AB 5 Decision Could Further Impact Supply Chain Issues
U.S. Supreme Court’s decision to let a Ninth Circuit ruling stand could slow port operations further and impact nationwide supply chains.
On June 30, 2022, the U.S. Supreme Court declined to grant review of California’s Assembly Bill 5 (AB5), which codifies the so-called ABC Test for employment-status classification. The California Trucking Association (CTA) had challenged the law, which went into effect in 2020, arguing that the Federal Aviation Administration Authorization Act of 1994 (FAAAA) as applied to truck drivers preempted the law.
The Ninth Circuit’s holding impacts the trucking industry’s business model, which depends on independent contractors. The requirement for California trucking owner-operators to comply with the law could slow the flow of interstate commerce and further exacerbate supply chain issues. The CTA warned of the “irrevocable damage eliminating independent truckers will have on interstate commerce and communities across the state.”
California Trucking Association Challenge
In 2019, the California Trucking Association sued to stop enforcement of AB5 on the grounds that the FAAAA preempted the law. The FAAAA expressly preempts state laws “related to a price, route, or service, of any motor carrier.” A federal district judge issued a preliminary injunction to enjoin enforcement of the law after finding that the FAAAA likely preempted the “B” prong of the ABC test. The Ninth Circuit reversed the decision. The CTA then brought its challenge to the Ninth Circuit’s ruling to the U.S. Supreme Court. With the Supreme Court’s refusal to review the decision, the case reverts back to the district court to hear the CTA’s challenge that the law violates the Commerce Clause of the U.S. Constitution.
AB5 and the ABC Test
AB5 codifies the so-called ABC test for determining whether a worker is an employee or an independent contractor. This was previously governed under California law by the multi-factor test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations, 769 P.2d 399 (Cal. 1989). Under the law, a worker is an employee and not an independent contractor, unless all three conditions of the ABC test under Cal. Labor Code § 2750.3(a)(1) are met:
The person is independent of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
The person performs work that is outside the hiring entity’s business.
The person is routinely doing work in an independently established trade, occupation, or business that is the same as the work being requested and performed.
The California legislature passed AB 5 after the California Supreme Court held in the 2018 Dynamex case that the ABC test applied to claims under state wage orders. The state Supreme Court later ruled that the ABC test applies retroactively to employee misclassification cases pending at the time of the Dynamex decision and (2) claims involving conduct that occurred before the Dynamex decision but that have not yet been filed. It is now clear how the ABC test applies to of a franchisor-franchisee relationship. There have been several exceptions to the law, most notably Proposition 22, which created an exception for app-based transportation and delivery companies.
Before the decision, most carriers treated truckers that are independent owner-operators as independent contractors. This allowed for flexibility, as owner-operators could bid on jobs and carriers could expand operations as needed without the large capital investment required to own and maintain their own trucks. Under AB5, a trucker that is an independent owner-operator generally cannot satisfy the second prong of the test because they are working for the carrier’s business and would therefore be an employee of a carrier.