Welcome to Delta Nu Alpha Dark Clouds on

Welcome to Delta Nu Alpha Dark Clouds on the Horizon – Issues Involving Truck Transportation Webinar - February 21, 2008 With Avery Vise, Editor, Commercial Carrier Journal and Henry E. Seaton, Seaton & Husk, L. P.

Henry E. Seaton & Husk, LP 2240 Gallows Rd. Vienna, VA 22182 www. transportationlaw. net Henry E. Seaton is a graduate of Duke University (A. B. ’ 70) and Vanderbilt School of Law (J. D. ’ 73). He has practiced law for 30 years in the Washington D. C. area representing motor carriers and brokers. He is a member of the Vienna, VA based law firm of Seaton & Husk. The firm specializes in freight claims, freight charge collection, contracting issues, carrier representation before the FMCSA and bankruptcy issues. . Mr. Seaton writes a monthly column on transportation law for the Commercial Carrier Journal (CCJ) and is the author of Protecting Motor Carrier Interests in Contracts. He serves as commerce counsel for the National Association of Small Trucking Companies. He was the Delta Nu Alpha Transportation Professional of the Year in 2001 and is a frequent speaker and lecturer regarding cargo claims, freight charges, contracting and risk/insurance issues effecting carriers and brokers. Mr. Seaton can be reached at HESeaton@aol. com. For articles and other information, please see www. transportationlaw. net.

Thank You Corporate Sponsors! Kings Express Landstar RMCS Apex Capital LP *USA Transportation Services, International *Champagne Logistics *Greatwide Truckload Management

About DNA n n n Fraternity of transportation professionals Open to all with interest in education Interdisciplinary – shippers, carriers, third party logisticians and students Traditional chapter format – Milwaukee, Chicago, Rockford, Nashville, Bowling Green, Grand Rapids, Louisville, Le High Valley Student chapters at Western IL University Scholarship program

Syllabus of Future Webinars Contains Chronic and Acute Industry Problems n n Format is issue presentation followed by open question and answer. Diverse opinions are encouraged. Goal is to assess issues, impart information and better prepare listeners as knowledgeable professionals in any industry which too frequently ignores day-to-day problems of contracts, claims and operations in favor of “supply chain management. ” CCPAC accreditation of 3 courses for cargo claims specialists.

Upcoming Webinar Topics 3/18/2008 4/15/2008 5/13/ 2008 6/17/2008 7/15/2008 8/19/2008 9/16/2008 10/21/2008 11/18/2008 Accident Liability Travels Up The Supply Chain Contract Waivers – 50 Reasons to Keep Bill of Lading Terms and Conditions, and Federal Rules Multimodal Cargo Claim Issues – A Prescription for Confusion Contracts of Carriage – A Study of Controversial Provisions Which Divide Shippers, Brokers and Carriers FMCSA Safety Regulations The Scourge of Double Brokering Cargo Claim Mitigation, Adjustment and Salvage Issues INCOTERMS – The Language of the Global Economy Supply Chain Security Issues – Alphabet Soup and New Regulations For more information and to register, go to www. deltanualpha. org Approved for Certified Claims Professional Accreditation Council (CCPAC) Credit (1. 5 CEUs)

Dark Clouds on the Horizon Acute Problems Facing Truck Transportation in 2008

The Economy The Credit Crunch Economic Downturn Insolvency Issues

Economic Downturn n The effect of economic downturn on transportation: Unforeseen bankruptcies n Unforeseen credit risks n Effect on brokers/effect on carriers n Critical vendor status, effect on small vendors (i. e. Quebecor World) n

"It's only when the tide goes out that you find who has been swimming naked. The tide is going out and it won't be a pretty sight. " -- Warren Buffett

Credit Crunch Leading to Downturn n New Housing Construction Down Forecast truckload cut backs n Little or no growth by major fleets n New truck sales down – cost/pre-buy n No “Red Iron” against the fence is aim n Growth in intermodal/rail and dedicated n “Alumni” are returning as sign of driver shortage abating n

