The U.S. Supreme Court recently denied the California Trucking Association's (CTA) petition for certiorari related to a case involving federal preemption of California Assembly Bill 5 (AB-5), a law that changed the legal requirements for independent contractor status in California that was targeted in large measure at the trucking industry's use of independent contractor owner-operator drivers. There are approximately 70,000 independent owner-operators within California who will be impacted by the law, which could cause additional supply chain disruptions at a time in which the industry is already facing challenges. The decision spurred protests that shut down the Port of Oakland for five days, and the future of the prominent use of independent contractor drivers in the trucking industry faces a grim future in California.
As brief background, AB-5 went into effect Jan. 1, 2020. AB-5 codified the "ABC" test for employee versus independent contractor classification adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex), 4 Cal. 5th 903 (2018). It is common in the trucking industry for independent owner-operator drivers to drive their own truck for a motor carrier under the motor carrier's operating authority. AB-5 makes it very challenging for an independent driver to work for a motor carrier without being considered an employee. This is because under the "B" prong of the ABC test, in order to be an independent contractor, the driver must "perform work that is outside the hiring entity's business." It is hard – if not impossible – for a driver for a motor carrier to satisfy this standard. (See previous Holland & Knight Transportation Blog posts, "Update on Key Issues for Motor Carriers Involving Independent Contractors," May 20, 2021, and "Federal Court Extends Temporary Injunction Barring AB-5 from Applying to Motor Carriers Operating in California," Jan. 15, 2020.)
The Court Decisions
In a federal court case brought by the CTA, on Dec. 31, 2019, U.S. District Judge Roger T. Benitez of the U.S. District Court for the Southern District of California issued an order temporarily blocking enforcement of AB-5 against the trucking industry given his finding that AB-5 was preempted by the Federal Aviation Administration Authorization Act (FAAAA) and, on Jan. 16, 2020, the court entered a preliminary injunction against enforcement of the "ABC test" against any motor carrier operating in California, pending entry of a final judgment in the action. (California Trucking Association et al. v. Attorney General Xavier Becerra et al., Case No.: 3:18-cv-02458-BEN-BLM.) The preliminary injunction ruling was appealed by the state of California and the Teamsters as intervenor to the U.S. Court of Appeals for the Ninth Circuit in California Trucking Ass'n v. Bonta, Case No. 20-55106.
On April 28, 2021, the Ninth Circuit overruled the District Court, finding that AB-5 was a generally applicable state law that was not preempted by the FAAAA. The court held that, "a generally applicable state law is not 'related to price, route, or service of any motor carrier' for the purposes of the [FAAAA] unless the state law 'binds the carrier to a particular price, route or service' or otherwise freezes them into place or determines them to a significant degree." The ruling conflicts with an opposite ruling from the U.S. Court of Appeals for the First Circuit with respect to a similar Massachusetts law. The CTA filed a petition for certiorari, seeking review by the U.S. Supreme Court.
The Supreme Court requested input from the Solicitor General, which recommended that the Court deny cert. The Court took that advice, denying cert on June 30, 2022. On remand, District Court Judge Benitez has set a further hearing on the matter for Aug. 20, 2022. The CTA will likely present its plan to try the case on the merits or to seek other preliminary relief associated with considering the matter on its merits.
Following the Supreme Court's decision not to take the case, the CTA announced that it is seeking changes to AB-5 to allow the application of the "business-to-business exception" in the law to apply more easily to truck drivers, and is working with other related industry groups to attain effective changes to retain owner-operators. The CTA and more than 70 trade associations also sent a letter to California Gov. Gavin Newsom asking him to issue an executive order delaying enforcement of AB-5. Gov. Newsom's office has since issued a statement that it "is looking into the concerns raised by the California Trucking Association," but also noted that the industry had "two years to plan for compliance." At the same time, the governor highlighted the Governor's Office of Business & Economic Development (GO-Biz), which "assists businesses in navigating state tax incentive programs, financing options, and resources from local economic development partners." This includes businesses that are not only seeking to add or retain employees but, as well as, "individuals who are considering establishing their own business authority for the very first time." Included among these economic programs is the California Office of the Small Business Advocate (CalOSBA), which is geared to "small business / start-up" financing. This reads as a guarded nod to the fact that one response to the lifting of the preliminary injunction is to assist truck drivers in forming their own businesses.
