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The trucking industry is a place where an entrepreneurial workforce can thrive, especially for owner-operators who choose to work as independent contractors. But California’s recent passage of a law that will limit when and how a business can contract with an owner-operator for trucking services is causing concern.
California’s Assembly Bill 5 changes who may be classified as an independent contractor. For decades, the critical line between employee and independent contractor hinged on a flexible “control” analysis. In simple terms, if the independent contractor controlled how the objectives of a particular assignment were accomplished, the worker could be properly treated as a contractor. And if the hiring entity exercised too much control, the worker was deemed an employee.
In 2018, however, the California Supreme Court ruled in favor of a rigid “ABC test” named after the three prongs the hiring entity must establish to assert independent contractor status of workers: (A) the worker is free from the control and direction of the hiring entity; (B) the worker performs work that is outside the usual course of the hiring entity business; and (C) the worker is customarily engaged in an independently established trade, occupation and business. The newly enacted legislation, set to go into effect Jan. 1, will expand that test and even potentially reach certain business-to-business relationships.
Under the ABC test, a contractor is deemed an employee for purposes of the California Labor Code unless the hiring entity — not the contractor — can establish all three conditions.
Specific concern lies with the “B” prong, which requires that to be an independent contractor, the person “performs work that is outside the usual course of the hiring entity’s business.”
Most owner-operators contract their work with trucking companies whose primary business is trucking. That means the contracted drivers are arguably performing work “in the usual course” of that trucking company.
The reason that AB 5 is so problematic to trucking is also exactly why the law may eventually be deemed inapplicable to the trucking industry. Imagine an owner-operator is driving from Phoenix to San Diego. Will that driver be a contractor in Arizona but an employee the moment they cross into California?
This may also, however, be one of the best points the trucking industry can make in challenging the law in court. State laws cannot interfere with certain federal laws, but AB 5 would seem to do exactly that given the broad reach of the Federal Aviation Administration Authorization Act of 1994. The FAAAA makes clear that states, “may not enact or enforce a law ... related to a price, route, or service of any motor carrier ... with respect to the transportation of property.”
The Federal Motor Carrier Safety Administration recently used FAAAA to strike down California’s meal-and-rest-break requirements. Similarly, requiring contracted drivers to morph into “employees” depending on which state lines they cross would clearly seem to “relate to” the price, route and service of a motor carrier. While the legal analysis surrounding pre-emption is complex, the argument that AB 5 is pre-empted by the FAAAA is formidable.
How should trucking companies proceed?
Some trucking companies may hope to avoid the effects of AB 5, at least in the short term, by contracting with owner-operators who have an LLC. To that end, AB5 identifies “business service providers,” who provide services to contracting businesses, as exempt from the test reach. However, a contracting business bears the burden of establishing that each of its “business service providers” satisfy 12 factors, including that the service provider actually contracts with other businesses to provide the same or similar services (regardless of whether the vendor is prohibited from having other clients), advertises and holds itself out to the public as available to provide the same or similar services, and keeps a business location that is separate from the location of the contracting business. While contracting with owner-operators who have an LLC may be a helpful step, it is not necessarily an antidote to AB 5 by itself, as some of the factors may prove tricky for owner-operators.
Various industry associations are pushing the state Legislature to adopt an explicit trucking industry carve-out, and pre-emption-based challenges will be made in court, but it’s likely to still go into effect in January. In the meantime, it’s recommended that companies assess any potential exposure by analyzing independent contractor relationships, make corrections, ensure contracts contain a relevant arbitration agreement, and evaluate their business-to-business relationships.
James C. Fessenden is a partner and Anet Drapalski is an associate with employment law firm Fisher Phillips in California.
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