With the ink still drying on its recent AB5-related deal with the Teamsters union in Southern California, the CEO and CFO of Universal Logistics used the occasion of the Cowen & Co. Global Transportation & Sustainable Mobility Conference on Wednesday to tout the benefits.
One of the key arguments: Universal has gotten out in front of the rest of the industry in solving both an ongoing dispute with the Teamsters and the question of compliance with AB5.
“We feel we de-risked ourselves,” Jude Beres, Universal’s (NASDAQ: ULH) CFO, said in a fireside chat with Cowen managing director Jason Seidl. “We are done and the deal is signed.” In comparison to many carriers that Beres said are “beginning their journey …. we just got through it.”
AB5 is a California law that had been kept out of the state’s trucking industry through an injunction that disappeared late last month after years of legal battles. It severely restricts the ability of a company to hire independent contractors (ICs), particularly when the ICs perform the same work as the firm hiring them, such as a trucking company retaining an independent owner-operator.
But both Beres and CEO Tim Phillips were specific in what the new deal is going to cost: as much as a roughly 20% increase in its expenses to have turned a certain percentage of independent owner-operators into employees, governed under a deal with the Teamsters.
The path to keep those cost increases in check, Phillips said, is “optimization” of the assets.
Specifically, the former independent owner-operators who drove under the Universal Logistics banner are being made employees with the company leasing the equipment they own. That is what creates the potential for optimization, according to Phillips.
“Maybe we can gain a few more hours out of that asset,” said Philips, noting that previously an independent owner-operator had the ability to turn down loads offered by Universal. “But we think we will have better controls in place.”
Phillips added that it is early in the game and Universal has “not yet seen how we can optimize.”
He also said another issue will be replacing or duplicating the “entrepreneurial spirit” that might have driven an independent contractor in the past to maximize time on the road in pursuit of a bigger payday. Figuring how to keep that drive going as an employee is also going to be part of the “optimization” challenge for Universal, Phillips said.
Phillips said the approach at Universal to classifying employees has several different aspects. There will be company drivers who are behind the wheel of a company truck. There will be employees who lease their truck back to the company, which is similar to the “two-check” model being pushed in particular by TransForce.
Universal has incorporated notable language in describing its deal with the Teamsters. For example, in its news release announcing the action, the company used the terms “partnership,” “arrangement” and “agreement” to describe what it had done with the union. In the Cowen fireside chat, Phillips said Universal had “formed a relationship” with the Teamsters. The term “contract” doesn’t come up.
Regardless of what they are calling it, Phillips said, “We will work together to grow our driver base.”
But he said the deal with the Teamsters — which he said is two years in duration and has been ratified and signed — also calls for a “nonunion model” that would operate alongside the union model. Phillips said some of those activities would be outside the Los Angeles/Long Beach area and could involve freight movement into the Inland Empire area or rail moves from various facilities.
Even though they might be facing higher costs, Phillips said Universal’s discussions with its customers over the employee plan “have been very good.”
“I think they walked away from the conversation knowing that we are going to be able to provide a consistent, reliable service in the state of California,” Phillips said. “[That service will] come in a couple of different fashions, but they can breathe and know that we have a plan in place.”
“There is going to be an increase in cost to do business in Southern California,” Beres said. However, echoing Phillips, Beres said the precise size will be higher “if the carriers can’t get that productivity out of the asset.”
“There are still a lot of clouds on the horizon that a lot of carriers and shippers are going to have to figure out,” Beres added.
In other topics discussed during the Cowen fireside chat:
- Phillips said flatbed rates, which make up more than 60% of Universal’s truckload operations, have been “very steady.” “If you look at the second quarter into the third quarter, we really saw no peelback in our flatbed rates,” he said. The Q3 flatbed rates “might have gone up a slight bit.”
- Capacity from the independent owner-operators the company continues to use has been “good on our side,” Phillips said. “In the last three months, our pipeline has increased 50%,” he said. With spot rates declining in some markets, it is leading some drivers who obtained their own motor carrier authority “when the market was red hot … to come back to us because we’re providing a platform of consistent freight.” These drivers have not exited the market, Phillips said, “but they have just changed where they are going to run, maybe with larger carriers with contractual freight.”