Divided you stand

U.S. Court of Appeals for the Seventh Circuit let stand a National Labor Relations Board order reinstating a FedEx Freight East employee the board had found to be improperly
discharged based on union activity.

The board, which awarded back pay to the employee, also more broadly ordered the carrier to cease and desist from discriminating against employees based on union activity. (Case Nos. 05-1365 & 05-1791)

Robert Stalker, owner of Robert’s Dismantling and Recycling Corp. (RDRC) in Hudson, N.H., pled guilty in U.S. District Court in Concord, N.H., to charges of conspiring to defraud FMCSA, the Internal Revenue Service and the company’s insurance carriers. Stalker admitted that, between 1996 and 2000, he paid RDRC drivers in cash for overtime hours they worked
without appropriately reporting the income on logs or to the IRS and insurance carriers.

A former Waggoners Trucking driver who admitted helping defraud the company of more than $120,000 will spend 35 months in prison and be required to pay $110,294 in restitution. Johnny Wayne Davis, of Columbia, S.C., was the final defendant sentenced in the scheme. Denise Lynn Hirst, the company’s former payroll administrator who used her position to steal from the company for her two boyfriends, had been sentenced to two years in prison and ordered to pay $126,115 in restitution. Anthony Vernon Ward, of Jacksonville, Fla., was sentenced to two years of probation and ordered to pay $17,879 in restitution.

Q We are looking at the corporate structure of our small motor carrier. Our accountant has advised us to consider breaking out our real estate, our tractors and trailers, and our brokerage operations into separate subsidiaries or affiliated companies or limited liability corporations. What are the legal benefits of doing this?

A No prescribed corporate formula will fit the needs of every carrier, but there are a number of good reasons to consider a functional separation of assets into separate corporations.

Legal liability. The trucking industry is a dangerous business, and the Federal Motor Carrier Safety Administration establishes $1 million per occurrence as a minimum amount of liability insurance that most carriers must have. In many cases, this is about all the coverage a small carrier can afford, so the conventional wisdom is to protect additional hard assets such as real estate, equity and equipment from judgment creditors of the trucking company through the use of separate corporations.

Ordinarily, courts will not permit a creditor of a trucking company to “pierce the corporate veil” and reach the assets of affiliates where the separation of assets and functions is for legitimate business purposes and established at fair market rates.

Carrier/broker separation. As I have discussed in previous articles, the roles of motor carriers and brokers are different, and the consequences of subcontracting shipments to other carriers as a motor carrier increases risk of vicarious liability for accidents. The broker regulations require that a broker not represent itself as a carrier, and under the Carmack Amendment a broker is allowed to escape legal liability for cargo loss or damage.

So there are good legal reasons for splitting up broker and carrier operations into separate corporations and for avoiding confusion about whether in a particular instance you are arranging for transportation or “offering to provide” for same. When there is no corporate wall between broker and carrier operations, it is easier for disputes over responsibility for cargo claims, workman’s comp premiums and joint and several liability issues to arise.

Tax planning issues. Many small truck company owners grow their estates through the purchase of real estate and equipment. Typically they want to keep control over the management decisions that affect day-to-day operations. But placing real estate and operating equipment in subsidiaries or affiliates owned by the children may be effective ways to split income, avoid probate and build a nest egg for future generations.

Clearly, there are federal and state tax consequences surrounding the decision to report separate entities’ profits and losses on their partner’s or shareholder’s return. A knowledgeable accountant and an attorney familiar with the inherent risk of your operation should be involved. Limited liability corporations and limited liability partnerships can allow loved ones to get the benefits of ownership while leaving the owner in control as the manager.

Even when you set up separate affiliates for tax, liability and estate reasons, you may be required to cross-collateralize assets or guarantee loans to raise marketing capital. Yet as a general rule, unbundling your assets into separate corporations probably will prove to be an excellent idea. The worst thing you can do is to conduct all of your operations in a sole proprietorship, exposing your personal assets to the unforeseen liabilities of trucking.

Yellow wins reversal on arbitration issue
A federal appeals court ruled that a customer service representative fired by Yellow Transportation did not qualify for the transportation worker exemption in the Federal Arbitration Act. The decision of the U.S. Court of Appeals for the Eighth Circuit, which reverses a lower court ruling, allows the carrier to compel arbitration of the former employee’s grievances as called for in the parties’ dispute resolution agreement.

The appeals court determined that the employee had never directly transported goods, operated any vehicle, handled any packages or directly supervised drivers in interstate commerce. The appeals court also concluded that a strike by customer service representatives, while inconvenient, would not disrupt interstate commerce or halt trucks from making deliveries. The job did satisfy certain elements of the transportation worker test regarding the coordination of freight flow, but the central task was to provide information to Yellow customers, not to supervise packages moving in interstate commerce, the appeals court said.