Driver Misclassification: 8 Mistakes Trucking Companies Make – Season 2, Episode 4

Putting a driver on 1099 doesn’t make them an independent contractor. Having them sign an independent contractor agreement doesn’t make them an independent contractor. And having a driver ask or even demand to be paid on a 1099 definitely doesn’t make them an independent contractor. What matters is how the relationship actually works. And there are a handful of mistakes I see trucking companies make over and over again that make it really hard to argue that their driver is truly an independent contractor. You can call someone a contractor all day long, but that doesn’t make them one. Today we’re going to talk about the eight biggest mistakes that I see in the trucking industry as regards to 1099s and W-2s.

Welcome to the Driven for Success Podcast. This is the podcast for trucking company owners and executives who want to build a better business, make better decisions, and keep drivers without losing control. My name is Mike Ritzema. I’m the host and owner of Superior Trucking Payroll Service, where our mission is simple to help trucking families. This podcast is one of the ways we fulfill that mission.

Last episode we talked about whether you could legally pay a truck driver as a 1099 contractor. And the answer was yes, some of the time. But you have to have the facts to support it. Today I want to come at it from a different direction. What are some of the things that trucking companies do to make a driver look like an employee, even though they’re issuing that driver a 1099?

So the first mistake that they make is thinking that the driver gets to choose. And this is the one I hear probably as much as any other. The driver says things like, “I don’t want any taxes taken out of my check,” or “I want to be a 1099,” or “I’ve always been a 1099,” or even, “I will only work for you if you’ll pay me as 1099.” The trucking company goes, “Well, we really need a driver, and your MVR is good, so okay.” But that’s not how this works. Worker classification is not an election. It’s not something that you and the driver get to decide. You don’t have a box where the company checks W-2 and the driver checks 1099, and whoever gets two votes wins.

The IRS looks at the actual relationship. Who controls the work? Who controls the financial side of the relationship? What does the overall relationship actually look like? The driver does not get to vote on whether he or she is an employee or a contractor. Period.

I have had calls from tens, if not hundreds, of clients and other people that aren’t clients of ours asking me questions about this. Well, the driver said that they were 1099 when they worked for so-and-so, or the driver insisted that they be paid via 1099 or they won’t work for me, and I really need the driver. Or even, and we don’t cover this in one of the future ones, so I’ll give it to you now. Sometimes the driver’s a tax protester. Uh, go search for tax protesters and how that goes for them on your favorite podcast or video or social media. It doesn’t go. Uh, they have all crazy reasons and things like that, but it never works.

But the driver usually wants this because they’re going to take home more money or they’re going to get out of some other obligation that would be required if they were paid via W-2. And the owner thinks, no harm, no foul, but they’re actually carrying all the risk of it now. And everybody’s happy until they’re not. It’s like deferring maintenance. Everything’s fine until it’s not.

And there’s another issue here, too. A driver wanting to be 1099 badly enough that they require it to work for you should make you scratch your head and wonder why. I will tell you that we’ll get into this in another episode, but typically it’s they owe somebody money and they don’t want to have to pay it. And if they’re skipping out on that debt, they’re going to skip out on you. Preview for an episode to come.

The next reason is thinking that because there’s a contract, everything’s cool. I get this one a lot too. We have this independent contractor agreement, so that should make them contractors, right? And they signed it. Okay. Well, what’s actually happening here? You can write independent contractor across the top of the agreement in huge letters. It doesn’t change the relationship. And contracts do matter, but the labor, the label-only contract does not override what reality is. If your agreement says the driver operates independently, but in practice you treat them exactly like your W-2 drivers, you have a problem.

The government cares a lot more about what you do than what your contract says you do.

To give you a more crazy example, I could say in the contract that I am in the NBA, National Basketball Association. I am not. But it’s in the contract, right? It’s the same thing. And you can say you’re a contractor, but if you’re not doing the work like a contract and you don’t have a real contractor working relationship, it’s no good. You’re not going to get out of anything. And so it just says it in that contract. It doesn’t make it true. Even if you say, well, my attorney wrote it for me. Your attorney probably wrote it for you because he thought you really had contractors. Did you tell your driver?

Did you tell your attorney, I want to pay this driver just like anybody else would pay a company driver, but I want it to be $1099 instead of W-2. If that’s what your attorney gave you, then I would like to talk to your attorney about maybe not practicing law, at least in trucking. Because you can’t do that. It’s just not okay.

