For decades, trucking companies have used independent contractors who drive their own trucks, known as owner-operators, to transport freight. However, this practice is now under threat in California thanks to a recent federal court decision that ruled that California’s independent contractor law applies to trucking and other motor carrier companies.
When Can an Employer Designate a Worker as an Independent Contractor?
Prior to 2018, the determination of whether workers could be designated as independent contractors was governed by the previous (less difficult) multi-factor test established in the case of S.G. Borello & Sons, Inc. v. Department of Industrial Relations (Borello test). Under the Borello test it was much easier to classify a worker as a contractor rather than an employee.
In Dynamex Operations W. v. Superior Ct., 4 Cal. 5th 903 (2018), the California Supreme Court adopted the ABC test, which was later codified in Assembly Bill 5 (AB-5). The ABC test is now used to determine whether a worker is an employee or an independent contractor. Under this test, a worker is presumed to be an employee rather than an independent contractor unless an employer can prove all of the following:
(A) the worker is free from control and direction of the hiring entity’s business in connection with performing the work, both under contract and in fact;
(B) the worker performs work outside the usual course of the hiring entity’s business; and
(C) the worker customarily engages in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity’s business.
The ABC test’s B-prong (the most difficult to meet), makes any person who performs a service within the usual course of the enterprise’s business an employee. Because an owner-operator/truck driver almost always performs the service of truck driving, which is the usually the same service as the trucking company, it is highly unlikely a trucking employer could properly classify a driver as an independent contractor moving forward.
Federal Court Decision Finds the ABC Test Applies to the Trucking Industry
In November 2019, the California Trucking Association (CTA) filed a lawsuit in the Southern District of California, seeking a permanent injunction to block the enforcement of AB5 against the trucking industry. An injunction is an order from the Court ordering a person to do something, or in this case not do something. The CTA claimed that AB5 should not apply to the trucking industry because it is preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA), allowing them to follow federal law instead of California law. Just days before AB 5 was set to take effect, a federal judge issued a temporary restraining order blocking California from enforcing the bill upon truck drivers.
The State and the International Brotherhood of Teamsters timely appealed the decision asking the Court to reconsider. On April 28, 2021, in a split 2-to-1 decision that may have enormous (adverse) implications for motor carriers operating in California, the federal Ninth Circuit Court of Appeal concluded that the FAAAA does not preempt AB-5 and therefore the trucking industry is required to follow California independent contractor law.
Is This Rule Final?
Maybe not. It is possible the CTA will ask the full Ninth Circuit court to hear the case, with all nine judges instead of just a panel of three, who could possibly overturn the decision. Alternatively, CTA may petition the United States Supreme Court to hear the case, which could happen as similar laws have been applied inconsistently across the United States. The CTA has indicated it will appeal the decision.
What Does This Mean for the Trucking Industry?
Truck drivers likely cannot be designated as independent contractors unless some action is taken by the Court or the California Legislature to exclude the trucking industry from following the ABC test. However, relying on the law to change is risky, and employers in the transportation industry, if they have not done so already, should evaluate their use of independent owner-operators in accordance with current California Law (ABC Test/AB-5).
The only hope for the Trucking Industry’s continued use of owner-operators in California is for them to consider whether their business models might satisfy the Business-to-Business exception to AB 5, recently modified in Assembly Bill 2257 (AB 2257). However, a worker or business that satisfies any of the exemptions set forth in AB 5 and AB 2257 does not automatically qualify to be independent contractor. Rather, for those occupations the determination of whether they can be designated as independent contractors is governed by the Borello test instead of the ABC test.
Employers should consult with legal counsel before classifying a worker as an independent contractor based on this exemption. Misclassifying workers as contractors carries significant risk of wage and hour liability.
The attorneys at Duggan McHugh Law Corporation are here to help you navigate these new laws and draft and implement corresponding legally-compliant workplace policies.