Protect your right to get paid

Transport Labor Contract/Leasing (TLC) could owe more than $5 million in back taxes because it failed to observe the limits on tax deductibility for per diem payments to drivers it leased to trucking companies in the mid-1990s. The U.S. Tax Court last month agreed with the Internal Revenue Service that actual practices and the terms of its contract with trucking companies established TLC as the employer. The court accepted IRS arguments that the trucking companies’ dispatch of drivers and supply of drivers’ trucks were of little significance. (Transport Labor Contract/Leasing vs. Commissioner; 123 T.C. No. 9)

Owners of Little Rock-based Continental Express were limited to a 50 percent deduction of per diem payments to drivers from 1995 through 1997 because they chose to take advantage of streamlined Internal Revenue Service procedures that don’t require proof of actual expenses, the U.S. Tax Court ruled earlier this year. The carrier fully deducted 60 percent of the per-mile per diem pay as nonmeal expenses. The court declared that the carrier could have fully deducted actual nonmeal expenses only if it substantiated them through receipts and other documentation. (Boyd, et al vs. Commissioner; 122 T.C. No. 18)

New Hampshire Motor Transport Association successfully challenged the state’s diversion of highway funds toward the planning and construction of the Nashua Commuter Rail Project. The state’s Supreme Court agreed that the expenditures were unconstitutional. (NHMTA vs. State of New Hampshire; No. 2003-641)

Q We have been asked by our carrier members to advise them about the wisdom of signing broker contracts that attempt to cut off carrier recourse to the consignor in the event of the broker’s default. What is your view of these provisions from the carrier’s perspective?

A This provision and its cousin – that the carrier appoints the broker as its agent for the collection of freight charges – are becoming all too frequent occurrences in broker-drafted contracts. Nancy Reagan’s advice is the best response. “Just say no.”

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In my book, “Protecting Motor Carrier Interests in Contracts,” I discuss language like this as one of 12 objectionable contract provisions that I call the “Dirty Dozen.” The most important collection tool carriers have for assuring payment on brokered loads is recourse to the consignor in the event of nonpayment by the broker or other intermediary.

As the Eleventh Circuit explained, “the bill of lading is a contract between a shipper and a carrier, and the carrier has a contractual right to expect payment pursuant to the bill. If the shipper wishes to avoid liability for double payment, it should take precaution to deal with a reputable broker or contract with the carrier to secure its release.”

The Fifth Circuit said it well when it noted that intermediaries have “few assets and book amounts of cargo which far exceed their net worth.” The court found, therefore, that carriers must expect payment will come from the shipper, although it passes through the intermediary’s hands.

Two-thirds to three-fourths of the bad debts turned over by carriers for collection involve intermediaries that have not paid freight charges. There is no good reason for a carrier to give up its right to collect from the shipper when that occurs. The court’s finding above got it right. Generally it is the shipper that outsources its traffic department and appoints the intermediary as its agent to procure carriers and arrange for the transportation of its goods. There is no reason to make the broker your agent for purposes of collecting freight charges from the one who first hired it.

If the shipper won’t vouch for the fact that its broker will forward its money to you, why should you accept this added risk? The shipper wouldn’t release you from the ultimate liability for cargo loss or damage in transit. Why should you release it from the ultimate liability for your freight charges? Allowing provisions to remain in broker/carrier contracts that purport to limit your recourse or make the broker somehow your agent when the shipper actually brought it to the party will only confuse the issue and compromise your position.

The ultimate legal liability of a broker is to receive the shipper’s payment in trust and to transmit the proceeds to the carrier to the extent the carrier has not already been paid. If the intermediary intends to fulfill this obligation, why should it care if the carrier preserves recourse to the shipper in the event of default? It seems like a sophisticated broker would want to accept the role of a pure intermediary, acting as a faithful conduit for the payment of freight charges and freight claims between shippers and carriers.

I know several good and honest brokers who have mortgaged their houses to pay carrier invoices because they guaranteed payment and the shippers have defaulted or gone bankrupt. Everyone should expect that the shipper ultimately is liable for payment of the freight charges. If the intermediary wants to “guarantee” payment based upon its non-trust assets, that is not a substitute for recourse.

A carrier is best served by preserving recourse pursuant to the bill of lading on all loads involving an intermediary. Any side agreement with the intermediary should be limited to refraining from presenting invoices to the shipper only if the carrier receives payment through the broker within the time limits established by the agreement.

Court says Time Auto contractors were employees
The U.S. Court of Appeals for the Six Circuit upheld the National Labor Relations Board’s ruling that Time Auto Transportation violated labor laws by terminating the independent contractor agreements of two long-haul drivers who were engaged in Teamsters union activities. The board had concluded that the degree of Time Auto’s control over the two drivers meant that they were employees, not independent contractors. (Time Auto Transportation vs. NLRB; Case Nos. 03-1194/1271)