Episode 071: Owner Operator Fallout

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Welcome back for another episode of the Fleet Success Show. I'm your host, Josh Turley, joined today again by Jeff Jenkins.

Howdy, howdy.

All right, so today we're going to talk about a topic that, uh, it's been in the news for a little bit, for a little while, I guess. You know, it got introduced last year, but it's this whole owner-operator fallout, AB5, right? California, for those who don't know, passed a law basically outlawing the use of owner-operators within the state. Um, it kind of spawned from, you know, the whole relationship between Uber and Lyft and their drivers, you know, because they weren't full-time employees. They were treating them as independent contractors. And so, you know, the law essentially said that you can't do that anymore, right? That they have to be full-time employees. They've got to be considered for benefits and PTO and all that, just like a normal employee would, because you just— you didn't ever have any of that with independent contractors, right? That's why a lot of companies would use independent contractors, is you let them figure out the taxes and all the insurance and all that stuff, their benefits, but you paid them more. Right, you had to pay them a little bit more, but in the, you know, in the long run, if you were running a business like Uber was, where you just didn't have many full-time employees, it kept your overall fixed expenses a lot lower.

Yeah, like in, in terms of trucking, typically when you look at an owner-operator versus a company truck, it's double the amount of profit. So if you're making 30 cents on the dollar with an owner-operator, it's usually 15 cents on a company truck, which is why it's so lucrative for for them to have owner operators, right?

And do you think part of the reason is there is because it increases the competitive landscape, right? Like owner operators are having to compete against each other and like what they're bidding or what they're accepting on those types of jobs. Are you saying profitable for the driver or profitable?

No, it's profitable for the company in that way because they don't have the liability.

Okay.

They don't have to pay benefits. They don't have to— I mean, there's a lot of different things that the company then just basically wipes their hands of and says, you take care of this because you're an independent contractor.

Gotcha. They have to pay more for the service, but it's not, not enough to offset their profits. It sounds like they were able to keep most of that then.

I will tell you that in trucking specifically, it is a very big focal point to gain your owner operators because of how profitable it ends up being for you, right? There's a downside to that. It does affect your CSA scores because that truck is still tied to you, right? Right. And usually their equipment's older, not as well maintained, so there are some some negative ramifications, but not enough to where someone wouldn't want to really just go after owner-operators.

Right, and have that be a majority of their trucking force.

Correct.

Yeah. So what happens is they passed this law last year and it went into effect January 1st, I believe.

Yeah, after postponement because of COVID Right.

And what was interesting about this is like it goes into effect, we already had, you know, like there's been in the news this whole time about the delays at the ports and things like that, a massive supply chain crisis. And then all of a sudden now one of the biggest regions for ports and getting access to the rest of the United States institutes this owner-operator law. Because it's interesting is you can still be an owner-operator in Arizona, Nevada, Oregon, but not in California.

Yeah, right.

And so like you could go to the border, but then once you were in the border, you had to be an employee of the company you were working for.

Yeah. So all the, all the drivers that are or owner operators that are in these surrounding states, they won't even go to California anymore.

Right? Like, I'll pick it up for you at the border, but you gotta get it from the port to the border. Yeah. What an interesting time. I thought it was interesting is 'cause a lot of these, you know, like we see this happen a lot with legislation and we're seeing it with California again with this whole electrification push, is that there's an intention behind the law and then there's all these unintended consequences. Like, we just learned that Vox, you know, like Vox Populi, the journalism agency, they do some shows on Netflix and they're a pretty popular media outlet, but they have a lot of independent journalists, you know, where they do freelance works, you know, it's like a blog and things like that. All of them, they either had to bring them in-house or they cut them. And so they just, you know, cut all their freelance journalists because they couldn't bring them in as employees. I don't believe they intended, like, you know, the crafters of this legislation probably didn't intend for, you know, independent contractors like journalists, photos, you know, photographers, or a lot of those guys are freelance.

They are. Well, think about, like, I mean, it's not— and it's, it's almost every industry. Like, you have independent, like, uh, you know, your satellite dish for your TV, you have independent contractors. Yep. That'll go and do installations and repairs for the big companies.

