(Editor’s note: Comment from CTA has been added)
That will clearly be the question not just in California but in the management executive suites of trucking companies big and small all across the country that do business in the Golden State, given that an appellate court has reversed the injunction that stopped California from enforcing the AB5 law on independent contractors and its follow-up clarifying legislation, AB2257.
The injunction was granted in a lawsuit filed by the California Trucking Association against the state’s attorney general, who is now Robert Bonta but was Xavier Becerra when the suit was filed. Becerra is now Health and Human Services secretary.
The most immediate question is when the injunction will be lifted. In an email blast, the trucking-focused law firm of Scopelitis Garvin Hanson Light Feary said that date will be a function of when an appeal is filed, with numerous moving parts in that decision. But the earliest it could be is May 19.
After that, or even before that in preparation, the question becomes how trucking companies based or even active in California will operate under a law that very much appears to block or greatly hinder the hiring of independent owner-operators to move freight.
“That is the million-dollar question,” Joe Rajkovacz, director of legislative affairs for the Western Trucking Association, said when asked what comes next for companies operating in California.
The choices that Greg Feary of Scopelitis laid out made clear that whatever path trucking companies choose will involve major decisions. They all include potentially significant alterations of the current business model used nationwide: A trucking firm using some number of company drivers, maybe as few as zero, supplemented by independent owner-operators.
The target of AB5, introduced by Assemblywoman Lorena Gonzalez, was always seen as drivers who delivered people or food, like Uber or Doordash, or truck drivers. But the people/food drivers got out from under AB5 when the so-called Prop 22 referendum passed overwhelmingly on Election Day last November.
Given that, Feary said it would not surprise him to see the state’s attorney general’s office, the primary defendant in the case, bring a relatively rapid action against some carriers over their use of independent contractors. He noted that since AB5 grew out of the Dynamex case, which involved a courier service, transportation has always been a target of Gonzalez.
The choices that Feary said companies are facing would all seek to bring the companies into alignment with the B prong of the ABC test embedded in AB5. The test was lifted largely verbatim from a state court decision known as Dynamex, which set out three tests to determine whether a worker providing service to a company should be considered an employee rather than an independent contractor.
It has always been the B prong that bedeviled the trucking industry, as it allows the hiring of outside contractors who “[perform] work that is outside the usual course of the hiring entity’s business.” A trucking company hiring an independent trucker does not pass that test.
Feary said he sees two or three “pivot points” that companies in California might adopt to continue using independent owner-operators while trying to stay in compliance with the B prong. The most radical is that a company could ditch its company drivers, elevate its brokerage division to becoming the core of the company and then have that brokerage hire the independent owner-operators. The idea is that moving freight is no longer the company’s primary business; brokering freight is, and hiring an independent owner-operator to move the freight is no longer carrying out the company’s primary function.
There are other possible shifts in a company’s business model, some of them involving determining questions of jurisdiction. Can a company set itself up, as well as the independent owner-operators it uses, in such a way geographically that it can avoid AB5?
As Feary said, “These are not minor decisions.”
But as Feary noted, the 2-1 decision by the 9th Circuit appellate panel did not sneak up on anybody. With the injunction being handed down first as a temporary injunction on Dec. 31, 2019, the day before AB5 was to go into effect, and oral arguments in the appeal of the injunction by the state of California and the Teamsters union being heard in early September, the trucking industry has been waiting months for this decision. Feary said COVID probably pushed its issuance back several months. Plans presumably are in place, or at least have been discussed, on what to do if the injunction was lifted.
Additionally, Scopelitis, whose views on various legal issues are watched closely in the industry, had predicted after the September arguments that the injunction was likely to be lifted, having concluded that two of the three judges on the appellate panel were not sympathetic to the CTA’s arguments.
But not all carriers are going to be up on the intricacies of AB5 and what can or can’t get done under it. As Rajkovacz said, “the smaller carriers are the ones that really have exposure in my opinion. They are not going to pay $700 or $800 an hour for the type of legal help they really need here.”
An email sent to the CTA was not responded to by publication time. An appeal of the appellate court panel decision is possible, but as Feary noted, the Supreme Court granting review is not guaranteed and it could be a year or two before a ruling is handed down, even if the CTA were granted certiorari.
The proceedings involving the injunction have received all the attention but have tended to mask the fact that the underlying lawsuit brought by the CTA has not been fully litigated.
However, the decision by the three-judge panel did reject two of the arguments made by the CTA, which would be a factor in any further litigation.
The first is that AB5 was not a law of “general applicability.” CTA attorneys had argued that the seemingly unconnected list of industries exempted from AB5 (a list that was expanded in AB2257) made AB5 fail the test of being a law of general applicability.
The appellate court rejected that argument, which fed into the second key legal decision: that as a law of general applicability, AB5 therefore did not affect “rates, routes or services” provided by motor carriers.
That three-headed standard is part of the language of the Federal Aviation Administration Authorization Act, which says a state may not enact a law impacting those three aspects of trucking. The rationale in the injunction was that AB5 did impact rates, routes and services, and was therefore in conflict with F4A, as the federal law is known..
“Laws of general applicability that affected a motor carrier’s relationship with its workforce, and compel a certain wage or preclude discrimiantion in hiring or firing decisions, are not significantly related to rates, routes or services,” the court wrote in the majority opinion.
The two judges in the majority, Sandra Ikuta and Douglas Woodlock, were appointed by George W. Bush and Ronald Reagan, respectively. Mark Bennett, who submitted a dissent, was appointed by Donald Trump.
Bennett’s dissent argues that rates, routes and services will be disrupted by the imposition of AB5 against the trucking industry in California. “In addition to altering motor carriers’ relationships to their workers, AB-5 will significantly impact motor carriers’ services to their customers by diminishing the specialized transportation services that motor carriers are able to provide through independent contractor drivers,” the judge wrote.
CTA CEO Shawn Yadon issued a statement that reviewed the decision but then looked toward the future. “We continue to stand by our initial claim that the implementation of AB 5’s classification test is preempted by federal law and is clearly detrimental to the long-standing and historical place California’s 70,000 owner-operators have had in the transportation industry,” Yadon said. “The California Trucking Association will take any and all legal steps necessary to continue this fight on behalf of independent owner-operators and motor carriers operating in California.”
The Teamsters is an intervenor-defendant in the case and issued an ebullient statement on the decision. “Today’s ruling from the 9th Circuit is a massive victory for California’s truck drivers, who for far too long have faced exploitation and misclassification at the hands of trucking companies that place corporate profit ahead of drivers’ safety and well-being,” the union said in the statement. “The court’s ruling confirms that California’s AB5 law can be enforced against trucking companies that misclassify their workers — and it should be obvious to everyone that drivers who perform work for a trucking company are employees of that company, not independent contractors. The Teamsters are proud to support drivers in their fight for their basic rights as employees, including sick leave, health insurance, and worker’s compensation.”
OOIDA, the trade group representing independent owner-operators, said it was reviewing the case before commenting.