FMCSA Chooses to Not Address Double Brokering and Fraud in Definitions of Broker Final Guidance

FMCSA Chooses to Not Address Double Brokering and Fraud in Definitions of Broker Final Guidance

Since there are differences in the definition of a broker in different sections of federal regulations, the FMCSA is aiming to stop certain dispatch services that claim to qualify as “bona fide agents” of motor carriers who are likely to be engaged in unauthorized brokerage.

FMCSA issued their final guidance on the definitions of “broker” and “bona fide agent,” including guidance on the role and activities of entities referred to as “dispatch services” and the level of financial penalties for unauthorized brokerage services provided by such entities.

The guidance looks at six main areas:

  1. the definition of broker;
  2. the definition of bona fide agent;
  3. the role of dispatch services in the transportation industry;
  4. how to determine whether a dispatch service is acting as a broker or as a bona fide agent;
  5. services dispatchers may provide without broker authority; and
  6. services that require dispatchers to obtain broker authority.

So, what does the final guidance say?

Double brokering and Fraud

First, let’s look at what the guidance doesn’t say.

The last few years have seen a big issue regarding allegations of fraud, supply chain abuse, theft of cargo, double brokering, and misappropriation of funds occurring in the industry.

Double Brokering occurs when a carrier accepts a load and then rebrokers it to another motor carrier.

This is not a legal practice.

Likely, the motor carrier that rebrokers the load is not authorized or in compliance with FMCSA and has become a big issue in the marketplace.

The rule of thumb here is if the rate seems too good to be true, then itis too good to be true.

For example, if you know the market and see a load 75% over the fair market rate, the load is likely double, or even triple brokered and you may be ghosted after delivering the load and never get paid.

Most commenters on the interim guidance were concerned with double brokering in which some entities act as brokers without proper authority.

In response, FMCSA said that “double brokering” is not a term defined by statute or regulation and has avoided creating “unintended consequences” in issuing its interpretation of its regulations and related matters.

The final guidance says, “While the guidance may be relevant to stakeholder compliance with FMCSA’s regulations, any changes to FMCSA’s regulations, and consequently to a stakeholder’s compliance responsibilities, would need to be made through a rulemaking proceeding.”

In other words, this is being kicked down the road as its own separate issue and it will be years before we see anything change on this.

Definition of Broker

Broker is defined in 49 U.S.C. 13102(2) as:

  • A “person, other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation.”

It is also defined in 49 CFR 371.2(a) as:

  • A “person who, for compensation, arranges, or offers to arrange, the transportation of property by an authorized motor carrier. Motor carriers, or persons who are employees or bona fide agents of carriers, are not brokers within the meaning of this section when they arrange or offer to arrange the transportation of shipments which they are authorized to transport and which they have accepted and legally bound themselves to transport.”

Final Guidance: “FMCSA has determined that the definition of “broker” at 49 CFR 371.2(a) is adequate.”

Handling money exchanged between shippers and motor carriers is one factor that strongly suggests the need for broker authority, but it is not an essential requirement for one to be considered a broker.

Definition of Bona Fide Agent

In 49 CFR 371.2(a), bona fide agents are defined as

  • “persons who are part of the normal organization of a motor carrier and perform duties under the carrier’s directions pursuant to a preexisting agreement which provides for a continuing relationship, precluding the exercise of discretion on the part of the agent in allocating traffic between the carrier and others.”

Final Guidance: A bona fide agent may be either an employee of a motor carrier or a contractor but must perform its duties as specified in a preexisting agreement between the parties.

While FMCSA has determined that the definition of “bona fide agent” in 49 CFR 371.2(b) is adequate, FMCSA clarifies that the term “allocating traffic,” which appears in the definition, means any exercise of discretion on an agent’s part when assigning a load to a motor carrier.

If an entity representing more than one carrier exercises such discretion, it would not meet the definition of “bona fide agent.”

Role of Dispatch Services

There is no statutory or regulatory definition of a dispatch service, nor is there a commonly accepted definition of such a service.

FMCSA noted previously that dispatch services have certain common features:

  1. They work exclusively for motor carriers, not for shippers
  2. They source loads for motor carriers
  3. They perform additional services for motor carriers that are unrelated to sourcing shipments

Final Guidance: FMCSA does not have statutory authority to regulate dispatch services unless such entities also meet the criteria for registration as brokers, freight forwarders, and/or motor carriers.

Dispatch Service: Broker or Bona Fide Agent

Final Guidance: Dispatch services may be classified as either brokers or bona fide agents, depending on the nature and scope of their activities.

