Blog Post

AB5: What we know about CA's independent contractor statute

Jul 15, 2022

On June 30, the U.S. Supreme Court declined to review the California Trucking Association’s legal challenge to California’s Assembly Bill 5 – or AB5 – the independent contractor statute. Signed by Governor Newsom in September 2019, and since on-hold pending review by federal courts, this controversial state law may upend the trucking industry’s independent contractor model by reclassifying owner-operators as motor carrier employees. In denying the opportunity to hear CTA’s challenge, SCOTUS has now given the green light for AB5 to take effect in California, which is likely to send shockwaves through an already beleaguered supply chain.

As of this posting, the district court had not yet lifted the injunction but it could at virtually any time going forward. Since this development pushes our industry into uncharted territory, that which we don’t know currently outweighs what we do know. Here’s where things stand today as we see them: 

As soon as the preliminary injunction is formally lifted, motor carriers will be subject to AB5’s worker classification test, a narrow three-prong “ABC test,” in order to classify a contracted owner-operator as an independent contractor for purposes of California law. That test states that an IC must:

  • Be free from the control of the hiring entity;
  • Perform work outside the usual course of the hiring entity’s business; and
  • Be customarily engaged in an independent trade or occupation.

The second prong presents the greatest challenge for trucking companies, since owner-operators arguably perform the same line of work as motor carriers. Owner-operators who are classified as employees under this ABC test (and whose relationships with motor carriers do not satisfy the business-to-business exemption discussed immediately below) will be covered by the substantive requirements of California labor and employment law.

AB5’s “business-to-business” or B2B exemption might provide some relief. The three-prong “ABC test” notwithstanding, a B2B exemption contained in the law could enable carriers to evaluate their relationships with owner-operators under the pre-AB5 standard (the so-called Borello test, after the 1989 California Supreme Court decision that articulated it), but only if the contractual relationship satisfies a set of 12 requirements:

  1. The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  2. The business service provider is providing services directly to the contracting business rather than to customers of the contracting business. This subparagraph does not apply if the business service provider’s employees are solely performing the services under the contract under the name of the business service provider and the business service provider regularly contracts with other businesses.
  3. The contract with the business service provider is in writing and specifies the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services.
  4. If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
  5. The business service provider maintains a business location, which may include the business service provider’s residence, that is separate from the business or work location of the contracting business.
  6. The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
  7. The business service provider can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.
  8. The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
  9. Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services, not including any proprietary materials that may be necessary to perform the services under the contract.
  10. The business service provider can negotiate its own rates.
  11. Consistent with the nature of the work, the business service provider can set its own hours and location of work.
  12. The business service provider is not performing the type of work for which a license from the Contractors’ State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.

Given the ambiguities in several of these factors, and the lack of court decisions interpreting and applying them in the trucking context, it is impossible to predict how attempts to meet the B2B exemption will fare. One piece of potentially good news is that the state appellate court that reached the issue of the B2B exemption for owner-operators in CA had several conclusions that may ease compliance, including that owner-operators provided services to the motor carriers and not the motor carrier’s customers.  See: People v. Sup. Ct. (Cal Cartage Transportation Express) (Cal. Ct. App. 2020)

We joined the California Trucking Association and a broad coalition of state and national trade associations in asking Governor Newsom for a moratorium and the state assembly for a legislative fix. Given the ongoing supply chain crisis, CA’s political leadership would be wise to urgently provide the trucking industry a carve-out from AB5. This law puts the livelihood of nearly 70,000 independent truckers across CA in jeopardy and threatens to further damage a supply chain that is already near the point of breaking. 

Independent truckers are a bedrock cornerstone of the U.S. supply chain, enabling the trucking industry to respond to cyclical demand surges that come with peak harvest, construction and holiday-import seasons. Independent owner-operators have been a documented part of the trucking industry for over 80 years, in fact. When you talk to owner-operators, they’ll tell you they chose to become independent truckers because it gives them the freedom to be their own boss. It provides flexibility to choose when they work, where they work, and how much they make. 

The IC model in trucking is a win-win-win. It benefits consumers by ensuring store shelves are stocked and orders are delivered on time. It benefits trucking companies by giving them the resources they need to serve their customers during peak seasons. And it allows independent truckers to run their own company on their own terms. 

AB5 serves only to benefit plaintiffs’ attorneys and big labor bosses. It’s incumbent on the Governor and legislature to remedy this problem before it exacerbates an economic and political crisis entirely of their own making, harming consumers, blue-collar business owners, and our nation’s economy. 

We will soon provide additional details and information about how some entities are addressing AB5 and any news on CTA’s request as it develops. More to come.