Updated: Nov 1, 2021
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:
A. The worker is free from the control and direction of the hirer in connection with the performance of the work
B. The worker performs work that is outside the usual course of the hiring entity’s business*
C. 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 cannot pass.
What Has Happened in the States Looking to Adopt A.B. 5 (Especially in California)
A.B. 5 was passed in the fall of 2019 by the California legislature and signed by Gov. Gavin Newsom. But in January 2020, U.S. District Judge Roger Benitez issued a preliminary injunction that exempts motor carriers from A.B. 5 while the California Trucking Association’s (CTA) lawsuit against the law is adjudicated. The injunction is an exemption that allows motor carriers to continue working with owner-operators until a final decision is reached in the CTA’s lawsuit against A.B. 5.
In September 2020, The Ninth Circuit heard arguments from the CTA regarding why that preliminary injunction should remain in effect. The court also heard arguments from the State of California and the Teamsters Union, who is fighting the CTA’s case. The court has not given any indication of when it will issue a ruling. Still, its decision will likely have years-long ramifications for carriers and independent contractor drivers that work in the state. Ultimately, the lawsuit could take years to make its way through various courts and potentially up to the U.S. Supreme Court, marking the importance of the Ninth Circuit’s decision to uphold the injunction or not.
After a decision is reached about the temporary injunction, the actual lawsuit itself against A.B. 5 – in which CTA seeks a permanent exemption for trucking – will be heard by the U.S. District Court in Southern California. From there, any decision will likely be appealed to the same Ninth Circuit Court of Appeals that listened to the case and then, potentially, will be taken to the U.S. Supreme Court.
CTA attorneys argue that a 1994 federal law (the Federal Aviation Administration Authorization Act) expressly prohibits states from enforcing laws that interfere with “prices, routes, and services” of interstate motor carriers. The CTA argues that California’s A.B. 5 does just that and should not apply to trucking operations in the state.
Carrier Responses to the IC's in these states
The law has already had significant consequences in California, with large and small fleets announcing a move away from using owner-operators based in California or even contracting them to haul loads in the state. Carriers have had to tell their California-based owner-operators they could no longer contract with them unless they move out of state.
Some fleets are offering their owner-operators a relocation package for those who want to leave California and stay as an owner-operator. Other fleets are giving owner-operators the option to transition to a company driver if they wish to continue operating within California.
Options to Navigate Similar Laws (If They Were to Pass in Your State)
Open a brokerage arm
The option that seems to be getting the most consideration from carriers, and which some already are using, is opening a broker arm to handle their relationships with owner-operators. This brokerage relationship will pass the “B” part of the ABC test because brokers aren’t technically in the same business as either the owner-operator or the carrier. Logistically, it could be challenging to pull off, but many have already gone through with this option.
Two events are necessary to make the freight brokerage model work.
The licensed motor carrier establishes a brokerage operation.
Independent contractors (drivers who own their trucks and contract with companies) secure operating licenses as Licensed Motor Carriers (LMCs).
There is a process with costs involved for each of those entities, but it’s possible with the proper legal advice.
In most locations, the process takes five to six weeks to open a brokerage arm. To avoid liability issues and to carry out the process correctly, it’s important not to connect the brokerage division to the carrier division. Motor carriers should set up a separate brokerage division from the carrier division to avoid cross-over liability.
Many now see the freight broker model as a viable option to avoid employee-based operations if A.B. 5 eventually eliminates the traditional owner-operator model. However, the Teamsters union, which has been using the employer-employee argument for the past decade in driver classification lawsuits, views any move toward a freight broker model as another way to classify drivers as independent contractors and thereby avoid funding employee benefits.
Additionally, the state and federal governments fear losing out on tax revenues due to the independent contractor model, as the burden to pay taxes falls on the contractors. However, companies like ATBS help independent contractors to meet their tax burdens.
Many owner-operator drivers in Southern California are already beginning to establish themselves as LLCs, even if they have just one truck. Those drivers are now receiving their loads from the trucking companies’ brokerage divisions they used to contract with as owner-operators. However, it can be a lot of work for an independent driver to file as a business entity such as a limited liability company, which could be a legal and paperwork burden beyond what an independent driver wishes to face. Unless you have someone to guide you through this, it could be a challenge. To learn more about the cost of obtaining your own authority, click on the link here.
To pass ‘prong B’ of the Dynamex test, a driver would have to have an independently established business or provide trucking services to a non-trucking company. This may be the way out of A.B. 5 for owner-operators.