On July 20, 2016, Judge Garrett of the Court of Appeals for the State of Oregon issued four favorable decisions in cases challenging the classification of drivers as independent contractors. These cases are worthy of closer review even if your business has no independent contractor operations in Oregon for at least two reasons.
First, more so than most judicial opinions, these practically sequential decisions highlight the important nuances between the use of owneroperators in, for example, manufacturing, versus the trucking industry, where state and federal governments impose regulations on motor carriers that, if ignored or misunderstood, can lead a judge (or panel of judges) to improperly conclude that carriers direct and control all of the means and methods used by owneroperators in the performance of services to those carriers. To that end, the Oregon decisions further stand as excellent examples of judicial panels that took the time to consider the economic realities of the independent contractor owner-operator business model within the context of the trucking industry.
Second, and perhaps more importantly, the four decisions underscore the significance of carefully crafting written agreements with your owner-operator fleets. At minimum, the Oregon Court of Appeals shows carriers how to properly use written agreements to avoid ambiguities and unintended consequences.
In Delta Logistics v. Employment Department Tax Section, Delta appealed the Administrative Law Judge’s (ALJ’s) decision that services provided by Delta’s owner-operators constituted employment.1 Delta disagreed because, under Oregon law, transportation services performed by any person that “leases their equipment to a for-hire carrier and that personally operates, furnishes and maintains the equipment and provides service thereto” are exempt from employment.2 Surprisingly, the ALJ agreed that Delta was a for-hire carrier, it did not own its own trucks, the trucks used were furnished by owner-operators who either personally operated those trucks or hired drivers to operate them, and the owner-operators maintained the trucks.3
Nevertheless, the ALJ still determined that the exemption did not apply because Delta’s agreement with its owner-operators did not constitute a lease under the statute.4 The ALJ reasoned that there was “no transfer of legal possession and use of the vehicle in exchange for compensation” under Delta’s agreements with its owner-operators.5 On appeal, however, the Court concluded that “an arrangement that has the effect of transferring to the for-hire carrier the right to legal possession and use of the vehicle, while requiring the owner to retain physical possession, control, and use of the vehicle” meets the requirements of a lease under the exemption statute.6
The ALJ also ruled that that the owner-operator agreements were not leases because they did not specifically “include a provision for remuneration for Delta’s use of the vehicles.”7 The Court of Appeals found that while the Owner Operator Contracts did not allocate a portion of Delta’s payment to the owner-operators for the lease of their vehicles, the Court was unaware of a requirement that such leases contain a specific allocation or that consideration was required to be “separately stated.”8
Last, the Employment Department argued on appeal that the ALJ’s order should be affirmed as to owner-operators who hired drivers and did not personally drive their vehicles.9 The Court of Appeals interpreted the statute to include the owner-operators’ drivers under the definition of “services performed in operation of the motor vehicle,” and, therefore, the exemption applied to the hired drivers as well.10
In Market Transport, Ltd. v. Employment Department, Market Transport was operating with independent contractors that either personally operated their trucks or leased their vehicles from third parties.11 The Court noted this common industry practice while reversing the ALJ’s decision as to assessments to Market Transport for independent contractors who operated their own vehicles.12 With respect to Market Transport’s drivers that leased their vehicles from third parties, the Court vacated the ALJ’s decision and sent the issue back for further proceedings as to whether those drivers “furnished” or “maintained” their vehicles under the statute and, therefore, qualified for the exemption from employment.13
The ALJ’s decision with respect to contractors that operated their own vehicles was that those contractors were not exempt from employment under Oregon law due to a lack of specific consideration in the applicable agreements for the period in which the vehicle was not in use.14 The Court reasoned that even when the vehicle was idle, Market Transport was still required to maintain and pay for operating licenses, taxes, and insurance, and those continued obligations were, in fact, consideration.15
In May Trucking Company v Employment Department, the Court of Appeals reversed, in part, tax assessments imposed with respect to May’s owner-operator drivers who owned their trucks outright.16 May’s fleet included approximately 200 owner-operator drivers.17 Seventy of those drivers either leased or purchased their vehicles from May, and then leased those vehicles back to May by agreement. The remaining 130 drivers owned their vehicles outright, and also leased their vehicles back to May by agreement.18
Based on “the documents [i.e., agreements] under which the contract drivers were leasing or purchasing their vehicles from May,” the Court of Appeals affirmed the ALJ’s determination that the drivers who leased or purchased their vehicles from May were not exempt from employment.19 In effect, the agreements between drivers leasing vehicles from May did not provide the drivers with any “transferrable interest” in the vehicles. Similarly, the agreements between drivers purchasing vehicles from May expressly provided that the “purchase” was a “bailment only” until the purchase price was paid in full. Relying upon Oregon case law providing that furnishing “their equipment” to a for-hire carrier requires a transferrable interest in the vehicle, the Court of Appeals easily found that May’s lease and purchase agreements failed to create such an interest for the owner-operator drivers.20
The drivers who owned their vehicles outright leased those vehicles back to May pursuant to an Independent Contractor Agreement (ICA). The ALJ concluded that the ICA failed as a lease under the exemption statute for three reasons.21
