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California trucking’s AB5 options get a hearing at IANA; brokerage on top?

Panel consensus: It will take litigation to get a transparent body of law on AB5’s implementation

From left to right: Marc Blubaugh, Benesch Law Firm; Matt Schrap, Harbor Trucking Association; Chris Shimoda, California Trucking Association; Peter Schneider, TGS

LONG BEACH, Calif. — Marc Blubaugh, the lead transportation attorney at the Benesch law firm, looked out over easily more than 1,000 people gathered for the annual meeting of the Intermodal Association for North America and told them something they might not have wanted to hear about California’s AB5 independent contractor law.

“If you came into this session thinking you’re going to hear the bulletproof compliance model, you’re going to be disappointed,” Blubaugh said.

Yet even if there was no definitive word on what trucking companies, particularly drayage firms, need to do to come into compliance with AB5, the discussion among Blubaugh and his three panelists brought out key points that at least give some idea of how the industry might respond.

Little new ground was broken in that regard. It was clear from comments by the three panelists — Matt Schrap, CEO of the Harbor Trucking Association, Chris Shimoda of the California Trucking Association and Peter Schneider of carrier TGS Transportation — that the list of compliance options is relatively short and little different from what emerged soon after the U.S. Supreme Court chose not to review a lawsuit by the California Trucking Association. That ensured the injunction keeping AB5 out of California, in effect since January 2020, would be lifted and the state’s trucking sector would come under the law.

One option is to make everybody who drives for a company an employee. Universal Logistics (NASDAQ: ULH) recently did that in its Southern California drayage operations in signing a deal with the Teamsters. Schneider said TGS has done the same thing. Its policy was in place Jan. 1, 2020, when AB5 went into effect in the state but not in trucking because of the injunction. 

Another is the two-check model, in which a driver with a truck gets hired by a third party (like Transforce, which is pushing this solution) or a trucking company while leasing his or her truck back to a carrier. The two-check model received little attention during the IANA panel. The Universal Logistics deal looks to the two-check model, but with Universal, not an outside company like Transforce, as the employer.

A final option, the brokerage model, “seems to have gotten the most traction,” Blubaugh said.

The brokerage model involves a trucking company converting itself into a brokerage, brokering freight to independent owner-operators, many of whom might have been previously operating on a lease deal with the trucking company that morphed into a brokerage. With the B prong of the ABC test in AB5 making it difficult if not impossible to hire as an independent contractor a worker who does the same thing that the hiring company does — like a trucking company hiring an independent trucker — the idea behind the brokerage model is that the new entity doesn’t actually move freight. It is an asset-light company that just brokers freight, and therefore wouldn’t run into the restrictions of the B prong.

But as Blubaugh conceded, “It’s not definite how a court would rule on that.”

Schneider’s approach at TGS, if it were ever challenged, would be a test of that. The president told the audience that TGS had split into two companies, calling it a hybrid.

One is a traditional trucking company that has employee drivers. The second is a brokerage company that brokers freight to independent owner-operators. He also stressed that the brokers at that company cannot broker freight to the employee drivers of TGS, and that the company has gone so far to separate the two arms that “we got rid of the fuel card just to be extra cautious.”

Schneider noted a key part of the brokerage model is that drivers need their own motor carrier authority from the Department of Transportation. Drivers under a company lease in the past would have operated under the authority of the company to which the truck was leased.

Getting authority is not a quick fix, as it takes $20,000 or more to get both legal authority and the insurance necessary to operate. And as an industry executive who requested anonymity said after the panel, the responsibilities of running under a person’s own authority are significant and involve a level of administration that many drivers might not be equipped to handle.

Even if that problem didn’t exist, HTA CEO Schrap said he has “regular communication with drivers and they don’t want to become employees.” Schrap said something he has noted before: There are numerous employee driver jobs available at any given time, and if independent contractors wanted to become an employee of a trucking company, “they can take advantage of it.”

“Look through the driver chat rooms,” Schrap said. “They have a consensus on how they feel about AB5. Getting your own authority is the path of least resistance.”

But Schrap also noted that whether the brokerage model will pass legal muster remains uncertain. And he pointed out what has become increasingly obvious to almost everyone trying to figure out what a company can or can’t do under AB5: It’s going to take some litigation and regulatory actions to build a body of law.

“Someone needs to get sued and someone needs to get cited and they need to fight back,” Schrap said. His organization, the Harbor Trucking Association, is the trade organization of the drayage carriers for Southern California. “That is not the preferred way of compliance, but again, the drivers do not want to be employees.”

(The panel at the IANA meeting came a day after the state’s Employment Development Department and Department of Industrial Relations held a webinar, listened to by FreightWaves. It was a two-hour recap of the legal history of AB5 but offered little in the way of examples of ways to comply while keeping the independent contractor model reasonably intact so the webinar did not address any kind of “workaround.”)

Schrap cast doubt on the desirability of the two-check model. “You’re still an employee,” he said, and that is something many of the drivers do not want. “We have owner-operators who make $5,000 per week. They are supposed to give that up to make $30 per hour?”

Shimoda, the vice president of government affairs for the California Trucking Association, whose suit led to the original injunction, reminded the audience that the full legal battle over AB5 was not done. He reviewed the current state of the case, which was never fully adjudicated; the original injunction made its way to the Supreme Court before being rejected for review there, resulting in the end of the injunction.

But the primary argument of the CTA case against the state — that AB5 is in conflict with a law known as the Federal Aviation Administration Authorization Act — never had a full hearing even at the federal district court level. The only question the court system ruled on is whether there could be a preliminary injunction to block implementation of AB5 in trucking (the district court said yes) and whether an appellate court agreed (it didn’t).

A fuller hearing on the law is now before the U.S. District Court for the Southern District of California, Shimoda said, and among other actions, the CTA will ask for another injunction. 

Shimoda said “we might hear something” before the end of the year or early in 2023.

Blubaugh tempered any optimism about the CTA case by noting that while he is “pretty bullish on the arguments being discussed,” not being in compliance with AB5 means a company is going through “another day of exposure from the California Labor Department or a private party.”

California’s Private Attorney Generals Act, known colloquially as PAGA, is a tool that individual citizens can use to sue an individual or an entity for what the private plaintiff sees as a violation of a state law where regulators otherwise might not have taken action.

Schrap referred to the legal sector that might pursue those suits as “container chasers.”

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John Kingston

John has an almost 40-year career covering commodities, most of the time at S&P Global Platts. He created the Dated Brent benchmark, now the world’s most important crude oil marker. He was Director of Oil, Director of News, the editor in chief of Platts Oilgram News and the “talking head” for Platts on numerous media outlets, including CNBC, Fox Business and Canada’s BNN. He covered metals before joining Platts and then spent a year running Platts’ metals business as well. He was awarded the International Association of Energy Economics Award for Excellence in Written Journalism in 2015. In 2010, he won two Corporate Achievement Awards from McGraw-Hill, an extremely rare accomplishment, one for steering coverage of the BP Deepwater Horizon disaster and the other for the launch of a public affairs television show, Platts Energy Week.