California's New Labor Bill

On September 18th, California Governor Gavin Newsom signed the “Employees and Independent Contractors” bill into law. This law, also known as Assembly Bill 5 or AB5, will rewrite California’s employment laws to make it harder for employers to classify workers as independent contractors.

This is good news for many workers in the gig economy. A gig economy is a free market system in which temporary positions are common and organizations contract with independent workers for short-term engagements. Unions and labor organizers have been advocating for the bill because it will protect workers who are currently treated as independent contractors. But the new law also has many independent truckers frustrated, and knock-on effects could be seen across the trucking industry.

What’s new in the AB5 law?

The main gist of the new law is that employers must follow a 3-part test (known as the ABC test) to determine whether they can classify workers as independent contractors.

The three parts of the test are:

1. The individual is free from control or direction of the hiring entity in connection with performance of the work.
2. The individual is performing work outside the usual course of the hiring entity’s business.
3. The individual is usually engaged in an independently established trade, occupation, or business of the same nature as the work performed.

It’s the second part of the test that will snag independent trucking contractors. Since a truck driver working for a carrier performs work that is indeed within the company’s usual course of business, they wouldn’t qualify as independent contractors.

The AB5 law constitutes organized labor’s biggest legislative victory in years and will reclassify around one million California workers as company employees. This means they’ll be eligible for benefits, pay guarantees, union membership, and more. That means the bill, since it protects workers in the gig economy from exploitation, has support from unions– including the California Teamsters Public Affairs Council, which represents truck drivers. Truck drivers are part of this vulnerable group; lawsuits involving employer misclassification cases have been filed against FedEx, NFI, and XPO. Those lawsuits tend to allege that the employer classified drivers or workers as contractors to avoid providing overtime, meal breaks, and minimum wage.

Others, particularly the California Trucking Association, have been formally opposed to the bill.

What should we watch out for?

Currently, some independent truck drivers fear this law will force them to shut down or move. Since they won’t be able to run their own business, they will make less money. As employees, they’d lose flexibility. The bill makes it virtually impossible for two trucking companies to contract together. Companies, for their part, are worried they can’t afford to hire on additional drivers as official employees, nor can they afford to buy additional rigs.

But it doesn’t have to be that way.

There are written exceptions for industry workers like freelance writers, artists, doctors, and commercial fishermen. The law could have been amended to address worker misclassification issues while protecting the 70,000 independent contractor truckers.

Now, some say these owner-operators are vulnerable, and if they leave the business, this could affect driver supply and demand (though, to be fair, there is a driver surplus right now, as we recently noted).

As Joe Rajkovacz, Western States Trucking Association’s director of government affairs put it: “In many respects, it will end the owner-operator model in this state as we know it.

What’s next?

The legislation isn’t over. Trucking industry lawyers want a federal court to rule that the Federal Aviation Administration Authorization Act (F4A) preempts California law. The FA4 law gives the federal government power to set rules for interstate trucking.

This hypothetical federal court intervention will almost certainly not happen before the January enforcement date. That means companies should still respond to AB5– but in reality, some will likely ignore it and wait into federal courts make a ruling.

There are other ways around AB5 in the meantime: carriers and drivers can go through brokers, which would mean they are “free from the control and direction of the hiring entity,” the hiring entity being the broker, allowing the driver to qualify as an independent contractor. An owner-operator could also contract directly with a shipper and not need to be reclassified. And an independent contractor, if taken on as an employee, could also agree to use their own truck, if the company doesn’t have one, and be reimbursed.

In other words, the California trucking industry isn’t getting turned upside down just yet. But it will certainly be interesting to see if the old phrase “as California goes, so goes the country” holds true– if so, trucking associations should be prepared and make sure exemptions are written into future legislation.

Red Arrow Logistics has the scale and scope to meet the budget and schedule requirements of the largest and smallest companies alike. If we can be of assistance, please email me at [email protected] or give us a call 425-747-7914