The Quick Guide to AB5 for Truck Drivers
Updated: Feb 17
On June 30, 2022, the U.S. Supreme Court denied certiorari on AB5. As a result, the injunction on AB5 that has been in place for over two years will be lifted, and AB5 will be law in California retroactive to January 1, 2020.
What is AB5?
Assembly Bill 5 (AB5) is a California law that restricts businesses from classifying workers as independent contractors rather than employees. The bill was driven by unions wanting to organize workers. Experts believe it will increase labor costs, create higher costs for consumers, reduce the quality of service, and most importantly, reduce the flexibility of workers. The bill is largely opposed by gig economy companies like Uber, Lyft, and DoorDash because the bill was initially created to try to combat these business models. Unfortunately, the bill will unintentionally affect independent contractor truck drivers in the state of California by making it difficult to work for themselves.
Click here to view our Quick Guide to AB5 eBook!
The Dynamex Ruling
AB5 is based on an April 30, 2018, California Supreme Court ruling on a case known as Dynamex. The Dynamex ruling establishes a presumption that workers are employees unless the hiring company can prove otherwise. Prior to Dynamex, the Borello test (in place since 1989) was an 11-prong test that most independent contractors (owner-operators) were able to pass. The Dynamex ruling replaces Borello with a new 3-prong test, called the ABC test, to determine if a person can be qualified as an independent contractor.
The three prongs of the ABC test that must be passed are as follows:
The worker is free from the control and direction of the hirer in connection with the performance of the work
The worker performs work that is outside the usual course of the hiring entity’s business*
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity
*The second prong is the part of the test that owner-operators leased to trucking companies are unable to pass.
Who is Exempt?
There are some contractors who are exempt from AB5 including doctors, dentists, insurance agents, lawyers, accountants, securities brokers, real estate agents, hairstylists, and many creative professionals. If you are exempt from AB5, you must still pass the Borello test to be qualified as an independent contractor. Owner-operators are currently not exempt from AB5.
The Two-Check System
One potential solution to AB5 is for carriers to pay their drivers via a “two-check system”. Although rare, two-check systems have been around for many years. Under the two-check system, the driver is no longer an independent contractor but is instead an employee of the carrier. At the same time, the driver has a rental agreement to rent his equipment to the carrier.
The first check is if the driver is an employee, and the second check is for the rental of the driver’s equipment. However, there are nuances that make this a difficult solution.
For example, because the carrier is renting the truck they can technically put any driver they want in the truck, especially if the primary driver is taking extended time off. Another example is that some believe they can pay the employee driver minimum wage and then put the rest of the money towards the rental of the truck. However, it’s likely in this scenario that the IRS will consider this as shielding income. A third issue is that as an employee, the driver can no longer choose when to work, how much they want to work, what loads they want to haul, or any of the other myriad of reasons that drivers choose to be independent contractors instead of employees. There are other potential issues with the two-check system as well, but these are examples of the more common ones.
In the meantime...
The trucking industry will continue to work towards solutions because there is a significant concern that AB5 will qui