Trucking attorney Jim Mahoney's law practice encompasses trucking and cargo loss litigation, claims management, compliance management, and operations consulting.
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AB5, Owner-Operators, and Motor Carrier Relations in California
California's "Assembly Bill 5," which went into effect June 30, 2022, reclassifies large numbers of workers as employees rather than independent contractors. It affects all motor carriers regardless of the state of domicile.
Under AB5’s three-point “ABC test,” a worker is
assumed to be an employee unless they meet
all three of these criteria:
- They are free from the control and direction of the hiring entity when performing their work.
- The work performed is outside the usual course of the hiring entity’s business.
- The worker is customarily engaged in an independently established trade, occupation, or business.
Impact to California trucking companies. Motor carriers operating in California now have to either reclassify as employees thousands of drivers who are currently independent contractors or move their business out of California – and still be cautious about the percentage of miles run in California.
Impact to the entire trucking industry.
Even though it’s technically a concern only for California owner-operators (O/Os), as a practical matter it’s a concern for all motor carriers who may run close to 50% of their miles in California with owner-operators. Thus, AB5 is having major impact on the entire trucking industry. For O/Os in the U.S., it effectively creates two separate labor pools: one in California and one in the rest of the country. It may yet spread fully across the country.
Options for trucking companies. At this point, the realistic options are few in number.
- Cease doing business in California – not a realistic scenario, considering that California is one of the world’s largest economies.
- Shift to an employer-employee model – not a great option for carriers who truly use O/Os for seasonal capacity, not to mention the effect on operating margins for higher costs for employees.
- Separate brokerage from carrier business. This would truly require creating two distinct businesses – not just an arm of the motor carrier, but a separate company, even going as far as to create a separate office away from the motor carrier, with separate payroll, etc. The brokerage would tender loads to O/Os who have their own authority – i.e., who can accept or decline a load based on their own preferences (rate, destination, etc.,) and who accept loads from other sources.
- Not run more than 50% of O/O miles in California.
- Have O/Os deadhead out of California.
- Pursue the B2B exemption. This course of action holds promise (see "The Best Option?" below). There is an exemption in the AB5 law for independent contractors. To receive this exemption, a company and contractor must meet all of 12 detailed requirements (see below).
The Best Option? As of now, the best option appears to be using a separate brokerage entity. The brokerage is best operated by a separately licensed (DOT and MC numbers) legal entity. (Do not allow cross-dispatching into California by the motor carrier.)
Right now – and until some plaintiff lawyer group attempts to challenge it and is successful all the way up to the Ninth Circuit Court of Appeals – brokering to a non-California O/O is not affected. You would be hiring “true” owner operators who have their own DOT/MC numbers and who are truly independent, running their own business, and taking loads from multiple sources (load boards, brokerages).
Large brokerage houses are taking this route, but the final curtain may not have fallen.
Some advisors are saying that using a California-based O/O who runs on an exclusive lease but has more than 50% of its mileage outside California would pass AB5’s ABC test. However, that spells trouble via attention that California would give to proving non-California miles, IFTA reports being considered.
The “Business to Business” exceptions mentioned is an “out,” but there will be litigation challenging motor carriers that do not meet all exceptions and any court interpretations are allowed, but I would avoid trying that until more dust settles.
Obviously, this whole mess is affecting the industry. No one can be absolutely certain of what workaround will prevail, but I do believe the brokerage option is safe. If you want to add to or create a new broker-carrier agreement that beefs up the language about business into or out of California, regardless of where the motor carrier is domiciled or has terminals, we can work on that together.
These are the 12 exceptions to AB5 from the text of AB 2257 that codified the law:
- 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.
- 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.
- 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.
- 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.
- The business service provider maintains a business location, which may include the business service provider’s residence, which is separate from the business or work location of the contracting business.
- The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
- 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.
- The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
- 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.
- The business service provider can negotiate its own rates.
- Consistent with the nature of the work, the business service provider can set its own hours and location of work.
- 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.
This seems to come down to a well-defined contract that complies with 49 CFR 376. We draft these all the time.
