California’s AB5 uses the ABC test to determine whether truck drivers qualify as employees or independent contractors. Trucking companies and owner-operators must evaluate exemptions, worker benefits, business structures, and potential compliance risks.
By Brad Nakase, Attorney
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Regardless of whether you own a trucking business in California or not, you have probably heard about a new amendment to the employment laws that is expected to drastically alter the country’s transportation system. Recent legislation has reshaped whether truck drivers are independent contractors under California law.
We have seen throughout the years how the supply chain business often gets greatly impacted by government laws. Stress has increased due to a change in the law, in addition to the typical difficulties the trucking business faces. Nonetheless, it is quite uncommon for a state’s employment laws to have such a significant impact.
AB5, a current government employment regulation, is in force. The AB5 bill has been a contentious issue for a number of months. We have delved deeper into AB5 in this piece of writing to learn more about it and how it impacts California truck drivers.
The California State Legislature enacted AB5. It was put into place in Sep 2019. It essentially reclassifies many workers in California as employees.
Many businesses are required by AB5 to reclassify their independent contractors as employees. The “gig laborers” were the target audience for this legislation. Giving gig workers the same rights and benefits as regular employees and preventing them from getting misclassified are two goals of the measure.
Paradoxically, labor unions throughout California first backed AB5 as a means of providing benefits to workers in the gig economy. It did, however, take the place of an earlier classification system for employees. California has strict rules that determine whether truck drivers are independent contractors or employees.
Must Read: What Is the Difference Between an Employee and a Contractor?
It was clear that California’s legislature, courts, and even voters wanted to do away with the independent contractor requirement outlined in AB5. AB5 had the upper hand in 2021.
It was to expand the general law “AB5 Test” to the definition of “employee.” The purposes of the Wage Orders, Labor Code, and the Unemployment Insurance Code. AB5 took effect on 30th June 2022.
The AB5 law was first put into effect to allow ride-hailing and delivery services like Uber, DoorDash, Lyft, & others to treat their drivers as employees. This gives them the same rights and benefits as normal employees.
However, because the AB5 statute modifies the labeling of workers in most logistics and trucking companies operating in California, it has a significant impact on trucking companies.
Unless they operate in a profession covered by the AB5 exceptions or the company can satisfy the requirements set forth by the statute’s ABC test, the majority of California workers are regarded as employees under the AB5 law. The legal framework governing whether truck drivers are independent contractors differs significantly in California.
An ABC test with three points has been introduced by AB5. An employee can only be considered an independent contractor when the employer can demonstrate that the employee satisfies each of the three requirements listed below:
The largest obstacle for recruiting firms in the California transportation industry will be Prong B. For example, if the hiring company operates in the transportation, trucking, or logistics industries, it will be challenging for them to demonstrate that the truck drivers they enter into a contract with are carrying out tasks outside of their regular business operations.
The Western States Trucking Association has informed its members that most of its members will find it difficult to complete the new ABC test’s requirements, particularly Prong B.
Even in that case, the drivers would nevertheless have to have an independently founded firm or offer transportation services to other businesses (Prong C) and be independent of the hiring company’s supervision (Prong A).
Are owner-operator trucks prohibited in California? No, owner-operators are not prohibited by California’s AB5 law. It certainly makes it difficult for trucking businesses to employ them, though. A motor carrier is required by the ABC test and the AB5 regulation to demonstrate that its employees are independent contractors rather than employees.
The second factor of the ABC test would be extremely difficult to succeed in, as it is clear that the majority of owner-operators in California have direct contracts with trucking, logistics, and transportation firms.
Now that the AB5 is in place, what can trucking businesses do? Does California’s AB5 impact truck drivers? For most truck drivers, these are some pressing questions. Trucking, transportation, and logistics firms that previously hired owner-operators would now be required to treat them as regular employees according to the AB5 statute.
Let’s examine what AB5 signifies for truck drivers and how it impacts them. Trucking businesses would be required to give owner-operators the same rights, benefits, and safeguards as every other employee in California if they hired them as employees.
Trucking businesses would be required to pay unemployment insurance, workers’ compensation, paid sick days, and minimum wage. Additionally, they would have to refund costs for items like fuel and upkeep.
Every trucking business would be interested in learning how to circumvent the AB5 law. We’ve covered a few options below that California-based trucking companies may want to think about following the AB5 law’s introduction. These choices can assist them in understanding how to circumvent the AB5 regulation.
1. Close Your California Trucking Company
For a transportation firm, this could seem like the most challenging alternative. Although it is not a preferred option for truckers or trucking businesses, it may be the most reliable way to get around the AB5 regulation.
2. Consider Owner-Operators to Be Employees
The AB5 law’s primary goal is to establish a work standard in California where every full-time driver is considered an employee and is entitled to the same rights, benefits, & workers’ compensation as other employees.
3. Establish Two Independent Companies
One alternative to overcoming the obstacles posed by AB5 is to establish two distinct companies: one that directly employs drivers and the other that acts as a brokerage for independent contractors, allowing them to set their own acceptable rates and take jobs wherever they choose.
4. Go for the B2B Exemption
There is excellent news for owner-operators who want to find employment as independent contractors in California. They can apply for the B2B exemption since it allows them to operate independently, particularly if they offer services straight to a contracting company rather than to that company’s clients.
It can be difficult for a business or contractor to meet all 11 specific conditions to receive this exemption.
However, after the AB5 statute is put into effect, drivers who are based and employed in California, particularly leased owner-operators, have a few alternative possibilities. The choices are as follows:
1. Moving
Drivers have the option to relocate outside of California. In this manner, they are able to run more than half of their miles away from the state.
2. Acquire Authority and Modify Their Status
Instead of functioning as a rented owner-operator in California, drivers can have their own operational authority and operate for a brokerage firm.
3. Avoid Receiving Outbound Loads
Drivers who transport freight into California risk being expelled. They should refrain from picking up outgoing shipments.
The subject of “Does AB5 harm truck owner-operators or drivers?” has been on the radar of the trucking sector in California for a long time. The owner-operators opted to continue the legal struggle to prevent the AB5 law since it was clear that the issue didn’t sit comfortably with them. California courts have addressed whether truck drivers are independent contractors through several important rulings.
The California Trucking Association (CTA) has asked a federal judge to impose a new court order to prevent the implementation of California’s AB 5 bill, which they claim will make owner-operator employees of motor carriers.
On 11th January 2023, CTA requested that federal judge (district) Roger Benitez temporarily delay the implementation of the statute that it claims will destroy owner-operators’ participation in California’s trucking business, citing new legal reasons in favor of its position.
This motion was made after the United States Supreme Court declined to hear a prior attempt to block the statute, which had been rejected by a federal appeals court. Both independent contractors and motor carriers have opposed the law.
A preliminary injunction was granted by Judge Roger Benitez in 2020. He ruled that the state of California had overreached itself. Denying motor carriers the option to employ independent contractor drivers is excessive. It was a critical decision for the trucking sector.
In support of its claim that owner-operators desire the autonomy to run their own companies, CTA has included statements, recent demonstrations, and surveys in its proposal.
In its statutory brief, CTA contended that state-level defendants are still committed to enforcing the statute against regulated motor carriers and that they have not given an explicit description of how motor carriers are capable of complying with AB 5 and the “Prong B” test.
Furthermore, CTA has asserted that the owner-operators and plaintiffs who have founded their businesses on federal legislation are suffering irreversible loss as a result of this.
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