Insolvency Threats n Effect of shipper bankruptcy on carriers Critical vendor status for few n Carrier is general unsecured creditor which loses pre-petition receivable and is hit with preference n Carriers should be tightening credit terms while strapped shippers seek greater days to pay n Effect on small carriers of factoring and recourse financing is significant n

n Effect of shipper bankruptcy on brokers If broker is “at risk, ” shipper insolvency will have major adverse effect n TIA contract makes broker sole obligor for payment n Sophisticated brokers follow different approach – as the disclosed pay agent of shipper, their obligation is to pay carrier only if paid by the customer n Role of broker is major legal dispute between broker and carrier community n n i. e. TIA and ATA broker/carrier contracts take different position on this

n Effect of broker insolvency on carriers and shippers: Venture capitalists and brokers unfamiliar with industry have advanced 3 PL large loans based on “security interest, ” entire receivable and cash flow analysis n If lender gets nervous or over-extended it can “flush the trade” – suck out cash and escalating payables, prior to bankruptcy n In bankruptcy, carriers can organize to claim priority – ACI, World Part n

n Effect of broker insolvency on shipper double payment: - (1) Pursue shippers under recourse theory. See Hawkspere Shipping Company, Ltd. v. Intamex, S. A. , 330 F. 3 d 225 (4 th Cir. 2003); National Shipping Co. Of Saudi Arabia v. Omni Lines, 106 F. 3 d 1544 (11 th Cir. 1997); Strachan Shipping Co. v. Dresser Industries, Inc. , 701 F. 2 d 483 (5 th Cir. 1983); and Oak Harbor v. Sears, 420 F. Supp 2 d 1138, 1148 (W. D. Wash. 2006) (2) Advance constructive trust (Blue Thunder)

Productivity and Demand Down/Cost Up n Equipment cost n n Pre-buy sticker shock ($120 k Tractor; $22 k Trailer) Fuel cost n Surcharge issues n n n Pegs and formulas Consistency Labor Cost/Productivity n HOS n n Flexibility and sleeper berth Circadian straight jackets Congestion The future of HOS and EOBR

Hours-of-service rules n n n Appeals court voided 11 hours of driving and 34 -hour restart on procedural grounds FMCSA issued an interim rule retaining those provisions Public Citizen sued, but the court sided with FMCSA Comment period extended until March 17 Risk: Merits of rules not yet considered

EOBRs n n n Appeals court in July 2004 faulted FMCSA for failing to consider EOBRs FMCSA in January 2007 proposed to require EOBRs for carriers demonstrating a pattern of noncompliance Some enforcement relief for voluntary installation September 2008 targeted for final rule Risk: FMCSA proposal just the first step

Mexican trucks n n n Program began Sept. 6, 2007 Currently 15 Mexican and 5 U. S. carriers Lawsuits by Public Citizen/Teamsters and OOIDA argued Feb. 12 Congress blocked funds to establish cross -border program; DOT says it can continue an existing program Risks: Cheaper competition and potential enforcement implications for U. S. carriers

n Welfare Cost n n Worker’s Compensation rates State overtime issues n n Washington State initiative Infrastructure Cost n n n Privatization of interstate highways Brown fields v. Green fields debate Foreign Interest/Eisenhower is dead Secretary Peters supports privatization Highway trust fund faces bankruptcy in 2009, Congress has funding issues How do you differentiate pricing?

n Dark Clouds n Shipper auctions return Cut rate pricing n Effort to establish lane-by-lane fuel surcharge n n Extended credit terms Increase insolvency risk n Exacerbate factoring cost n n Double brokering – who is the carrier

Break One

Turbulent Winds of Change

Identifying the opposition n n n Organized labor Safety advocate groups Blue state labor relations boards and legislatures Plaintiff’s Bar Pro Labor Senators and Representatives Anti-Pollution advocates

Examples n Environment n n n Anti-idling ordinances State fuel requirements LA and Long Beach ports proposal Union backed – tenuous tie to owner-operators Safety Advocates n n n James P. Hoffa states, “The FMCSA is showing it as being held captive by the trucking industry" in response to the new HOS decision. Joan Claybrook states: “The FMCSA is continuing the sweatshop conditions for truck drivers rolling down the highway which endangers Americans all over the country. ” What’s really needed is a repeal of the Fair Labor Standards Act exemption so truck drivers will be paid overtime and can have a 9 to 5, 40 hour a week job.

