The Importance of Separating Freight Broker and Motor Carrier Entities
November 30, 2023
Understanding and adhering to federal regulations is crucial for the success and sustainability of any business—especially those in the trucking industry. One such critical aspect is keeping freight broker and motor carrier entities separate, a principle emphasized by regulatory standards outlined in 49 C.F.R. §371.7.
The Federal regulatory definition explicitly mandates that a Freight Broker’s registration should be under a separate legal entity from that of the Motor Carrier. 49 C.F.R. §371.7(a) explicitly prohibits a broker from performing or offering brokerage services under any name other than that specified in its registration. Furthermore, 49 C.F.R. §371.7(b) underscores the need for transparent advertising, stipulating that a broker must not represent its operations as that of a carrier, and any promotional material should clearly indicate its broker status.
Legal Implications of Operating Under a Single Entity
Failure to adhere to the separate legal entity requirement poses significant risks, potentially jeopardizing the entire sustainability of the company. Operating a broker and carrier under the same legal entity can lead to legal complications, where loads tendered by a carrier to a broker under common ownership may be treated as the carrier’s liability. This not only violates regulatory standards but also undermines the legal defense a broker may have in the event of a claim arising from a load under tender.
Mitigating Risks and Ensuring Viable Defense
To safeguard against these risks, companies should establish a separate broker registration under its own legal entity, complete with distinctive branding and contracts. This separation not only aligns with regulatory requirements but also ensures a viable defense for brokers in the face of potential claims, maintaining the integrity of their operations.
Comparing Liability: Freight Broker vs. Motor Carrier
The risks associated with not following this corporate structure are underscored by the vast difference in liability between freight brokers and motor carriers. While motor carriers may face substantial settlements exceeding $165 million in some cases, freight broker authority is “exempt” from liability for cargo and bodily injury claims under the D.O.T. authority. Past litigation history supports that successful judgments against freight brokers only occurred when they portrayed themselves as motor carriers or exercised excessive control over drivers.
Best Practices for Compliance
To ensure compliance, conduct a thorough review of your company’s legal entity, advertising, branding, and contracts to verify the separation of broker and carrier entities. For companies holding dual authority, it is imperative to maintain separate advertising and branding materials for motor carrier and freight broker operations. Additionally, separate contracts for each service provided to clients help delineate the distinct roles and responsibilities, further minimizing legal complexities.
Staying vigilant in maintaining the separation of freight broker and motor carrier entities can help your business proactively mitigate legal risks. By following best practices and maintaining a clear distinction between broker and carrier entities, businesses can navigate the regulatory landscape with confidence and protect their interests in the face of potential legal challenges.
Complete our Transportation Broker Risk Scorecard to help pinpoint the specific risks threatening your trucking operation and brokerage operation. Prioritize key strategies to minimize exposure and increase resiliency.