The Supreme Court yesterday denied an appeal from the California Trucking Association about AB5, the new employment law in California governing independent-contract work. That means the law goes into effect today, and the trucking industry in the most important state for supply chains will face major upheaval.
“It is going to be a radically new world in California’s trucking sector with the imposition of AB5, and it isn’t clear what parts of the industry — if any — are ready for it,” writes John Kingston at FreightWaves. The law was enjoined by a lower court on New Year’s Eve in 2019, preventing it from going into effect for the trucking industry. In April 2021, the Ninth Circuit Court of Appeals, in a 2–1 decision, overturned the injunction, allowing the law to apply to trucking, but it was still not in effect while the CTA appealed the decision to the Supreme Court. Now that the Supreme Court has denied the appeal, the law goes into effect today.
AB5 seeks to classify more independent contractors as employees under state labor laws. Most truck drivers are independent owner-operators who contract with trucking companies to make deliveries.
But AB5 makes it much harder for that arrangement to work. It imposes an “ABC test” to determine whether someone is an independent contractor. The “B” portion of that test, which says that an independent contractor must be someone who “performs work that is outside the usual course of the hiring entity’s business,” is the largest problem for truck drivers. Making deliveries is part of the usual course of a trucking company’s business, so it would be difficult to classify independent owner-operators as independent contractors.
The independent-contractor model is a major selling point for many truck drivers. They individually own their trucks and can choose to contract with whichever trucking company they would like. They have flexibility in setting their own schedules, and they’re small-business owners instead of large-business employees.
A piece from Truckinginfo describes the legal hoops that trucking companies will have to jump through to deal with AB5:
One option, of course, is using the same drivers as employees. “That’s presumably not very likely because most of those drivers want to be independent contractors,” [attorney Greg Feary] said. “They own their own trucks, they have their own businesses, and this really does throw a monkey wrench into their business model.”
Another option for motor carriers operating in California, he said, might be “to pivot to being a logistics company — a broker or freight forwarder — and using small motor carriers to deliver goods. The courts of California presumably would realize that property brokers are in a different trade/occupation/profession than a small carrier. You would hope that a California judge would understand that and recognize that.” . . .
“The only winners here will be the legal profession in my opinion,” [Western States Trucking Association leader Joe] Rajkovacz added, “as many motor carriers and brokers will need to ‘lawyer up,’ and frankly for the majority of small-business, they can’t afford the legal fees to try and defend themselves against a state determined to do the bidding of organized labor who believe they will financially benefit by increased membership.”
That last part is key: Unions are happy with AB5. Independent owner-operators aren’t unionized, and unions hope to be able to attract newly classified employees as members.
If the Biden administration gets its way, something similar to AB5 will be passed at the federal level. As Iain Murray wrote for Capital Matters last year, Secretary of Labor Marty Walsh (himself a former union president) supports more independent contractors being classified as employees. That would significantly decrease worker freedom and threaten the entire “gig economy” that has flourished over the past decade.
For now, we’ll get to see how it works in California. The law could not have come at a worse time for the trucking industry, which now must reorganize itself on the fly while also dealing with backed up deliveries and a looming freight recession.
“Gasoline has been poured on the fire that is our ongoing supply chain crisis,” said the California Trucking Association in a statement after the Supreme Court declined to hear its case. California’s 70,000 independent owner-operators have seven days to restructure their entire business, it says.
The CTA’s argument was that AB5 violates the Federal Aviation Administration Authorization Act (F4A), which, despite its name, applies to trucking as well since it is a federally regulated industry. F4A prohibits states from passing laws or regulations that interfere with “rates, routes and services.” While a lower court bought the CTA’s argument and enjoined the law on those grounds, the Ninth Circuit did not.
The total impact of the law is still unclear. But the last thing trucking needed right now is more California regulations. Trucking companies will be preoccupied with satisfying the state’s legalism, and plenty of drivers could have their livelihoods upended. And though AB5-style regulations aren’t federal yet, California’s outsize presence in the logistics industry means the entire country will feel their effects.