Stuck on the Low Road

Rotterdam, Europe's largest port, is a marvel of efficiency. More than 7,000 container ships visit its docks annually, most stopping for barely more than a day. New terminal facilities, built on landfill where the river meets the sea, handle 10 million containers with a minimum of congestion and pollution.

The freight -- Chinese clothing and electronics, American pharmaceuticals, Spanish automobiles -- seamlessly flows to warehouses, distribution centers, rail yards, and barges surrounding the port, on time and on schedule. The tightly integrated freight-movement system at the port makes it possible to operate a just-in-time logistics system in which goods arrive at their destination 15 minutes before they are moved to their next spot on the supply chain. This allows shippers to operate with minimal inventory, a must on a continent where most retail shops have minimal space to store goods. Lean logistics means lower interest costs on merchandise, lower insurance costs, less theft, and less need to discount unsold goods.

By comparison, American ports and the logistics and distribution systems they feed are old world. Trucks clog the overwhelmed highways and roads leading to the ports. Thick diesel pollution fouls the air not only in the ports and neighboring communities but in inland warehouse districts under siege from container trucks and freight trains. Stacks of containers form walls around residential communities. Traffic congestion slows commuting time and wastes fuel. Rates of asthma as well as lung and heart disease are climbing. And just-in-time delivery is impossible in a system where old, worn-out container trucks, without digital communication, spend half their days waiting.

Port trucking -- the industry segment that carries containers to and from ports, warehouses, and railroad yards -- is one of the most extreme cases of abuse. Competition for work is intense. Instead of a computerized system advising a driver to pick up a container at a designated loading dock at a particular time, drivers sit and wait, engines on. Since the drivers bear the costs, there is no incentive for trucking companies to modernize. Freight rates paid to drivers are so low that the median age of the trucks driven by the nation's 70,000 port truckers exceeds 11 years. How is this possible when the Environmental Protection Agency adopted diesel engine standards in 2001 that required trucks to meet stringent standards for emissions by 2007? Simple -- the EPA bowed to the reality that the U.S. has chosen a low-road freight transport policy, and grandfathered all used trucks that were on the road when the standards went into effect. By contrast, Rotterdam's trucks -- indeed all trucks in Holland, are tested regularly to ensure compliance with strict emission standards. Nearly all the trucks working in Rotterdam's just-in-time logistics system are owned by trucking companies that employ their drivers, and all the trucks are less than five years old.

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Americans chose this low road for freight movement in 1980, when Congress deregulated the trucking industry, disbanding the Interstate Commerce Commission. Advocates ranging from consumer advocate Ralph Nader and Sen. Ted Kennedy to the nation's retailers and the agricultural freight-hauling industry predicted that deregulation would bring market-competition, lower rates, and economic growth. Instead, we got a system that shifts business costs onto the public and onto truck drivers, suppresses private investment in innovation and new technology, and forces trucking companies into competing by cutting corners, like carrying overweight containers, or depriving drivers of fuel surcharges.

The rise in drivers misclassified as "independent contractors" is symptomatic of the low road on which American freight transport policy has been stuck for more than a quarter-century. Whereas trucking was once a stable job, with industrial wages and benefits, deregulation meant that hundreds of thousands of truck drivers had to give up their employment contracts, union representation, and the protection of labor legislation. Today these owner-operators must provide their own trucks, pay for their own employment taxes, maintain their equipment, buy fuel and insurance, and directly bear the risk of economic downturns, health emergencies, and equipment failures. Twelve-hour days without compensation for overtime have become the norm. Drivers skimp on maintenance, which causes their engines to emit excessive cancer-causing diesel particulates. An owner-operator may gross around $80,000, minus costs averaging $52,000, and take home perhaps $28,000 before taxes. All the risks are the driver's.

A classic case is FedEx Ground operations. FedEx saves money and resists unionization by disguising its drivers as contractors or temps -- something that is illegal under labor law. A California court found (in Estrada v. FedEx Ground, 2004) that delivery drivers were employees in everything but name. They were made to buy or lease trucks that met company specifications, were required to pay for the company logo to be painted on their trucks, and were dressed in company uniforms, down to the color of their socks and shoes. They made pick-ups and deliveries on routes assigned by the company, were barred from using their trucks to haul loads for other companies, and had to park their trucks in company-assigned spaces. The Court found that FedEx Ground misclassified its drivers as independent contractors as an illegal means to avoid paying state unemployment insurance and workers' compensation insurance. It levied a $17.6 million fine against the company. A class-action suit consolidating suits against FedEx Ground's misclassification is supposed to be heard in northern Indiana in the fall. In 2007, the Internal Revenue Service fined FedEx $319 million for its misclassification of workers.

