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California AB-5: How it Affects the Owner-Operator

On September 19th, 2019, the governor of the most populous state in the country signed Assembly Bill No. 5 into law. It went into effect at the beginning of 2020 but has since been blocked by a federal judge as of January 16th. While originally intended to prevent worker exploitation in the new “gig economy”, its wording can have results beyond the gig economy into the world of trucking.

What is AB-5?

It is illegal to misclassify employees as independent contractors in an attempt to save money on various payments such as social security and disability insurance. Assembly Bill 5 expands upon the definition of an independent contractor versus employee by asking three questions, otherwise known as the ABC test:

  1. Is the person hired given extensive freedom in how about they go accomplishing the task?
  2. Is the work performed done outside of the hiring company’s normal business operations?
  3. Is the person hired a member of an established business for the line of work they are doing?

If all three of these questions are answered as yes, then the person is an independent contractor. If the answer to even one question is no, then they are to be classified as an employee.

Let’s take a look at DoorDash, one of the companies for who this bill is targeting in particular:

  1. The person in question is given freedom on the route they take to get the food to the customer.
  2. The delivery of food is the company’s normal business operations.
  3. The driver is an individual rather than a part of another business.

It fails check 2 and 3, and as such DoorDash must consider the driver an employee.

Our summary here is not a substitute for understanding the bill directly. For more information, you can read the bill here.

How Does Assembly Bill 5 Affect Owner-Operators?

It is very possible that a driver going through California will experience no difference in being an independent contractor.

As an example, if an Owner-Operator under his own Authority hauls reclining chairs on behalf of Costco from California to Texas and is not given a specific route to take:

  1. The driver has the freedom to determine how he will get the truckload to its destination.
  2. Costco’s primary business is wholesale/retail, not shipping products.
  3. The owner-operator is a member of his own trucking business.

This example would be unchanged by the new law; the driver would still be an independent contractor. Once Costco says the driver must use Highway 10 to get to Texas, the driver may be considered an employee.

But let’s say an owner-operator works with Landstar to deliver goods. In that case, it would not matter how much freedom an owner of a trucking business is given, the fact that Landstar’s primary business operations are shipping/logistics means that this owner-operator must be considered an employee for hours worked.

This scenario is more realistic than the Costco example. Landstar is the country’s largest owner-operator fleet. It has already told some of its drivers that it will no longer be using them in California due to the new law: they must move or work with someone else. 

While the law is intended to avoid worker abuse in companies such as Uber and Lyft, its wording can impact truckers.

Blocking AB-5

On January 16th, U.S. District Judge Roger Benitez issued a preliminary injunction against AB-5, forbidding California from enforcing the law on carriers and owner-operators until a pending lawsuit brought by the California Trucking Association is decided.

Beyond just a lawsuit and injunction, the wording of the new law may very well be against federal law. The Federal Aviation Administration Authorization Act (FAAA) of 1994 states that states cannot “interfere with prices, routes, and service” of motor carriers. Since the United States Congress has the power to regulate interstate commerce from the Constitution, this defense against AB-5 seems to be rock solid.

Also worth mentioning is that the companies specifically targeted by the law such as DoorDash are fighting it as well. Indeed, AB-5 has much resistance from a plethora of special interests.

Conclusion

When it comes to controlling the trucking industry, AB-5 has an uphill battle against it. Opponents of the bill say it should not relate to interstate issues. Even if it were reworded to either only include intrastate commerce or exclude trucking all together, it would still face opposition from numerous actors such as GrubHub.

If AB-5 survived and became a law in the Golden State, it could have positive and negative consequences. Owner-Operators that work with logistics companies such as Landstar may have to move out of the country, but those who drive for other companies such as Walmart or Safeway may be given more freedom on how to deliver goods so that they can continue being considered an independent contractor.

The way things are now, AB-5 is blocked, meaning that truck drivers can breathe a sigh of relief not having to think about any additional rules to follow, for the time being. Only time will tell what eventually happens to AB-5.

But in some ways, the damage has already been done. Many Owner-Operators living in California, such as those working for Landstar or Prime have not had their contracts renewed for the new year and had to make some difficult decisions between moving out of the state or changing with whom they work. For these unfortunate people, it does not matter that the law was blocked within a month of becoming official.

Other states, such as New Jersey, are also creating similar bills that may become law. Whether or not those will have an exception for trucking has yet to be seen. They very well could be similar to the law in California, where even if the law is blocked, logistics companies planning ahead will refuse to renew contracts for its owner-operators in the respective state.

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