January 30th, 2020

By: Tyler Rollema, Senior Associate

Since it was signed into law in September 2019, Assembly Bill 5 has generated rumors and confusion throughout California due to its major implications for employers across the state. The new bill, which began as an attempt to curtail the controversial policies of companies like Uber and Lyft, attempts to reclassify many types of independent contractors as employees. But this shift is also of particular concern to the trucking industry, which has historically been a place where owner-operators can choose to work as independent contractors, which may now be limited to when and how a business can contract with them for trucking services.

AB5 challenges the traditional methods of determining employment in favor of an ABC test. The problem with this test is the “B” prong, which states that to be considered an independent contractor rather than an employee, the worker must “perform work that is outside the usual course of the hiring entity’s business.” Since most owner-operators contract their work with other trucking companies, their work is arguably within the usual course of the business and, as such, would reclassify them as employees.

The National Law Review, in a recent article, had this to say about AB5: “Ultimately, AB5 dramatically shifts what services will be considered the work of independent contractors and is anticipated to shift the classification of approximately 2 million independent contractors to employees. This has major implications for employers across the state and would significantly increase the cost of doing business for many companies”. Among the 2 million independent contractors includes more than 70,000 truckers in California, whose services may be restricted if the law is enforced.

Proponents of the law claim it is designed to protect worker’s rights by affording current independent contractors the same benefits as traditional employees, which include a minimum wage, worker’s compensation, expense reimbursement, unemployment insurance, along with paid sick and family leave days. Employers will also have to pay their share of customary federal Social Security and Medicare payroll taxes.

One persistent rumor among truckers servicing California’s ports is that drivers with companies not in compliance with AB5 be turned away from terminals on Jan. 2, the day after the law was set to go into effect. However, according to David Libatique, deputy executive director of stakeholder engagement at the Port of Los Angeles, “they won’t be denied entrance to the port based on imposition of AB5. The state will be using a different test to be determining whether drivers are employees or contractors, but that’s not up to us to determine, check upon, or enforce.”

As a major short-term win to the trucking industry, on December 31st, one day before the law was to go into effect, US District Court judge Roger T. Benitez issued a temporary restraining order, carving out a temporary exemption for the trucking industry until the courts rule on a lawsuit filed by the California Trucking Association (CTA).
Most recently, on January 16th, Judge Benitez granted the CTA a preliminary injunction on its lawsuit over Assembly Bill 5, ruling that AB5 is obstructed by existing federal statues, namely the Federal Aviation Administration Authorization Act. Benitez wrote in his ruling that the, “FAAAA preemption is broad but not so broad that the sky is the limit: states retain the ability to execute their police power with laws that do not significantly impact rates, routes or services”. This is most certainly a victory for the bill’s challengers and may be a foreshadowing of more rulings reinforcing the bill’s violation of federal law.

As a hedge against the possibility that the law may ultimately be upheld by the courts, many drayage companies in Southern California have begun channeling more freight through freight brokers. By letting a broker handle the relationship with the owner-operator, this may help satisfy the “B” prong of the test. This model may be the best alternative to what they fear will be a relentless push by California and other states to abolish independent contractor operations. States lose millions of dollars in tax revenues each year because those companies avoid paying workers compensation and other taxes, so it would come as no surprise if AB5, and other similar state laws, become the new standard.

For those following the industrial real estate market, it will be a matter of time before the effects of AB5 are realized. As trucking companies continue to face political challenges, especially in California, demand for industrial space and truck yards may shift as these companies stall growth plans or look to cut costs, which may have a negative impact on rates. However, even amid this uncertainty, South Bay industrial property and business owners should find solace in the importance of the Los Angeles and Long Beach port complexes and surrounding industrial supply that, in addition to the region’s population base, will allow the trucking industry continued growth and success for years to come.