As a controversial new law targeting the use of independent contractors goes into effect Jan. 1 in California, there’s still immense uncertainty about how it will be enforced and even how long it will remain law in its current form.
Assembly Bill 5 codified into law and expanded on a California Supreme Court ruling from 2018. In a case involving Dynamex, a courier company, the court ruled that certain workers should be presumed employees instead of independent contractors when evaluating wage and hour classification in class action cases. It established an ABC test to determine whether a worker was an independent contractor or an employee, under which employers were required to meet all three prongs of the test. The “B” prong is regarded as a difficult one for traditional trucking owner-operator models to meet, as it requires that the worker performs work that is “outside the usual course of the hiring entity’s business.”
On the surface, that would seem to require most trucking companies using owner-operators in the state to turn them all into employee drivers. However, some fleets have been adopting other strategies, or in some cases a wait-and-see approach in the wake of legal challenges to the bill.
“People kind of shrug their shoulders and are trying to figure it out still,” said Page Siplon, CEO, TeamOne Logistics, Alpharetta, Georgia, which provides logistics recruiting for the asset-based transportation and logistics industry.
In a video highlighting workforce issues, Siplon said, “I think many in the industry, me included, felt that trucking was going to be exempted. It seems like such a logical, nationwide part of our industry. The large carriers are really giving owner operators two options. Some are offering relocation packages, paying or offering money to their owner operators to move out of the state of California and set up shop in Texas, for example. Or they have to … sell their truck and give up the way they’ve been doing business and become company employees. Neither are great solutions and frankly not quite fair to the industry.”
Enforcement of AB5
One big question has been how the new law will be enforced. It’s not like there will be enforcement officials at the state borders or at the gates to the state’s intermodal ports checking for whether drivers are employees or owner-operators.
When asked what the Owner-Operator Independent Drivers Association has been telling its California-based members about how AB5 is going to affect their owner-operator members, many of which work as independent contractors, spokesperson Norita Taylor told HDT in an email, “We had reached out to officials in CA asking those same questions in particular with how our members can comply with the new law and have yet to get answers.”
According to a fact sheet from the California Labor Federation, which supports AB5, the new law has the same remedies as previously existed for a claim for misclassification or unpaid wages. A worker can file a wage claim to the Labor Commissioner, an Unemployment Insurance Claim to the Employment Development Department, a lawsuit in court for unpaid wages, a PAGA [Labor Code Private Attorneys General Act] lawsuit, or an arbitration.
In addition, the federation notes, AB5 creates a new remedy for public enforcement. In addition to the Attorney General and the Labor Commissioner, it allows city attorneys and district attorneys in large cities – Los Angeles, San Francisco, San Jose, and San Diego – to seek injunctive relief to force companies to change their business model.
In addition, notes J.D. Supra, individual claims can trigger larger agency audits of hiring companies’ classification practices — and those audits will now look to the ABC Test to determine improper classification.
It’s likely any claims filed under AB5 will be fought by employers, resulting in lengthy legal battles.
What Fleets are Doing
In keeping with the confusion over enforcement, the strategies fleets have been taking in the wake of the new law are all over the map.
Some companies are playing it safe and moving away from using owner-operators in California.
According to published reports, Nebraska-based motor carrier Werner Enterprises in 2018 decided to eliminate the use of all owner-operators in California, following the state Supreme Court Dynamex decision that initially set up the ABC test later expanded by AB5. At the Council of Supply Chain Management conference in fall 2019, Werner CEO Derek Leathers decried the situation. “It was wrong [that we were forced into the decision] because these are good men and women who were serving the shipping community well,” the Journal of Commerce reported.
According to other reports, Swift Transportation made a similar move, with lease-purchase owner-operators telling the Western States Trucking Association that they even had been told to move out of state.
One alternative that some fleets are pursuing is a stringent business-to-business exemption in the law.
