This post is part of a series sponsored by IAT Insurance Group.
Over the past two and a half years, the entire nation has been following California Assembly Bill 5 (AB 5), which changed the definition of who is considered an independent contractor (IC) in many industries.
Recently, the injunction to keep AB 5 out of the trucking sector was lifted. This decision affects the approximately 70,000 ICs in California that already face a host of challenges, including increased regulation, rising fuel costs and other supply chain demands.[1]
Until the 2019 California court decision that changed the definition of who is an IC in various industries, the Borello test was used to determine the common law relationship between a business owner and an IC. With the new ruling, workers are now presumed to be employees unless the business-to-business exception is met, or the trucking company can prove that all three “prongs” of the ABC test are met:
- The employee is free from the employer’s control or management when performing work.
- The work takes place outside of normal operations.
- The employee is engaged in an independent trade, profession, occupation or business.[2]
The ABC test is positioned to provide a more predictable and simpler method of determining IC status,[3] Still, the problematic piece for the trucking industry is B. IC drivers perform work within the normal business of the car carrier.
Why AB 5 struck a nerve in the trucking industry
Initially, AB 5 had far-reaching effects on IC from all industries. Freelance writers, newspaper deliveries, business consultants, real estate and insurance agents and Uber drivers were affected, for example. But since the original ruling, many of those industries have been exempted, including trucking.
The trucking injunction was lifted on August 29th and AB 5 as it stands is the law of the land in California. When the Supreme Court refused to hear the case, several ICs went on strike at California ports, straining the coastal supply chain as many drivers went out of business.[4]
Who influences AB 5?
California-domiciled motor carriers are affected by AB 5. Drivers who live out of state can maintain IC status as of now, but it is wise to seek professional legal advice to determine whether you are covered by AB 5 when transporting to and from California.
Some companies are encouraging drivers to move out of state, but not all can take such aggressive action. In an industry that lacks 80,000 drivers[5]the combination of AB 5 and the looming California emissions deadline is quickly draining capacity.
As of now, car carriers have two options:
- Stay with the IC model. If you choose to continue employing ICs, obtain legal advice on how to structure your business model to meet the compliance criteria.
- Make all ICs employees. Currently the safest option, bringing all ICs into the group as employees can eliminate confusion. But hiring employees is a big task. From buying or leasing vehicles to adding salaries and benefits, having employees is a whole new business model for many car companies. Unfortunately, many small businesses do not have the resources they need to convert ICs into employees.
Finding solutions
While pending appeals are pending since the injunction was lifted[6], a possible solution currently exists; a provision in AB 5 allows exemption from company to company. ICs would need to establish a business entity and contract with a third-party logistics company.
This exemption is very narrow for those in the trucking industry, and B2B approval means meeting several exemption provisions, ranging from business location criteria and customer base restrictions to providing services directly to contractors, rather than supporting clients in the contractor business.
Although the conversation around AB 5 is far from over, your insurance broker can help you find the solutions necessary to change existing business models, such as obtaining larger workers’ compensation insurance, restructuring your business and putting you in touch with the right legal representation to restructure as a B2B IC group.
Contact IAT Insurance to learn more about how AB 5 may affect coverage for commercial transportation.
By Scott Miller
[1] Freight Waves “California Trucking Prepares for Shake-up Under Independent Contractor Law AB 5,” July 2022.
[2] Justice “Dynamex Operations West, Inc. v. Superior Court of Los Angeles County”, 2018.
[3] State of California Department of Industrial Relations “Independent Contractor vs. Employee”, January 2022.
[4] Wall Street Journal “Protesting Truckers Pledge Extend Blockade of Port of Oakland”, July 2022.
[5] American Trucking Association’s “ATA Chief Economist Pegs Driver Brige at Historic High,” August 2022.
[6] Trucking Info “AB% Injunction Lifted but CTA Plans to Renew Challenge”, August 2022.
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Transporters Contractors Trucks
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