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What is AB5 and How Does it Impact the Trucking Industry?

Estimated reading time: 4 minutes

On June 30, 2022, the United States Supreme Court declined to hear the Ninth Circuit’s decision in California Trucking Association v. Bonta, 996 F.3d 644 (9th Cir. 2021). At issue in the case was a California state statute referred to as “AB5.” The state law codified the “ABC” test for whether a worker is an employee or an independent contractor. The consequences for motor carrier operations in California are likely significant.

What is AB5?

Under AB5, an individual hired or engaged to perform a job function is presumptively an employee unless the hiring entity establishes that the individual:

A.  Is free from the control and direction of the employer in performing work, both practically and in any contractual agreement between the parties; and

B. Performs work that is outside the usual course of the employer’s business; and

C. Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the employer.

Does AB5 impact motor carriers?

Yes, it likely does. AB5 threatens to ensnare the “owner-operator” business model. In the typical owner operator business model, the motor carrier leases tractor equipment from a small business owner who also provides driver services. The owner operator business model is typically challenged to pass factor “B” because motor carriers and owner operators are often deemed to be in the same business – – transporting goods by truck. If any one prong of the ABC test fails, the individual who purchased a commercial truck in pursuit of the freedom of the road, may be reclassified as an employee of the motor carrier. The implications include:

  • Lawsuits by reclassified individuals who argue they have not been given proper pay (overtime, minimum wage, failure to pay on time) or meal and rest breaks under California employment laws. These lawsuits can become class actions and involve extensive defense costs, attorneys’ fees, and high damages awards.
  • Lawsuits by reclassified individuals who argue they should have been covered by workers’ compensation insurance in the event of an injury.
  • State investigation and action by the Division of Labor Standards Enforcement or the Employment Development Department, resulting in fines and penalties.

What about the business-to-business exemption?

Under the “business-to-business” exemption in AB5, even if a motor carrier hires an owner-operator with its own business, the availability of the exemption remains unclear because:

  • Most ICs in California do not operate separately registered business entities; instead, they do business as a “DBA” which is just an individual using a business name. It is not a registered business.
  • Additionally, the test of whether the business-to-business exemption applies will look past any official business registrations and try to determine whether the IC is truly independent of the motor carrier. If the IC is working exclusively with the motor carrier or does not have any of the typical attributes of an independent business, they will likely be reclassified as employees.

Does AB5 impact brokers?

The short answer is probably not. The freight brokers business model would seemingly meet the ABC test set by AB5 because brokers hire motor carriers to transport goods. Brokers and motor carriers are expressly defined under federal law and demonstrably separate businesses. Each performs different services from the other. Additionally, brokers and motor carriers will likely qualify for the business-to-business exemption of AB5.

What lies ahead?

The trucking industry in the US is largely made up of owner-operators, including approximately 70,000 in California. Not only are drivers in California impacted by AB5, but so is every motor carrier that sends its owner-operators into the state. For an industry that already reports a driver shortage of 80,000+/- to meet demand, future supply chains are at risk. Trucker protests as a direct result of AB5, most recently at the Port of Oakland, are likely to spread. There is no guarantee that the displaced drivers from AB5 will choose to sign on as employed drivers for large fleets. In fact, it is not beyond reason many will exit the industry to pursue the independence of business ownership.

While the Supreme Court’s refusal to review the Ninth Circuit’s decision on CTA’s challenge of AB5 has paved the way for the law to take effect, it’s unclear how or if it will be enforced – and it’s likely the trucking industry will continue the challenge the law on behalf of its constituents. This will continue to be one of the top issues facing the trucking industry in the road ahead.

Stay tuned.