FedEx also used its political muscle to change which labor law it is subject to, in order to deter unionization. In 1996, as Congress cleared the decks for a summer recess, FedEx lobbyists had friendly legislators insert into a transportation bill two words -- "express carrier" -- which had the effect of excluding the employees of FedEx from coverage by the National Labor Relations Act (NLRA). Instead, the revised bill put these workers in the same category as airline and railroad workers, who are covered by the provisions of the Railway Labor Act. That act, unlike the NLRA, requires system-wide bargaining units.

Thus, when Massachusetts FedEx employees voted for union representation by the International Brotherhood of Teamsters in an election conducted by the National Labor Relations Board, a federal district court panel voided the election on the grounds that FedEx employees, unlike the employees of other express delivery companies, were governed by the Railway Labor Act. That meant they could not organize one work center at a time. In May, the House of Representatives voted to end FedEx's exemption from the NLRA. In retaliation, the company threatened to cancel its orders for new planes from Boeing, jeopardizing the Obama administration's recovery plans. Soon thereafter, FedEx announced a multimillion-dollar advertising campaign, attacking the House vote as a "bailout" of rival UPS, which is largely unionized. The legislation, part of an omnibus transportation bill, is still pending.

is there any hope that the Obama administration and Congress will place America's freight-transit system back on the high road with enforceable environmental and labor standards making possible modern, just-in-time logistics? There are some positive indications. As a senator, Barack Obama sponsored legislation aimed at ending misclassification of independent contractors who are employees in everything but name. As a presidential candidate, he endorsed the Port of Los Angeles' Clean Trucks Program, championed by environmental groups and the Change to Win Federation. The Program sets emissions standards for trucks and requires companies to classify their drivers as employees. And the House's transportation bill, shepherded by Transportation Committee Chair James Oberstar of Minnesota embraces the vision of a freight-transport system with cleaner fuel, more modern freight-hauling equipment, and better infrastructure. Legislation aimed at tightening the rules against misclassification of employees is pending (House Bill 09-1310), and there is much that the administration could do with better enforcement of existing laws.

But it won't be easy. In July, Transportation Secretary Ray LaHood announced that the administration would support delaying consideration of the House bill's ambitious transportation policy reform, in order to keep Congress focused on health-care and energy legislation. The trucking industry has tied up the Los Angeles reform program in court. On April 28, 2009, Christina A. Snyder, U.S. District Judge of the Central District of California, issued a preliminary injunction against those parts of the Los Angeles and Long Beach plans that are not directly related to safety, on the grounds that the Federal Aviation Administration Act of 1994 preempts local regulations. She did permit the Los Angeles Harbor Commission to phase out the oldest trucks on safety grounds. A full hearing won't begin until December. The delay could cripple a plan that has already succeeded in forcing hundreds of the worst trucks to be retired and induced companies to put almost 5,000 new trucks on the road.

Furthermore, because of the ambiguities in the federal legislation governing classification of employees and independent contractors, there is no guarantee that the FedEx Ground class-action suit set to open this fall will eliminate misclassification. Instead, it could uphold independent contracting as standard practice in the industry.

All current proposals to move freight transport off the low road stop short of establishing the sort of regulatory authority that disappeared when the Interstate Commerce Commission was eliminated in 1980. Since then, there has been no effective authority ensuring that containers are not overweight, that leasing agreements conform to the law, and that the rigs are safe.

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In the absence of decisive federal leadership, states and cities have been at the forefront, motivated by a desire to find new revenue sources as well as to eliminate diesel pollution. California, suffering from both budget distress and lethal smog, is in the lead. In addition to the efforts by the Los Angeles Harbor Commission to regularize port trucking, the state attorney general's office has been looking into misclassification of port truckers at the ports of Los Angeles and Long Beach since October 2008. In July, an official with the California attorney general's office reported that five cases have been filed, but investigators have looked at dozens of companies because the problem is "pervasive," and more suits will be filed soon as a part of the ongoing crackdown. Taking their cue from California, attorneys general from eight states announced in June that they would work together to investigate FedEx Ground's classification of its drivers as "independent contractors."

"State and local governments in Ohio are being cheated out of hundreds of millions of dollars each year as a result of employee misclassification," said Attorney General Richard Cordray of Ohio. "We are committed to aggressively pursuing these misclassification cases to level the playing field for businesses that play by the rules and to protect Ohio's workers."

While the Los Angeles Harbor Commission's Clean Air Plan, the California attorney general's investigation, the Estrada decision, and the eight attorneys general's joint investigation of FedEx Ground are all promising signs that cities and states are recognizing their stake in moving American freight transport onto the high road, federal leadership is necessary. The aviation and transportation bill points the way, with its emphasis on alternative fuels, expanding rail capacity, modernizing infrastructure, reducing diesel emissions, and recognizing workers' rights to organize under the NLRA. More leadership is necessary if America's freight-movement system is ever to change to a lean logistics model like the one that already exists in Rotterdam.

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