A Disturbing Trend in Worker's Compensation Coverage for Transportation Brokers
A few weeks ago, we heard a sordid, and potentially expensive, tale concerning worker’s compensation insurance coverage from one of our longtime clients. This client is a transportation broker with under 10 employees. As such, normally its insurance premium for worker’s compensation coverage is under $1,000 per year. However, after an audit by the insurer, our client was presented with a premium invoice of over $50,000, or over 50 times the original premium.
What was most jarring, besides the ridiculous premium, was the reasoning behind the increase. The auditor determined that under the broker’s worker’s compensation policy, money paid by the broker to “subcontractors” could be treated as part of the broker’s employee payroll for calculating the broker’s premium for the worker’s comp. policy. In other words, the broker’s payroll would be increased by the amount the broker paid carriers that didn’t provide proof of worker’s comp coverage.
There are a number of practical and legal problems with the auditor’s conclusion. On the practical side, certificates of insurance provided by carriers often do not include any reference to worker’s comp. coverage. In addition, each state has its own worker’s comp. laws, and transportation brokers are not and should not be responsible for whether a motor carrier is abiding by its state worker’s comp. laws. But insurers are responding to an increase in driver injury worker’s comp cases being filed against brokers and shippers as “statutory employers” because the motor carriers themselves do not provide such coverage.
On the legal side, there is one glaring problem with the auditor’s conclusion – motor carriers are not subcontractors to the broker. This is a common misunderstanding in the industry. In many shipper/broker contracts motor carriers are casually referred to as “subcontractors”. However, both under the law, as well as simple logic, this is not the case.
Black’s Law Dictionary defines “Subcontractor” as follows:
“Where a person has contracted for the performance of certain work (e.g., to build a house) and he in turn engages a third party to perform the whole or a part of that which is included in the original contract, e.g., to do the carpenter work) his agreement with such third person is called a ‘subcontract’, and such person is called a ‘subcontractor’.”
Merriam-Webster’s dictionary defines “Subcontractor” as: “an individual or business firm contracting to perform part or all of another’s contract.”
Here, for the carriers to be subcontractors of the broker, the broker would have had to first contract with the shippers to perform motor carrier services. Only if the broker first contracted to perform motor carrier services itself could the broker then subcontract those services to the motor carriers. An entity cannot subcontract to another services that the entity never contracted to perform itself.
Transportation brokers contract with their customers to arrange transportation by federally authorized motor carriers not to physically perform the transportation services themselves. Only federally authorized motor carriers can legally perform transportation services. Transportation brokers cannot perform transportation because they are not licensed to do so. In addition, brokers are prohibited by federal regulation from representing themselves to be a motor carrier. See 49 CFR §371.7(b), which reads:
“A broker shall not, directly or indirectly, represent its operations to be that of a carrier. Any advertising shall show the broker status of the operation.”
Because brokers do not, and cannot legally, contract to perform transportation services that a motor carrier performs, brokers cannot subcontract with motor carriers to perform transportation services.
Motor carriers are no more subcontractors to brokers than airlines are subcontractors to travel agents that book flights with airlines on behalf of their customers. Just as do travel agents with airlines, the transportation broker books the transportation with the motor carrier. And just as the airline ticket is the direct contract between the passenger and the airline, the bill of lading is the direct contract between the motor carrier and the shipper of cargo. The motor carriers are not subcontractors of brokers but independent contractors, performing a legally and definitionally distinct function.
To combat this problem, we recommend:
1. Find out if the carriers have worker’s comp coverage – check their certificate of insurance and if it is not on there, ask them to provide it separately.
2. Make an effort to use carriers with worker’s comp coverage.
3. Use the G&H Broker-Carrier contract. The contract defines motor carriers as independent contractors and states:
“CARRIER represents and warrants that it is in full compliance and shall maintain Worker’s Compensation insurance as prescribed by the laws of the states in which the transportation services shall be performed. If CARRIER does not provide Worker’s Compensation insurance CARRIER hereby represents and warrants that under state or federal law applicable to CARRIER, it is exempt from providing workers' compensation coverage to drivers, owner/operators or other independent contractors working for CARRIER. CARRIER acknowledges and agrees that on behalf of itself, its employees, drivers or contractors, it waives any and all claims against BROKER and/or Broker's Customer and will assume full and complete responsibility for compensation of any and all work-related injury occurring to any of its personnel and that CARRIER shall fully indemnify, defend and hold BROKER and Broker's Customer harmless for any claims, demands, lawsuits or administrative proceeding brought against BROKER or Broker's Customer for any such work-related injury or employment obligations.”
As always, please feel free to call Liese or me to discuss how to protect yourself.