California’s contractor law has steep implications for trucking: Here’s what your fleet needs to know

(Art by David Q. Watson)(Art by David Q. Watson)

California lawmakers late last week passed a landmark piece of legislation that aims to overhaul the independent contractor landscape in the state. In short, it presses businesses to classify more workers as employees, with the potential to impact millions of workers across nearly all industries — from drivers for rideshare companies Uber and Lyft to software coders, hair dressers, nurses, construction workers, dog walkers and even strippers.

And, of course, owner-operators working as independent contractors and the motor carriers that contract with them. Here’s a primer for how the law impacts the trucking industry and how fleets can comply with the soon-to-be law, currently referred to as Assembly Bill 5 or A.B. 5.

Though California Gov. Gavin Newsom hasn’t yet signed the bill to officially make it law, he’s expected to before the Oct. 14 deadline. If signed, the law will take effect January 1, 2020.

What you need to know: Though not specific to trucking, the law could have major ramifications for fleets and owner-operators who work in the state — including those that aren’t based in California. Trade groups have warned over the past 18 months that A.B. 5 — and its genesis court case, Dynamex vs. Superior Court — could effectively be an end to the traditional owner-operator contracting model, in which an owner-operator works under the authority of a larger motor carrier.

“Everybody needs to be up to speed and know that the laws in California have changed,” says Chris Shimoda, head of government affairs for the California Trucking Association. “You need to be consulting either your in-house counsel or outside counsel and paying attention to what trade associations are putting out there in terms of information.”

Though the state’s Supreme Court, via the Dynamex decision, last year issued a ruling that altered how adjudicators (like courts and arbitrators) should determine employee-contractor classification (such as owner-operators leased to motor carriers), the ruling was narrower in scope than A.B. 5.

A.B. 5 codifies into law the the so-called ABC test established by the Dynamex case for determining employment classification and likely will create regulatory enforcement actions involving the California labor code and unemployment tax code, says Greg Feary, a partner at the transportation law firm Scopelitis, Garvin, Light, Hanson & Feary.

Most relevant to trucking, the ABC test’s B-prong prevents employers from contracting with workers that perform the same work as the business itself — such as contracted owner-operators hauling loads for fleets.

Strategies for trucking fleets to comply with the new law

Do nothing – aka, wait and see: The Dynamex decision is being challenged in federal court at the 9th Circuit in at least two cases, with a third — CTA v. Becerra — likely headed there too, says Feary. Those lawsuits assert that federal law pre-empts state law and, if successful, could offer relief to carriers operating in California. “That’s one option – sit patiently and wait on the federal courts to rule,” said Feary.

Cut ties with California: Carriers could decide the cost of doing business in California is greater than the reward and pull out of any California operations to shield themselves from the impact of the new law.

Cut ties with independent contractors: Carriers could end any owner-operator ties in California and decide to only employee company drivers. That obviously has its challenges, says Feary, given the already tough environment fleets face in recruiting new drivers. It also “presumes that owner-operators working under your authority want to be employees,” he says. “Most of them don’t. They have chosen to be independent business entrepreneurs for a reason. They don’t want to be employee truck drivers. Those reasons might be that they want more money or more freedom or both.”

Broker freight to owner-operators: Carriers could choose to work through an affiliated brokerage — either existing or newly established — to broker loads to independent owner-operators (those who have completed the process to obtain operating authority), in lieu of the traditional owner-operator-lessor model, says Feary. “You may decide you’re not going to be a motor carrier in the state and you’re going to broker freight to small motor carriers or to motor carriers period,” he says.

Well before A.B. 5 was introduced, Western States Trucking Association’s Joe Rajkovacz pointed to that set-up as an option in the wake of the Dynamex ruling. Rajkovacz said last November that WSTA had been working with its owner-operator members to help them on the path to becoming independent motor carriers.

Under this model, carriers would create or use a brokerage arm separate from their trucking operations. Then, they could broker loads to former owner-operator contractors — now working as independent motor carriers — as well as any other carriers.

The model isn’t ideal, as it can be a costly hurdle for owner-operators to transition to independent motor carriers, especially given the climbing expense of liability insurance, says Feary. But it’s an option nonetheless. “Whether or not the owner-operators you used to deal with decide to become motor carriers is their independent decision,” says Feary. “The decision to be a broker is independent of the owner-operators who used to work under a contract for you. They may decide to be owner-operators for another motor carrier or employees for” another carrier, he says.

Impact outside of California

Even for fleets not domiciled in California, A.B. 5 could be a detriment. “The jurisdictional issue is muddy,” says Feary. The 9th Circuit has requested guidance from the California Supreme Court on this issue, he says.

But for out-of-state carriers who have owner-operators that live in California or that operate frequently in the state, “the likelihood is nearly certain” that those carriers will need to comply with A.B. 5, he says. “For out-of-state motor carriers with out-of-state owner-operators who only infrequently deliver into the state or pick up loads from the state, I think it’s much more of a question of whether A.B. 5 would even apply to them.”

Potential challenges/changes to A.B. 5

Though A.B. 5 likely will take effect Jan. 1, it still faces challenges and backlash.

There likely will be additional legislation next year to clarify or change the law, said Shimoda. However, it’s uncertain “whether or not trucking gets a fix that works to allow independent truckers to operate,” he says.

CTA will be working with legislators to try to find paths for legitimate owner-operators to continue to work in California, he says.

Uber and Lyft, whose business model could be upended by the law, have signaled they do not intend to comply, and instead hope to push the law to a referendum in 2020.

In addition to legislative fixes next session, courts could also intervene, says Feary, particularly as the law relates to trucking. “The courts might interpret the law as it relates to interstate operations and effect its application to interstate trucking operations,” he says. “It’s so controversial and has so many opponents, this is one of those few laws that probably will be touched in some way, whether by the legislature changing it next year, by a referendum in the 2020 election or by the courts – or maybe all of the above.”