Consulting agencies do this. I know Infusionsoft did this for a long time, is they had independent contractors that were— their entire job was as an implementer for Infusionsoft. They built up a whole business model around this. And then they became a partner. Infusionsoft didn't bring them into the fold. They were just like, hey, you could be your own partner. And then they usually would offer auxiliary services in addition. And so that was almost like a gateway for them. We're going to get introduced to you because we're going to help you implement this tool, and then we're going to sell you a bunch of our services on top of that. In technology, that's rampant. Like, that's a really common practice.

Oh, it's huge.

Oracle, Microsoft, they all do it. And now all those employees, if you're primarily doing work for one entity, you under the new California AB-5, you need to be considered as an employee of that entity.

Yep.

Which means, you know, and they're doing it because payroll taxes and insurance and You know, they'll tell you is that it's, well, we want to make sure that we're looking out for the little guy, you know. But there's a ton of owner-operators who are pissed about this right now.

70,000— over 70,000 trucking owner-operators in California, and they're all affected.

And their whole business model is set up around them working for a company, and right, like, they've got everything set up this way, just gone.

And the ports is predominantly owner-operators.

Right. So not only do we have a supply chain issue getting stuff off the ports, now we've just exacerbated that problem.

Big time.

It sounds a lot like the electric grid out in California too. And they just— I think marijuana's been legal over there for a little while, but you know, there's something going on over there in that water over there.

What water?

Maybe not, yeah. True, we are facing our water shortage out here.

Yep.

What I think is interesting too about this is that for a long time, not a long time, I would say in the last 5 years, you've been seeing this really big push towards like a gig economy. We talk about people pursuing side hustles and like, you know, setting up your Etsy shop or, you know, you're just people becoming more entrepreneurial. And this law feels like it's almost counterintuitive to that. I knew somebody that like they actually had 2 or 3 cars and they paid for them all with their Uber and Lyft. Like that's all they did. and they, they would never ever gone and worked for a taxi company. No. But with Uber and Lyft, like, it's like, well, I own my own vehicle and I have a lot more flexibility and control over when I work and don't work. And for them, like, it's, it's a side gig and it turns into like a full-time thing.

Well, there's a lot— it's funny that you mentioned that. There's a lot of owner-operators that they will go and they will either lease purchase or they'll just be full-on owner-operator with a company. And then they will pay off that truck, and then they'll find a driver for that truck and do the same thing for another truck. So they build up these small fleets, 2, 3, 5, 10 trucks, but they're all, they're all dedicated to one company because that company has helped them pay off their, their loans. That company, they know how they operate, they know the people that work there. I mean, there's, there's something comfortable with staying with a single entity when you are an owner-operator, but this law says no, you can't do that. You have to actually contract yourself to multiple companies, not just one.

Yeah, in some ways it can actually be a good thing to diversify, right? Like if that company goes down, you know, like it's not the only bread, it's not the only egg in your basket, right? We see that with consulting agencies. If you're too tied to one company, you know, and that company goes down or the relationship sours or any of that stuff, like it can mean disaster for your business. And so diversifying where you don't depend on one customer is a good practice. But in this case, It's the economies of scale that you're taking advantage of, and you lose that if you have to go between too many different companies. So now it hurts your profitability because you're not dedicated to one company anymore, because you do have to be more things to more people. I mean, a lot of these owner-operators just aren't ready for, you know, the economies of scope that come along with that.

No, there's a lot of issues when it comes to trucking owner-operators and being able to You know, for pay, for example. So if you contract with a company, you know, some of them have 30-day pay terms. Well, if you don't want to abide by those 30-day pay terms, then you can go and get yourself a factoring company. Well, that factoring company is going to take anywhere from 2 to 7% off of what you just earned to be able to get you paid right away. Also, a lot of owner-operators are very reliant on the companies they're contracted to to help with maintenance and repairs. They'll have either a maintenance fund that they've contributed over time, or they'll take a loan out from a company. Well, you can kiss those goodbye because if you're no longer single source to me as a company, I'm more than likely not going to loan you any money for whatever the repair ends up being because I don't have that loyalty really with you to know that you're contracted just to me, not to multiple companies at the same time.

