Earlier this week, the United States Supreme Court denied review—or Certiorari—of the Circuit’s reversal against the injunction of AB5 (Assembly Bill 5) in California, a law governing owner-operators that potentially could be very disruptive to trucking operations in the nation’s most populous state.
As previously reported by LM, truck drivers are divided on AB5, which limits when workers can be contractors instead of employees. Some local port drayage operators supported the measure which would have limited owner-operators in that sector.
A Reuters report noted that, in its ruling, the Supreme Court said that the California worker classification law “will be devastating for the industry and should be blocked.” And it added that the court blocked a petition by the California Trucking Association (CTA), which claimed that AB5 makes it more difficult for businesses to treat workers as independent contractors rather than employees, is blocked by federal regulations governing the industry.
The CTA has long maintained that federal law governing interstate commerce pre-empts any state law, and it argued that AB5 is pre-empted by the Federal Aviation Administration Authorization Act (FAAAA) of 1994, which was in accord by a decision made by a California judge in early 2020, in the form of an injunction against AB5.
At this week’s SMC3 Connections ’22 conference in San Diego, California Trucking Associations Senior Vice President of Government Affairs Chris Shimoda said that through the ABC classification test, one of its measures states that an independent contractor has to be in a separate line of business from the company it is contracting with.
“That is obviously a problem for independent truckers,” he said.
An analysis of the decision by Indianapolis-based Scopelitis LLC noted “the injunction that has been in place for roughly two years will be lifted quickly and complying with AB5 will be a reality for trucking companies in California. Motor carriers should immediately evaluate their California operations to determine what steps, if any, should be taken to respond to the changed backdrop for trucking.”
Scopelitis President and Managing Partner Greg Feary told LM that the Supreme Court’s denial of review against the injunction of AB5 sends it back to the 9th Circuit to issue a mandate in which the 9th Circuit will instruct a trial court to lift the stay and AB5 will be applied to the trucking industry, specifically owner-operator or independent contractor motor carriers, which will be retroactive to the effective date of the legislation, going back to January 1, 2020.
“The question then becomes if I am a motor carrier and have owner-operators under contract in the ‘conventional or traditional’ structure, which is the owner-operator operating under the motor carrier’s authority, whether or not that owner-operator should be deemed an employee rather than an independent contractor,” he said.
And under AB5, he said that that the “ABC test,” which the Reuters report said was created by the California Supreme Court in the 2018 case Dynamex Operations West Inc v. Superior Court to determine whether workers are truly independent contractors, is comprised of three prongs, including:
Prong B is the most troubling, according to Feary, as that is where most industry stakeholders would predict that even if you can prove prong A and prong C, it would be difficult to prove prong B.
What’s more, this development comes at a time when there are many concurrent issues impacting the supply chain, including things like the upcoming Peak Season, China’s reopening, and the recently-expired contract between the PMA and ILWU, among others.
Feary added that there are a number of EPA CARB-type laws that are going to reduce the truck availability, or the usage of certain trucks that are not compliant with the California Resource Board or EPA regulations.
“You now arguably have less truck drivers as a result of this, because at least some percentage of motor carriers will either not do business in California, because they feel that there is too much risk of class action lawsuits or regulatory action by the California government,” he said. “You have another slice of motor carriers that will say what we want to do is only use employee truck drivers as a result of this law…so any of you owner-operators who want to be employee truck drivers, we will continue to work with you, but, if not, then we cannot use you.”
Feary said that leads to the question of whether these owner-operators decide they do not want to be employee truck drivers and retire or drive for a smaller carrier that may not be as sensitive about this legal development, or simply exit the industry for another profession.
“I think you can easily predict, from a 50,000-foot view that you are not going to have more truck drivers in California, you are going to have less,” he said.
Looking ahead, Feary said that there could be a trickle-down effect of this week’s developments in Blue, or Democratic, states, which are typically high density.
“If you think about the states that might react to this, the reaction being that maybe the Teamsters are already lobbying for a law like this in the state, or maybe the legislatures of those states that have been reticent, because they know AB5 has gotten caught up in litigation…all of the sudden, it looks to a lot of folks in these blue states that are trying to push for a law like this that the ramp is now clear, because the Supreme Court won’t rule,” he said. “They won’t meddle in it and will leave it to the states. You can see states like Washington, Oregon, Illinois, Colorado, New Jersey, and New York look at something like this. New Jersey has already been looking at it for two years, having sent Senate bill 863 [its version of AB5].”
From a freight perspective, DAT Principal Analyst Dean Croke told LM that the Supreme Court’s rejection of CTA v Bonta comes at a time when supply chains in California are under stress and market conditions are tight.
"“In Los Angeles, the load-to-truck ratio for dry van freight is 11.6 over the past seven days, meaning there were 11.6 van loads for every truck posted to our load board network," he said. "In Fresno, the state’s leading market for fresh produce shipments, the ratio for reefer freight is 11.7. AB5 as it applies to trucking has been in the courts for nearly two years, giving companies time to prepare, but there’s going to be confusion. It’s important for everyone to take time to understand AB5 and how it affects them, because owner-operators are in demand right now. Looking at where capacity might be affected the most in the near term, I’m watching dray capacity and high-volume van lanes out of Los Angeles to warehouse markets like Stockton.”