One of the lawsuits challenging California’s controversial ABC test as it applies to the trucking industry, where it will widely disrupt the owner-operator model, suffered a setback in the California Court of Appeals.
On Nov. 19, the California Court of Appeals reversed the earlier trial court decision in People v. Cal Cartage Transportation Express, LLC. The appeals court ruled that the ABC test, first expressed in the state Supreme Court’s Dynamex ruling and later codified in the state’s controversial AB5 law, is not preempted by federal law.
This opinion does not directly impact a court challenge filed by the California Trucking Association against AB5, noted the transportation attorneys with Scopelitis, Garvin, Light, Hanson & Feary in an email alert. In the CTA v. Becerra case, the federal district court in the Southern District of California issued a preliminary injunction in January prohibiting the state from enforcing the ABC test against motor carriers. That case is currently on appeal to the federal 9th Circuit Court of Appeals.
The Cal Cartage Case
In January 2018, the Los Angeles City Attorney’s office sued NFI Industries and its subsidiaries, Cal Cartage Transportation Express, CMI Transportation, and K&R Transportation California, for alleged misclassification of truck drivers.
After that lawsuit was filed, California put into place the more stringent ABC test to determine whether workers are employees or independent contractors. It first appeared in a state supreme court decision in the case, Dynamex Operations West Inc. v. The Superior Court of Los Angeles County.
Prong B of the ABC test requires that a worker be classified as an employee, unless the employer establishes that the worker “performs work that is outside the usual course of the hiring entity's business.” Many believe this essentially prohibits the longstanding owner-operator model used in the trucking industry.
The ABC test was later codified into law by the state legislature in Assembly Bill 5.
At issue in the lawsuit is whether the Federal Aviation Administration Authorization Act of 1994 (FAAAA) pre-empt California’s ABC test. The FAAAA preempts state laws “related to a price, route, or service of any motor carrier...with respect to the transportation of property.” The defendants contend that because the ABC test makes it impossible for a motor carrier to contract with an owner-operator as an independent contractor, the ABC test is preempted by the FAAAA.
However, the state countered that the ABC test is not preempted because it is a generally applicable employment law that does not prohibit the use of independent contractors, and therefore does not have an impermissible effect on prices, routes, or services.
The appeals court agreed with the state and ruled against NFI, saying the state’s Supreme Court had ruled in Harris v. Pac Anchor Transportation that the FAAAA does not preempt generally applicable worker-classification laws that do not prohibit the use of independent contractors.
The appellate court ruled that “the ABC test is not preempted because it is a generally applicable employment law that does not prohibit the use of independent contractors, and therefore does not have an impermissible effect on prices, routes, or services.”
The appeals court in its decision noted that “the defendants offered no evidence, and the trial court made no factual findings, concerning the impact, if any, of application of the ABC test on motor carriers’ prices, routes, and services.”
In the Pac Anchor case cited by the court, the defendants argued that the state’s unemployment compensation law claim would “significantly affect motor carrier prices, routes, and services because its application will prevent their using independent contractors, potentially affecting their prices and services,” saying that being forced to reclassify their drivers as employees would drive up their cost of doing business and thereby affect market forces.
However, in Pac Anchor, the court ruled that “UCL action that is based on an alleged general violation of labor and employment laws does not implicate [Congress’s] concerns” about “regulation of motor carriers with respect to the transportation of property[.]” It added that while “Congress passed the FAAAA in order to end a patchwork of state regulations[,] . . . nothing in the congressional record establishes that Congress intended to preempt states’ ability to tax motor carriers, to enforce labor and wage standards, or to exempt motor carriers from generally applicable insurance laws.”
In the NFI case, the appeals court ruled that “like the labor laws examined in [the Pac Anchor] case, the ABC test is a law of general application” and that “independent owner-operator truck drivers, as defendants currently use them, may be incorrectly classified, does not mean the ABC test prohibits motor carriers from using independent contractors. The ABC test, therefore, is not the type of law Congress intended to preempt.”
The Business-to-Business Exemption
“The court specifically cited the availability of the business-to-business exemption contained within AB5 in support of the concept that the use of ICs is not prohibited by the law,” the Scopelitis attorneys said.
Under that exemption, the court said, “the ABC test does not apply to a business-to-business contracting relationship, including contracts between licensed motor carriers and independent owner-operators who may operate as sole proprietorships, LLCs, or other business entities, if the hiring entity demonstrates a list of criteria is satisfied.”
In trucking, however, the list of criteria that must be satisfied is daunting.
To potentially meet this exemption, the independent contractor would have to have a business entity (such as an LLC, a corporation, etc.) that is registered by the state. The business must have a separate business location and be “customarily engaged in an independently established business as the area of work performed,” advertise those services to the public, provide its own equipment, be able to negotiate its own rates and set its own hours, and has to enter into contracts with other businesses performing the same work.
“That’s a series of fairly stringent factors,” said Shannon Cohen, a Scopelitis partner, in a 2019 webinar following the passage of AB5. “We do feel the model can be used to create a viable, workable model, but there are going to be a few factors you need to pay attention to,” such as the requirement to enter into actual contracts with other businesses – not just having the right to enter into such contracts as has previously been one of the factors often used to determine the independent contractor relationship.