California Governor Gavin Newsom put pen to paper on September 18, 2019, putting into law a bill that is going to have a grave impact on the already strained trucking industry. There are a lot of people out there that I have talked to that have either not heard of this landmark change, or quite simply have chosen to ignore the news, thinking that if they don’t run in CA, they will not be impacted. Unfortunately, with over 70,000+ independent contractor drivers in the state, the reach of this will ripple throughout the entire country.
AB5 was a result of the court case Dynamex Operations West, Inc. v. Superior Court of Los Angeles, which was ruled on by the California Supreme Court in April 2018, and gave way to a new test to measure the validity of what an independent contractor would be. Running with the new “ABC Test” idea that stemmed from the Dynamex ruling, Assemblywoman Lorena Gonzalez authored AB5 in an effort to put into law the much more rigid three-prong test for all businesses in California, or any business that hired contractors from within the state. Though 50 or so business industries were able to successfully lobby their way into exemptions prior to its signing into law, trucking was not granted such leniency, setting into motion the current crisis that is rearing its vicious head for many trucking companies nationwide!
Here are the three rules of the ABC Test that a company must be able to prove in order to classify someone as a legitimate contractor according to the new law:
(A) The worker is free from control and direction in the performance of services; and
(B) The worker is performing work outside the usual course of the business of the hiring company; and
(C) The worker is customarily engaged in an independently established trade, occupation, or business.
The issue for the trucking industry comes from the B-prong of the so-called ABC test. As you can see, a trucking company using a contractor that is in the business of trucking is a direct violation of the test, in which all three prongs must be successfully proven. There are limited options to those that were either contracted or are in the business of hiring contractors in accordance with the previously utilized Borello Test for independent contractor status. Independent contractors for trucking companies, large and small, are now being forced to either become company drivers in the form of buy-out options, move their entire residence and families out of the state in order to keep their contractor status, or spend more money to become operators under their own authority and run freight for brokerages instead. Some may be leery of this option, as it could create a “Catch 22” in being caught in a double-brokering scenario for carriers turned brokerages in order to comply.
As a carrier, it would seem the simple choice might be to just move operations to another state. This is not the case in AB5 however, since it would still restrict the contracting of any contractor drivers that reside in California by an out of state carrier. Some carriers are considering a two-check system for their incorporated contractors that own their trucks, which would break down as a fair employee wage on a W-2 for their work performed as a driver and a separate payment to the driver’s corporation for their equipment usage. Under this new system, the liability of things like disability, unemployment insurance, and workers’ compensation are now the responsibility of the contracting company. This not only adds undue burden to the company contracting operators of their own equipment in terms of separating the two, but it also makes it more expensive for that company to continue operations in an industry already stepping over dimes to make nickels!
From what I have seen, it was the few ruining it for the many, as is usually the case with many new laws. From the few taking advantage of the system by hiring drivers without a single asset, then classifying them as contractors to avoid liability, the lawmakers were then able to pour gasoline on the flames to ignite an inferno! For legitimate companies like that of my own, taking operators with their own equipment and nurturing them in a freight-rich environment through my own contacts, a painful thorn has now been inserted into our sides. From small companies like my own to the large mega-carriers throughout the nation, decisions are now being made either to swallow the costly fees of compliance or wait it out and pray for a “Hail Mary” exemption in the final hours or soon after the law takes effect. Though meant for gig-economy companies like Uber and Lyft, trucking now finds itself sideswiped and left on the shoulder to fend for itself. As of the writing of this article, the California Trucking Association (CTA) has filed a lawsuit against the state and only time will tell if the many companies banking on action such as this may get the reprieve and fairness they are asking for in this hostile new situation!