When the U.S. Supreme Court on June 30 declined to hear the California Trucking Association’s (CTA) case against a divisive California worker classification law, the future of many owner-operators in the state became uncertain. AB5 was passed into law in 2019 and went into effect in 2020, but the lawsuit had prevented it from affecting the trucking industry.
Known as the “gig worker bill,” California’s AB5 requires companies that hire independent contractors to reclassify them as employees, with some exceptions. Independent contractors are not entitled to the same benefits as employees. For example, independent contractors are not entitled to paid family leave, workers’ comp, overtime, or unemployment insurance.
However, many independent contractors across the nation say they prefer to be independent contractors because of the flexibility and autonomy they enjoy. The new ruling could result in the death of the owner-operator and independent contractor business models in California.
Brad Klepper, president of Interstate Trucker Ltd., a law firm dedicated to legal defense of the commercial drivers, said this could lead to companies looking out-of-state for independent contractors instead of those whose live in California.
The law applies to approximately 70,000 truck drivers based in California.
“The bill was originally directed toward the gig economy (think Uber and Lyft) but found a home in the trucking industry,” shared Klepper in a recent column for The Trucker. “In essence, when the bill was signed into law it basically made the independent contractor business model for trucking companies extinct in California.”
New York and Illinois have looked at creating laws similar to AB5. Legislators, though, speak about workers for Uber and Door Dash, failing to mention the impact on truckers. The recent protests in California may make them consider owner-operators.
“Of course, the decision not to hear the case was a great disappointment to all owner-operators and operator dependent companies like ourselves,” noted Jon Coca, president of Wisconsin-based Diamond Transportation, Inc. “We had high hopes that the court would hear the case and overturn the decision by California and the 9th Circuit Court’s decision to uphold it.”
California Trucking Association officials believe AB5 violates the Constitution and could force the end of the trucking industry’s owner-operator model. However, the U.S. Solicitor General recently advised the court to deny the CTA’s petition, saying that AB5 will not have a significant impact on prices, routes, or services.
AB5 states that a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that the person is “free from the control and direction of the hiring entity in connection with the performance of the work, the person performs work that is outside the usual course of the hiring entity’s business, and the person is customarily engaged in an independently established trade, occupation, or business.”
The California Supreme Court in its ruling on the case cited “the harm to misclassified workers who lose significant workplace protections, the unfairness to employers who must compete with companies that misclassify, and the loss to the state of needed revenue from companies that use misclassification to avoid obligations such as payment of payroll taxes, payment of premiums for workers’ compensation, Social Security, unemployment, and disability insurance.”
California businesses will now be required to use the ABC test to determine independent contractor status. For a person to be classified as an independent contractor, the test requires:
A: That the worker is free from the control and direction of the hiring entity in connection with the performance of the work and in fact;
B: That the workers perform work that is outside the usual course of the hiring entity’s business; and
C: That the worker is customarily engaged in an independently established trade occupation or business of the same nature as the work performed.
The ABC Test is used by the U.S. Department of Labor and 33 states. Most recently, California changed from Common Law to this test. Used by the IRS, New York, the District of Columbia, and 17 other states, the Common Law Test determines worker status by examining behavioral control, financial control and relationship of the parties for each job. It’s possible for a worker to be an independent contractor under Common Law and an employee under the ABC Test.
In 2019, the California legislature passed AB 5 to add Section 2750.3 to the Labor Code, adopting and expanding the ABC Test to define “employee” not just for purposes of the Wage Orders, but also for purposes of the Labor Code and the Unemployment Insurance Code.
“What most people don’t understand is that the hundreds of thousands of independent contractors out there driving trucks and delivering goods made a conscious choice to do so. They didn’t want to be an employee of a larger company; they want to run their own business and run in areas they control,” explained Coca.
“That’s how the ICs in our company run,” he continued. “Further, this is how many of us began our companies. You start by driving and learning the ropes and then advance to buy your own truck. After that, many will choose the buy more trucks and grow a small business. If a law like this manifests, it will certainly slow down the rise of small trucking companies — if not put an end to it.”
The ruling by the Supreme Court led to hundreds of independent truck drivers in California stopping work and taking to the streets beginning July 17 to protest the law. The protest effectively shut down cargo operations at the Port of Oakland for seven days.
“Right now, it’s discouraging for commerce in California, but we don’t haul freight in or out of there much. This just means we will be less likely to deliver there in the future,” Coca said. “The bigger issue will be other states that may try to follow along and pass similar law. If it spreads, it will be debilitating for the industry. All of these owner operators (independent contractors) will choose to leave the industry … leaving us with an even greater driver shortage.”
Some businesses have embraced a brokerage model to deal with AB5.
FedEx shifted to an agency system in which the company contracts with a third party that then employs the driver on its behalf, according to the Journal of Commerce. By doing this, FedEx has insulated itself from accusations of exerting too much control over independent contractor drivers.
“The equivalent approach for drayage operators would be to set up a brokerage division, which would still be able to use independent owner-operators, provided those drivers incorporate themselves as small businesses,” according to a JOC article, “California drayage companies hedge against AB5 via brokerage.” It notes that the brokerage model could lead to a great deal of uncertainty.
According to the article, even if drayage trucking companies create their own brokerage units, it’s possible many companies will retain the use of company drivers for at least a portion of their business.
Klepper said companies can simply agree to treat the contractors as employees. But the problem could be that many of the drivers have their own trucks and want to be independent contractors.
“In theory, a carrier could also change its structure to be a logistics company, using independent carriers to deliver goods,” Klepper said. “This would arguably get past the part B of the ABC test: The independent contractors would no longer be working for a trucking company, so the job they perform would be outside the course of the hiring entity’s business. The only way to know for sure whether this would work would be for the courts to hear the matter. And there is no guarantee that the courts would agree.”
As of now, AB5 has caused a lot of uncertainty on several levels of the trucking business, from the CEOs to the individual driver. Depending on how the future goes, states adopting legislation similar to AB5 could become “deserts” for owner-operators.
“This isn’t the end of the world — yet — but we have to be very careful these laws don’t spread,” Coca said. “The ABC test is a bad benchmark for independent contractors in trucking.”
Joseph Price has been a journalist for almost two decades. He began in community media in 2005 and has since worked at media outlets in Virginia and Arkansas. He is also a commercial drone pilot and video editor. He hosts a weekly community radio show focused on goth, metal and industrial music that airs Wednesday evenings at 6 p.m. at www.kuhsradio.org.