In 2019, California passed legislation called AB 5, which reclassifies many independent contractors as employees, including truckers. Signed into law in 2019, the “gig worker bill,” as it has been dubbed, took effect in January 2020. However, the California Trucking Association (CTA) got an injunction and stopped the state from reclassifying truck owner-operators as motor carrier employees under that law – until now.
AB 5 uses a three-part “ABC test” to figure out if a worker is an independent contractor, all of which must be true:
- The worker is free from the control and direction of the employer (hiring entity) when performing work.
- The work is outside the typical scope of the employer’s business.
- The worker is customarily engaged in an independent trade, occupation, or business.
This “ABC test” is pretty tough to pass, especially the part about the “work being outside the scope of the employer’s business.” In many other states, independent contractor status is denied only if the worker typically performs work at the employer’s premises. The test in California raises the bar for independent contractor status.
So, what’s happened to put AB 5 back in the spotlight for the trucking industry?
The Supreme Court refused to hear the CTA case, and the injunction was lifted on June 30, 2022. Without the injunction, truck owner-operators can now fall under the gig worker bill’s criteria.
What’s Next?
There are about 70,000 owner-operators in the state. And, according to the CTA, more than 70% of them serve some of the country’s busiest ports, including Los Angeles, Long Beach, and Oakland. In most cases, AB 5 will govern the owner-operators’ relationships with carriers, brokers, and shippers.
Motor carriers will, in many instances, have to reclassify independent contractors as employees, which costs them more in payroll tax, employee benefits, and insurance. For example, AB 5 extends Workers’ Compensation rights to workers who had previously been classified as independent contractors and could not file claims for work-related injuries against their hiring employers. As employees, they are entitled to Workers’ Comp benefits. Be sure you speak with your insurance broker to fully understand how AB 5 impacts your insurance program.
Also, because AB 5 applies only in California, carriers that operate in and outside the state will need to figure out how to separate their operations for the time being to comply with the state’s regulations. (Note: Similar legislation is being considered in other states, so this may change.)
Additionally, independent contractors who work under contract with a trucking company and for themselves will lose flexibility under the new regulations.
Other legal issues with AB 5 also need to be unpacked, as the law is now in effect.
Some expect lawsuits to begin, and, depending on the political landscape, the outcomes may differ. One thing is for sure: to determine how the law may or may not apply to them, carriers will need a thorough understanding of their business relationships with their drivers. Those working with independent contractors must take action to keep their operations running smoothly.
About Western Truck Insurance Services
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