Trucking Looks for Solutions to California's Stringent New Independent Contractor Law

A new California law, going into effect in January, designed to address worker misclassification could seriously affect the trucking industry, but there is so much up in the air that there’s no clear path for trucking companies using independent contractor owner-operator drivers in the state.

AB5 does away with most of the traditional methods of determining whether someone is truly an independent contractor or an employee, such as the worker’s amount of risk and investment in his or her business, in favor of an ABC test.

The big problem with the ABC test is the “B” prong, which states that to be considered an independent contractor rather than an employee, the worker must perform “work that is outside the usual course of the hiring entity’s business.”

In other words, if you’re in the business of hauling freight, you could contract with someone to paint your building or do your taxes, but you can’t use an independent contractor to haul freight.

Or at least that’s what you would think. But AB5, like any bill, includes pages and pages of additional legalese, carve-outs for specific industries and other bits and pieces that have led to a variety of opinions on how it’s going to affect trucking companies.

“Is the sky falling?” asked Greg Feary, president and managing partner of the Scopelitis law firm, in a webinar. “It’s falling in certain areas, but we don’t predict it is falling in trucking for independent contractors.”

That doesn’t mean there aren’t some serious challenges ahead, and in the meantime, trucking companies in California are still trying to figure out what to do next.

“We have more questions than answers,” said Weston LaBar, executive director of the Harbor Trucking Association in California, in an interview, pointing out that the law as passed had no language in it specifically about trucking, for good or for bad.

Converting owner-operators to employee drivers

The bill’s supporters seem to expect that companies will simply convert their independent contractors to employees.

But Feary told HDT that he doesn’t see that as a “comprehensive solution.

“I would be surprised that under normal circumstances, a motor carrier approaching the independent contractor workforce and saying, ‘Give me a show of hands, who wants to become an employee,’ I doubt there would be many hands that would go up in the air.”

“A significant number of owner-operators, more than a simple majority, see themselves as independent businesses and entrepreneurs – and they did that intentionally. If they wanted to be an employee, they already would have been an employee for a motor carrier.”

LaBar said the association has members that already have been in the process of converting their independent contractors to employees. But he notes that the law is being challenged, and if ultimately the courts find that it is preempted by federal law governing motor carriers, “and you already reclassified them as employees, it’ll be impossible to convert them back. You would be compliant with state law but may be giving up a competitive advantage.”

In addition, like Feary, LaBar pointed out that a lot of independent contractor truckers don’t want to be employees, and rather than be converted, will likely take their truck to another motor carrier that is still signing on owner-operators. “If they have a large number of contractors they will lose capacity, and that is a concern, especially for our large motor carrier members who rely on hundreds of owner-operators,” he said. “Over the last couple of years, a lot of motor carriers who have gone to all employee fleets have lost a significant amount of drivers. In some cases we’ve seen two-thirds or more of the fleet leave and go elsewhere, because they want to remain ICs.”

Another knotty part of that conversion: Who’s going to buy the owner-operator’s truck? With all of California’s air quality regulations, “I don’t see trucking companies buying older used trucks from owner-operators.” We may see the used-truck market in California become flooded with equipment, meaning owner-operators won’t be able to sell the truck for nearly what it’s worth.

Are they truly in the same business?

The author of AB5 has targeted the “gig” economy and companies such as Uber and Lyft in her comments. Yet Uber has said it has no plans to make Uber drivers company employees.

“Contrary to some of the rhetoric we’ve heard, AB5 does not automatically reclassify any rideshare drivers from independent contractors to employees,” said Tony West, Uber’s chief legal officer, in comments after the bill’s passage. “AB5 does not provide drivers with benefits, nor does it give drivers the right to organize. In fact, the bill currently says nothing about rideshare drivers.”

Referring to the three-part ABC test, West said, “arguably the highest bar is that a company must prove that contractors are doing work ‘outside the usual course’ of its business. But just because the test is hard does not mean we will not be able to pass it. In fact, several previous rulings have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.”

Asked about Uber's position, Feary explained, “Uber’s position has been for a long time that they’re a technology marketing company." The drivers are doing business with people that who to move from point A to point B; Uber’s business is simply to put a platform together so those two can talk to each other.

Trucking companies could theoretically make similar arguments. You can argue (and companies have argued in court, with varying degrees of success) that the business of a motor carrier, engaging the shipping public and dealing with all the things associated with being a motor carrier, is not the same type of business than the independent contractor driver, whose business is freight delivery.

“When you look at it from a certain perspective and height, you can cast it that way," Feary said. He cited an Indiana Supreme Court decision issued in January, QDA vs. the Indiana Department of Workforce Development, involving a driveaway company.

