California Truck Law Gets Complex
On Sept. 18, 2019, California Governor Gavin Newsom approved Assembly Bill 5 (AB 5), which aims to restructure the way independent contractors are classified and hired in the state of California. The bill went into effect January 1, 2020.
Assembly Bill 5 codifies a stricter set of requirements laid out in the April 2018 decision of the California Supreme Court in the case of Dynamex, a courier company. In that ruling, the court issued a new framework known as the “ABC test” to determine whether a worker is an employee or an independent contractor when evaluating wage and hour classification in class action cases.
Additionally, AB 5 makes the ABC test applicable to all Labor Code and Unemployment Insurance Code claims, in addition to only Wage Order claims. This means workers classified as employees under the ABC test are entitled to workers’ compensation, unemployment and disability insurance, paid sick days and family leave, in addition to minimum wages, overtime, and meal and rest breaks.
Truck Drivers are circling the CA Capitol in big rigs, blaring their horns.
Group is against AB5 which could reclassify workers in several industries including trucking industry and gig economy pic.twitter.com/0FsyT5BLCK
— Ashley Zavala (@ZavalaA) September 5, 2019
Workers must meet the following criteria outlined in the ABC test to be classified as an independent contractor:
- (A) The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
- (B) The person performs work that is outside the usual course of the hiring entity’s business.
- (C) The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Workers must meet all three of these criteria to be classified as an independent contractor. Otherwise, the companies they work for must offer them full-time employment.
In the asphalt industry–both contracting and hauling–the criteria most likely to complicate the issue is Test B, since it is quite common to subcontract services a company might normally undertake themselves during particularly busy times of year.
Much of the media attention surrounding Assembly Bill 5 focuses on its impact on gig economy workers, such as Uber and Lyft drivers. Although the bill will affect a wide range of industries, there are a number of exemptions pertaining to the construction industry written into AB 5.
Ramifications for Construction
AB 5 states that the ABC test does not apply to “the relationship between a contractor and an individual performing work pursuant to a subcontract in the construction industry.” Those cases will continue to be governed by the almost 30-year-old test adopted by the California Supreme Court in S. G. Borello & Sons, Inc. v. Department of Industrial Relations.
Construction subcontractors are exempt from the new rules if the contractor satisfies seven new criteria set forth in AB 5:
- The subcontract is in writing.
- The subcontractor is licensed by the Contractors State License Board and the work is within the scope of that license.
- If the subcontractor is domiciled in a jurisdiction that requires the subcontractor to have a business license or business tax registration, the subcontractor has the required business license or business tax registration.
- The subcontractor maintains a business location that is separate from the business or work location of the contractor.
- The subcontractor has the authority to hire and to fire other persons to provide or to assist in providing the services.
- The subcontractor assumes financial responsibility for errors or omissions in labor or services as evidenced by insurance, legally authorized indemnity obligations, performance bonds, or warranties relating to the labor or services being provided.
- The subcontractor is customarily engaged in an independently established business of the same nature as that involved in the work performed.
The Borello factors are outlined on the California Department of Industrial Relations website. Although they sound similar to the criteria of the ABC test, experts say the Borello test offered more room for disagreement, as not all factors will be applied in all cases.
The Borello test’s 30-year history in the state makes its application much more clear than the ABC test. It is advised that contractors who believe themselves to be exempt remain informed in regards to AB 5 as it is applied in real-world situations.
Changes to Trucking
Construction trucking services meeting the below criteria were given a two-year grace period, expiring Jan. 1, 2022.
AB 5 defines construction trucking services as hauling and trucking services provided to a licensed contractor “utilizing vehicles that require a commercial driver’s license to operate or have a gross vehicle weight rating of 26,001 or more pounds.”
Construction-related trucking are exempt from the ABC test if they meet the criteria outlined in the previous section, except for requirement number two (licensed by the Contractors State License Board). Requirement number two does not apply to trucking companies, as long as their work does not require said license and the following criteria are met:
- They’re a business formed as a sole proprietorship, partnership, LLC, LLP, or corporation.
- Their work is performed after Jan. 1, 2020, and they’re registered with the Department of Industrial Relations as a public works contractor (even for work on private jobs).
- The subcontractor utilizes its own employees to perform the construction trucking services, unless the subcontractor is a sole proprietor, operating their own truck to perform the entire subcontract and holds a valid motor carrier permit issued by the
- Department of Motor Vehicles.
The subcontractor negotiates and contracts with, and is compensated directly by, the licensed contractor.
After the two-year grace period ends, companies must offer full-time employment to owner-operators who do not meet all three criteria outlined in the ABC test, entitling those to workers’ compensation, unemployment and disability insurance, paid sick days and family leave, in addition to minimum wages, overtime, and meal and rest breaks.
The bill also states that AB 5 does not prohibit owner-operators from working as an employee of a trucking company using their own rig as long as the trucking company reimburses the owner-operator for reasonable expenses incurred for using the employee-owned truck.
Trucks in Protest
Although AB 5 only applies to companies operating in California, analysts at investment firm Cowen said the state is often a “policy Petri dish” for other states.
Misclassifying workers carries many risks, in the form of unpaid taxes and penalties, as well as driver claims for unpaid wages, including overtime, benefits, and penalties.
Contractors who believe themselves to be exempt should stay informed in the coming year as we see how AB 5 is applied in practice. Construction trucking services have two years of business-as-usual, but the battle for eliminating this expiration date and extending an exemption to the trucking industry in general has already begun.
On Sept. 5, 2019, truck drivers circled the California Capitol in their trucks, blaring their horns in protest. And, the California Trucking Association has filed a lawsuit to challenge the Supreme Court’s decision.
The legislation’s sponsor, California Assemblywoman Lorena Gonzales (D-80th Assembly District) has stated she is open to business-favorable amendments to the bill during the 2020 legislative session.
Additionally, gig economy businesses, including Uber, Lyft and DoorDash, are investing millions of dollars to bring the issue to voters as a proposition on the next ballot.