The “ABC test” was codified as California Labor Code § 2775 following the California legislature’s passage of AB 5 in 2019. The ABC test is used to determine whether a worker is an employee or an independent contractor. AB 5 went into effect on January 1, 2020, but the U.S District Court for the Southern District of California granted a preliminary injunction on the law’s application to motor carriers in the trucking industry. The Ninth Circuit then overturned the District Court’s decision and found that AB 5 was not preempted by the Federal Aviation Administration Authorization Act (the FAAAA) and that AB 5 applied to motor carriers. The Court, however, stayed enforcement of its decision pending California Trucking Association’s (CTA’s) request for the U.S Supreme Court’s review of this decision.
That stay is expected to soon be lifted with the U.S. Supreme Court’s decision to deny review of CTA’s appeal.
The Court’s decision to deny review has profound consequences for the transportation industry. Motor carriers must evaluate and adopt alternative operating models to mitigate risks and comply with current regulations. Consequently, motor carriers should now consider restructuring their delivery models, if necessary, to comply with AB5.
This article briefly discusses a few options that motor carriers should consider adopting to restructure their delivery models so that they are in compliance with AB 5. Although the list of alternative models stated below is not exhaustive, it illustrates the various methods transportation companies can utilize to adapt to these changes.
ABC Test Overview
The “ABC” test creates a presumption that all workers are employees; the burden is then placed on the hiring entity to apply the ABC test and show that the worker meets the qualifications for an independent contractor. Under the ABC test, a person providing labor or services for monetary compensation is considered an employee unless the hiring entity demonstrates all of the following:
(A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
(B) The person performs work that is outside the usual course of the hiring entity’s business.
(C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
In Vazquez v. Jan-Pro Franchising International, Inc., the California Supreme Court held that the three-part ABC test applies retroactively.
AB 5 provides several exceptions to the ABC test. When an exception is found to apply, the Borello test, a multi-factor test, is used instead to determine the proper classification of the worker. Currently, there are no express exceptions to the ABC test for motor carriers or the trucking industry.
The ABC test and its exceptions are difficult to satisfy, so it is recommended that an attorney conduct an audit of a company’s employment classifications if the company utilizes independent contractors.
Alternatives for Transportation Companies
Pivot to an Employer-Employee Driver Model
The first alternative transportation companies may consider is classifying all drivers as employees instead of independent contractors. Drivers who have been operating as owner-operators and want to maintain their autonomy may not be in favor of this model. Companies would then also have to comply with the various laws that govern employer-employee relationships. However, this is the safest alternative to comply with the state law mandates and would allow companies to avoid ensuring that all the required elements and conditions exist for the contractor classification.
As a reminder, if a transportation company proceeds with this type of employer-employee model, the Ninth Circuit in International Brotherhood of Teamster v. Federal Motor Carrier Safety Administration recently held that California’s meal and rest break rules for drivers of property carrying commercial motor vehicles will likely be preempted by federal regulations.
Adopt a Freight Brokerage Model
Carriers currently utilizing independent owner-operators can potentially mitigate risks and comply with AB 5 by shifting their company into a brokerage. See Labor Code § 2777. Doing so would allow the newly formed brokerage to provide freight to drivers in a manner that is similar to a traditional brokerage firm.
The “B” prong of the ABC Test requires that independent contractors perform work that is outside the usual course of the hiring entities business. Therefore, if the hiring entity is a brokerage rather than a transportation carrier, freight movement would no longer be a part of the hiring company’s activities, thus potentially satisfying the “B” prong and allowing owner operators to maintain their independent status. The drivers would also need to satisfy both the “A” and “C” prongs to be properly classified as an independent contractor. Cal. Lab. Code § 2775.
Comply with the Business-To-Business (B2B) Exemption in AB 5 and AB 2257
While there is no specific exception to AB 5 for motor carriers or the trucking industry, there is a very narrow exemption within AB 5 for independent contractors in California Labor Code § 2776. AB 2257 (2020) broadened this exemption and removed the requirement that business service providers (contractors) provide services directly to the contracting business rather than to customers of the contracting business, so long as “the service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.” Cal. Lab. Code § 2776(a)(2).
To fall within this exemption, a company and contractor must meet all of 12 specified requirements. Cal. Lab. Code § 2776. This B2B exemption is a viable alternative that may provide relief for companies and motor carriers who want to maintain their independence and avoid the employment classification.
Conclusion
With AB 5’s application to the trucking industry comes the important need for employers to comply with new regulations and eliminate the risk of misclassifying workers. The experienced labor and employment attorneys at Palmer Kazanjian Wohl Hodson LLP are available to review and revise existing business models and offer guidance to ensure proper compliance with AB 5 and its amendments and exemptions.