In wake of Supreme Court’s refusal to review California AB5 ruling, truckers turn to Plan B

The Supreme Court’s refusal to review a legal challenge to California’s so-called AB5 rule that covers classifying independent owner-operators as trucking company employees has large truckload carriers scrambling for a suitable Plan B.

The California Trucking Association (CTA) called the Supreme Court’s decision not to review its 2018 lawsuit as “gasoline poured on the fire that is our ongoing supply chain crisis.”

Immediately after the ruling, truckers began protesting the so-called “gig economy” law and blocked freight entrances at the Port of Oakland, the West Coast’s third-largest container port. The freight slowdown lasted nearly a week and caused massive delays.

California is home to an estimated 70,000 independent truckers. But the new AB5 rule is threatening to make it prohibitively expensive to remain independent.

So as the nation is in the midst of peak shipping season ahead of the November-December holidays, unionized and some independent drivers were refusing to cross picket lines as freight backed up. Usually, about 10,000 containers are moved through the Port of Oakland every day. The work action limited that to about one-fifth of that amount.

At the start of the labor protest, as many as 15 container ships were waiting for dock space at the Port of Oakland. President Joe Biden’s administration had made clearing up bottlenecks and delays at the nation’s ports one of its top priorities to unclog supply chain delays.

The AB5 rule appears to be making things worse. The CTA said the law “would cause motor carriers and owner-operators to bear the substantial, if not insurmountable, costs and burdens associated with shifting to an employer-employee business model.”

Research shows that employee drivers make more money. Misclassified port truck drivers earn gross incomes averaging $28,783 before taxes, according to a Teamsters union survey. That same survey showed employee port drivers earn an average of $35,000 annually. Median wages of long-haul employee drivers in the full truckload category were slightly above $53,000 in 2018, while median wages for contractors in this segment were $44,520.

The Teamsters say the supply chain mess is unrelated to port woes. The supply chain crisis happened while AB 5 was not even in effect for this industry, according to the union. The union says pervasive misclassification is one of the major drivers of both the driver shortage and the congestion at the  ports.

“When it comes to the trucking industry, the problem is that the law will affect the many truckers who want to be independent so we at SmartHop do not think it will have a positive impact on the trucking industry,” said Guillermo Garcia, CEO and co-founder of trucking technology company SmartHop, which helps small trucking companies and owner-operators run their business more efficiently. 

“There are larger trucking companies that are pushing drivers to be independent contractors rather than hiring them as employees to avoid some operational costs,” Garcia added. “However, the problem is that the law also affects the many drivers that want to be independent. We expect it will disrupt California and will affect a lot of truckers.”

The problem, insiders say, is AB 5 is generalizing a specific issue that needs to be solved in a much more specific way. So the law is viewed as hurting the industry and many small independent truckers.

Some trucking companies already are toying with alternatives. Some California-based trucking operations already have moved toward classifying themselves as brokerage operations with their former owner-operators. This allows them to provide services with a contract at arm’s length with independent truckers who have set themselves up as single-truck operators.

Landstar, the largest group of owner-operator-dominated trucking companies, already has told owner-operators in California that they will need to relocate out of state if they want to remain independent contractors with the carrier.

During a recent earnings call, Landstar Vice President and Chief Safety & Operations Officer Joe Beacom said it is telling its owner-operator partners they need to be aware of the legal update as well as options for their businesses to “relocate out of California or not haul California-originating loads.”

David Heller, vice president of government affairs for the Truckload Carriers of America, said AB 5 is one of those rules whose impact has yet to be determined. But he said the trucking industry was “extremely disappointed” in the Supreme Court’s decision not to review the California AB5 ruling.

“It’s not an overnight thing whose impact will be determined when the first infraction occurs,” Heller told LM. “This will be played out in the courts. Think oversight and lawsuits.”

But already, Heller said, some carriers are “certainly preparing and have changed their base of operations outside California” to be in compliance with the AB 5 law. Originally, the law was designed to cover “gig economy” workers such as Uber and Lyft drivers. But the courts have interpreted it as covering all transportation independent contractors.

Some California trucking companies are examining a so-called “two-check system” to pay formerly independent contractors. Under this methodology, truckers would be hired as employees, but then issued a check to lease the equipment back to the company.

“That is probably the most creative thing I’ve heard,” TCA’s Heller said. “But none of this is going to help solve the supply chain crisis. This actually makes it worse than it was.”

As container freight is starting to pile up at West Coast ports, logisticians fear a replay of the 2021 peak season. That was a time when West Coast-bound container ships loaded with Chinese-made apparel and goods clogged the entire supply chain and caused shortages throughout the system.

TCA and other trucking entities “are looking at any and every option,” Heller said. “Moving out of state is one of the solutions that is being discussed. The success of workable alternatives will be determined over time.”

Besides being a blow to trucking efficiency, Heller said, the ruling is an “assault on the American dream” as many of today’s largest TL carriers – J.B. Hunt, among others – began soon after 1980 deregulation.

“This is certainly an assault on the American dream—one person with one truck growing into a multi-billion-dollar business,” Heller said. “This hampers and downplays that scenario. This does not bode well for becoming a successful independent company.”

Until then, truckload executives using owner-operators to flesh out their operations in California are looking at creative ways to be legally compliant while still maintaining what is the most practical way for their fleet operations to succeed.