Breaking Down Complex Law into Bite Sized Pieces

On June 30, 2022, the United States Supreme Court declined to take up the Ninth Circuit’s decision in California Trucking Association v. Bonta, 996 F.3d 644 (9th Cir. 2021), setting the stage for California’s AB5 to impact the trucking industry. Trying to understand how this might impact business in California? We’ve broken the moving pieces down to help focus in on what really matters.

What is AB5?

• AB5 was the bill in California that codified the “ABC” test for whether a worker is an employee or an independent contractor.
• The test is strict and assumes that every worker is an employee unless proven otherwise
• To prove otherwise, a hiring entity must show all three:
  • A: Is free from the control and direction of the employer in performing work, both practically and in any contractual agreement between the parties; and ​
  • B: Performs work that is outside the usual course of the employer’s business; and ​
  • C:Is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the employer.​

Does it impact brokers?

• Not typically. The brokerage business model meets the ABC test because brokers hire motor carriers to transport goods. Brokers are in separate businesses from motor carriers. And motor carriers perform distinct work from brokers.
• Additionally, brokers and motor carriers typically qualify for the “business to business” exemption of AB5.

Does it impact motor carriers?

• Yes. Motor carriers often hire independent contractor drivers or owner/operators to help support their businesses. These types of hires commonly fail the “B” prong of the test because motor carriers are in the business of transporting goods by truck and IC drivers or owner/operators are very similar. The cases to date and the arguments of the California Trucking Association show that distinguishing between a motor carrier and their drivers is difficult under this test.
• The business-to-business exception also does not save motor carriers, even if they are hiring ICs or owner/operators with their own businesses. It can help, but it is not a cure.
  • First, many ICs in California do not operate separately registered business entities; instead they do business as a “DBA” which is just an individual using a business name. It is not a registered business.
  • Second, the test of whether the business-to-business exemption applies will look past any official business registrations and try to determine whether the IC is truly independent of the motor carrier. If the IC is working exclusively with the motor carrier or does not have any of the typical attributes of an independent business, they will likely be found as misclassified employees.
• Therefore, motor carriers in the State of California are now at risk of failing the test misclassifying drivers and owner/operators who are not employees.

What is the business-to-business exemption?

• The business-to-business exemption to AB5 is where one business entity is hiring another business entity via contract. If this is the case, the standard ABC test will not apply, however, another test does apply (the “Borello” test). That test requires proof of all the following factors:
  • (A) The business service provider is free from the control and direction of the contracting business entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
  • (B) The business service provider is providing services directly to the contracting business rather than to customers of the contracting business.
  • (C) The contract with the business service provider is in writing.
  • (D) If the work is performed in a jurisdiction that requires the business service provider to have a business license or business tax registration, the business service provider has the required business license or business tax registration.
  • (E) The business service provider maintains a business location that is separate from the business or work location of the contracting business.
  • (F) The business service provider is customarily engaged in an independently established business of the same nature as that involved in the work performed.
  • (G) The business service provider actually contracts with other businesses to provide the same or similar services and maintains a clientele without restrictions from the hiring entity.
  • (H) The business service provider advertises and holds itself out to the public as available to provide the same or similar services.
  • (I) The business service provider provides its own tools, vehicles, and equipment to perform the services.
  • (J) The business service provider can negotiate its own rates.
  • (K) Consistent with the nature of the work, the business service provider can set its own hours and location of work.
  • (L) The business service provider is not performing the type of work for which a license from the Contractor’s State License Board is required, pursuant to Chapter 9 (commencing with Section 7000) of Division 3 of the Business and Professions Code.
• The business-to-business exemption is complex and creates much uncertainty.
• To use this exemption, it is absolutely necessary to have a good independent contractor agreement in place.
• Note that this test fails if the business being hired does not contract with any other businesses.

What is the consequence of having a misclassified worker?

• Lawsuits by misclassified employees who argue they have not been given proper pay (overtime, minimum wage, failure to pay on time) or meal and rest breaks under California employment laws. These lawsuits can become class actions and involve extensive defense costs, attorneys’ fees, and high damages awards.
• Lawsuits by misclassified employees who argue they should have been covered by workers’ compensation insurance in the event of an injury.
• State investigation and action by the Division of Labor Standards Enforcement or the Employment Development Department, resulting in fines and penalties.

Taylor Johnson PL is presently advising clients on these issues and stands ready to discuss alternative business models, the business-to-business exception to AB5, and other ways to minimize the impact of AB5 on your business.

In other news…

The Supreme Court’s No-Action Decisions Put the Trucking Industry in a Mire

You may also have heard about the Supreme Court’s other non-action this week: On June 27, 2022, the United States Supreme Court declined review of the Ninth Circuit Court of Appeals’ decision in Miller v. C.H. Robinson. This case was of major significance to the industry because the Ninth Circuit’s decision left brokers exposed to negligent hiring claims in cases where hired motor carriers cause personal injuries. Reach out to us if you have questions involving this important law. And stay tuned for more!