The family behind Stockton, California-based Yandell Truckaway and Benicia, California-based Santa Clara Warehouses is spinning off an entity called Yes! Logistics. According to a report in the North Bay Business Journal, the trucking and warehousing businesses will continue to operate as before, but Yes will coordinate with Yandell and other carriers for loads in other industries and other areas. About half Yandell’s 100 drivers have been independent contractors.
Yes! Logistics is helping independent drivers create their own limited liability companies or another type of business organization and helping owner-operators find online resources that match freight loads with drivers.
In the drayage business, where owner-operators are used extensively to move intermodal containers in and out of California’s ports and railheads, many companies are taking a wait-and-see attitude.
Weston LaBar, executive director of the Harbor Trucking Association, representing intermodal carriers operating in California’s ports, told HDT in an interview that many of HTA’s members area holding off making any major changes to comply with the new law, because there is both litigation challenging AB5 in court and the potential for changes in the law in the state legislature.
“If they are making changes, they’re looking to do it in the least invasive way for their drivers and customers,” he said. “No one wants to go down the arduous and expensive task of reclassifying drivers and changing their business model only to find that AB5 doesn’t apply.”
Rail Delivery Service in Fontana, California, is one company that says it’s staying with its traditional owner-operator model until they see how litigation turns out – but that doesn’t mean company officials haven’t been researching contingency plans.
“Our message to our drivers and to our customers is that we’re going to keep our model the same,” CEO Greg Sanders told HDT in an interview. “But we know we have to be very fluid in our thinking and have a Plan B in place.”
One option would be to convert RDS’s approximately 200 owner-operators into employees. Sanders notes that the company does operate a separate dedicated-trucking division that already uses employee drivers, which gives it the know-how to make such a conversion successful – but he also notes that most independent contractors don’t want to be employees. They value their flexible schedules and love having their own equipment.
“If they wanted to be company drivers they would work for someone else as a company driver,” he said. If the company is eventually forced to convert them to employees, he said, it would want to make their life as similar to what they have as owner-operators as possible. One way to do that is to employ the drivers and also lease the driver’s equipment from him, sometimes called a two-check system.
Another possibility is for owner-operators to set up their own corporations and become employees of those corporations, with Rail Delivery Services contracting with those corporations, not with the drivers.
Of course, that gives the drivers all the headaches of running a corporation rather than a sole proprietorship, including worrying about benefits. “I think the industry could change the model for the long term by companies that will put themselves in place to offer those type of services to these small businesses,” Sanders said. “It may give them long-term benefits. Think of a non-profit co-op in place solely to provide insurance and other benefits to small business owners. You see them in so many different industries; there’s no reason we couldn’t put that in place for our industry.”
However, Sanders emphasizes, all that is just contingency planning. “Our belief is that with [the California Trucking Association’s] lawsuit against the state of California, that we will get some injunctive relief on this issue.”
Legal Challenges to AB5
Sanders was referring to a lawsuit filed by the California Trucking Association in November, arguing that the classification test codified by AB5 is preempted by the supremacy and commerce clauses in the U.S. Constitution and is in direct conflict with the Federal Motor Carrier Safety Act and the Federal Aviation Administration Authorization Act of 1994. (Part of the FAAAA bans states from enacting laws that affected a motor carrier's prices, routes and services.)
“AB 5 threatens the livelihood of more than 70,000 independent truckers,” said CTA CEO Shawn Yadon. “The bill wrongfully restricts their ability to provide services as owner-operators and, therefore, runs afoul of federal law.”
According to Sanders, a hearing on CTA’s request for a temporary injunction was scheduled for Dec. 30 but now has been pushed back to Jan. 13. “That’s a very important date. If there is a temporality injunction, we have bought some time until this gets solved in the legal courts.”
The CTA’s lawsuit is not the only one.
In December, the Western States Trucking Association filed a complementary suit targeting how AB5 treats motor carriers that provide “construction trucking services.”