Any agreement you download from the internet, worse than the attorney thing. It’s worth the money. By the way, if you have legitimate owner operators and you want to pay them $10.99, retain a trucking attorney. We can make referrals. That’s worth the money ten times over. Because it’s you might think of it as, oh, I got to pay this many hundreds or a thousand dollars or whatever it is now to get a new owner operator agreement. But that is insurance against the lawsuit that is surely heading your way when there’s a misunderstanding. So the good attorney, by the way, will ask the right questions to make sure that your contract is good.

Here’s the next mistake the company just owns all of everything that’s involved here. They own the truck, they pay for the fuel, they pay for the maintenance, they pay for the insurance. Who’s got the risk here? If the company’s buying all those things, then the company has all the risk and the driver has none. A little legitimate business is going to have investment, it’s going to have expenses, it’s going to have risk.

A legitimate business can lose money while doing work. An employee never will. So if the trucking company, you provide the truck and the fuel and the insurance and the maintenance, all that stuff, and then your driver just shows up to drive the truck, we need to have a serious discussion about what exactly is going on in your business. If the driver’s entire business fits in a duffel bag, you’d better take a hard look at whether you want to 1099 them or not. And owning the truck is not some magical test by itself. There, as I’ve said before, there’s not one single factor that automatically determines classification.

But financial control and investment are part of a bigger picture, and they’re a decent part of it. You’ve got who the financial risk, if the transmission drops, as I’ve said in other times, who just had a bad financial day? Uh that’s one of the things. If the drive if the cup if the truck gets better fuel mileage because the driver is driving more slowly and smoothly, who keeps that savings? Who just made more money? Can the contractor actually lose money?

We have a test for this for free, truckingpayroll.com. Look for under our tools or resources and probably free trucking tools or trucking success tools. Go there and then you look for the 1099 versus W-2 quiz. It’s absolutely free. It will take you less than two minutes. And there are questions that are asked about in trucking language, not in attorney speak or IRS speak. I encourage you to check it out. It’s well worth your time if you’re not sure.

A fourth mistake is controlling a driver like an employee. This is a little tricky for trucking companies because one of the big things would be that the worker, the driver, in other situations could drive for somebody else and go back and forth, like having two part-time jobs at the same time. And you can’t do that in trucking. The DOT will not allow it. So that part, don’t worry about because you’re going to have that anyway. But there’s more to it than that, too. You’ve got a contract agreement saying this person is independent. So when operations treats them like an employee driver and says, This is your load, and this is when you’re leaving, and this is the route you’re taking, and this is what you’re doing next, and you can’t turn the load down, and you need permission for time off, and you must be here for employee meetings, or you must follow our procedures in a certain way that aren’t DOT related.

At some point, you ask, how independent really is this worker?

Now, trucking companies do have legitimate requirements, you do have customers and appointments, and I get all that. DOT, of course, too. But that doesn’t, so it doesn’t mean you can’t ever give an independent contractor instructions, but it’s always about how much instruction you give them versus an employee.

Just as a sidebar, and I don’t think I go into this, I’m not planning on going into this today, but if you ever have an employee meeting and you invite contractors, you’re saying they’re employees. I’ve heard of cases where legitimate contractors got to be treated as employees because they were told to go to employee meetings. Or if you give them an employee handbook for the independent contractors, when they decide to get mad at you, which we’ll talk about in a future episode, they can come get you. So just be mindful of that too as a side sidebar.

You can’t run someone like an employee all week and then turn them into a contractor at payroll time. It’s just not okay. They need to be able to turn down loads from time to time. Now, that doesn’t mean that they get to turn down as many loads as they want. At some point, they’re just not really working for you. And because of insurance requirements and things like that, you might have to have them on your liability insurance. You really have to for the DOT. So at some point, you just they’re just not worth the time. But they do have to have the ability to be able to reject a load or to be able to take the path they want to take or buy fuel where they want to buy fuel, all those kinds of things.

Shouldn’t be getting vacation, they shouldn’t be getting comp time, things like that. So company procedures generally shouldn’t apply to them other than like the DOT required things. All that matters when you’re determining whether somebody’s an employee or not, or if they’re a contractor or not. The DOT stuff does not change, so to be clear about that.

The fifth mistake that I see is that your 1099 drivers and your W-2 drivers are almost identical. Take one of your W-2 drivers, take one of your 1099 drivers, and take their names off, then describe their jobs. Which truck do they drive? How are they dispatched? Who pays for the expenses? Can they reject loads? Who controls their schedule? How are they managed? What happens if they want a week off? What’s different?

