As I discussed in my previous blog, one of the biggest challenges Motor Carriers (MC) face is maintaining the IC Status of their drivers and defending an IC-to-EE reclassification. The first step involves having an IC Lease Operating Agreement (ICOA) and the second is to identify state-specific laws that pertain to EE and IC status.

The ideal structural concept for each MC begins to get much more complex when you break down their operations at the state level. Each state has its own interpretation of "what classifies an IC as an employee (EE) for the purposes of WC coverage". This "IC vs. EE" environment is grounded either in case law or statutory foundations. Additionally, an IC has the right to challenge for EE status, (thus WC benefits) in as many as three states: where they live, where the MC is domiciled, and where the injury occurred.

With these varying and unique risk areas, you can see why it's easy to begin to feel overwhelmed and unsure of how to protect your company and your IC's properly. The good news is there are solutions. Below are five levels of distinct approaches/models/philosophies that MC's typically utilize:

1. No Workers Compensation (WC) or Occupational Accident (OA) Requirements - No Sponsored Program

   • Pro:
     • This model has no complexity and the MC has no administrative tracking duties.
   • Con:
     • This model puts the MC at grave risk - no protection exists against an IC Re-Classification/WC lawsuit.
     • Some states still mandate some form of occupationally related injury coverage (e.g. MS) and penalties for non-compliance may be excessive.

2. Require WC or OA - No Sponsored Program

   • Pro:
     • By having minimum requirements, a MC attempts to ensure that their IC's have at least some type of benefits, assuming their IC's comply.
     • The complexity to "enforce" is minimal.
   • Con:
     • Minimal coverage still fosters an environment for IC's to challenge for EE status.
       • The MC has only decreased their risk slightly by hoping the IC's have individual protection. There is still no protection layer for the MC.
     • This type of program can be an administrative nightmare in the context of tracking certificates of insurance, varying coverage expiration dates, and the auditing of coverage standards to ensure compliance.
     • The MC still has no control or any of the advantages of a unified coverage form.

3. Cover All IC's Under a Corporate WC Program

   • Pro:
     • This program offers the highest level of benefits for IC's and helps decrease the chance that an IC would seek EE status since they are already receiving WC benefits.
   • Con:
     • Each state has specific views on covering IC's with WC. Effectively, there are only 22 states where this model works. In the other 28 states there is a strong risk of "crossing the line" and being subject to State Insurance Commission codes & potentially State Employment Tax ramifications.
       • Fines for acting "in the business of insurance"
       • Audit determined "back" Employment Taxes on IC pay + fines
     • Additionally, WC is typically about 3 times more costly to procure than OA, meaning that if the IC is "charged back" for this coverage it can be a large expense to their business. If the MC pays for WC coverage it can be a significant operational cost as well, especially if the program suffers from adverse loss experience.

4. Require WC or OA, Sponsor an OA Program with Contingent Liability (CL) Protection

   • Pro:
     • By sponsoring an OA program with a solid CL protection built in, a MC can significantly decrease their risk while ensuring their IC's have quality OA protection.
     • This type of program, if properly structured, can offer protection to the MC in all states.
   • Con:
     • Building this type of program brings with it a much higher level of complexity.
     • These programs can increase administration workload and the MC may still be at risk for a WC audit, depending on their corporate WC carrier.

5. Require WC or OA, Sponsor an OA Program with CL Protection, Build an IC WC Option, & Tie in the Corporate WC

   • Pro:
     • This program offers the highest level of protection for the MC against any lawsuits where an IC seeks EE status and WC benefits.
     • By building in a WC option for IC's in the 22 "acceptable" states and for all MC Fleet Owners (those with multiple units & EE's), along with Corporate WC/CL hybrid, the MC maximizes risk mitigation, maximizes compliance, and minimizes the risk of a WC audit.
   • Con:
     • This type of program takes a high level of complexity to develop and administer, thus can be difficult for many to access & build.

As you can visualize with the accompanying chart, each of these models flows to the next in terms of increased coverage and decreased risk, with "Model 5" being the most complex, yet effective model yet for addressing IC risk.

Every MC is different in terms of size of IC fleet and scope of operations. However, every MC utilizing an IC fleet shares the same very unique risks. The biggest single factor that will dictate the sophistication of your MC's IC Risk Mitigation model will be how much risk you want to shoulder?

Through a unique combination of Workers Compensation, Occupational Accident and Contingent Liability, an MC can develop a total solution that best meets their unique needs, while providing them with maximum protection. In order to achieve true long-term operational viability, it is imperative that every MC develop the IC Risk Mitigation model that works best for them.