n The goals Repeal FLSA exemption n Make truck driving shift work n Kill flexibility in name of circadian rhythm n

n Blue State Initiative Washington has extended its state overtime law to include both inter- and intrastate trucking and the Supreme Court refused to hear an opinion. n California under the guise of “pollution control” proposes to eliminate owneroperators at port. n Eliot Spitzer in New York passed legislation requiring all truckers making pickups and deliveries in New York to add New York worker’s compensation to their certificate of insurance. n

State Laws – the Patchwork Quilt n n n Uniform Carrier Registration – intends to simplify Bingo Card/ Single State Registration but now must comply with Secretary of State requirement (e. g. NJ, PA, NJ et al) Serious Impediment for Small Irregular Route Carriers Seizures and Major Fines

The THREAT of Unionization n n A strong political force Targeting service industries which are not exportable overseas Advocates in HOS, Mexican trucks, LA ports issues Major goals are to defeat independent contractor model and pass “Employee Free Choice Act” (see www. teamsters. org – “Fed Up with Fed. Ex”)

Pending Federal Legislation and the 2008 Election n Employee Free Choice Act n n n Supported by Democratic majority in both Houses Would eliminate requirement of election, requiring union certification based on card signing alone Depriving management of opportunity to respond Would require 30 mediation and could impose contract if no agreement Endorsed by both Democratic candidates

n Obama-Durden-Kennedy Bill Possible repeal of FLSA Exemption n Intended to eliminate safety harbor protection for treatment of independent contractors as 1099 recipients n Sponsored by teamsters who claim n 10. 3 million workers in all industries are misclassified as independent contractors; and n Employers save upward of 30% in payroll costs n

The Perfect Storm n n Owner-operators play a significant part in the truckload industry Truth in Leasing Regulations (49 CFR 376) applies to leases with drivers of commercial motor vehicles (10, 000 gwv) n n n Imposes duty to “control” on carriers (insurance, HOS, maintenance, safety, etc. ) Traditionally OOIDA class action suits under self-help provisions, 49 USC 14704, have been major area of litigation Benefit from cheaper OCC/ACC insurance rates, no withholding, itemizing deductions, differences in self employment tax v. employee/employer match

Now the Classification of Owner. Operators as Independent Contractors is Under Attack

n The issue of Federal tax law treatment was thought settled in an IRS ruling found at www. irs. gov/irs. cite/van. ops. pdf, permitting carriers to sell equipment over time to owner/operators and still keep independent contractor status for withholding purposes. n n The retention of drivers with equipment under the owner/operator model has been successfully employed to encourage responsible drivers to own and manage their own assets while taking advantage of lower taxes. (i. e. , No W-2 treatment, no FICA match, greater deductions) Safe harbor provisions allowed a challenged carrier to rely on the custom and usage in the industry when challenged or federal audit

State Law Treatment (1) (2) Much of the economic incentive for the owner-operator model is the freedom of choice afforded to the owneroperator to opt out of traditional workers compensation coverage and obtain cheap but comparable occupational accident occ/acc coverage. Application of mandatory workers compensation provisions on owner-operators is a state law issue traditionally based on variations of a “controls test” which has morphed over time into a complex web of statutes and case law interpretations that vary by state.

(3) Until fairly recently, the advantages of a onesize-fits-all independent contractor agreement complying with the truth-in-leasing regulations outweighed the risk of state law reclassification, especially when the independent contractor was required to purchase occ/acc insurance affording coverage in case of injury on the job.

(4) Yet pro labor industrial relations and workers compensation boards at the state level have upped the ante on the reclassification issue inspiring retroactive unemployment compensation tax penalties and ever stricter control guidelines on the classification issue (e. g. IL, CO, CA, MA, et al).

(5) (6) Over 72 state law initiatives were introduced last year. Organized trucking has met with little success. Although fact intensive in the absence of statutory relevance it is difficult to meet the 20 point control test when the owner-operator must be part of the carrier’s daily operations to effectively serve the shipper.

