Carriers, drivers look at ways to deal with California's AB-5

Dave Wickenhauser on Mon, October 28, 2019

Last Updated: Tue, December 31, 2019

As the dust settles on the recently passed new California independent contractor law motor carrier companies and independent drivers are scrambling to make sense of the law and to decide what to do about it.

Part of the problem arises from the fact that although the new law is very simple on the surface, the devil – or possibly the loophole -- is in the details.

Simply put, as it pertains to truckers the new California law states a carrier must classify as an employee any driver who hauls a load for them. A carrier cannot hire an independent owner-operator to take up the slack if there are not enough employee drivers to fulfill capacity.

In other words, a carrier must turn down business.

From the point of view of an independent owner-operator who wishes to remain independent the pool of available loads declines considerably … as he or she can accept freight only from shippers and warehouses rather than from carriers that have their own fleets.

With that in mind, and with the January 1, 2020, deadline looming for compliance, California motor carriers and drivers are actively thinking about their options, including compliance, or seeking out loopholes.

Or, many may be planning to take a "wait and see" approach knowing that there are many challenges to the new law, and are planning to just do nothing and continue as before.

Compliance

It's highly likely that California legislators simply believe that trucking companies will just go ahead and sign up all of their independent contractors as employees.

But, it takes two to tango, as the saying goes, and independent drivers might not think that's such a great idea.

Greg Feary, president and managing partner of the Scopelitis law firm, told HDT recently, “I would be surprised that under normal circumstances, a motor carrier approaching the independent contractor workforce and saying, ‘Give me a show of hands, who wants to become an employee,’ I doubt there would be many hands that would go up in the air.

“A significant number of owner-operators, more than a simple majority, see themselves as independent businesses and entrepreneurs – and they did that intentionally. If they wanted to be an employee, they already would have been an employee for a motor carrier.”

And, too, carriers are cautious about jumping onto the idea of adding a bunch of new employees under the new law, with the risk of finding themselves unable to reclassify them back as independents if the challenged law is overturned.

Fleets that rely on a large number of independent contractor drivers will find themselves at a competitive disadvantage without drivers to serve capacity if they cannot convert those independents to employee status.

Finally, compliance – meaning converting thousands of independent drivers to employee status -- raises the concern about what to do with all the older, possibly non-emission-compliant trucks left behind by those independents.

One industry spokesperson told HDT, “I don’t see trucking companies buying older used trucks from owner-operators. We may see the used-truck market in California become flooded with equipment, meaning owner-operators won’t be able to sell the truck for nearly what it’s worth."

Seeking alternatives

One tactic that has been suggested to solve the independent contractor-employee dilemma is to try to argue that motor carriers are really not in the same business as the independent drivers they hire.

The thinking is that the motor carrier deals with the shipping customer and handles all of the mundane details that the man or woman who sits behind the big rig's wheel doesn't have to deal with.

Unfortunately, where it has been tried elsewhere courts have not always seen it that way. And with the scrutiny given to the new California law it's not expected that courts will buy that idea.

A motor carrier that hires independent contractors exclusively might be able to argue the point … right up until it has at least one employee driver, and then AB-5 descends on them like a big hammer.

Another approach that some might want to explore is for the independent driver to file as a business entity such as a limited liability corporation; which could be a legal and paperwork burden that might be beyond what an independent driver wishes to face.

Another workaround being looked at is that trucking companies that employ their own drivers can spin off a subsidiary company that operates as a third-party brokerage hiring independent contractor drivers.

Doing nothing

One can suspect that this might be the default approach for many smaller carriers.

Feary told HDT, “Certainly one option is to stand pat. You have to think about, will this law even look the same a year from now?”

The California Trucking Association, for example, was very active in trying to obtain an exemption for trucking. Followup activity could result in legislation amending the new law in favor of trucking companies.

Others are challenging on the basis of a Federal Aviation Administration ruling that prohibits states from enacting laws that affect a motor carrier's prices, routes and services. Lawsuits are in motion right now claiming that California's new law is preempted by the Federal rule.

It won't be the first time that the Federal government preempted a California law. Late last year the Federal Motor Carriers Safety Association declared that truckers are not subject to a new California law mandating meal breaks and rest periods similar to that of office workers. Early this year, California filed suit against the FMCSA hoping to overturn their ruling.

Finally, California's might be seeing a ballot initiative in an upcoming election to overturn AB-5. Uber and Lyft have already funded a ballot committee to the tune of $60 million.

All this is to say that there is a chance that the "wait and see" carriers might be able to ride out the new law without making any changes, hoping that the law will be overturned before authorities catch them hiring independent contractors.

Sources: HDT, Overdrive

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