On July 13, 2022, owner-operators held a convoy protest through the Ports of Los Angeles and Long Beach, slowing down traffic on multiple freeways. Other owner-operators picketed at the entrance to the port complex, which caused one terminal to close its gates early at the Port of Long Beach. The following week, nearly 1,000 owner-operators blocked access to terminals at the Port of Oakland, which effectively shut down operations at the Port for five days. Operations at the Port resumed on July 23, 2022, but the stoppage has created a backlog. On July 25, 2022, the Port of Oakland filed suit against the protesters seeking a temporary restraining order and injunction to prohibit the protesters from "illegally blocking marine terminal gates and halting international trade." On Aug. 2, 2022, the Superior Court of California County of Alameda granted the temporary restraining order. A hearing on the preliminary injunction is set for Aug. 29, 2022.
Options for Drivers and Carriers
If the law goes into effect without change, drivers and carriers have a few options, all of which would be disruptive. These options include:
- Employee Model: The driver could become an employee of the motor carrier. However, many drivers prefer to be self-employed, as evidence by the recent protests. Freedom and flexibility are likely chief benefits for those who prefer to be independent. Some carriers don't necessarily want employee drivers either, since it adds fixed costs and can be harder to adjust to changing demands.
- Staffing Model: The driver could become the employee of a staffing company, and the motor carriers could hire those drivers similarly to the way they do currently. This addresses the concern of motor carriers that do not want to add employees, but does not address the concern of drivers that want to stay independent.
- Broker/Carrier Model: If each driver obtained authority to operate as a motor carrier, they would likely not run afoul of the "B" prong, because they would not drive for a motor carrier, they would be a motor carrier. However, there are many practical challenges to this for the existing drivers and the existing carriers.
For existing drivers:
- Drivers would be responsible for obtaining operating authority and all of the regulatory compliance obligations that go with that responsibility.
- The insurance is expensive, and comparatively more expensive than how insurance is obtained through an owner-operator model.
- Carriers would need their own port access under the Uniform Intermodal Interchange and Facilities Access Agreement, which adds an additional expense and administrative burden.
- The newly formed motor carrier still needs business, and they cannot generally get it from other motor carriers (interline transportation and trip leases are limited exceptions to this general rule, but insufficient to form a business around).
For existing carriers:
- Motor carriers are not permitted to simply subcontract a load to another motor carrier. Instead they need freight broker authority. Brokers arrange for motor carriers to perform transportation but do not perform the transportation themselves. Existing motor carriers that use owner-operator drivers would need to obtain broker authority to tender freight to their former owner-operator drivers that have turned themselves into motor carriers. This model is likely permissible under the B prong because brokerage and carriage are likely to be seen as different businesses. However, if the broker business is not sufficiently independent from the motor carrier entity it may not get around the ABC test, and there are liability and compliance risks to consider as well.
While each of these issues are potentially surmountable, and there are many small trucking companies throughout the country, this option adds cost and complexity.
- Co-op Model: Independent drivers could band together to form a cooperative or similar member-managed limited liability company (LLC) that could be designed to mimic the benefits and burdens of their current independent status. This would essentially be the same as the broker/carrier model, but without each driver needing to form their own trucking company or resolve all of the issues identified above on their own. However, the structural complexity might dissuade drivers from banding together in this way.
Unless there is a change in the law, different carriers and drivers will likely employ each of these models to comply with the law. Some drivers will simply stop driving. Driver shortages are already plaguing the industry, and fewer drivers will only worsen the challenges with the supply chain. Nearly 40 percent of all containerized U.S. imports come in through the Ports of Los Angeles and Long Beach. What happens in California most likely will impact the entire country.