Ruling Threatens Independent Trucker Business Model in California

Motor carriers that use independent truck drivers to haul freight in California may need to adopt a new operating model and reclassify drivers as employees if a recent 9th U.S. Circuit Court of Appeals decision stands.

Freight carriers have long contracted with drivers who own and operate their own rigs, but a 2019 California law, AB5, has threatened such arrangements by establishing a three-part test to determine whether workers are employees or independent contractors.

In California Trucking Association v. Bonta, a federal appeals panel ruled 2-1 to uphold California's authority to enforce that test against motor carriers. Legal experts expect motor carriers and independent truckers to appeal the decision.

"If the ruling stands, motor carriers will likely have to rethink how they structure their relationship with drivers," said Kyle Winnick, an attorney with Epstein Becker Green in Newark, N.J. He noted that many motor carriers use independent contractors to move goods, and some owner-operators in turn use their own subcontractors.

Corey Cabral, an attorney with CDF Labor Law, a California-based labor and employment defense law firm, called the case "an issue of exceptional importance" that's likely headed to the U.S. Supreme Court.

California legislators enacted AB5 after the state's Supreme Court adopted the so-called ABC test in a 2018 ruling (Dynamex Operations West, Inc. v. Superior Court). The test, which under AB5 affects numerous industries, requires that three criteria be met for a worker to be classified as an independent contractor. The worker must:

• (A) Be free from the hiring company's control and direction in performing the work, both in fact and under contract.
• (B) Perform work outside the hiring firm's usual course of business.
• (C) Be customarily engaged in an independent trade, occupation or business.

Cabral noted that many owner-operators made significant investments in their own equipment so they could be self-employed. But if an employer fails to establish all three conditions, AB5 requires that the worker be considered an employee rather than an independent contractor. Experts consider the "B" criteria the most difficult for independent contractors to meet. The California Trucking Association (CTA)—which was representing motor carriers that hire owner-operators—and two independent truckers filed a complaint seeking to block enforcement of the ABC test against motor carriers, as the "B" prong jeopardized their business model.

The CTA contended that the Federal Aviation Administration Authorization Act of 1994, or FAAAA (which pre-empts state laws related to motor carrier prices, routes or service involving transportation of property), should bar enforcement of AB5 against carriers.

Not Necessarily the Last Word

The U.S. District Court for the Southern District of California, after hearing the case, issued a preliminary injunction blocking the state from enforcing AB5 against motor carriers operating in the state, holding that the CTA's case was likely to succeed on its claim that the state rule is pre-empted by the FAAAA. The court noted that carriers likely would have to reclassify all independent-contractor drivers as employees for all purposes to comply with the California labor law.

California officials and the International Brotherhood of Teamsters appealed the ruling to the 9th Circuit. The appeals court reversed the district court's order, ruling that the FAAAA doesn't pre-empt enforcement of AB5 against motor carriers.

"Because AB5 is a generally applicable labor law that affects a motor carrier's relationship with its workforce and does not bind, compel or otherwise freeze into place the prices, routes or services of motor carriers, we conclude that it is not pre-empted" by the FAAAA, the panel ruled in a majority opinion.

Judge Mark Bennett dissented, arguing that AB5 "significantly impacts the services motor carriers are able to provide to their customers" and therefore requires that the FAAAA pre-empt the law's enforcement against carriers. Bennett wrote that differences in services provided by independent contractors and employees are not superficial, and that AB5 will eliminate carriers' ability to respond to fluctuations in supply and demand.

Unless reversed on appeal to the full 9th Circuit or the U.S. Supreme Court, the decision could upend motor carrier business models.

"Practically, the main takeaway for motor carriers and owner-operators is that they need to comply with AB5, either by converting to traditional employee classifications or satisfying one of the AB5 exemptions," Cabral said. "The latter option is not for the faint of heart and should only be considered with the advice of counsel. Maintaining an independent contractor business model might create significant potential liability and would require a high degree of risk tolerance."

Cabral cited a split among the federal circuit courts (the 7th and 9th circuits on one side and the 1st and 3rd on the other) "making the issue of FAAAA pre-emption ripe for review."  

If the state and individual employees are allowed to start enforcing AB5, motor carriers might face new wage and hour class actions, including those potentially alleging it was unlawful for trucking companies to maintain independent-contractor classification during the injunction period, according to Cabral, who suggested carriers establish and maintain compliant employment policies and procedures.

Broader Implications

The appeals panel decision could possibly have broader implications for other independent contractors in California, according to Winnick. "It certainly strengthens the argument that other federal law does not pre-empt AB5. For example, the Airline Deregulation Act, which covers air carriers, uses a similar, albeit broader, pre-emption clause as the one at issue in CTA v. Bonta," he said, noting that AB5 creates uncertainty for employers.

"Many of the exemptions to AB5 are vague and ambiguous. For example, the business-to-business exemption contains 12 criteria that an employer must meet. It will take time for the courts to clarify these criteria and other exemptions to AB5," he said. "California employers would do well to audit their contractor relationships and err on the side of caution."

Dinah Wisenberg Brin is a freelance writer and reporter based in Philadelphia.