If the only difference is that one gets a W-2 in January and the other gets a 1099 in January, that is a huge red flag. Ginormous red flag for the IRS. If you can’t explain the difference without mentioning payroll taxes, you may have only one worker. So that’s something I’ll think about too. You can’t, again, that’s where you get in trouble with a driver who says, I want to be 1099 when you’ve got W-2 drivers. That’s it doesn’t work because they’re doing the same work. One of them’s getting paid 1099, and one of them’s getting W-2 for basically the exact same job and the exact same amount of risk and all those things, it doesn’t work.

The IRS will see right through that, and you’re going to be stuck. Driver’s actually going to win and you’re going to lose, and you’re going to lose big. So it’s really one of the simplest gut checks you can do. If you’re dubbed if your 1099 drivers and your W-2 drivers are essentially the same people as far as their tasks go, that’s not good for you to be paying 1099.

Another mistake, I hear this one from time to time. They talk about, well, but I pay that driver percentage. Or we pay them by the load, or we don’t pay hourly. Most drivers don’t get paid hourly, and that’s a whole other discussion whether they should be. I as long as drivers are paid fairly, that’s what matters to me. But none of these things settle classification because employees can be paid by the mile, employees can be paid percentage, employees can be paid commissions, independent contractors can be paid all those same ways. So how you calculate the check is not what determines whether somebody is an employee or a contractor.

A different pay formula does not create a different employment relationship. You look at we’ve got all these different pays. Uh, even if you said I pay all of my W-2 driver’s mileage and all of my 1099 drivers percentage, it really doesn’t matter. That’s not the thing that’s going to differentiate them. Again, it’s still the relationship and the risk and the equipment who provides the equipment. All those things are the things that are really going to matter. It’s more the substance than the mechanics of how you decide how much they’re going to get paid. So sometimes owners think that because, well, I’m paying a percentage, so they can be 1099.

That is wishful thinking at its at its truth. So keep that in mind, unfortunately.

Number seven, I get a lot. We’ve always done it this way, or a variant of this is everybody else does it this way. We’ve been doing it for 15 years. Okay. That tells me how long you’ve been doing it. It doesn’t mean that you’ve been doing it right. Again, everybody else pays drivers just that way. And I see that in certain pockets of the country, among certain subsets of trucking company owners. And they all may do that, but it doesn’t make it legal at all.

There are a lot of practices in trucking that get passed from one company to another. It’s almost like tribal knowledge where it just gets that’s how I worked for a truck company and that’s how they did it, and I started my trucking company, so that’s how I’m going to do it. Happens all the time. It happens not just in trucking, it happens everywhere. But that doesn’t mean that that’s the right way to do it. Doing something wrong and for 15 years doesn’t turn your 16 into right.

And even excuses beyond that are, well, my accountant never said anything. Well, your accountant doesn’t do your payroll. My payroll company lets me do it. They do because you’re the decider of what’s going on. They are not in your business deciding how your driver should be paid. If I’ll bet if you asked them and told them what happened, they might tell you you’re doing it wrong. They might not. If they don’t tell you one way or the other, then call me and I’ll tell you, even if you don’t ever sign up as a client, because you need to know. Take our quiz on our website again, truckingpayroll.com. You know, or everyone I know does it.

Okay. Well, if everybody you knew went through red lights and stopped on greens, would you do that? No. Okay. Means might meet the wrong people as far as how to run their business. They might be good at everything else and great at all the other things, but as far as business goes and reporting requirements for the IRS, they are not there. It’s the industry habits. People see the subset of their industry, their neighbor, basically their neighbor trucking company or something like that, or the company where they started, and so that’s what they do. And that’s a wrong way to do it. Uh, you need to be compliant, it’s going to come get you at some point.

So it’s worth not living with the wondering when the other shoe is going to drop on this.

The last mistake that I get, and I hear this, I hear this not only from trucking companies, but I hear it from some vendors to trucking companies. I’ve heard it from an insurance agent, and that freaked me out. Uh, I still my head blown away. It was years ago, to be fair, and it’s not an insurance agent I do a lot of work with, so they go, but the driver has an LLC. I’m like, my goodness. That might be relevant to how they structured their business, but it’s not changing anything that’s happening. It’s still the same truck, and the dispatcher and the work and the control and the relationship are all the same as they were before they formed the LLC and now after.

But instead of writing this check to Joe Smith, you’re writing it to Joe Smith trucking LLC. Creating an LLC doesn’t magically change anything.

