Confusion, adjustments follow new California AB5 ruling on owner-operators

Confusion is the name of the game in the wake of a federal judge lifting an injunction on California’s Assembly Bill 5 (AB5) law after the U.S. Supreme Court failed to take up the matter.

The Owner-Operator Independent Driver Association (OOIDA) has sent a letter to California Gov. Gavin Newsom in hopes of receiving some clarification on what truckers should expect from the law.

“California hasn’t provided any guidance on how they will enforce the law,” an online video from OOIDA Foundation says. “OOIDA has reached out to the governor’s office for clarification, and it’s still unclear how the courts will interpret the law.”

AB5 became the law covering an estimated 70,000 owner-operators in the Golden State after Judge Roger Benitez of the U.S. District Court for the Southern District of California refused a California Trucking Association (CTA) challenge to enforcement of AB5 against the trucking industry.

Jeff Tucker, the National Industrial Transportation League highway chair and CEO of Tucker Company Worldwide, a major transportation brokerage company, said the recent lifting of the injunction against enforcement of California’s AB5 law caused the U.S. transportation economic engine to suffer.

“California's AB5 represents a clear and present danger to owner-operators, who represent over 90% of today's trucking industry,” Tucker said.

Tucker added AB5 threatens the industry as a whole by allowing states to dismantle trucking, the most commonly used delivery system in the United States, by moving from one seamless interstate system to possibly a 48-state patchwork regime. 

“This will thwart efficient interstate trucking services and increase the costs for goods sold in every store in America,” Tucker added.

CTA is indicating that it intends to file a new motion for preliminary injunction under the Federal Aviation Administration Authorization Act (F4A) preemption standard set forth by the Ninth Circuit and on Dormant Commerce Clause grounds.

The Dormant Commerce Clause, or Negative Commerce Clause, in American constitutional law, is a legal doctrine that courts in this country have inferred from the Commerce Clause in Article I of the Constitution. The primary focus of the doctrine is barring state protectionism.

According to CTA, motor carriers will have to buy a “fleet of trucks” and maintain and repair those trucks, provide for meal and rest breaks, train employees, set up staff and provide worker's compensation insurance. As a result, CTA alleges, its members would pass these increased costs off to customers as increased prices.

Moreover, CTA argued that its members would have to “reconfigure and consolidate routes” to offset increased costs. Its members might eliminate certain routes all together and might have to reconfigure routes to ensure their drivers can take meal and rest breaks. All of this would make the routes of CTA's members less efficient.

CTA contended that the increased labor costs caused by AB 5 would likely put small motor carriers out of business and force other motor carriers to leave California. The remaining motor carriers would therefore offer “diminished services.”

Already, Landstar System, the nation’s third-largest truckload carrier and largest in terms of utilizing owner-operators, has informed its California-domiciled owner-operators that they must move out of state or lose Landstar’s business.

Schneider, the nation’s fifth-largest over-the-road TL carrier, has done similar actions with its California-based owner-operators.

“It’s an underappreciated story,” Schneider CEO and President Mark Rourke told LM. “There are some 70,000 owner-operators in California. Some are heavily concentrated at the ports, which are the lifeblood of freight in that area.”

Asked how disruptive AB 5 would be if enforcement were strictly enforced, Rourke replied: “I would suspect it’s highly disruptive. It’s all about (levels of) the enforcement.”

Rourke said Schneider “got in front” of this issue several years ago to make sure his company was prepared for fallout from AB 5, which is exactly what is happening now. Other TL carriers are not as fortunate.

As an industry, Rourke said, trucking is not ready for the rule. The California Trucking Association is remedies.

“But the Supreme Court already has said it’s not taking this case up. It’s not very good policy,” Rourke said.

AB 5 is resulting in one of two scenarios, carrier executives said.

• If you want to be an owner-operator in California, you need to move out of that state into a neighboring one; and
• Owner-operators must obtain their own operating authority (with insurance) to haul loads in the Golden State.

 “There are expenses that can affect (owner-operators) value proposition,” Rourke said. “But that’s what most (trucking) companies are going to require.”

 The CTA and OOIDA are in negotiations over their legal rights to try and protect the independent contractor model. Some options being discussed:

•  Business as usual and wait and see what law enforcement does;
•  Carriers cancel leases and report drivers as employees;
•  Two-check model—One check for the use of the truck and another check for the driver. Driver must declare truck income separately; and
•  A carrier may become a broker and use owner-operators with their own operating authority

AB5 places into law an independent contractor test known as the “ABC” test. In order to be considered an independent contractor, a worker must satisfy all three p parts of the test.

• A. The person is free from the control and direction of the hiring entity, both in contract and in fact;
• B. The person performs work that is outside the usual course of the hiring entity’s business. (This is the issue for owner-operators in trucking.); and
• C. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed

Certain independent contractors—insurance agents, physicians, attorneys, accountants, engineers and direct sellers—were placed under a different test. With few exceptions, the relationship between independent truckers and their carriers, brokers and shippers will be governed by the “ABC” test.

AB 5’s long-term impact on owner-operators is unclear. But already, some large truckload carriers are adjusting their relationships with owner-operators, with a few advising them to move out of state in order to continue to haul.

Carriers, brokers and even shippers will have to demonstrate that their business arrangements satisfy all three parts of the “ABC” test, some legal experts said.

The Supreme Court’s refusal to review a legal challenge to AB 5 has trucking company-related workers and carriers scrambling for a suitable Plan B.

The 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.”