Options are Limited, and Include Pulling Out of the Golden State, as Trucking Group Files Lawsuit to Stop the Change

On Jan. 1, a new law takes effect in California that will likely bar use of contract truck drivers – for now – by freight carriers, and those companies are scrambling to find a path forward.

In April of 2018, the California Supreme Court handed down a ruling in what is called the Dynamex case, which set up a very tough "ABC" test for when a worker can be considered a contract employee.

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That test consists of the following:Part A of the test requires that the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

Part B of the test requires that the worker performs work is outside the usual course of the hiring entity's business; and

Part C of the test requires that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

In addition, the contractor must actually be in business for themselves.

This is a high bar indeed for an employee to be considered a legitimate contractor, especially Part B.

In September, the state passed a bill that codifies the court's ABC test into state law.

While both the decision and the law face court challenges, that will likely take years to play out. Meanwhile, the new law takes effect this coming January 1.

And on Tuesday, the California Trucking Association filed a federal lawsuit challenging the law, arguing the law will deny many truckers the ability to work as independent drivers in California who can profit from their own vehicles while setting their own schedules.

The suit says some 70,000 California truckers could be affected.

While the new law is meant to change the status quo in occupations from Uber drivers to IT contactors, thousands of truck drivers in California operate as independent contractors, especially in the drayage sector moving ocean shipping containers from ports to local warehouses and transload facilities.

The California measure "effectively prohibits an owner-operator from working directly for a motor carrier," said Joe Rajkovacz, director of governmental affairs and communications for the Western States Trucking Association, when the bill was passed.

Carriers have few options.

First, they can cut ties entirely with California owner-operators, or cut ties with the state itself by no longer doing business there.

They can also work with contract drivers to transition them to become company employee, instead of being independent.

Finally, and most interestingly, carriers could establish a freight brokerage arm, separate from their direct transport businesses, to broker loads to independent owner-operators.

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Of course, making contract driver employees might add costs to carriers in terms of benefits and other cost factors. But interestingly, surveys have shown the majority of contract drivers generally would prefer to remain independents, given the increased flexibility.

That said, there have been protests off and on in California in recent years by contactor drivers, especially drayage drivers, demanding to be made company employees.

The Owner-Operator Independent Drivers Association has taken a more wait-and-see attitude regarding how the new law will affect trucking.

OOIDA told its California members that "We see it as self-inflicted by motor carriers after decades of treating drivers like indentured servants, perpetuating an environment with awful working conditions, and a failure to pay drivers anything close to a living wage. We know there is a concern that it might be difficult for many owner-operators and motor carriers to comply with the part 'B' requirement. At this time, we think that's a premature assumption."

As reported this week in the Commercial Carrier Journal, large transportation provider Landstar recently sent a letter to its more than 10,000 owner-operators nationwide, saying it would soon contact its California-based owner-operators to discuss some options relating to the potential impact of the new law.

In the letter, Landstar added that its contractors will need "to make [their] own informed business decisions with respect to how [they] wish to react to A.B. 5" based on the options Landstar provides. It has not released any information on those potential options.

Landstar also said that it doesn't anticipate its owner-operators based outside of California, including those who occasionally pick up and deliver loads in the state, to be impacted.

Truckload carrier Swift reportedly ended its arrangements with leased owner-operators in California in March, part of a flight from using owner-operators and avoiding needing to hire them.

The court decision and now new law has generated a wave of carriers of all sizes to abandon contracting with owner-operators in California, Rajkovacz noted.

Meanwhile, ridesharing platforms Uber and Lyft recently began rolling out their plan for trying to convince California lawmakers to exempt them from the state's new restrictive labor law, which could ruin their business models in the Golden state.

The trucking industry is likely to seek similar relief. Trucking industry groups are warning the law could reduce the flow of goods consumers and business need in the state if exemptions are not granted – though as with Uber and Lyft's approach might require carriers to offer contract drivers health insurance and other concessions to get the exemptions.

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