While the U.S. Supreme Court made a number of headlines this quarter, its refusal to consider whether California’s controversial worker classification law should be blocked by a federal law that regulates the labor industry. trucking has slipped under the radar. SCOTUS’ action on June 30 to deny review of the California Trucking Association’s challenge to Assembly Bill (AB 5) as it applies to motor carriers in California will have significant implications in the state’s trucking industry. In the very near future, you will be required to comply with AB 5 and its impact not only on independent owner-operators who own their own trucks, but also on your own staffing practices. What should you know about this polarizing decision and what should you do about it?
Brief reminder on AB 5
The California Legislature promulgated AB 5 in September 2019codifying the State Supreme Court landmark Dynamex decision. This law established the “ABC” test used to determine the classification of workers. Under this strict test, workers in California are presumed to be employees. Businesses have the daunting task of overcoming this presumption and demonstrating that a worker is an independent contractor by proving the three prongs of the test:
- the worker is free of control and direction in the performance of the services;
- the worker performs work outside the normal course of business of the hiring company; and
- the worker is usually engaged in an independently established trade, profession or business.
Although AB 5 is extremely broad in scope, certain professions such as licensed physicians, surgeons, dentists, psychologists, veterinarians, accountants, stockbrokers and real estate dealers are specifically exempt. However, truckers were not on the list, which has wreaked havoc on the industry for most of the past three years.
How did we come here?
Shortly after the Dynamex decision, the California Trucking Association (CTA) and two individual owner-operators filed a lawsuit in federal court to challenge the law as it applied to the trucking industry. The CTA argued that the Federal Aviation Administration Authorization Act (F4A) overrides state law and decided to block its enforcement against trucking operations.
The trial court granted the CTA a major victory in 2020 by issuing a preliminary injunction blocking the law as it applied to trucking. It concluded that AB 5 has “more than a tenuous, remote or peripheral impact on motor carrier prices, routes or services” and was therefore edged out by F4A.
On appeal, however, the Ninth Circuit Court of Appeals reversed the ruling, finding that F4A was no ahead of AB 5. In a disappointing 2021 ruling, it ruled that the state’s misclassification law “is generally applicable labor law which impacts the relationship between a motor carrier and its workforce, and does not in any way bind, obligate or freeze any price, route or particular service of a road transport company at the level of its customers.
SCOTUS avoids controversy
Shortly thereafter, CTA filed a petition for certiorari with the Supreme Court of the United States (SCOTUS) to review the Ninth Circuit’s decision. Such challenges are generally considered a long shot as SCOTUS only accepts review of approximately 1% of applications that land on its file. With SCOTUS taking a more business-friendly approach in many recent cases, however, there was optimism within the trucking industry that it would accept the Ninth Circuit’s review of the ruling and reverse course.
However, in a brief one-sentence order on June 30, the Supreme Court declined to review the decision. This leaves in place the Ninth Circuit’s ruling that AB 5 is not pre-empted by federal law and therefore considered state law – a decision that sent shockwaves through the trucking industry. We now await the administrative steps that must work their way through the court system that will formally remove the lower court injunction blocking AB 5 and allow the state to enforce the law as it sees fit.
Unsurprisingly, the Supreme Court’s decision drew polarizing reactions. On the one hand, the CTA and trucking companies are warning that this will drive up freight costs at a time of high inflation. They also believe it will have a devastating impact on the already fragile supply chain, as it will push independent owner-operators out of business.
On the other hand, unions and the state view the decision as a significant victory in their decades-long battle against misclassifications in the trucking industry. In the middle are the thousands of drivers who prefer the independence of owning and operating their own trucks and the freedom to create their own working arrangements with different companies.
What happens now?
SCOTUS’ refusal has left thousands of owner-operators and motor carriers in California and across the country confused. Motor carriers may be wondering if their drivers are now classified as employees, if they need to hire or rehire drivers as employees, if they can still operate under this new model, or if there is a way to continue to do business with owner-operators. without including them as employees.
Additionally, it’s unclear exactly when the injunction will be lifted and when California can begin enforcing AB 5 against the trucking industry. Sounding the alarm in the industry, California Labor Commissioner Lilia Garcia-Brower just tweeted last week that her agency is ready to enforce the law. July 13, she invited the drivers to contact the agency if they believe they have been incorrectly classified as independent contractors.
What should you do?
Given this turn of events, it is imperative that trucking companies begin to take immediate action to deal with the ramifications of AB 5 if using independent contractors. This potentially means complying with the panoply of California laws that govern the employment relationship, including the following:
- Hire drivers in accordance with Labor Code § 2810.2;
- Reimburse drivers for all costs incurred in operating and maintaining their vehicles;
- Recording of drivers’ working hours;
- Provide and manage meal and rest periods;
- Provision of detailed payslips;
- Establish and oversee worker safety programs; and
- Payment of workers’ compensation and unemployment insurance.
Alternatively, several players in the trucking industry have considered the business-to-business exemption under AB 5. This allows business service providers that are established as a “sole proprietorship, partnership, limited liability company or corporation” to enter into a contractual agreement with a company. However, you will need to meet 12 specified criteria for the exemption to apply. You should carefully review your options with legal counsel before setting a course for a strategy.
The recent Supreme Court decision reinforces the far-reaching and lasting impact of the AB 5 on the trucking industry.