California’s AB5 Law: What It Means for Independent Carriers
Regardless of where your trucking business operates, you’re probably paying close attention to California’s “Assembly Bill 5,” or AB5, which reclassifies large numbers of independent contractors as “employees.” Although signed into law in late 2019, a lawsuit from the California Trucking Association prevented it from initially affecting trucking companies.
However, the Supreme Court’s refusal to review the case means the injunction will be lifted and the law will now apply to anyone moving freight in and out of California. This will have an immediate impact on shippers, carriers and brokers as the industry increasingly relies on independent truckers while facing shortages in supply chain resources across the country.
What is AB5?
AB5, also known as the “gig worker bill,” was signed into law in September 2019 by California Governor Gavin Newsom, and requires companies hire independent contractors and reclassify them as employees. The law creates a new, three-point “ABC test” where a worker is assumed to be an employee unless they meet each of these three criteria:
- They are free from the control and direction of the hiring entity when performing their work.
- The work performed is outside the usual course of the hiring entity’s business.
- The worked is customarily engaged in an independently established trade, occupation, or business.
The second point, in particular, makes it more difficult for employers to classify workers as an independent contractor.
How does AB5 impact the trucking industry?
Has California banned owner-operators? The short answer is no. The new law essentially has a two-fold impact on the trucking industry. Because AB5 only applies in California – for the moment – carriers who operate in and out of the state will need to determine how to separate their operations to accommodate the new California trucking regulations. However, it’s important to note that similar legislation is currently in the works in as many as 22 other states as well.
Additionally, carriers will need a thorough understanding of their business relationships to determine how the law may or may not apply to them. For example, independent carriers in California could previously enter into exclusive lease agreements with shippers – the driver would technically be an independent contractor, but cannot not use the carrier’s equipment with other organizations.
Per AB5, this type of business relationship is unlawful, since the driver would now be classified as a full-time employee. The impact on independent carriers or owner-operators who work with multiple shippers is less clear, but more examples should surface quickly as carriers review their lease agreements.In many cases, AB5 would require employers to pay independent truckers as full-time employees, which they may find to be cost-prohibitive.
Many large carriers are already taking action or making recommendations to their independent contractors. Landstar, for example, is recommending that truckers relocate out of California entirely, or switch to their own authority, if they want to stay on as independent contractors. Alternatively, independent contractors could utilize a brokerage or simply haul loads that originate in California.
Though more information is coming out each day, one thing is clear: since the law is now in effect for the trucking industry, carriers working as independent contractors need to act quickly to ensure their business keeps running smoothly. Not only do they need to fully understand the AB5 trucking law and how it might impact them, but also how to not run afoul of it.
Stay in control with the right partner
In response to the new law, independent carriers may feel overwhelmed by these rapid changes and not sure as to what to do next. However, there are resources available to help you stay in control.
First, independent owner-operators could acquire their own California motor carrier authority. Although it’s an investment and will increase the amount of administrative work, it can help you keep more of the profits and grow your business.
Additionally – while not ideal – truckers can simply deadhead out of California. AB5 restricts independent contractors from transporting loads that originate in California. However, it does not prohibit them from delivering loads coming from out of state. Utilizing a load board can help drivers find loads once they’ve left California.
As mentioned earlier, independent owner-operators could also relocate their business. However, with several other states considering similar laws, this option comes with risks.
A strategic partner such as Truckstop can help you understand the costs associated with each load, and provide valuable insights to help you know exactly what you need to charge to haul it. The Truckstop Load Board can help you find profitable loads, and choose reputable brokers to work with. California’s AB5 law is and will continue to have a significant impact on the trucking industry, especially as the full scope of the law becomes clearer, but it doesn’t need to take your business off the road. With the right partner, you can understand, navigate, and stay on top of changing laws, all while keeping your business profitable and efficient.