Those who are optimistic about the likelihood of the law being pre-empted at the federal level point out that the current National Labor Relations Board under the Trump administration is viewed as relatively pro-business. For instance, the NLRB in early 2019, in a case involving Super Shuttle at the Dallas Fort Worth airport, determined that its drivers were not employees subject to the National Labor Relations Act, but rather independent contractors excluded from the act’s coverage.
Freelance writers and photographers also filed suit in December, alleging that AB5 unconstitutionally restricts free speech and the media.
In the latest challenge, Uber, delivery start-up Postmates, and two contractors who work for the companies filed suit against the state alleging that AB5 is unconstitutional, saying the law’s targeting of app-based workers and platforms and treating them disparately from traditional workers violates the Equal Protection Clauses of the United States and California Constitutions.
“AB 5 is a vague and incoherent statute that does not accomplish what its sponsors have stated they sought to achieve,” notes the suit. “There is no rhyme or reason to these nonsensical exemptions, and some are so ill-defined or entirely undefined that it is impossible to discern what they include or exclude. For example, some types of workers are excluded (e.g., a delivery truck driver delivering milk) while others performing substantively identical work are not excluded (e.g., a delivery truck driver delivering juice).”
Lorena Gonzalez, the author of AB5, characterized the Uber/Postmates lawsuit as “Uber greed” on her Twitter account. However, she has on Twitter indicated some willingness to listen to the complaints of the journalism industry.
We reached out to Gonzalez’ press representative to learn more about her stance on trucking and AB5, but a recent statement on the recent firing of drivers by Universal Logistics she posted on Twitter may offer some insight.
The tweet was in reference to Universal Logistics’ Holdings laying off 70 company drivers shortly before Christmas, citing soft freight conditions in 2019. The International Brotherhood of Teamsters decried the move as retaliation for a recent union vote. “Drivers report that the company told them that if they buy their own trucks then they can come back to work as independent contractors,” the Teamsters said in a release.
Gonzalez tweeted: “Companies like Universal Logistics are exactly why we had to pass AB5 as they engage in intentional misclassification of their drivers. Firing works for joining a union and saying they must become independent contractors is exactly the type of illegal behavior that we are committed to stopping in California.”
It’s also likely that in 2020 we will see some sort of efforts to get the state legislature to fix or repeal AB5.
HTA’s LaBar told HDT that in private conversations with state legislators, some had expressed concern that AB5 needs fixing, and even that it had been a mistake to vote for it in the first place.
Kevin Kiley, a Republican California Legislator representing the 6th Assembly District, said he will introduce legislation in 2020 to “restore the right to earn a living.” In mid-December, he announced that in January he would introduce legislation proposing a constitutional amendment that would go beyond AB5 and “enshrine the right to earn a living in the California Constitution.”
“Rarely has a single bill caused so much harm to so many people so quickly,” Kiley said in a Dec. 18 press release. “But even before Assembly Bill 5, California’s laws were more hostile to workers than any satte in the nation, with arbitrary restrictions on vocational freedom and working conditions.” This bill would include the right to be independent and pursue contractual employment opportunities, along with the right to practice one’s vocation “without unreasonable occupational licensing restrictions” and would “enable flexible work arrangements that are currently forbidden or heavily restricted by California’s rigid labor laws.”
He has started a petition drive asking constituents to express their desire to ditch AB5.
On Twitter, Kiley alleged that the many exemptions in AB5 “came not from principle but political influence.”
#AB5 was not compelled by Dynamex. The Legislature could've overridden Dynamex to make it workable (as @asmMelendez and I proposed). Instead, AB5 broadened Dynamex via the Labor Code, making it even more unworkable. Then, exemptions came not from principle but political influence https://t.co/n89kUKRAaV— Kevin Kiley (@KevinKileyCA) December 27, 2019
A source who works at the state capitol told California Globe reporter Evan Symon, “Just before Christmas there were some Assemblymembers who said they were shocked at the number of people coming out against AB 5. Truckers especially… I can say that we’ve heard from a lot of Californians about wanting changes to the bill. After January 1st we’re probably going to hear a lot more.”