California’s independent contractor law poses challenges for trucking
Transportation Permit & Tax Regulatory Alert
A bill that became law in California this fall sent waves of concern through businesses who use an army of workers currently seen as independent contractors, including some truck drivers. The law (California’s AB5) makes it much more challenging for workers of all kinds to be classified as independent contractors. For a driver (and any other worker) to be properly classified as an independent contractor, he or she needs to meet three criteria (known as the ABC test in California). The individual must:
Be free from the control and direction of the hiring entity in how the work is done;
Perform work outside the usual course of the hiring entity’s business; AND
Be independently established in that trade, occupation, or business.
‘B’ is the sticking point
For those in the trucking industry, the biggest sticking point is (B), since independent truck drivers often drive for trucking companies. It will be hard to argue that independent drivers, owner/operators, or lease drivers perform work (transporting freight) that is outside a carrier’s business, since the carrier is in the business of transporting freight. Therefore, two trucking companies will likely find it virtually impossible to contract together, and carriers that contract with owner-operators will face significant liabilities.
If a company finds that it has been misclassifying workers (or will be after 1/1/2020, the effective date of the law), it will have to determine how to remedy the situation. It could convert the misclassified workers into employees, but if a large part of the workforce is misclassified, this could be a challenge.
What can you do?
In response to AB5, some large truckload carriers have used the options below to eliminate the risk of misclassification. The contractor can:
Continue working for the carrier and must move from California to another state, with or without assistance, and change the state of his or her CDL;
Sell the truck to the carrier and drive for the company as an employee;
Obtain operating authority and take broker freight from the brokerage division of the carrier and from other sources of freight; or
Agree not to be used on loads originating and/or terminating in the state of California.
The last two options hold the greatest risk of misclassification. The third has a connection with an asset-based carrier in the business of trucking which may be found to violate the “B” provision of the ABC test. The fourth still has the carrier working with contractors holding a California CDL and address, just not hauling freight originating and/or terminating in California.
Are they business service providers?
Some carriers are considering contracting only with owner-operators who have a legitimate LLC. That way, they might find refuge under AB5’s business service provider provision, where contractors that provide services to contracting businesses are exempt from the ABC test. They would, however, meet other economic realities criteria, which can also be challenging. These include whether the person to whom service is rendered (the employer or principal) has control or the right to control the worker both as to the work done and the manner and means in which it is performed. Others include whether the worker contracts, advertises and holds himself 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.
Another option being investigated is separating the brokerage operations from the trucking business, so carriers can deal with the owner-operators through the broker. This type of relationship might need to be tested in the courts.
Crossing state lines
Since truckers often cross state lines, a question remains as to whether a driver will be an independent contractor in one state but become an employee once he or she crosses the California border. Enter the Federal Aviation Administration Authorization Ac (FAAAA).
Generally, state laws are not to interfere with some federal laws. Specifically, under the FAAAA, 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.” Recently, the Federal Motor Carrier Safety Administration used FAAAA to strike down California’s meal-and-rest-break requirements. In that same vein, requiring contracted drivers to be deemed employees depending on which states they are in might “relate to” the price, route, and service of a carrier. Therefore, AB5 could arguably be preempted by the FAAAA.
Employees create an additional burden
Some carriers argue that the law will cause many trucking companies to either close their doors or move out of California, since profit margins are already so small in the industry, and any extra financial burdens will make operating pointless. The extra costs stem from providing employee benefits and protections, such as minimum wage, unemployment, and leave (California has a handful of leave laws).
In an industry that is already struggling to find drivers, and California being a shipping port, the impact of AB5 could be felt by consumers across the country.
Will we see a trend?
Some businesses outside of California fear that the law’s passage will inspire other states to take similar action. The federal Department of Labor and Internal Revenue Service each also have their own tests to determine if someone may be considered an independent contractor, throwing more confusion into the works.
The California law will likely be challenged, but since it becomes effective January 1, 2020, there is likely not enough time to stop it before then. Efforts could work to get it rescinded. Proponents of the law argue that too many workers were classified as independent contractors when they should have been treated as employees. Some Presidential candidates have also indicated support for the law.
What will happen down the road to AB5 and the industries it will affect remains to be seen. As time goes by, adjustments may be made to help soften the blow. Until (if ever) AB5 is amended, however, employers will need to consider how to comply.
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