“The court recognized that QDA’s normal course of business was arranging for the delivery of those RVs, where the driver’s normal course of business was delivering them,” he said. “The court did note that if the company also had W2 drivers, they may have reached a different decision.”

However, said Scopelitis Partner Chris McNatt, “From what we’ve seen so far it’s highly doubtful a California judge would look at the driver-motor carrier relationship and not find they are engaged in the same business.”

A possible model: The business-to-business exemption

There is a business-to-business exemption in AB5 that may be of value, said Shannon Cohen, a Scopelitis partner, “meant to capture bona fide business-to-business relationships.”

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, she explained in a webinar. 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,” Cohen said. “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.

Some companies, Feary said, might decide that they really are a third-party logistics provider or broker, not a motor carrier, and broker freight to motor carriers. Some of the company’s independent contractors might be willing to become independent motor carriers and accept brokered freight from the same company they used to run under contract to.

“You’ll find today any number of motor carriers that have a brokerage subsidiary because they can’t handle all the freight their customers want them to handle. Or they don’t prefer some of the freight their customers want them to move, it’s the wrong route, the wrong price, and they broker it out to small motor carriers. It may be they look at that and say, my brokerage affiliate or subsidiary is going to do more business now because that’ the way they’re going to do business in California. That’s going to depend on your position in the industry and who your customers are, if that’s the way they want to do business with you.”

The Harbor Trucking Association offers a Trucker Advantage program that helps drivers become motor carriers, offering help with permits, authority, insurance, etc. “That’s not easy for a lot of folks to do,” LaBar said.

Will the law even stand as is?

“Certainly one option is to stand pat,” Feary said. There are legal challenges and the possibility of “trailer” legislation, and even a potential ballot initiative, all of which mean “you have to think about, will this law even look the same a year from now?”

Scopelitis’ McNatt said the ripple effects of AB5 could be significant. “California is in many cases the bellwether of what’s going to happen across the rest of the country.” Democratic presidential candidate Elizabeth Warren earlier this month released a sweeping labor proposal, including adapting California’s ABC law as the federal standard.

“There have been extensive lobbying efforts; the California Trucking Association engaged in a valiant effort to obtain an exemption for trucking,” McNatt said. “Those will continue beyond the legislative session,” he added, and could lead to so-called trailer legislation, follow-up legislation that could change the law.

“Stay tuned also for what you will see from the gig companies potentially pushing their own trailer legislation and/or pushing for a ballot measure, which could bleed over into trucking,” he said.

However, said HTA’s LaBar of a trailer bill that addresses trucking companies, “We don’t know if that will be beneficial for the trucking industry or will be even more onerous on the trucking industry.”

The law is also being challenged by suits alleging that for trucking, it is preempted by federal law through the Federal Aviation Administration Authorization Act, part of which prohibits states from enacting laws that affected a motor carrier's prices, routes and services.

If the dispute makes it to the Supreme Court, Feary said, “you might find out this law is federally preempted in trucking. But you can appreciate that’s not going to be a quick solution.”

Meanwhile, Cohen noted, “the legislation was subject of a hard-fought battle, and I think those efforts will continue through the 2020 session.”

Although Uber has said its drivers are not affected by the law because they’re not in the same business, it nevertheless is taking action to try to change the law. “We will continue advocating for a compromise agreement,” West said. “But we are also pursuing several legal and political options, including working with Lyft and other Internet platform companies to lay the groundwork for a statewide ballot initiative in 2020.”

Scopelitis’ attorneys said one possibility is a “dependent contractor” model. “Uber and Lyft have suggested that’s a direction they may go,” said Feary. “That has a genesis in Canada where we see the idea that they are independent contractors,” but there are still benefits and the ability to collectively bargain.

“A dependent contractor bill was launched in June in New York and it got no favor on the business side or the labor side; both were opposed to it. But with Uber and Lyft pushing it we might see some movement.” In fact, Bloomberg Law reported on Oct. 10 that lawmakers in New York are working on legislation to create a new dependent contractor category.

Another possibility is a ballot initiative. When AB5 passed, Uber and Lyft together had already transferred $60 million into a campaign committee account for a ballot initiative.

What’s your appetite for risk?

HTA’s LaBar said the association has spoken with many top legal experts and attorneys in the state. “Most of them have very differing opinions on what you can or can’t do,” he told HDT. “Mostly the question you get asked is, what is your risk exposure appetite – how afraid are you of getting sued? If you’re completely risk averse, classify them as employees and try to build a business that way. If you’re medium risk, there are ways such as co employers and brokerage models. And if you have a big risk appetite, don’t do anything; at the end of the day you may be federally preempted and end up in a great position.”

Or not.