Assembly Bill 5 (A.B. 5) is a California law that restricts businesses from classifying workers as independent contractors.
Stricter employee classification laws have momentum, and federal changes could be on the horizon.
This means your fleet may need to be prepared if A.B. 5 becomes the law of the land.
A.B. 5 is based on a California Supreme Court ruling on a case known as Dynamex.
The Dynamex ruling replaces the old classification test with a new ABC test.
Owner-operators leased to trucking companies likely cannot pass this test.
In January 2020, a preliminary injunction was issued that exempts carriers from A.B. 5 while the lawsuit is adjudicated.
The injunction allows motor carriers to continue working with owner-operators until a final decision is reached.
The law has already had significant consequences in California, with fleets announcing a move away from using owner-operators based in California.
The option that seems to be getting the most consideration from carriers to get around A.B. 5 is opening a broker arm. This brokerage relationship will pass the “B” part of the ABC test.
Implement a “two check system.” 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 problematic solution.
Many owner-operators in Southern California are beginning to establish themselves as LLCs and receive loads from a trucking companies’ brokerage divisions.
The U.S. Department of Labor (DOL) is also proposing new guidelines on employee classification.
Being this is at the federal level, it may not impact the rules of the state-based A.B. 5.
Even with the classification test in the initial DOL proposal being considered more positive for independent contractors, laws similar to A.B.5 are a real threat for fleets.
On November 3, 2020, California voters easily passed Proposition 22, an exemption from AB5 for app-based drivers and couriers.
Prop 22 created a hybrid model between contractors and employees; essentially a “contractor-plus limited benefits” model.
It’s believed that Prop 22 should be a factor in whether the trucking industry remains exempt from AB5 as well.
Your fleet needs to begin thinking about an action plan if A.B.5 style rules were passed federally or in your state.
It’s no secret; The government has been aggressive in seeking unpaid taxes and penalties from companies misclassifying their drivers. On top of that, those drivers are also making claims for unpaid wages, including overtime and benefits. The potential tax debt owed to the government, coupled with a driver seeking money owed for misclassification, may end up costing a carrier hundreds of thousands of dollars. These misclassification risks have become even more concerning with the passing of Assembly Bill 5 in California earlier this year.
Assembly Bill 5 (A.B. 5) 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. However, many experts believe A.B. 5 will actually increase labor costs, create higher prices for consumers, reduce the quality of service, and, most importantly, reduce workers’ flexibility.
Though California’s law has drawn the most attention, similar legislation has popped up among other states, including New Jersey, New York, and Washington. Likewise, just this month, the Democratic-held U.S. House passed a labor law that would adopt a stricter test nationally to determine whether a worker can be classified as an independent contractor. That bill has a slim chance at passing the Republican-controlled Senate, and President Trump already stated he would veto the bill if it did somehow pass. However, the point remains: stricter employee classification laws, especially those at the state level, have momentum, and federal changes could be on the horizon depending on the results of the election. Your fleet should prepare for the possibility of A.B. 5-type legislation becoming the law of the land.
The History of A.B. 5 (Where did the idea come from, and why?)
A.B. 5 is based on the California Supreme Court ruling on a case known as Dynamex on April 30, 2018. The Dynamex ruling establishes a presumption that workers are employees unless the hiring company can prove otherwise.
Before the Dynamex ruling, the Borello test (in place since 1989) was the standard for determining classification. The Borello test is an 11-prong test that most owner-operators (Independent Contractors) 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 that must be passed of the ABC test are as follows: