California Law May Increase Cost of Household Goods Shipments

Annie Erling Gofus - Aug 30 2022
Published in: Public Policy
AB5 may force companies to classify independent owner-operators as trucking company employees.

In 2019, California Assembly Bill 5 (AB5) was passed and has the potential to cause major problems for the trucking industry in California. Carriers are on edge over the ramifications of AB5, and they’re warning that the law will have a major impact on the state’s trucking sector which could increase costs for all types of goods and services.

AB5 will make it more complicated for companies to hire independent contractors. Unless they fulfill the criteria set forth in a three-pronged test (known as the ABC test), businesses must categorize independent contractors as full-time employees under federal law.

If the company that hires workers cannot prove all three of the following things, those workers are assumed to be employees:

  • The worker is autonomous and can provide services without the company’s interference.
  • The worker is completing work tasks that do not fall under the company’s typical business operations.
  • The worker is employed in an occupation that is usually established independently from the work being done.

California passed AB5 to address the problem of employees who are misclassified. The legislation was designed to govern businesses that employ a large number of gig workers, such as Uber, Lyft, and DoorDash, but it has a direct impact on the trucking sector. If AB5 becomes law, it could have negative consequences for independent truckers who own their vehicles and contract with businesses to transport goods. The bill, once signed into law, made it difficult for trucking companies to use the independent contractor business model.

According to Harbor Trucking Association CEO Matt Schrap, AB5 would have a devastating impact on 70,000 owner-operators in California. However, the new AB5 regulation is poised to make it difficult—if not impossible—to stay self-sufficient.

“We’re really moving away from worker protection right now and into something different. This industry’s been working very hard to combat all the misclassification issues, but I’ll tell you AB5 is not without its challenges specifically,” Schrap said.

Schrap continued, explaining that no one is certain of the industry’s future. He believes that prices will go up for those wanting to stay in the business and follow whatever guidance California offers regarding AB5 rules.

Supporters of the bill argued that it can protect employees from being paid unfairly and other benefits, such as health insurance. However, those against the change have stated that it would drive them out of the industry and leave many workers unemployed.

Many independent drivers are still in the dark as the regulation comes into force, adding to the sector’s difficulties. Because of the new rules, a number of trucking businesses have discontinued operations in California.

“We’ve already heard of many carriers—especially the out-of-state ones—who have decided to just cease doing business here in California,” Schrap said. “You do have other fleets who are looking at relocating to some trucker-friendly other states like Texas or some in the middle of the country there. We’re not expecting to lose that many to other states, but losing folks to other industries is a real possibility.”

AB5 Impacts West Coast Port Operations

The Supreme Court’s recent decision not to review a legal challenge to California’s AB5 rule has left large truckload carriers scrambling for an appropriate alternative. The California Trucking Association initially filed an appeal but, on 29 August, the U.S. District Court for the Southern District of California lifted the injunction, which allows AB5 to be enforced.

The California Trucking Association (CTA) argues that AB5 could violate the Federal Aviation Administration Authorization Act (F4A) and put an end to the current trucking industry model, which consists of owner-operators.

The CTA states that AB5 violates the F4A, which prohibits state enforcement of laws or regulations surrounding prices, routes, or services of motor carriers. A U.S court granted an injunction that prevented the state from continuing to enforce a law against motor carriers.

The solicitor general, on the other hand, in a filing submitted on May 24, argued that CTA’s request should be denied, stating that AB5 would have little impact on prices, routes, or services. The CTA predicted that, under AB5, motor carriers and owner-operators would face significant costs and restrictions in converting to an employer-employee business model.

The decision caused trucker protests at the Port of Oakland, which contributed to a 28% decrease in container volumes from July 2021 to July 2022. Truckers, protesting the “gig economy” law, blocked freight entrances at the Port of Oakland. The West Coast’s third-largest container port became inaccessible due to the peaceful demonstration. Freight slowed for nearly a week, causing significant delays.

Unionized and some independent truckers have been refusing to cross picket lines as the country enters peak shipping season ahead of the November-December holidays. The Port of Oakland typically moves about 10,000 containers per day. The protest only allowed one-fifth of the original amount.

Lessening traffic jams and delays at the country’s ports is one of President Biden’s top objectives to decongest supply line stoppages. The AB5 rule, on the other hand, appears to be making things worse.

On July 23, following the disruptions, terminals were reopened and truckers were advised to congregate at “Free Speech Zones.” However, port officials speculated that it could take up to a month for the ports to return to their regular traffic levels after the protests.

How the Trucking Industry Is Preparing for AB5

Before a legal battle by the state trucking business delayed implementation of the legislation, some businesses had been preparing for it since it was passed in 2019. After the Supreme Court denied review of the case in July, businesses are working to eliminate owner-operators from their California operations to avoid penalties.

Landstar System is advising its California owner-operators that if they wish to continue to be independent contractors with the firm, they will need to relocate out of state due to the impending implementation of labor law AB5.

Joe Beacom, Landstar’s vice president and chief safety and operations officer, said the company has made a playbook to get ready for this eventuality and put lots of thought into the planning process. There are over 11,000 people who own their businesses and lease from Landstar, which refers to these individuals as business capacity owners, or BCOs.

Schneider National has long since eliminated independent contractors in its California business ahead of the law. Approximately 2,400 owner-operators were contracted with the carrier in Q2 of 2022, a decrease from the approximately 2,800 who were contracted in Q1 of 2021, according to investor presentations.

Already companies are making moves to comply with AB5. Recently, a settlement was reached between Teamsters Local 848 and Universal Logistics that will classify all of Universal Logistics’ drivers in Southern California as employees and allow them to unionize.

What Is Next for AB5?

The Ninth Circuit U.S. Court of Appeals held that California’s AB5 is a “generally applicable labor law” and that the preliminary injunction should be lifted, according to a 2-1 decision. The CTA then filed a petition with the Supreme Court of the United States. More than a dozen organizations filed amicus briefs in support of the CTA’s petition, one of which was the Owner-Operator Independent Drivers Association.

At the time, the U.S. Supreme Court had not yet ruled on whether to hear the case but in November asked the Solicitor General for an opinion. In May, the solicitor general recommended that the Supreme Court refuse to hear the CTA’s appeal. This week, Judge Benitez of the U.S. District Court for the Southern District of California lifted the injunction that challenged the enforcement of AB5.

CTA intends to file a new motion for preliminary injunction, and briefing on the new motion for an injunction will take place this fall.

Worldwide ERC® and its public policy team are closely following the progress of California Assembly Bill 5 and its impacts on the mobility industry. We will publish updates as they become available.  You can also learn more about these and other public policies impacting your business by participating in the policy forums at the Global Workforce Symposium.