Yeah, that relationship definitely becomes a lot more transactional.

Yep.

And so now you're having to win on the margins and you're having to compete with all the other owner-operators out there. Like, it just— like, this will end up being worse for truck drivers and worse really for trucking companies in general. And anything that's worse for them is usually going to be worse for the American economy.

Yeah, absolutely.

Because it does— it's going to change pricing and all that, which, you know, in today's age of inflationary pressure, then it's just one more drop in the bucket, you know. So it just kind of happens. Um, what are some other like downsides? We talk about, you know, having to do multiple employees Like we talked about the, the challenge of getting paid. Yeah, you know, like I think of if I'm a company and I'm working for, you know, I've got like my LLC set up and maybe I've got 2 or 3 people working for me as subcontractors, but now I'm responsible for invoicing and collecting payments and in a model that's not been predominantly built that way, you know, that like you mentioned, you've got your 2-week holdback, you've got this, this period of, well, what are they going to do? They're going to do direct deposit? Is it You know, like, how does that all work? And now it becomes very much like a 1099 type of situation where it's invoicing and collections.

Most likely that owner-operator is going to find a factoring company. So what you'll see is you'll see factoring companies start to get more profitable.

Yep.

What's funny is, so we went to the Texas Trucking Show, uh, back in June. The biggest booths and the most frequent booths that you saw were factoring companies. Huh. Because they're raking it in. I mean, you gotta think they're going in and they're getting thousands of loads every day and they're getting 2 to 7%, depending on how good that owner-operator negotiates, right?

Right.

Percent of whatever that guy made. So if his load was $100, which obviously it's not $100, you know, even if it's $5, it's $5 for every load, thousands of loads. I mean, it's astronomical what these companies are making. And it's basically just for letting you get paid earlier and they're gonna be your collection service. Right. So I'm saying, hey, you have to contract a different company. So now as an owner-operator, I'm, I'm doing different brokerages probably every single day. I'm no longer going to the companies that actually have their own assets. I'm going to more brokerage type companies, right? And I'm having to broker from all these different companies. And then every single load I do, I have to then take through that factoring company.

And what ends up happening is you have a lot of non-value-add partners. That take their little piece of the pie.

Yes, right, and they do. Well, brokers will also take a percentage off the top if you're not— if they have to pay someone else. So now if they go to the factoring company, well, no, no, now it's a 3% fee to you for using a factoring company plus that 5% for the factoring company. Now it's 8%. You've almost lost a tenth of the value of that load. Yep, just so you could get paid.

And so you end up seeing this shift back instead of being this gig economy now it's going to shift back to becoming a lot more predominantly employer-employee relationships. And you kind of crush a little bit of that entrepreneurial spirit that— big time, you know, like we're kind of known for in this country.

Yeah, well, I mean, you hear all the time, what's your side hustle? You should have a side hustle. And a lot of people do.

Yeah.

All right, it's just something that they are an independent contractor to another company on the side to make ends meet, extra money. I mean, it's especially important when you have the inflationary economy that you just talked about. I mean, people need to make more money in different ways, and now you're just making it a lot more difficult. Yep.

And right now, I know they're in the news. One of the reasons why this came up for us as a topic was just you've got a lot of people that are not happy. They're not happy about all the changes and everything shifting. Um, they— so they've been protesting this law for a little while.

Yep.

Apparently Port of Oakland's now totally fed up with it.

So the beginning of August, it looks like they sued the person, the main person that organized the protests in Oakland. And then there's, I think they said there was 2,000 protesters, so they're trying to sue all of them, basically saying, well, it's no longer a peaceful protest, you're interfering from our ability to work. You know, now they're, they're protesting outside of the gates to go into the port, right? But what that's doing is preventing trucks that want to work from going in, right?

