Updated: Nov 2, 2021
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 yourself.
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, but lawsuits have been filed, and the trucking industry is hoping for restraining orders, injunctions, and/or federal preemption to stop AB5. Unfortunately, that could take months or years to accomplish.
The Two-Check System
Another 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 to the driver as 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 can 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 mean time...
The trucking industry will continue to work towards solutions because there is a significant concern that AB5 will quickly spread to other states like New Jersey, Illinois, Washington, and New York. Many presidential candidates want AB5 to be the rule of the land and would prefer all people to be employees and members of a labor union. As things stand today, the most common options we see carriers offering their owner-operators with California residences are:
Move residence out of California
Get own operating authority and drive for the trucking company’s brokerage division
Significantly increased costs
Significantly increased administrative responsibilities
Significantly increased compliance responsibilities
Become an employee
Deadhead out of California
Can deliver loads into California, but...
Cannot pick-up loads in California
End relationship with carrier
This law is set to go into place on January 1, 2020*. Thus, if you are an owner-operator with a California residence, AB5 forces you to make a significant change to how you operate your trucking business before the end of the year. Here at ATBS, we are already seeing some of our clients moving their residences to other states like Nevada and Arizona. This is because owner-operators are independent contractors by choice and have no desire to become employees. Whatever steps you plan on taking, we hope it works out for the best. If you have any questions, feel free to give us a call or send us an email and we will do our best to assist you.
*On January 13th, Judge Roger Benitez of the U.S. District Court in Southern California indefinitely extended a temporary restraining order that exempts trucking from compliance with AB5 until he decides whether to issue a permanent injunction.