Fed. Ex Cases n Precedent setting, distinguishable but threatening. The Court found owner-operators should be reclassified as employees because: n n n Company had sole right to interpret Operating Agreement Routes could be refigured without driver say Driver’s work was core to the company’s business Company controls who drives vehicle Company can effectively terminate contract “at will”

The Conundrum n n Truth-in-leasing and safety regulations require exercise of control but control destroys independence under 20 Part Control Test Shippers impose just in time / guarantee service requirements but under control test owner/operator must have right to turn down loads

Political Response to Classification n n Increasingly states are interpreting the control tests to require worker’s compensation for owner -operators, the TCA has announced an initiative to create state exemptions recognizing the political atmosphere in Washington is not conducive. Preemption not viable in pro labor Congress. Trial lawyer adversaries make process difficult. A coalition of large trucking interests, small trucking interests and owner-operators has not yet been formed. OOIDA has not lobbied in! Conflict among carriers/ATA

Alternative Excess Capacity Models Core carriers using “outside” carriers Owner-operators urged to “take the last step” and become their own independently authorized FMCSA Carrier Benefits: n n n Liability becomes vicarious or contingent Avoid cut-through liability on workers compensation, withholding, overtime, etc. if buck stops with the name on the door Problem areas: n n n n Loss of economics of scale Vicarious liability Policing of small carriers safety record / negligent hiring issue “Controlling speed” – how to retain subcontractor? Broker/carrier conversion interline? Cargo liability issues

Shipper and Broker Resistance to New Model Based on Scourge of “Double Brokerage” n n n Use of spot market/internet by unscrupulous middlemen; The ease of identity theft; Confusion over “who is carrier” on bill of lading and broker resistance to identifying service provider on bill of lading.

n What can be done? n n Asset based carrier clearly disclose its brokered affiliate is arranging transportation to shipper Match carrier hired to name on door at the time of pickup Contingent cargo insurance and better understanding of Accord and insurance Separate carrier and broker operations: n n Confusion when carrier and broker wear the same “hat” Violates 498 CFR 371 Places “man in the middle” in liability loop (e. g. California, son of Schramm) Vicarious liability – how much “checking out” is enough – join us next month!!

Preemption n What is it? n n How does it apply to WIC, state overtime, “clean and green initiatives? n n n The doctrine that under the Commerce Clause of the Constitution, Federal Law can trump state laws in the name of uniformity and achieving an overriding Federal purpose. Safety enforcement, F 4 A Act preempting intrastate authority requirements are examples Answer - So far it does not The patchwork quilt Conflicting requirements and laws Current Congress is not favorable alternative because of labor constituencies Rowe v. N. H. Motor Transp. Ass'n, 522 U. S. ___ (2008).

Segment Analysis of Effects of “Winds of Change” n Irregular Route TL n Productivity reduction n n n Sleeper berth New equipment cost PU and PD scheduling/inflexibility Price pressure – fuel surcharge One man-one truck model in jeopardy I/C Model-small business cost advantages – 30% at peril Intermodal n n n Port access problems L. A. ports bill – union efforts Credentialing – port cards and TWIC

n Dedicated and core carriers n Long term contract cost assumptions at risk – not accounting for: HOS charges n Overtime charges n Restrictive week rules n Cost of unionization n n Easier to unionize

n n n The patchwork quilt Conflicting requirements and laws Current Congress is not favorable alternative because of labor constituencies

Future enforcement n n n Comprehensive Safety Analysis 2010 Wireless roadside inspections Risk: Carriers’ – and drivers’ – safety records could be far more volatile and sensitive to flawed data.

CSA 2010 n n n Concept: Intervene early to correct safety problems without a compliance review SEAs to be replaced by targeted BASICS Each carrier reviewed every 30 days Operational model testing in Colorado, Georgia, Missouri and New Jersey FMCSA plans rulemaking by this summer See www. fmcsa. dot. gov/csa 2010

Wireless roadside inspections n n Concept: Replace physical inspection with data uploads on driver and vehicle status FMCSA issued a report in July 2007 and conducted an initial test in August 2007 Agency met with technology vendors in January to discuss concept and options Likely model based on weigh station or roadside inspection, but FMCSA also has discussed “ubiquitous screening. ”

Wireless roadside inspections Enhanced screening concept Federal databases State databases Source: FMCSA Enhanced screening station

Virtual inspection data points • Hours of service • CDL number • Other driver info, such as LDWS, collision warning • VIN • US DOT number Source: FMCSA Other fault code info • Fuel system • Transmission • Air system • Electrical/electronic systems Brake system performance Lighting system performance Tire condition