• Assembly Bill 5 (AB5) is a California labor law prohibiting the use of leased contractors to perform work in the same business as the contracting party.
• AB5 is based on the ABC test and the “B” prong makes it very difficult for carriers to use leased contractors to haul freight in California.
• Motor carriers could be subject to unemployment payments, minimum wage and worker’s compensation claims, and penalties for unpaid employment taxes.

A carrier’s capacity to move freight is the greatest determinant of revenue. A primary source of drivers, leased independent contractors, was made illegal in California.

On June 30, 2022, the California Trucking Association (CTA) was denied its request to have the U.S. Supreme Court hear its case about the state’s Assembly Bill 5 law (commonly known as AB5). The result was that the injunction on AB5 was lifted. AB5 is enforceable back to at least January 1, 2020.

What is AB5?

Under AB5, a worker is an employee and not an independent contractor unless:

A. The person is free from the control and direction of the hiring entity in connection with the performance of work;

B. The person performs work that is outside the usual course of the hiring entity’s business; and

C. The person is customarily engaged in an independently established trade, occupation, or business.

These criteria are referred to as the “ABC” test. Point “B” is troublesome for motor carriers because leased contract drivers are in the same business as motor carriers.

If contractors are determined to be employees of a carrier and the drivers were misclassified, then they‘re eligible for benefits like minimum wage, overtime pay, unemployment, worker’s compensation, etc.

At least one other legal test, the Borello test, will be applied in misclassification, wage, or unemployment cases. It focuses on the independence of the owner-operator’s business and the ability to make decisions about the work they accept and for which customers.

Which carriers may be affected?

Independent contractors, also known as owner-operators, can haul freight in California under their own DOT number and authority, just not under a lease to a trucking company.

However, motor carriers are not allowed to use leased independent contractors to haul freight under the carrier’s DOT number in California under AB5.

Carriers that use non-California based contractors that haul into and out of CA may also be subject to AB5-related penalties and taxes. If work is performed in multiple states, California law will apply to all in-state work for many types of claims (including minimum wage and expense reimbursement, as well as, unemployment and worker’s compensation claims).

California law may also apply to out-of-state work if more than 50 percent of a driver’s work time is in California, or when a driver starts or ends a trip in California and there is more work time in California than in any other single state. The driver’s residence and motor carrier’s domicile are not considered in determining applicability of Labor Code requirements.

AB5 is California’s version of a misclassification law. The misclassification of drivers as contractors instead of employees can result in penalties in any state.

Carrier options

Some options to minimize the loss of driver capacity that carriers could consider but may not protect them from claims or penalties are:

1. Convert contractors to employee drivers.
2. Lease the truck from the independent contractor’s business and hire the contractor as an employee driver.
   • Commonly referred to as a “two-check system,” the carrier cuts the driver a paycheck and a separate payment to lease the truck.
3. Contract with contractors who hire employees and meet all California labor laws.
4. Move contractors out of California and do not use contractors in California to haul freight regardless of their domicile. Another version of this option is to minimize the contractor’s time delivering and picking up freight in California as a percentage of work in all states.
5. Pay independent contractors in compliance with wage and hour laws with total compensation, but there are other regulatory and tax requirements that have to be met as well.
6. Qualify for the business-to-business (B2B) exemption which has several criteria including, the contractor must provide the service to the carrier and not the customers of the carrier. The Borello test used in misclassification suits is also applied to evaluate the business to worker relationship. The B2B exemption is a very difficult path to navigate.
7. Terminate the leased contractors’ operating agreements and have the owner-operator obtain their DOT authority to accept broker freight.
   • The carrier must obtain broker authority if they do not have it already.
   • The contractor must accept freight from several customers to avoid being too economically dependent on the carrier.

Some carriers are legally segmenting their business to isolate California operations and selling that portion to remove risk. The purchaser of that segment still has to comply with AB5.

What’s next?

California has not provided clear guidance as to which carrier operating models will prevent being in violation of AB5. Cases related to wages and benefits that have been on hold due to the AB5 injunction can move forward. Carrier operating models will be tested as cases are settled.

AB5 is still being challenged in courts. Until further notice, all cases in front of the California Labor Commission will have both the ABC test from AB5 and the Borello test applied.

Motor carriers should consult a transportation attorney familiar with California labor law to determine the best path forward.