Is it still ABC for AB5? What’s happening now?

Is it still ABC for AB5? What’s happening now?

BREAKING: A hearing on AB 5 is scheduled for 10:30 a.m. PST on May 1 at the U.S. District Court for the Southern District of California in San Diego.

In mid-October, California’s AB5 legal battles that covers an estimated 70,000 owner-operators are far from over.

In April 2021, the first injunction to fight the law from affecting the trucking industry was overturned by an appellate court.

Since then, the injunction was fought all the way up to the U.S. Supreme Court which declined to hear an appeal of that decision in June 2022, which resulted in the injunction being lifted and the law going into effect for the trucking industry.

But the arguments in the original CTA lawsuit have not been fully heard before a court, who has chosen to continue its fight.

Back in September, a few days after the state asked to keep the Owner-Operator Independent Driver Association (OOIDA) out of the next step in the lawsuit, a federal district court judge has let the association in.

Before we dive into what is going on, let’s look at how the AB5 independent contractor law affects the trucking industry.

What is California’s AB5 independent contractor law?

On Sept. 18, 2019, California Governor Gavin Newsom signed bill AB5 into law that will make it more difficult for companies to classify people who work for them as independent contractors with the new ABC test.

Under the ABC Test, a worker is presumed to be an employee unless the employer can show that all three of the following “prongs” or conditions are satisfied:

  • A. the worker is free from the control and direction of the hiring entity in connection with the performance of the work,
  • B. the worker performs work that is outside the usual course of the hiring entity’s business, and
  • C. the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

The ABC is problematic for the trucking industry because of prong “B”, or whether a worker performs an activity that is at the core of the business’ mission. For example, a trucking company hiring a landscaper to take care of the grounds around a headquarters would not meet that test but hiring an independent owner-operator would.

Let’s look at port truckers in California as an example.

There are around 13,000 truckers regularly serving the ports of Los Angeles and Long Beach. However, only a few hundred are classified as employees.

The others are owner-operators who traditionally:

  • lease their rigs from trucking companies
  • drive under those companies’ permits, and
  • rely on them for work assignments

These owner-operators are paid by the load and get a 1099 independent contractor tax form at the end of the year.

The new AB5 law would basically require carriers to hire the independent contractors and pay them health insurance and other employee benefits.

What’s next for AB5?

California Trucking Association is pushing for another injunction with final briefs due Dec. 2, 2022. After that, the court will decide whether to schedule any hearings.

This process will now happen with OOIDA along side California Trucking Associations as OOIDA has pushed for more clarity from the law, saying “California hasn’t provided any guidance on how they will enforce the law. OOIDA has reached out to the governor’s office for clarification, and it’s still unclear how the courts will interpret the law.”

BREAKING: On Dec 7, 2022, OOIDA requests preliminary injunction against AB5. The state must file its response in March, and a hearing on the preliminary injunction is scheduled for May.

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

For now, the brokerage model is the most likely solution in a research note published by Cowen transportation analyst Jason Seidl.

After a private roundtable, Seidl published his report backing the brokerage model, in which a trucking company transitions to being mostly a brokerage and brokers freight into independent owner-operators. But those independent owner-operators would need to get their own authority and insurance if they are now driving under the banner of a company providing those necessities.

Going to the brokerage model isn’t easy if a company is smaller, Seidl wrote, adding “panelists pointed out that smaller carriers with less legal and financial wherewithal are likely to remain non-compliant and face penalties or move to other states altogether, creating an opportunity for larger carriers to take share.”

The other most likely option for complying with AB5 is making drivers employees. 

Department of Labor proposes changes to national independent contractors test?

The Department of Labor issued a recent proposal on how they will approach independent contractor status.

notice of proposed rulemaking is scheduled to be published in the Federal Register on Thursday, Oct. 13.

Instead of using California’s strict ABC prong approach, or the Trump-era test, the Biden administration will use a “multi-factor economic realities test that considers factors of the working relationship to determine whether the worker is truly in business for themselves.”

The DOL proposal would consider six factors equally:

  1. the nature and degree of the worker’s control over the work
  2. the worker’s opportunity for profit or loss based on personal initiative or investment
  3. investments by the worker and the employer
  4. the degree of permanence of the working relationship
  5. the extent to which the work performed is an integral part of the employer’s business, and
  6. the degree of skill and initiative exhibited by the worker

OOIDA is looking over the new proposed rule but says it looks promising.

“Any rule must recognize the owner-operator model if it is to be successful when applied to trucking,” OOIDA President Todd Spencer said. “The administration’s stated desire to formulate a test that considers all aspects of a working relationship is promising, but we will carefully review every detail of their proposal and fight back against any provision that would unfairly stack the deck against true independent contractors.”

“Truckers are tired of the seemingly endless parade of new classification rules coming from legislators and regulators that have largely disregarded their concerns and preferences,” Spencer said. “Whether it is AB5 in California that jeopardizes their business model, or the Trump-era classification rule that gave mega carriers a carve-out to exercise even greater control over their contractors, small-business truckers and professional drivers feel ignored.”

A 45-day comment period on the DOL proposal began on Oct. 13 and must be submitted by Nov. 28.

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