With the Supreme Court’s 2021-22 term about to kick off Oct. 4 — the first Monday in October, the long-standing start date for proceedings — California’s trucking industry is focused on two cases that could go a long way to help define whether an independent owner-operator must be considered an employee in that state.
And even as there is little chance of a rapid decision that might threaten the independent owner-operator model in California — there are still pre-decision filings to be made — discussions in the industry are continuing on a key question: If the state’s AB5 rule ultimately becomes the law of the land, what happens next?
There are two key cases in which earlier rulings ultimately went in favor of AB5 and industry participants lost, and those participants are now seeking review from the Supreme Court, known as certiorari, in a final attempt to keep AB5 out of the state’s trucking sector.
One of them is the case that the California Trucking Association brought against the state’s attorney general in 2019 and which since the first day of 2020 has provided the injunction that so far is keeping California from enforcing AB5 in the trucking sector. Two appellate courts ruled against CTA in later proceedings, but the injunction has been allowed to stay in place while the case proceeds to the Supreme Court.
The other is a case brought by the state against drayage provider Cal Cartage, an action that started as a driver classification lawsuit but ultimately brought AB5 into the proceedings. That case goes back to 2018.
In both cases, the appeals process ultimately had the same ruling: The Federal Aviation Administration Authorization Act, the so-called F4A, does not preclude the imposition of AB5 in the state’s trucking sector. Earlier decisions in the two cases held the opposite, that F4A precluded AB5 in trucking because it could affect “rates, routes and services.” That phrase is lifted directly from the wording of F4A, which prohibits a state from passing any law or regulation that could impact those three market conditions.
The impact of AB5 on trucking’s rates, routes and services was invoked in several of the briefs filed in support of the CTA’s request for review.
In the brief filed by a coalition of 48 state trucking associations (excluding California and Minnesota, which filed its own amici brief), attorneys wrote that through AB5, “California has effectively deprived a federally regulated industry of the right to use the owner-operator business model. As such, the state’s actions affect prices, routes and services in the industry. California’s AB5 is no different than the outright ban of owner-operators by the Ports of Los Angeles/Long Beach or the Michigan Legislature.”
Marc Blubaugh, a partner and co-chair of the firm’s Transportation & Logistics Practice Group, filed an amici brief on the CTA case for both the Transportation Intermediates Association and the Intermodal Association of North America, supporting CTA’s request for certiorari and against the two appellate decisions that held AB5 was not in conflict with F4A.
In an interview with FreightWaves, Blubaugh said that “conventional wisdom” is there should be a ruling on the certiorari request by the CTA in the next four to six months.
Blubaugh said the CTA could have waited longer to file its certiorari request, which would have kept the injunction in place in the interim. But he speculated that the “thought process” was that the Supreme Court was “going to be looking at the Cal Cartage case, and wouldn’t we rather have the CTA petition so we can say, ‘Here’s another case involving the F4A issue, signaling again that this is of great public importance and needs a consistent decision.’”
He added that some of the lawyers involved in filing the amici briefs believe that the CTA case is a “better vehicle” to block AB5 in trucking because of the wording of F4A.
Greg Feary, a partner with the trucking-focused law firm of Scopelitis, Garvin, Light, Hanson & Feary, said he did not expect to see a ruling on the certiorari petition until “probably much later this year or early next year.”
There is a third logistics-related request for certiorari before the court that deals with the question of F4A: an appeal of the C.H. Robinson vs. Miller lawsuit, in which the 3PL was found negligent as a result of a crash that left a driver a quadriplegic. AB5 is not at issue in the case, but F4A is.
Regardless of how the calendar plays out, the reality is that if the appeals court decisions in the Cal Cartage and CTA cases are upheld, AB5 would become an immediate reality in California trucking.
That means there is plenty of discussion in the industry about its structure on the other side of a decision upholding AB5. Even if the discussions are just theoretical at this point, they are planting the seeds for the various solutions that might ultimately be adopted in an AB5 world.
The ABC test in AB5 is a three-step guideline that can be used to establish whether a worker is an employee of an independent contractor (IC). It is generally viewed as written in such a way that it is more likely that a worker will be considered an employee rather than an IC. Its presence in the PRO Act that has passed the U.S. House of Representatives but not the Senate is considered a key sticking point for its ultimate approval.
The ABC test is problematic for the trucking industry because of the B prong. It defines a person as an employee if that worker is involved in the primary activity of a company. A trucking company can hire an outside accountant for tax preparation and not conflict with the B prong because accounting is not its primary activity. But if it hires an independent owner-operator to move freight, then it runs the risk of conflicting with the B prong since moving freight is what the company is all about.
One option would be to make a lot more drivers employees, which has always been the goal of the backers of AB5, including its key sponsor, Assemblywoman Lorena Gonzalez.
But that is given little chance of happening. In its amici filing, the Western States Trucking Association (WSTA) foresaw a situation in which some “fortunate” companies would be able to add to its rank of employees drivers, while others will “be forced to dramatically reduce the services they provide and the routes they service. For many small owner-operators, the result will be that they will no longer be able to work as independent contractors by marketing their trucks and their skills as drivers because the employment mandate will be cost-prohibitive.”
A second alternative would be to meet the standards of the business-to-business exception that is part of AB5. But that pathway is difficult to meet with its 13-point test, and few see it as being able to keep the independent owner-operator model alive in an AB5 world.
Another possibility is the so-called brokerage model. Feary reiterated what he told FreightWaves in April, that a trucking company could essentially become just a broker and hire independent owner-operators to move freight.
Blubaugh said he thought the brokerage option was “the most popular option” for companies looking at what they might do to comply with AB5. It would allow companies “to say we’re not in the same line of business,” since the former trucking company/now 100% brokerage would not be moving freight but instead just brokering it.
The converted carrier could also pursue new business lines, such as offering an array of services like insurance or regulatory compliance functions to the independent drivers, some of whom might previously have been an employee of the converted carrier but now might need to be driving under their own authority from FMCSA.
Another option laid out by Blubaugh is a complicated setup involving what he said was a “two-check” plan, a system in which an independent driver is paid wages and a payment in a separate check for leasing the truck in order to keep an arm’s-length relationship.
Joe Rajkovacz, the director of governmental affairs and communications at WSTA, said he already is seeing activity in preparation for AB5 that involves changing the legal status of what are now independent drivers.
“What is happening, even right now in response to the possibility of AB5 becoming enforceable, brokers are increasingly requiring sole-proprietor motor carriers to incorporate or become LLCs,” he said in an email to FreightWaves. He added that WSTA is aiding in such conversions.
The idea behind the conversion to an LLC or an S corporation model is that the driver would not be paid as an independent contractor whose compensation is then recorded in an IRS 1099 form, which is the mark of an IC. Rather, it’s a payment to an outside corporation.
Feary said he was not a fan of that approach. “I don’t think the whole S corp. LLC idea has much merit,” he said. He viewed it as a “misguided attempt” to “fit under the B-to-B exception.”
“But there is far more to the B-to-B exception than whether a formal business entity exists,” Feary said.
All of the approaches involve a radical restructuring of industry practices. No matter which one is pursued, Feary said, “it’s a heavy lift for the entire industry.”
This cornucopia of possible different models sits alongside the warnings that were inherent in all the amici filings. In addition to WSTA, filings were made by OOIDA, the American Trucking Associations, a group of state trucking associations and a coalition of shippers, like the American Chemical Association.
“The reason you saw so many amici briefs is this is going to have massive ripple effects on the supply chain,” Blubaugh said.