Independent contractor costs can’t be part of PPP borrowing base — Scopelitis

The complicated rules of the road for small trucking companies seeking government COVID-19 assistance steered into a discussion of the simple math of “upside down” freight rates in a wide-ranging webinar Friday conducted by Scopelitis, one of the biggest trucking-specific law firms in the country.

It took place the same day that applications could first be submitted to the Small Business Administration (SBA) under the Paycheck Protection Program (PPP) designed to support lost income for workers who would otherwise be staring at unemployment. 

And for a trucking company with 500 people or fewer, one of the big questions is whether independent contractors can be counted in that 500 and whether their compensation can serve as the basis for determining the size of the loan available under PPP. Prasad Sharma of Scopelitis’ Washington office said it hadn’t been clear previously but the answer now looked like “no.”

“For us, this was an important area but very confusing,” Sharma said on the webinar. He said there are other programs to support independent contractors — specifically an expanded Economic Injury Disaster Loan (EIDL) program. As he noted in his remarks, “It makes no sense for the SBA to make a loan payment to a carrier for an independent contractor and then compensate the IC for lost income.”

As the webinar’s slide presentation noted, the text of the CARES Act — the financial stimulus and aid act that created the PPP — had wording that could be interpreted as saying that independent contractor costs should be counted in the base for the company applying for PPP support. “But there are policy and practical considerations that suggest no,” according to the slide. That language that suggests independent contractor costs says the loan eligibility would include whether the borrower “paid independent contractors, as reported (on an IRS form 1099).”

There’s another consideration in putting independent contractor payments into the base equation for borrowing money under PPP, according to Scopelitis’ Greg Feary: It might lead to problems with employee classification down the road.

“You could run into a legal argument that you were making an admission that you were controlling them sufficiently … that they could be employees,” Feary said. Clarification of the issue, he added, “is something that is more good news than bad news because it avoids some litigation on the issue.”

The irony of the loan program is that until recently, a lot of trucking companies had a few weeks of rising rates and tremendous business as a result of the rush to restock shelves. The loans are supposed to be for companies that have been negatively impacted by the coronavirus. In one of the slides for the presentation, Scopelitis said the recipients of the PPP loans “must certify in good faith that the loan is necessary due to impact on operations related to uncertain economic conditions and the funds will be used to retain workers and maintain payroll,” as well as other ongoing financial obligations like mortgages.

(The growing view that the good times might have been short-lived got another piece of evidence this week with LTL carrier Central Freight Lines reducing pay and hours. Those reductions came on the heels of what Central Freight said in a letter to employees was a 33% reduction in its revenue in recent weeks. The cutbacks announced include salary cuts of 15% to 25%, a cut in rate per mile of 5 cents, and reduced hours for local drivers, dock workers and other hourly employees.)

Those rising and sinking truck rates led Nathaniel Saylor of Scopelitis to discuss how brokers or carriers should confront a situation that is probably easing but was definitely significant not all that long ago: spot market rates that substantially exceeded contract rates.

Saylor noted that getting into a discussion or taking action to get out of lower contracted rates and into higher spot ones might run into the reality that if the carrier or broker just “waits it out” while rates continue to fall, this may all be a moot issue.

Saylor led his discussion with a slide titled “Force Majeure.” But what he said a lot of carriers he’s talked to are more focused on now is “not about the ability to perform, but it is mostly, hey, I am upside down on the rates where spot rates are bigger the contract rates, so what can I do?”

One scenario is when the carrier has no duty to take the contract. If that’s the case, Saylor said, “you can just not accept the cargo and try to renegotiate the rates.”

If the obligation to take the freight is clear, Saylor said, “there are a couple of different ways you can look at this.” One is to determine whether “hard costs” have increased, which may be a stronger justification to walk away from the obligation. But he said that in most discussions he’s had recently, “we’re just talking about damages that you are missing out on your ability to charge higher rates.”

A broker getting pinched is a different situation because the gap between what they’re getting paid by the shipper and what it costs to secure capacity in the market is a “hard cost.” That sort of discussion can be stark enough to involve the broker saying that “you are putting me out of business.” “I won’t be able to handle the cargo and that is going to leave you in the lurch,” he said. “Let’s see if we can renegotiate the rates.”

Attorney Braden Core of Scopelitis addressed the issue of actually declaring force majeure because of an inability to perform, unlike the sort of rate squeeze Saylor discussed. A full declaration of force majeure, he said, is “intended for circumstances where you actually are unable to perform,” he said. Given the turmoil among ocean and air carriers, Core said, depending upon your obligations, “you may have a better defense [for declaring force majeure] than somebody whose costs just went up.”

Describing force majeure as a “blunt instrument,” Core noted that there are steps that legally might be taken prior to that declaration. A “more targeted” option, he said, would be if a broker or carrier had service level guarantees. “Maybe you can suspend those,” he said. 

But if whatever action you take ends up in court, Core said, and the contract in question is a fixed-price contract, most courts will hold that by entering into that contract you have “assumed the risk of an economic downturn.”