What is the AB5 law? Influential facts that show how it impacts owner-operators.
Will the passing of California’s Assembly Bill 5 law (AB 5) devastate the United States’ fragile supply chain? Over 70% of truckers serving some of the nation’s largest ports are owner-operators. There are 70,000 owner-operators in California. How will they keep working?
These are questions that you may have concerning this new law. In this article, I will break down AB 5 as simply as possible. Then, I will explain how it will affect small trucking companies and owner-operators. Read on. Is this legislation a sign of things to come on a national level?
What is the AB5 law?
Based on April 30, 2018, the California Supreme Court ruling on the Dynamex case, AB 5, took effect on January 1, 2020. This employment legislation changed the rules employers must use to classify workers as either employees or independent contractors. The classification is important because employees have benefits and protections like:
- Overtime pay
- Minimum wage
- Unemployment insurance
- Paid family leave
Trucking companies are affected by AB5. California crafted the law to protect workers from exploitation by company management. However, it remains uncertain if it achieves that objective.
The “ABC” Test
The law assumes that all workers are employees. The burden of proof is on the employer to show that a worker is an independent contractor. Under the ABC test, a worker is an employee unless:
- A. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- B. Performs work outside the usual course of the hiring entity’s business.
- C. Is customarily engaged in an independently established trade, occupation, or business of the exact nature involved in the work performed.
Carriers, brokers, and shippers must satisfy all three parts of the ABC test.
What is the control and direction of the hiring entity?
To pass this part of the test, the employer has to satisfy the right to control test. An employer/employee relationship is likely to exist if:
- An employer has the right to control and direct the work of an individual
- As to the result of the work to be done
- As well as the details of how the individual should do it
Work outside the usual course of business
For example, a hairdresser hires a carpenter to work on a leaky roof. It would be easy for the carpenter to be classified as an independent contractor under AB 5. He is working outside of the usual course of business of the hairdresser, i.e., hairdressing; therefore, he is an independent contractor.
If a trucking company hires an owner-operator to haul freight, the company cannot prove that the driver is an independent contractor under AB 5. Instead, the owner-operator works within the usual business course for the trucking company.
Engagement in an independent trade
To satisfy part C of the law, a worker’s business activities must exist independently of the hiring firm. The business should be able to survive if the business relationship with the employer ends. Factors that are considered include whether the worker:
- has a separate office or business location
- Owns the equipment needed to perform the services
- Employs assistants
- Is paid by the job rather than by the hour
- Possesses all applicable business licenses
- Files business (Schedule C) federal income tax return
Drivers who will not be affected
The law affects the whole industry. A subset of drivers will not have problems complying with AB 5. These are:
- Employee drivers- These are drivers that work for carrier companies. They do not own equipment; they haul loads the company directs them to.
- Independent owner-operators- These guys own their equipment. They have MC authority. Their loads are sourced from brokers and load boards.
Who will be affected in the trucking industry
Seventy thousand owner-operators in California may be affected by the passing of AB 5. Two types of owner-operators will be affected by the legislation:
- Leased owner-operator (exclusive) – They do not own their equipment. They do not have motor carrier authority. Instead, they can enter into a lease with a carrier company and use their motor authority. Because of the lease agreement, they cannot use their equipment on the open market.
- Leased owner-operator (non-exclusive) – These owner-operators own their equipment. They have operating authority. They can work for another carrier under the lease and operate on the open market.
What can carriers do to comply with AB 5?
Some carriers might have to downsize their owner-operator fleets. Others might end up hiring former independent contractors as employees. Here are some ways that carriers can comply with AB 5.
- Independent brokerage from the carrier business would entail a company creating two distinct businesses. One for employee drivers and another for which is a brokerage working with independent contractors who set their rates.
- The “two-check” model is when the carrier makes two checks to the driver. One to the driver as an employee and another to truck hire. In this case, careers will not need to buy trucks outright.
- Shift to an employer-employee model- California drafted the bill to achieve this outcome. This way, full-time drivers receive full benefits. Companies can use this option.
- Cease doing business in California- This option is not desirable for all involved but remains on the table.
- Pursue B2B exemption- This is hard to achieve. You have to meet 11 detailed requirements. It allows business service providers with these entities:
- sole proprietorship
- limited liability company
- limited liability partnership
One of the requirements is whether the provider is doing the service for the business and not the company’s customers.
What can drivers do to comply with AB 5?
- Get your operating authority- Drivers can apply and get MC operating authority and haul for brokerages, rather than leased owner-operator.
- Become an employee- Drivers can also become employees for carriers and enjoy the benefits and perks of being an employee.
- Deadhead out of California- This is going from one point to another with a load. You will deliver shipments to California but will not pick up loads in the state.
- Move residence out of California- You can move your place outside California. Most of your miles will be run outside the state.
On June 30, 2022, the Supreme court upheld the Ninth Circuit Court of Appeals ruling. This ended the injunction holding AB5’s application to the California trucking industry. Owner-operators in the state will have to make immediate changes. I hope the information above guides you to the best decision for you and your business.