That's usually how that works, right? You know, they picket and then like you can't get through and You know, that's kind of the point of the peaceful protest is like just to shut things down and muck it all up. Um, but so we'll see, we'll see how this all ends up turning out. I mean, honestly, it's California, so I think we all know how this is going to turn out. We'll see if other states follow suit. We'll see if they come back around in a couple years and say, yeah, about that, like, we didn't quite intend for the, the far-reaching effects that this was going to have. Um, you know, now we're going to take tailor it back to, well, we just really wanted to target Uber and Lyft.

Yeah. Right?

Because that's really what this started off as, and now it's affecting every industry.

What you'll see is you'll see these container ships diverting to other ports. So like the Port of Savannah has record inbound ships coming in because they don't have the regulations. The Port of Houston is another one. Yep. I mean, they're totally doing all this construction and this expansion because they don't have those regulations that are preventing people from coming in in a timely manner and getting offloaded. At that peak when there was those, you know, I think there was like 80 ships waiting to be unloaded and they were spending like 2 weeks at a time out at sea just sitting and docked, waiting to try and get in to unload. I mean, can you imagine the— I wish I knew the cost, the fuel you're burning to sit out there, right? How much of that dead time that you're wasting not getting that product in. I mean, we had what I mean, weeks and weeks where you ordered something and you're like, it's supposed to usually be there within a week. 3, 4, 5 weeks later. I ordered something, I think in September of last year for Christmas, and it didn't get— I don't think it got delivered until March of this year. Like, it took that long. It came from China, right? So you'd expect that it's going to take a while, but holy crap.

Ah, just a mess.

It is a mess.

Yeah, kind of like, uh, you know, we beat the electrification dead horse and it's the same kind of thing. So all we can hope is that sometimes cooler heads will prevail and the common sense will win the day again. Uh, just keep pushing for it. You know, if you're in California, we commiserate with you. Um, you know, there's some good things that come out of this, you know, and obviously you want to make sure that the employer-employee relationship isn't being taken advantage of, you know, where we are treating employees fairly and not just skirting the law to get around taking care of people, you know. But you want to make sure the intent gets carried through and it doesn't go too far, you know.

And I, I also think that, and I think it goes with employment, whether you're an owner-operator, whether you're an employee, if you don't like it somewhere and you feel they're screwing you, go somewhere else.

We try to tell people that here all the time, right, is that everybody's self-employed. Yeah, you know, like you're in charge of your own paycheck.

So if an owner-operator is upset and they were the ones protesting against the company because they didn't want to work for them, well, guess what? They would just go contract with somebody else, right? It's the same with Uber and Lyft. I, you know, I understand the intent, but if you weren't happy with Uber, you could have gone to Lyft. If you weren't happy with Lyft, you could have gone to Uber. If you weren't happy with either, go drive a cab, right? I mean, there's other options out there available, or go find a new career. So It's not me trying to be insensitive. It's just you do have that personal responsibility and that personal freedom to go and do something different if you didn't like it. I don't think we need laws to prevent those type of things.

Right. Well, that's going to wrap it up for us on this episode. As always, if you have any questions, comments, love to hear them at podcast@rtafleet.com. And then go check out thefleetsuccesssummit.com. We've got the details coming up on there as we announce new speakers. For our summit. That's going to be March 21st and 22nd in Las Vegas, Nevada.

We've already announced two speakers.

We've got two.

So we announced two. I guess this will be last week on social media, on LinkedIn. So we've got Mike Pritchard and Sam Bradford, both confirmed.

There you go.

As speakers.

I love listening to me some pitch.

Me too.

It's a good guy to listen to. And Sam's just always awesome.

Right? And it's, we're gonna add some more, more killer speakers to come to that. So like, if you're not there, you'll definitely be missing out.

Absolutely. All right. Well, until next time, we'll see you later.

Thanks guys.

Thanks for joining us on this episode of the Fleet Success Show. If you like the show, we'd appreciate your 5-star review. Be sure to subscribe anywhere you listen to podcasts and come hang out with us on social media @fleetsuccess. See you next time.