On June 30, the United States Supreme court announced that it would not hear the California Trucking Associations’ (CTA) petition for a hearing on whether California’s Assembly Bill 5 (AB 5) independent contractor classification law applied to motor carriers. On August 20, a California federal district judge lifted an injunction that had been in place and exempted motor carriers from AB 5 since January 2020.
What does this mean for motor carriers and trucking companies in California?
In short, at least for the time being, motor carriers and owner-operators must meet the requirements of AB 5 and more stringent “ABC test” to establish independent contractor status.
Refresher of AB 5 and the ABC Test
California presumes that all workers are employees. AB 5 created a three-part test known as the “ABC” test to determine whether a worker is an employee or an independent contractor. To establish independent contractor status, all of the three following requirements must be met:
A. The worker must be free from control and direction of hiring entity in performing the work, both in contract and in fact;
B. The work being performed must be outside the usual course of the hiring entity’s business; and
C. The worker must be customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The problem with the ABC test for motor carriers and owner-operators is that it is virtually impossible for them to meet factor B because the work being performed is typically not outside the usual course of the hiring entity motor carrier’s business.
What options are available going forward?
The CTA is already raising new challenges to the application of AB 5 to motor carriers. However, unless and until the law is changed, hiring entity motor carrier companies have options to comply with AB 5: 1) terminate all independent contractor agreements with owner-operators and convert them to employees; 2) meet the stringent test for the business-to-business (B2B) exemption from AB 5; or 3) become a certified freight broker and use owner-operators with their own operating authority. However, even if the ABC test is met or the B2B exemption applies, the Borello test for determining independent contractor status still must be applied. The Borello test relies on 13 or more separate factors, most of which revolve around the extent of control the hiring company has over the worker. (Borello & Sons, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341)
Misclassifying an employee as an independent contractor may result in significant liability for the hiring entity employer – including claims for unpaid minimum and overtime wages, payroll taxes, penalties, etc. Motor carriers should review and audit their practices to ensure compliance with AB 5, which must be determined on a case-by-case basis.
Duggan McHugh is available to help employers with determining proper work classification and compliance with AB 5.