An End of an Era: AB 5 and What It Means for Motor Carriers and Their Independent Contractors
This post is part of a series sponsored by IAT Insurance Group.
For the last two-and-a-half years the entire nation has been tracking California Assembly Bill 5 (AB 5), which changed the definition of who is considered an independent contractor (IC) across many industries.
Recently the injunction to keep AB 5 out of the trucking sector was lifted. This decision is impacting the approximately 70,000 ICs in California already faced with a myriad of challenges, including increased regulation, rising fuel costs and other supply chain demands.[1]
Up until the 2019 California court decision that changed the definition of who is an IC across industries, the Borello test was used to determine the common law relationship between a business owner and an IC. With the new decision, workers are now presumed employees unless the business-to-business exemption is met, or the trucking company can prove all three “prongs” of the ABC test are satisfied:
The worker is free from the employer’s control or direction when performing work.
The work takes place outside the usual course of the business.
The worker is engaged in an independent trade, occupation, profession or business.[2]
The ABC test is positioned to provide a more predictable and simpler approach to determine IC status,[3] yet the problematic piece for the trucking industry is B. IC drivers perform work inside the normal course of business for the motor carrier.
Why AB 5 hit a nerve in the trucking industry
Initially, AB 5 had far-reaching impacts on ICs from all industries. Freelance writers, newspaper delivery persons, business consultants, real estate and insurance agents and Uber drivers, for example, were affected. However, since the original ruling, a lot of these industries received exemptions, including trucking.
The trucking injunction was lifted on August 29, and AB 5 as it stands is the law of the land in California. Once the Supreme Court refused to hear the case, several ICs at California ports went on strike putting a strain on the coastal supply chain as many drivers ceased to function.[4]
Who does AB 5 affect?
Motor carriers domiciled in California are impacted by AB 5. Drivers living out of state can maintain an IC status as of right now but it’s wise to seek professional legal counsel to determine whether you are subject to AB 5 when hauling to and from California.
Some companies are encouraging drivers to move out of state, but not everyone can take such aggressive action. In an industry that’s short 80,000 drivers[5], the combination of AB 5 and the impending California emissions deadline is rapidly chipping away at hauling capacity.
As of now, motor carriers have two options:
Stay with the IC model. If you opt to continue hiring ICs, obtain legal advice on how to structure your business model to meet the compliance criteria.
Make all ICs employees. Currently the safest option, bringing all ICs into the fold as employees can eliminate confusion. But bringing on employees is a huge undertaking. From purchasing or leasing vehicles to adding wages and benefits, having employees is a whole new business model for many motor carriers. Unfortunately, many small companies don’t have the upfront resources they need to convert ICs to employees.
Finding workarounds
While impending appeals are expected since the injunction was lifted[6], a possible workaround currently exists; a provision in AB 5 allows for a business-to-business exemption. ICs would need to establish a business entity and contract with a third-party logistics company.
This exemption is very narrow for those in the trucking industry, and B2B approval means meeting multiple exemption provisions, ranging from criteria surrounding business location and clientele restrictions to supplying services directly to contracting businesses, rather than supporting customers of the contracting business.
While the conversation surrounding AB 5 is far from over, your insurance broker can help you find the solutions necessary to change existing business models such as obtaining larger Workers Compensation policies, restructuring your business and putting you in contact with the correct legal representation to restructure as a B2B IC group.
Contact IAT Insurance to learn more about how AB 5 can impact commercial transportation coverage.
By Scott Miller
[1] Freight Waves “California Trucking Prepares for Shake-up During Independent Contractor Law AB 5,” July 2022.
[2] Justia “Dynamex Operations West, Inc. v. Superior Court of Los Angeles County,” 2018.
[3] State of California Department of Industrial Relations “Independent contractor versus employee,” January 2022.
[4] Wall Street Journal “Protesting Truckers Pledge Extend Blockade of Port of Oakland,” July 2022.
[5] American Trucking Associations “ATA Chief Economist Pegs Driver Shortage at Historic High,”August 2022.
[6] Trucking Info “AB% Injunction Lifted but CTA Plans to Renew Challenge,” August 2022.
Topics
Carriers
Contractors
Trucking
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