First, the ALJ found that the lease “lacked a definite duration.”22 The ICA provided that it terminated when either party gave 30 days written notice, or immediately upon the owner-operator’s breach. The Court of Appeals adopted May’s argument that a lease was not required to state an end date, as long as “the circumstances under which the lease terminates” could be determined.23 Under Oregon law, “a lease or personal property that does not state a specific duration is construed to be terminable at will.”24
Next, the ALJ found that “the [ICA] failed because of an absence of consideration for the use of the equipment” on the grounds that the leased “did not allocate remuneration specifically for May’s use of the vehicle or for the truck’s ‘idle time.’”25 But, as the Court of Appeals noted, it had previously rejected that reasoning (in the Market Transport case), and rejected it again here.26
Third, the ALJ concluded that May did not show that owner-operators personally maintained their vehicles. The ICA required the owner-operators to maintain their vehicles, but since they frequently used May’s maintenance facilities and only “nominally” paid for services there, the ALJ concluded that the owner-operators did not “personally perform them.”27 The Court of Appeals held that the ALJ erred because “a contractor with financial responsibility under an agreement for the maintenance of equipment, and the freedom under an agreement to select a third party to perform maintenance, satisfies the requirement for personally performing the maintenance under [the statute].”28
In CEVA Freight, LLC v. Employment Department, the Court of Appeals reversed tax assessments imposed by the Employment Department and found that the services performed by CEVA’s owner-operator truck drivers (and drivers who worked for owner-operators) were excluded from employment under Oregon law.29 The ALJ concluded that the owner-operators were not independent contractors for three reasons.
First, the ALJ found that the owner-operators did not meet the statutory definition of an independent contractor because they did not obtain the requisite licenses to perform services pursuant to their agreements with CEVA. The Court of Appeals looked to the agreements between CEVA and its owner-operators and reasoned that since the owner-operators were providing services to CEVA, and not the public in general, the owner-operators were only required to obtain state drivers licenses, and were not required to obtain USDOT operating authority (they were operating under CEVA’s authority).30 As a result, the owner-operators met the third prong of the statute “because they were responsible for obtaining all of the licenses— namely, state driver licenses—necessary to accomplish their pick-up and delivery services.”31
Second, the ALJ concluded that CEVA had the right to exercise direction and control over the owner-operators’ means and manner of providing services under the agreements.32 The Court of Appeals again disagreed, holding that, on balance, the owner-operators “provided the fundamental means of carrying out the services” even though CEVA provided certain resources to its owner-operators that were similar to “means” described in the Oregon Administrative Rules. Likewise, owner-operators “controlled the method by which they performed the delivery services required by their agreements with CEVA,” even though CEVA imposed certain requirements upon the owner-operators that “suggested a degree of control over the ‘manner’ of providing the services.”33
Third, under Oregon law, a person is engaged in an independently established trade or business if three of the five criteria in ORS 670.600(3) are met. The ALJ found that CEVA had failed to show that the owner-operators were engaged in “an independently established business.”34 The Court of Appeals reversed the ALJ’s findings based upon the “unambiguous terms” of the agreements, holding that the owner-operators:
(1) bore the risk of loss related to their business through their responsibility for loss of their vehicles due [to] accident or break-down and responsibility for loss to CEVA’s customers, ORS 670.600(3) (b); (2) made significant investments in their business through the ownership or lease of their vehicles and payment of all operating expenses, ORS 670.600(3)(d); and (3) had the authority to hire or fire helpers to provide or to assist in providing the services. ORS 670.600(3)(e).35
Since CEVA’s owner-operators met the statutory definition of independent contractor based upon the Court of Appeals’ review, the services of CEVA’s owner-operators were exempt from employment under Oregon law.
As described above, there are notable commonalities among these four decisions that are instructive for drafting purposes in your agreements with independent contractor owner-operators. For example, the Employment Department and ALJ may not have challenged May Trucking’s exemption had May drafted its agreements with a careful eye on Oregon law. Since Oregon law requires owner-operator drivers to have a “transferrable interest” in their vehicles, May could have chosen to only engage owner-operators who owned their trucks outright or purchased those trucks from May and refrained from including the “bailment” language in its agreements. Delta Logistics (as well as Market Transport) could have been more precise in its agreements regarding the consideration given to owner-operators for the use of their vehicles, specifically with respect to what portion of remuneration represented compensation for use of the vehicle, including any down or idle time. May Trucking could have described its owner-operators’ duties to personally maintain their vehicles in greater detail, including drawing a clear line between those duties and the services (and costs therefor) offered by May at its facilities.
We do not want to assume that the carriers in these cases used generic form agreements with their owner-operators, but if they were, these cases illustrate that “cookie-cutter” or generic form agreements can be dangerous. With independent contractor arrangements under such intense scrutiny, carefully-drafted, customized agreements are warranted. Work with your advisors to understand the regulatory landscape in the jurisdictions in which your owner-operate fleets are based to ensure that your agreements will be more likely to withstand regulatory scrutiny.