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Dynamex Fallout: Truckers Seek to Toss CA’s New Gig Economy Law as Trucking Companies Cut Ties with Independent CA Drivers

We’re now just a few weeks away from the nation’s most stringent independent contractor misclassification law taking effect in California. But if a group of truck drivers have their way, the law will stall out before it ever gets on the road. The California Trucking Association filed an amended lawsuit in federal court on November 12, 2019 asking the court to block the new statute from taking effect, claiming that it violates federal law and would harm over 70,000 independent truckers who have chosen to be independent workers. It appears to be the first legal challenge to California’s AB 5, and all eyes will be on this litigation over the next month.

When Governor Gavin Newsom signed AB 5 into effect in September, and codifyied the Dynamex decision, it all but spelled doom for many industries and businesses across the state. Starting January 1, 2020, a worker will be considered an employee for all purposes under the law, unless the hiring entity establishes that:

 (A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; 

(B) the worker performs work that is outside the usual course of the hiring entity’s business; and 

(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. 

This concerns many businesses, especially those in the gig economy, as it could require a restructuring of common business models that have grown used to relying upon contract labor.

One business that would be particularly hard hit is the trucking industry. According to the CEO of the California Trucking Association, independent truckers are typically experienced drivers who have previously worked as employees and have, by choice, struck out on their own. To force these drivers into the role of employee, the CTA says, would deprive more than 70,000 independent truckers of their ability to work. “Many would have to abandon $150,000 investments in clean trucks and the right to set their own schedules,” the AP reported.

In order to redress this concern, the CTA filed a lawsuit in the Southern District of California federal court in November 2019. “The direct and real consequence of AB 5, therefore, is that CTA’s motor-carrier members, if they wish to avoid significant civil and criminal penalties, must cease contracting with owner-operators to perform trucking services for customers in California and to shift to using employee drivers only when operating within the state,” said the complaint. Specifically, the lawsuit alleges that AB 5 is preempted by the commerce and supremacy clauses of the Constitution and the Federal Aviation Administration Authorization Act (FAAAA). Therefore, the trucking association wants the law blocked from being applied or enforced.

What was the Dynamex decision all about?

The state Supreme Court decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles dealt with a same-day courier service that, to save money, had converted all its employees into independent contractors. A former employee claimed the shift was a state Labor Code violation, and the litigation that ensued ended up reinterpreting how workers are classified. The ruling established a three-part “ABC” test for certifying independent contractors.

Under the ABC test, a worker will be deemed to have been “suffered or permitted to work,” and thus, an employee for wage order purposes, unless the “employer” proves, as noted above, that:

(A) the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work and in fact; 

(B) the worker performs work that is outside the usual course of the hiring entity’s business; and 

(C) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity. 

Even if an owner-operator is able to demonstrate their true independence and satisfy the A and C prongs, as most owner-operators contract their work with other trucking companies (be it through a truck broker or another motor carrier), it is virtually impossible to pass the B prong as both are in the business of trucking. In other words, because an independent owner-operator is involved in trucking, they could not be considered truly independent if they’re working for a company whose primary business is trucking.

Failing one “prong” of the ABC test in the court case, or the parallel 1-2-3 test in the legislation, means that the independent contractor flunks the entire test and would thus be classified as an employee of the hiring entity.

The fact that the bill is near to becoming a law, and the liabilities that will hit employers as a result of a reclassification, means that some trucking companies are flatly refusing to work with owner-operators. Annihilation of the owner-operator business model is likely inevitable if further modifications are not made to the ABC test. 

The AB 5 bill actually goes beyond Dynamex, as it would expand the ruling to apply to unemployment insurance taxes, workers’ compensation insurance, and other benefits– which were not directly addressed within the Dynamex decision – thereby exposing trucking companies to additional employment costs for which they would be liable.

The bill includes exemptions for several industries, including doctors and surgeons, securities brokers and dealers, and real estate agents. They instead would be subject to a test set forth in another decision, S.G. Borello & Sons Inc. v. Department of Industrial Relations. Truck drivers, however, are not a part of the current exemptions.

Even though the Dynamex decision is already law, labor representatives alleged that many companies disregarded it and that AB 5 would ensure that workers would not have to file suit on a case-by-case basis to seek enforcement.

If successful, the CTA’s lawsuit would lead to a temporary injunction blocking the law from taking effect on January 1 as planned. In the meantime, once some breathing room is established and no immediate deadline is looming, the parties would gear up for a larger legal fight over whether the injunction would be rendered permanent, and if so, the extent and scope of such an injunction. 

We will continue to monitor the court proceedings and report back to our clients regarding the status of this critical litigation. If you have questions or concerns regarding the status of your drivers in California, or any other state, please reach out to Megan Wagner at mwagner@setlifflaw.com or (804) 377-1275 or Pete Schurig at pschurig@setlifflaw.com or (804) 377-1276. 

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