In recent months we have seen a trend that goes something like this. A broker enters into a contract with our carrier client to haul interstate freight. The load confirmation sheet shows the broker’s name, we send an invoice to that broker, but payment comes from a different company. Upon further investigation we find the paying company is related to the broker and frequently they have carrier authority. Some of the responses we get when we voice objection to this is they are doing it for accounting convenience or their legal department said it is ok to do it that way, or they have never had anyone object to this. It is probably true that no one is going to object as long as the payments keep coming, but what if they stop coming and you have to pursue payment through legal proceedings. Who do you go after?
UC Factors has spent a lot of time researching this issue. We have looked into the pertinent FMCSA regulations and DOT regulations to try to find a definitive answer to this situation. We have also consulted legal specialists in the transportation industry. As a result of our research we have concluded that this type of activity is, at best highly inappropriate and really bad business, and at worst is illegal.
From FMCSA regulations 371.7 Misrepresentation states the following:
- A broker shall not perform any brokerage service (including advertising) in any name other than that in which its registration is issued
- A broker shall not, directly or indirectly, represent its operations to be that of a carrier. Any advertising shall show the broker status of the operation.
Henry Seaton, the country’s foremost legal expert on transportation, stated the following. “Broker regulations require the broker to, among other things, track when it billed the customer, when it received payment, and when it paid the carrier. This is in effect a constructive trust. The regulations also require the broker to segregate its brokerage operations from any other business in which it is engaged or to at least keep separate books and records.”
After satisfying ourselves that this activity was a clear violation of regulations, we inquired as to why the FMCSA would not warn violators that this behavior would not be permitted. The answer we got is one that we don’t agree with and we believe is a misinterpretation of a specific regulation. We were told that the FMCSA isn’t concerned with broker abuses because under section 14101b parties can waive rules of commerce except safety in a broker carrier agreement.
We strongly disagree with that interpretation after reading and analyzing the wording of that section. We don’t have the luxury of asking the people that wrote section 14101b what they meant, so we can only go by the exact words that they use.
First, there is nothing in that section that says the parties can waive the rules of commerce. It says they can “expressly waive any or all rights and remedies under this part for the transportation covered by the contract”. The requirements of conduct by a broker could not accurately be called rights or remedies. They are clearly obligations and could never be waived by the wording of this section.
Further, Section 14101b is titled Contract With Shippers and no where in this section does it mention the word broker. While it is true that a broker steps in the shoes of the shipper in terms of being obligated to adhere to any rules or obligations of the shipper, this section does not give the broker any right to shed any obligations of being a broker.
The biggest concern we have about this matter is knowing who we are granting credit to and who has ultimate responsibility in paying. A big part of issuing credit to a broker is knowing they have an active and valid bond in place.
When we are being paid by someone other than the broker, is the bond still covering any future default situation? The legal experts claim that the load confirmation should establish the underlying carriers right to the broker’s bond upon default.
That may be true but since payments aren’t coming from the broker it places legitimate doubt on the voracity of the load confirmation document. Maybe the carrier affiliate of the broker is representing to the shipper that they are hauling the freight and the shipper doesn’t know a broker is involved at all.
We have never been a company that is comfortable waiting for something to become a problem before we take a position on it. Our position with brokers is we expect the broker to pay for a load that our carrier/client hauls. We are not agreeable to any other affiliate of the broker making payment on our carrier’s loads. We don’t know for certain that having an affiliate of the broker paying the broker’s carriers is illegal, but we do know for certain that it is bad business.
Not all factoring companies would take the time to ensure that you are protected and have the best opportunity to receive payment. Take a look at our guide on how to choose the best factoring company for your business here: