owner operators as independent contractors who haul certain types of loads for the company. Any time freight is delivered and an invoice generated, the company has an asset that can be leveraged to obtain funds. If the company's cash flow is a problem, factoring trucking invoices may be the solution.
At 1st Commercial Credit, we have account representatives specializing in factoring trucking and transportation businesses. Whether your trucking company is running dry vans, reefers, or flatbeds, you must be successful at managing these challenges:
- Maximizing cash flow
- Avoid doing business with slow paying account
- Minimizing uncollectible accounts
These challenges are our primary focus. In addition to factoring your freight bills within 24 hours, we can provide pre-screening of your new or existing freight brokers or shipper accounts, collect your receivables, and provide you with easy to understand, real-time, on-line access to all your factoring data.
First Commercial Credit is a factoring company that offers freight factoring for the transportation industry. Services may include but are not limited to trucking, air freight, local delivery and freight brokers in the USA, Canada and the United Kingdom.
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