28 Jul The Impact of California AB 5 Law on Truck Drivers
One of the most challenging aspects of California employment laws is worker classification. While this may seem minor, the California Department of Labor Standards Enforcement estimates that worker misclassification results in losses of about $7 billion per year for the government.
Given this, the passing of AB5 is expected to reduce misclassification and enforce proper tax collection from businesses. However, it has also shaken up the business landscape, particularly the trucking industry and other industries that hire contractors regularly. Read more about the California law below to understand how it will impact current operations.
What is the Trucking AB 5 Legislation?
California Assembly Bill 5 (AB5), also called the “gig worker” bill, was signed into law in 2019. Effective January 1, 2020, this law imposed stricter rules that employers must follow to classify workers in California as independent contractors. As a result, many workers who were once considered independent contractors have been reclassified into employees, granting them proper benefits and workplace protections.
While the AB5 Law was designed to regulate workers in the gig economy, it applies to all sectors in the state. According to California laws, independent contractors are not entitled to minimum wages, overtime pay, workers’ compensation, and other benefits. Thus, AB5 aims to protect workers against misclassification and prevent tax evasion from companies.
How to Classify Nonexempt Workers if they are Employees or Independent Contractors?
Under the AB5 Law, employers should use the three-pronged ABC test to classify workers correctly. Under this test, all workers are presumed to be employees. To classify a worker as an independent contractor in California, the employer must show that they meet all three criteria in the ABC test:
The worker is free from control
The first condition stipulates that the worker is free from the employing party’s direction and control while working. In this case, you can view control from three perspectives: behavioral, financial, and relationship.
Employers exert behavioral control if they dictate how, when, and where workers should perform their jobs. Financial control refers to their ability to influence economic decisions like reimbursing expenses. Finally, relationship control is exhibited in the way the parties interact with each other. The relationship between the two may also be specified in a contract or document.
To meet this condition, employers must demonstrate that they have no control over the worker in any regard.
The worker performs work outside the usual course of business
The second condition stipulates that the worker should perform work outside the employing party’s normal operations. In other words, an independent contractor should not be doing the same work the hiring entity does for its customers. To prove this, employers must prove that there’s no overlap between their and their contractor’s work.
Among the criteria, this clause is the most challenging to meet. It has also led to heated debate in the trucking industry. Currently, there are around 70,000 independent owner-operator trucking drivers in California. Given that these independent drivers perform the same work as the companies that hire them, they would fail to meet this condition in the ABC test.
The worker is engaged in an independent trade
Finally, the third condition stipulates that the worker must be engaged in an independently established trade or business. The nature of their work here should be the same as the work they perform for the employing party. But it doesn’t mean workers should have their own business entity.
As long as the worker can offer their services to the market without being tied to a particular hiring entity, they’re considered to be in an independent business.
The Advantages and Disadvantages of AB5 Law
Generally, AB5 has generated mixed responses since it has advantages and disadvantages. Get to know more about them below to see both sides.
- Eligibility to Benefits
The main advantage of AB5 is that more workers will likely be classified as employees. In effect, they become eligible for benefits and protections required by California’s employment laws. Besides minimum wages and overtime pay, other benefits include withholding taxes, medical coverage, meal breaks, and paid leaves.
- Level Playing Field
AB5 California also helps level the playing field between gig workers and regular employees. Back then, gig workers classified as independent contractors were not entitled to benefits. They often also had to shoulder responsibilities that companies do for their employees. Thus, the new classification rules set by AB5 grant them equal rights as those of employees.
- Potential Loss of Autonomy
One of the main reasons independent contractors enjoy their classification is the flexibility in their work schedule, routine, and location. But with the implementation of the AB5 Law, a private contractor may lose some of that autonomy since they’ll need to follow specific standards as an employee.
- The threat of Higher Prices
With AB5 expected to turn many independent contractors into employees, businesses will incur more labor costs. Given this, there’s a risk that companies will raise their prices to protect their bottom line. With inflation currently at an all-time high, increasing prices will put an even more considerable strain on customers’ wallets.
Impact of AB5 Law
The passing of AB5 California generated massive uproar among businesses. While the bill primarily targeted companies that hired gig workers at scale, it also indirectly affected the trucking industry. Read on to learn more about its impact on truck drivers and businesses.
One of the groups that reacted strongly against AB5 was the truck drivers. As mentioned, several truck drivers in California operate as independent contractors.
But the new rules make it virtually impossible to work as an independent owner-operator. Based on the second prong of the ABC test, they’ll need to be classified as employees now. Otherwise, they’d need to pivot to being a broker, get trucking authority, or move out of state. Unfortunately, these all put drivers at a loss due to effects like:
- Increased Expenses
Trucking authority refers to permission granted by the government to transport goods. While independent contractors can pursue this route, it will lead to significantly more expenses due to insurance and fewer discounts. Unfortunately, most truck owner-operators can’t afford this option and would likely get overpowered by large corporations.
- Loss of Flexibility
Independent owner-operators in the trucking industry enjoy the contractor model for its flexibility. They own their trucks, set their schedules, and choose what companies to work with. But by becoming employees, they give up this freedom and flexibility since they’ll need to commit to one company and follow its standards.
These effects have ultimately led to a significant trucker protest in California. In fact, the truck drivers’ protest has become so big that truckers recently shut down cargo movement at the Port of Oakland, one of the country’s busiest. Should this continue, supply chain issues may get worse.
As mentioned, AB5 will significantly impact businesses that rely on gig workers and contractors. For example, ride-sharing companies like Uber and Lyft have openly protested the law. They even filed litigation to exempt their workers from the ABC test rules. To better understand why here are the potential effects of the law on businesses like them:
- Higher Costs
Unsurprisingly, AB5 will have substantial financial implications for businesses, especially those whose contractors must now be classified as employees. In this case, companies will spend more to cover the benefits and protections for their contractors-turned-employees.
- Increased Scrutiny
Businesses must also navigate the complexities of reclassifying their workers. Now that the law is effective, you can expect more regulatory scrutiny about the matter. Thus, companies should check their contractor classification and make changes, as needed, immediately.
Aside from this, it’s important to note that AB5 applies to all California workers. So even if your business operates outside the state, you’re still subject to AB5 if you engage with workers based in California.
Consult for Legal Counsel on the California AB5 Law
With the significant changes brought about by the California AB5 Law, it’s understandably overwhelming to figure out your next step. Whether you’re a truck driver or employer, we’ll give you proper legal advice to understand the nuances of the law and stay compliant.
Here at Fernald & Zaffos, we have lawyers specializing in logistics law to help you navigate the new challenges you’re facing. Contact us today at 323-922-5314 to schedule a consultation with our legal counsel.