Court of Appeals Strictly Construes the Oregon Owner-Operator Exemption

Kevin Anderson Employment and Labor, Regulations, Small Business

 

Owner Operator

The Oregon Court of Appeals recently issued its decision in 3P Delivery, Inc. v Employment Department Tax Section, 254 Or.App. 180 (2012), clarifying the application of ORS 656.047, generally referred to as the “owner-operator” exemption. That decision requires any motor carrier using owner-operators and seeking to apply ORS 656.047 to carefully review its method of operating and make changes as may be required. Motor carriers that use owner-operators can benefit from the owner-operator exemption provided certain requirements are met, but the Court of Appeals decision requires strict compliance. ORS 656.047 provides in part:

(1)  As used in this chapter, “employment” does not include:

. . . . .

(b)  Transportation performed by motor vehicle for a for-hire carrier by any person that leases their equipment to a for-hire carrier that personally operates, furnishes and maintains the equipment and provides service thereto.

(2)  For the purposes of this chapter, services performed in the operation of a motor vehicle specified in subsection (1) of this section shall be deemed to be performed for the person furnishing and maintaining the motor vehicle.

The Court of Appeals strictly construed the requirements of the exemption by stating that the substance of the motor carrier/owner-operator relationship trumped the form of the relationship. That is, having your paperwork in order to meet the requirements will not suffice if the actual relationship is otherwise. The facts of the “lease/lease-back” relationship between the motor carrier (“Carrier” below”) and the owner-operator (“Operator” below) in the case before the court were as follows:

  1. Operator leased truck from Carrier under lease agreement (“Lease).
  2. Carrier leased the truck back from Operator pursuant to an Operating Agreement.
  3. Operator delivered shipments for Carrier.
  4. Pursuant to the Operating Agreement, Carrier paid Operator weekly by a single unallocated amount that included both a payment for use of the truck and compensation for the Operator’s services.
  5. Carrier deducted the payments owed to it under the Lease from its weekly payments to the Operator under the Operating Agreement.
  6. Carrier deducted a flat fee from Operator’s weekly settlements for maintenance, fuel and insurance. The Lease was a “full-service” lease meaning that Carrier’s payments to Operator for use of the equipment included a flat fee for maintenance provided by Carrier’s agent. Further, the Lease obligated the Operator to follow an established maintenance schedule.
  7. Although the Lease said that the Operator could use the equipment to provide service for others, it was subject to the Operating Agreement that required the Carrier to have “exclusive possession, control, and use” of the truck and could not operate the truck for any other person without the prior written consent of the Carrier.
  8. The Lease provided that it terminated immediately upon termination of the Operating Agreement.
  9. The Administrative Law Judge (“ALJ”) whose opinion was the subject of the appeal found that the Operator had no interest in the truck beyond providing service to the Carrier; that the Carrier retained all rights to the truck;  that the Lease gave the Operator no meaningful possessory interest that could be transferred and was a “legal fiction”; and, as a result of the foregoing, the Operator could not “furnish” the truck to the Carrier, as required by ORS 657.047(1)(b).
  10. The ALJ further found that the Operator received no compensation under the Operating Agreement for leasing the truck back to the Carrier because the weekly amount paid did not allocate that amount between the use of the equipment and the Operator’s services and, as a result, the Operator did not lease the vehicle to the Carrier, as required by ORS 657.047(1)(b).
  11. The ALJ further found that although the Operating Agreement required the Operator to maintain the equipment, in reality the full service Lease required the Carrier to provide the maintenance with the Carrier being entitled to take a deduction from the Operator’s settlements.

The Carrier made three arguments to the Court of Appeals:  one, that the ALJ erred in finding that the Operator did not “furnish” the truck to the Carrier; two, that the ALJ erred in failing to allocate the amount paid to the Operator under the Operating Agreement between amounts for use of the equipment and amounts for the Operator’s services; and, three, that the ALJ erred in refusing to admit into evidence excerpts from two manuals regarding the wages of truck drivers. The Court of Appeals rejected the first two assignments of error and said it did not need to decide the third assignment of error because of its conclusion on the first assignment.  Only the first assignment of error is of major concern and will be discussed below.

In regard to “furnish” the truck, the Carrier based its argument on the fact that the ALJ stated in the underlying Order that the Operator “never held title” to the truck and, as such, focused on ownership rather than a leasehold interest.  The Court of Appeals disagreed and concluded that the ALJ focused instead on whether the Contractor possessed an interest in the truck that could be transferred. In this regard the Court of Appeals affirmed the ALJ’s conclusion that the Lease, the Operating Agreement, and the actual day-to-day practice, taken together, did not provide the Operator a possessory interest in the vehicle that could be transferred by the Operating Agreement back to the Carrier. The Court of Appeals stated that:

“. . . it is evident that the lease/lease-back arrangement provides a paper trail of transactions designed to fulfill the requirements for exemption under ORS 657.047, without a practical basis in fact. . . . Just because the [Lease] is called a ‘lease’ does not mean that creates an interest in the vehicle that the [Operator] could lease back to the [Carrier]. When the [Lease] and the [Operating Agreement] are considered together, it is apparent that, other than the authority to drive the vehicles for [Carrier] while the drivers were in compliance with the [Operating Agreement], drivers had no further authority over the vehicles or their maintenance. Thus, we agree with the ALJ that the drivers had no interest in the vehicles that could be leased back or ‘furnished’ to [Carrier], so as to satisfy the requirement of ORS 657.047, that a vehicle be leased to a for-hire carrier.”

On the one hand, the Court of Appeals decision is distressing because it upsets the well-established owner-operator model used throughout the industry nationwide.  On the other hand, the decision eliminates the uncertainty concerning the exemption and how it can and will be applied by the Department and the Oregon courts.

Motor carriers that rely on the owner-operator model and hope to claim the benefit of the unemployment exemption must conform in substance to the intent of the statute. Having the right paperwork and using the right words will not prevail over the actual relationship that is established. Every motor carrier in this situation must carefully review and revise their model to ensure that in a sale/lease-back or lease/lease-back arrangement that the owner-operator actually acquires a valid possessory interest in the vehicle that is transferable. Further, the owner-operator’s rights as an “owner” or “lessee” must be recognized and viable. The arrangement must be more than an accommodation or convenience, that is, it must give the owner-operator a certain level of rights and control.

If motor carriers desire to continue using the owner-operator model and claim the exemption, they likely will be required to make a major shift in how they currently do business under this model. Those changes will make using the owner-operator model more difficult and will require modification of the existing paperwork so that the substance (reality) and the form (paperwork) of the relationship conform with each other. It can be done and, in that regard, the Court of Appeals’ decision provides a guide in how not to do it.

It should be noted that only the owner-operator exemption under ORS 657.047 was under consideration. Separate and apart from that statute is ORS 670.600 that defines and sets out the requirements that must be met to qualify as an independent contractor under Oregon law.

If you wish to discuss your current owner-operator operation and paperwork or your classification of workers as independent contractors, please contact either John or Kevin.