By the time California Governor Gavin Newsom signed into law the “Employees and Independent Contractors” bill known as AB5 in September, carriers had already begun planning for new wage and benefit costs they could face if their contractor drivers are deemed employees.
The legislation, which lowers the threshold for classifying a worker as an employee versus an independent contractor, was aimed at gig-economy employers such as Uber and Lyft. But trucking companies making use of the independent contractor model – particular “asset light” carriers that depend on that type of relationship to haul freight – are vulnerable to the bill’s effects as well.
That’s why carriers looking ahead to when the legislation goes into effect on January 1 are more likely to weather the storm, according to Peter Kirsanow, a partner with the law firm Benesch, Friedlander, Coplan & Aronoff.
Speaking on a panel hosted by investment bank Stifel on October 11, Kirsanow cautioned, however, that along with added new wage, sick leave, and workers’ compensation benefits for which carriers could become responsible, a driver deemed an employer will also carry with them protections related to state and federal civil rights laws.
“You may have a vendor relationship where that vendor may have committed some type of violation of Title VII [of the Civil Rights Act of 1964] or some other anti-discrimination statute,” Kirsanow said. If the carrier is now deemed to be the employer, those acts may become a liability for that carrier, even though the carrier didn’t commit the act of discrimination directly. “If charges or complaints are filed, the carrier potentially would be responsible for defending against them,” he said.
New costs to carriers considered to be employers under AB5 could increase by as much as 35% over what they had been when their vendors were considered independent contractors, according to some estimates – “a fairly significant hit to the bottom line,” Kirsanow stressed.
Kirsanow explained that there are truck drivers who have organized their business in a way that takes advantage of the independent contractor model, and therefore “aren’t necessarily appreciative” of California’s new law. “But there are a lot of unions out there, mainly the [International Brotherhood of Teamsters], who think otherwise and may be doing things on behalf of these drivers thinking they’re doing them a favor,” he said. The Teamsters union has been working for years, for example, to get drayage truck drivers at California’s ports classified as employees, thus opening them up to collective bargaining.
“The Teamsters are salivating about this, as are other unions, because of the potential for organizational activities,” Kirsanow said. “I’m sure they’ve already geared up for AB5’s effective date.”
But carriers have ways to push back, he said. “They’ve got preemption defenses on the federal level. We’ll see what happens with the National Labor Relations Board. They may not necessarily recognize that suddenly these workers are deemed to be employees under the National Labor Relations Act.”
Depending on how and where a lawsuit is filed pursuant to the new law, the ramifications could extend to out-of-state carriers whose owner-operators happen to drive trucks within California or touch the state in some way, according to Kirsanow.
And then there’s the concern of AB5 “metastasizing” to other states, he warned. Fortunately for those carriers that could be vulnerable to the added costs the law could impose, the roughly 20 jurisdictions that employ some form of the so-called “ABC” test used to determine if a contractor is independent are more limited than those in California. That means carriers would face lower hurdles to demonstrating in those outside jurisdictions that their vendors are independent contractors and not employees.
Carriers have options
Carriers can plan to convert owner-operators to employees, Kirsanow pointed out, but doing it successfully will depend on the individual company’s business model. “I don’t know if it’s going to be feasible or desirable for many,” he said.
They can also move to a so-called “two-check” option, which, according Kirsanow’s colleague, Benesch partner David Ferris, involves treating the “services end” of a carrier’s operations as a W-2 payment, and treating the trailer-leasing side as a lease payment. “This has been reviewed at the federal level – the Social Security Administration has looked at it and recognizes it as valid,” Ferris said.
But the option that seems to be getting the most scrutiny from carriers, and which some already are using, is letting a broker handle the relationship with the owner-operator. “This will satisfy the “B” part of the ABC test,” Kirsanow said, because brokers won’t be in the same business as either the owner operator or the carrier.
“But you have to have a separate company, and it would have to comply with the National Labor Relations Act, which dictates what constitutes a separate employer versus a joint employer. That could be a logistical nightmare, but many have already done this.”