And again, I’ve gone through this before, but I will explain it again. An LLC is a feature of a company, it is not a company type. Uh, some people think LLC stands for limited liability corporation. It is limited liability company. Uh corporations by definition are limited liability. So that would be, as the joke goes, redundant and repetitive. It doesn’t work that way. So, but LLC is a feature, it limits the liability, usually uh partnerships and sole proprietors, but corporations can file for LLCs too. And it says that an LLC, when done correctly, and talk to your favorite attorney about making sure you do this correctly, but that if you lost, if that business was lost, like all the assets in the business were lost, meaning think of it, easiest way to say it is there’s a million-dollar judgment against you beyond what your insurance would cover.

Uh then if they just sued the business and they got a million-dollar judgment, the law, the attorneys and whatnot could take all the assets of the business, but they couldn’t touch your house, they couldn’t touch your 401k, absent circumstances that would warrant that, like negligence or piercing the corporate veil and things like that. Again, talk to your attorney about all that. But that’s the idea behind an LLC is that you limit the liability to the assets of the company. Versus if you didn’t have one and you’re just Joe Smith in our example, and you get sued, and you there’s a million-dollar judgment over and above whatever your insurance would cover, they’re going to take your house or they could, they can take all your assets, they can go after you personally. And the LLC stops that from happening when done correctly.

That’s all it does. Uh, if you were Joe Smith getting a 1099, you’re going to fill out a Schedule C on your income tax return, very likely. If you are Joe Smith trucking LLC, that you just formed an LLC from your other your other business and didn’t do anything else with it, you’re going to file a Schedule C with your 1040 on your income tax return, just like you did before. It changes nothing for tax, it changes nothing for the employer relationship. It doesn’t solve the problem. So stop thinking that it will, please. It is it doesn’t do anything having to do with the employment relationship. So just sorry if I’m beating that drum too hard, but it makes me crazy because it’s such bad advice that vendors in trucking sometimes give to especially smaller trucking companies, but all trucking companies that they can just do this.

Uh well, just make them form LLC No nothing that happens there.

All right, so under all these mistakes, it comes down to one bigger mistake, starting with the answer you want. Which you what a lot of trucking companies do is say, we want this driver to be 1099, and then they try to build a case behind it to justify it in some way, and that’s backwards.

Start with the facts, so start it with talking about what the relationship actually looks like and the driver, how much control they have over the work that they do, and where the financial investment is and where the risk is for the driver. And is this person really operating an independent business? Then from there you determine the classification, not the reverse of that, like a lot of trucking companies try and do. Don’t design the paperwork to get to paying a driver as a contractor as a 1099. Design the relationship correctly and let the facts tell you what it is. It’s a very different way to approach this, and I can’t encourage this enough because too many companies want to try and save a penny now, and then it bites them in the behind later.

We had one come in here last week that had that happen. And they had paid, they had paid the worker $1099, and they felt it was industry standard, is what they told me. And then that person was let go, and they got the labor board involved. We’ll talk about that in a future episode, teasing it up right here, but you it’s a bad day for you when you’re getting a call from the labor board about contractors.

So here’s the simple test for trucking company owners.

If you’re paying drivers as independent contractors right now, here’s what I would do. Don’t start with your contracts. Don’t start with the fact that they get 1099s as justification for doing it, or don’t start with what somebody told you years ago. Start with the driver. Pretend somebody who knows nothing about your company followed that driver around for a week. What would they determine? Would they see somebody running their own trucking business or would they see a company driver who happens to give a different tax form? If it looks like an employee all week, a 1099 on Friday is not going to cure it.

That’s the question I want every trucking company owner using 1099 drivers to be able to answer.

Now, none of these factors exist in a vacuum. There is not, as I’ve said before, there’s not a magic bullet that tells you this the line between 1099 and contractor. I wish there was. Congress ever wants to reach out to me, I’ll tell them where to put it, right? But they won’t. The IRS looks at the overall relationship, behavioral control, financial control, and the type of relationship between the parties. That’s been true, no matter who’s in charge of the IRS. All the other federal and state laws use their own tests as well, and they’re different from the IRS laws. So this isn’t about finding a checkbox that makes somebody a contractor.

It’s about whether the whole entire relationship supports that classification.

If you’re paying drivers on a 1099, don’t just say, do we have a contractor agreement? Ask, could we defend how this relationship actually works? Because you’re going to have to. And that’s what matters. A 1099 is a tax form. It is not a worker classification strategy.

Thanks for listening to Driven for Success. See you next week.