California Governor Gavin Newsom is expected to sign a bill into law that could have a significant — and some fear devastating — effect on the trucking industry in that state.
On Sept. 10, the state Senate passed the “Employees and Independent Contractors” bill, or AB5 as it is more commonly referred. The law makes standard what is known as the ABC Test to determine whether a worker is an independent contractor or an employee.
The bill passed by a vote of 29-11 along party lines, with Democrats favoring the measure. According to reports, Newsom, a Democrat, has expressed he intends to sign the bill, which would go into effect Jan 1.
AB5 was designed to sharply define the definition of “independent contractors” in order to protect workers’ rights, according to the bill’s author, Democratic Assemblywoman Lorena Gonzalez of San Diego.
“It’s our job to look out for working men and women, not Wall Street and their get-rich-quick IPOs,” Gonzalez said.
AB5 was based on a California Supreme Court decision, Dynamex v. Superior Court of Los Angeles County, in April 2018. In that case, courier company Dynamex Operations West had reclassified its employees as independent contractors in order to cut costs. The workers sued and the court ruled in their favor, determining that they should be classified as employees, based on what is known as the ABC Test.
The test uses a three-pronged set of criteria that presumes a worker must be considered an employee unless the employer can prove:
- That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
- That the worker performs work that is outside the usual course of the hiring entity’s business; and
- That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
There is no nationally recognized definition delineating between independent contractors and company employees. Each state sets its own criteria for determining independent contractor status. The ABC Test is applied to varying degrees in at least 28 states.
In Massachusetts and New Jersey, the test is used across the board to determine who can be classified as independent contractors. In many other states, the ABC Test is used all or in part, and is applied to specific industries and to specific labor laws pertaining to subjects such as wages and unemployment.
Prior to the Dynamex case, California used an 11-point standard that had been in place since 1989 to determine employee or contractor status. In the Dynamex case, the court used Massachusetts’ application of ABC as a template. That model was also the one used in AB5.
California’s prior standards focused on an employers’ control over a worker to determine contractor status. It allowed for flexibility and was “complicated, expensive, and prone to litigation,” according to the state Senate analysis of AB5. By contrast, The ABC test operates on a premise that all workers should be considered employees unless they can meet all three standards.
Much of the impetus behind AB5 was to take aim at businesses that unfairly use independent contractor status as a way to cut costs at the expense of workers. Many of these companies, such as Dynamex, are part of what is referred to as the growing “gig economy.” Some of the most notable examples in recent years of platform-based companies where workers’ status as an employee or a contractor have been a point of contention have been ridesharing companies like Uber and Lyft, or food-delivery services like GrubHub and DoorDash.
Businesses that rely on independent contractors are free from labor standards such as minimum wage and overtime. They don’t have pay payroll taxes and insurance costs, nor do they pay into Social Security or Medicare for contractors.
According to one industry estimate, classifying a gig worker as an employee can cost a company up to 30% more than classifying them as a contractor.
While the Dynamex decision applied only to rules governing minimum wages, overtime and guaranteed breaks, AB 5 also pertains to workers’ compensation, insurance, and paid time off.
While the good intentions of AB5 are clear, opponents of the bill argue that it is too sweeping, that it doesn’t differentiate between the businesses that abuse the independent contractor status and industries that traditionally rely on the use of independent contractors, most notably the trucking industry.
Some in trucking fear the ABC standards would effectively end the ability for large trucking companies in California to lease to or contract with small carriers or independent owner-operators.
The key problem with ABC when it is applied to trucking is with the “B prong,” the one that says a company cannot hire an independent contractor to perform work that is a normal part of the hiring entity’s business.
In other words, a company whose business is to carry freight cannot contract a smaller company or an individual owner-operator to carry freight with them without making them a full employee.
In addition, the drivers or small carrier being contracted would have to meet the “C prong,” which is to be able to show that they are independently established businesses that provide trucking services to other companies. This not considered nearly as big a hurdle as the B prong.
It should be noted that many states that have looked to the ABC Test as a model for their own standards chose to do without the B prong.
AB5 passed the state Assembly in May, also pretty much along party lines, and has been a hot topic in California all summer.
Representatives of the trucking industry, including the California Trucking Association and the Western States Trucking Association, have led opposition to the bill.
“There is no reason why protecting workers does not include defending the right of tens of thousands of drivers who have built their businesses around the independent owner-operator model, invested hundreds of thousands of dollars in their trucks and have operated their own businesses for decades,” said Shawn Yadon, CEO of the CTA, in a press release.
There are more than 130,000 trucking companies in California, and as in the rest of the nation, most of them are small fleets or individual drivers. As people throughout the industry can foresee catastrophic repercussions if suddenly none of them can get contract work — to them, to the larger companies that normally would contract them, and to the industries they serve, such as agriculture.
Some state lawmakers expressed concern with the potential upheaval AB5 could cause as it moved its way toward approval.
A few industries managed to have exemptions for themselves included into the legislation. Trucking, however, was not among them, despite efforts by industry representatives, testimony by members of the industry and organized protests.
Even Gonzalez, the bill’s author, has expressed her openness to making adjustments, including possible exemptions, to AB5 in the future.
But that sort of thing takes time. Newsom has until October 13 to sign the bill, but he is not expected to wait, which means that at least for a while, California’s trucking industry stands poised to be an unwilling test case as other states and Congress, which is considering legislation based on ABC, wait to see what happens.