While no single factor is paramount in assessing the business relationship between a dispatch service and a motor carrier, the extent of a motor carrier’s control is relevant because the greater control a carrier has over a dispatcher’s actions, the less likely the dispatcher is to exercise independent discretion in sourcing and allocating loads and hence need broker authority.

This requires a fact-specific analysis of whether the dispatch service’s activities meet the criteria set out in the statutory and regulatory definitions of “broker” or “bona fide agent.”

Factors Indicating Broker Authority is Not Required

Final Guidance: A dispatch service that meets the following criteria would generally be considered a bona fide agent and would not require broker authority.

This list is not exclusive, and a dispatch service does not necessarily have to meet every listed factor, depending on its specific activities:

  • The dispatch service has a written legal contractual relationship with a motor carrier that clearly reflects the motor carrier is appointing the dispatch service as a licensed agent for the motor carrier. This is often a long-term contractual relationship. The written legal contract should specify the insurance and liability responsibilities of the dispatch service and motor carrier.
  • The dispatch service complies with all state licensing requirements, if applicable.
  • The dispatch service goes through a broker to arrange for the transportation of shipments for the motor carrier and does not seek or solicit shippers for freight.
  • The dispatch service does not provide billing or accept compensation from the broker, third-party logistics company, or factoring company, but instead receives compensation from the motor carrier(s) based on the pre-determined written legal contractual agreement.
  • The dispatch service is not an intermediary or involved in the financial transaction between a broker and motor carrier.
  • The dispatch service is an IRS 1099 recipient from the motor carrier, or a W2 employee of the motor carrier as specified in the legal written contract agreement.
  • The dispatch service discloses that they are a dispatch service operating under an agreement with a specific motor carrier, and the shipment is arranged for that motor carrier only.
  • The dispatch service does not subsequently assign or arrange for the load to be carried/moved by another motor carrier.
  • A dispatch service does not provide their “services” for a motor carrier unless that motor carrier specifically appointed the dispatch service as their agent in accordance with the aforementioned requirements.

Factors Indicating Broker Authority Is Required

The following factors indicate the dispatch service should obtain broker authority.

Again, this list is not exclusive, and a dispatch service does not necessarily have to meet every listed factor, depending on its specific activities.

  • The dispatch service interacts with or negotiates any shipment of freight directly with the shipper, or a representative of the shipper.
  • The dispatch service accepts or takes compensation for a load from the broker or factoring company or is involved in any part of the monetary transaction between any of those entities.
  • The dispatch service arranges for a shipment of freight for a motor carrier and there is no written legal contract with the motor carrier that meets Section IV.E.1 of the Guidance above.
  • The dispatch service accepts a shipment without a truck/carrier, then attempts to find a truck/carrier to move the shipment.
  • The dispatch service engages in allocation of traffic by accepting a shipment that could be transported by more than one carrier with which it has agreements and assigns it to one of those carriers.
  • The dispatch service is a named party on the shipping contract.
  • The dispatch service is soliciting to the open market of carriers for the purposes of transporting a freight shipment.

What kind of insurance coverages do brokers need?

Today, brokers need a wider variety of protection that often includes:  

  • Truck/Freight Broker Auto, General Liability Coverage – Up to $5,000,000
  • Professional (E&O) – Up to $1,000,000
  • Contingent Cargo Liability – Up to $500,000

Truck Broker Liability (TBL) is designed for truck brokers, along with trucking operations, that have brokerage authority. TBL is a hybrid primary liability policy that addresses the truck broker’s general liability arising out of the ownership and use of a truck by the motor carrier of a brokered cargo move, in compliance with a written truck brokerage agreement.

It provides bodily injury and property damage liability coverage protecting the truck broker if legal action is taken because of a truck accident involving a motor carrier to whom they brokered a load.

General Liability is designed to respond to the liability a freight broker could assume other than liability to cargo or liability as result of a vehicle being driven. For example, a freight broker might be pulled into a lawsuit if third-party trucker or warehouse personnel was injured because of cargo being unloaded from their truck.

Errors and Omissions Insurance (E&O or professional liability) is designed to protect brokers from lawsuits that claim you made a mistake in your professional services and can help cover expensive court costs or settlements.

Contingent Cargo Legal Liability is designed to protect a transportation broker or freight forwarder against the liability assumed when deciding to move cargo for others. This provides coverage when a trucker’s primary motor truck cargo policy fails to assume responsibility for cargo loss or damage.

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