Friday, March 20, 2015

No Good Deed Goes Unpunished

Clean Truck Lease Backs Still Under Scrutiny

When the Clean Air Action Plan (CAAP) came into effect in 2006, motor carriers operating in the Port of Long Beach (POLB) and Port of Los Angeles (POLA) were faced with a ultimatum; upgrade to clean equipment or find a new line of work.

At the time, most independent owner operators (IOOs) hauling for these motor carriers were driving what was then deemed to be non-compliant trucks equipped with dirty, uncontrolled diesel engines. Without retrofits and eventually a 2007 model year engine, these vehicles were not allowed to enter into POLB or POLA after the progressive truck ban under the CAAP was implemented.
Motor carriers needed to completely change their business models and purchase their own trucks driven by employees, or help their IOOs get into newer vehicles so they could keep hauling. Both options left much to be desired.
Although the POLA tried to help carriers make the choice by attempting to force out the owner operator business model, carriers sought creative strategies to help their IOOs while attempting to maintain the contractor model. Everyone in the industry saw the writing on the wall – a truck ban was going into effect and little could or would be done to stop it.
With few other options, the industry responded, and since then the ports have recorded unparalleled emission reductions, primarily due to the replacement of older, highly polluting diesel engines by much cleaner diesel and natural gas trucks.
Today particulate matter emissions at the ports have dropped 80-90% below the levels measured in 2005. Nevertheless, there looms the possibility of a second truck turnover requirement. With the South Coast AQMD looking at everything from backyard BBQs to burger joints for emission reductions in the region, there is little likelihood that the 2007 diesel engine will continue to be eligible for port service in the San Pedro Bay ports over the next 5 years.
There is also a very good chance that California and the rest of the country will be facing stricter ozone standards, precipitating a need for additional reductions. And with a limited tool belt for local regulators seeking to control mobile sources of pollution, the ports serve as a proven medium for a simple solution regardless of how the ports themselves feel about it.
The emissions requirements within the original CAAP were based state law adopted in 2005. Specifically, the California Air Resources Board (CARB) Drayage Truck Regulation section 2027 that covers every maritime port and intermodal rail facility within 80 miles from a maritime port. The regulation allows local jurisdictions to pass stricter laws within the regulatory framework of the Drayage Regulation, which is exactly what LA and Long Beach did, going above and beyond the statewide standards and requiring the 2007 engine two full years before the statewide plan.
No industry group had enough political will or capital muscle to stop CARB from passing the Drayage truck rule in 2006 and when POLB and POLA tightened the standards and created a separate regulatory structure under the CAAP, the industry was so concerned with the ban of the independent contractor model, that the emissions requirements were never formally challenged by anyone.
Many will recall that ATA did sue POLA on the IOO ban, which went all the way to the SCOTUS. The high court eventually found that the employee mandate/independent contractor ban was in violation of federal law, specifically the Federal Aviation Administration Authorization Act (F4A) provision that gives the federal government exclusive jurisdiction over rules that impact the routes, rates, or services [missing word] motor carriers.
Despite lower court rulings in favor of the employee mandate, the clear violation of F4A gave ATA confidence to pursue the litigation against the POLA all the way to the high court. Long Beach was not sued because they decided to remove the employee mandate all together and avoid litigation to save precious capital resources. However, Long Beach did move forward on the truck turnover portion and other provisions under a registration agreement that ATA and POLB agreed on in lieu of the IOO ban.
However, ATA was not willing to challenge the emissions standards at either port, so the standards went forward while the IOO ban was being challenged. This left many motor carriers with the issue of having several owner operators – thousands in fact – who were unable to secure new equipment.
Some forward thinking IOOs and their motor carriers capitalized on grant opportunities and low interest guaranteed loans through the Port Finance Acceptance Company (PFAC), a creation of Daimler Truck Finance and a southern California finance firm, Crossroads Equipment Lease and Finance.
With the grants and a PFAC loan, some IOOs were able to secure trucks with monthly payments as low as $250 using only the grant money as a down payment. Between state and local grant funds, over 1,600 trucks were replaced in LA/LB. However, at the time of CAAP’s passage in 2006, there was estimated to be 12,000-16,000 trucks servicing LA/LB port complexes. Needless to say, there was a large unmet need for financial assistance.
In order to offset these high costs, trucking companies set up programs to lease newer, clean trucks directly to their IOOs to continue in port service. Many of these leasebacks came with strings attached that among other things prevented their IOOs from taking their “tool” (in this case the truck) to another carrier.
Granted, thousands of drivers in this leaseback scenario were able to pay off their truck and still make a good wage. Many in fact have upgraded their equipment through traditional finance institutions once they were out of their leaseback, having received a positive credit bump from their completed lease that carriers reported to credit bureaus.
Although well intentioned, the problem with the leaseback arrangement is that when the employment test is applied by federal or state regulators, more often than not it is found to be one of many influential factors for misclassification. One of the key provisions in determining whether or not an independent contractor is misclassified is who is in control of the “tools.”
The central question is: How can someone be truly an independent contractor when the tools they are using to complete the task are not only provided by, but are in fact owned by the company who is contracting with the driver?
Recent court decisions and decisions made to stave off potential misclassification actions outside of litigation have only served to complicate the issue. Regardless of many independents wanting to remain as such, large intermodal carriers such as Comtrak Logistics, have completely abandoned the IOO model in favor of employee drivers, leaving the independent entrepreneurs to find work hauling for another motor carrier or stop driving in port service all together.


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