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California Contractor Ban Could Drive Owner-Operators Out of the Industry

Owner-operator truck drivers, along with other independent contractors, could end up leaving California altogether if a new law goes into effect, as expected.

A new California law could wipe out truck driver owner-operators in that state, along with independent contractors working in occupations ranging from movie production to computer programmers, and is expected to drive up logistics costs and make a growing truck driver shortage worse.

It goes into effect on Jan. 1, 2020, but will be retroactive “to the full extent of the law,” according to the law’s text. This is expected to fuel a raft of class action lawsuits seeking to obtain compensation due to workers who were previously deemed contractors but are now defined as employees.

Governor Gavin Newsom signed the California legislation AB 5 into law on September 18.

The new law may be emulated by other states and perhaps by the federal government should the Democrats win control of Congress and the White House next year. Presidential candidates, including Joe Biden, Bernie Sanders, Kamala Harris, Elizabeth Warren, Julian Castro and Pete Buttigieg, earlier declared their support for the bill, and Senators Sanders, Warren and Harris have sponsored a similar measure in the U.S. Senate

Most truck drivers choose to become independent contractors because they enjoy being the owners of their businesses and the freedom it provides. Six days before the State Senate cast the last vote on the bill, more than 150 owner-operator truck drivers from around California drove in a convoy to the state capitol in Sacramento to protest the pending legislation.

State Assemblywoman Lorena Gonzalez Fletcher, who prior to her election served as the secretary-treasurer of a union local in San Diego, introduced the bill, which passed the assembly earlier this year before the State Senate approved the final version on Sept. 13.

Following Senate passage, she said, “The legislature made it clear: We will not in good conscience allow free-riding businesses to profit off depriving millions of workers from basic employee rights that lead to a middle-class job. It’s our duty to look out for working men and women, not Wall Street and their get-rich-quick IPOs,” apparently referring to Uber.

Called AB5, the law codifies a controversial decision handed down last year by the California Supreme Court in a case involving the Dynamex package delivery company. That decision established a three-part “ABC” test for determining whether a worker is considered an employee or a contractor. While some other states have adopted three-part “ABC” tests of their own in recent years, the second prong of California’s is completely different from any other state.

The test decided upon by the state Supreme Court—now codified into written state law by the legislature’s action—holds that a worker cannot be a contractor unless he or she:

(A) 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) Performs work that is outside the usual course of the hiring entity’s business.

(C) Is customarily engaged in an independently established trade, occupation, or business.

It is the second “B” part of the test that is devastating for truck fleets which have relied on the services of owner-operators since the commercial trucking industry emerged during the throes of World War I, when undelivered rail freight clogged the streets of major cities.

The ABC laws adopted by other states use much the same language, but with one key exception: They only exclude workers who work out of the same location from independent contractor status, not those who simply choose to work in the same kind of business.

Even if a California company does not use independent contractors, it will negatively impact because the new law’s reach is far more extensive than has been reported, notes attorney James Fessenden of the Fisher Phillips law firm. Businesses can find themselves liable to the employees of their vendors, even if those vendors are large, established businesses.

This is because a vendor’s employees may be able to claim they are also employees of the “contracting business” under the ABC test unless the contracting business can satisfy 12 different requirements outlined in the law, he explains.

“Among those, the business retaining a vendor must now prove that any vendor they hire actually provides the same or similar business services to other clients, and the vendor must provide services directly to the business, not to the business’s customers. The bill even requires, among other things, that the vendor advertise its services to the public.”

Other attorneys have suggested that because of the way the new law is written, it also could prove to be devastating for businesses in the state that are considered franchise operations.

Amway Salespeople Exempt

In addition to for-hire trucking companies and ride share services, several other industries are expected to be hard hit by the new law, including the high-tech and entertainment sectors, both of which currently rely on large numbers of independent contractors and are considered vital to the state’s economy.

Up until the final Senate vote, employers had hoped to add exceptions to the bill that would help protect the traditional roles of independent contractors in their industries.

The new law does exempt an odd assortment of occupations, including physicians, dentists, veterinarians, psychologists, lawyers, private investigators, grant writers, certain photographers and photojournalists, and certain freelance writers and editors, fine artists, architects, accountants, engineers, insurance agents, investment advisers, real estate agents, graphic designers, travel agents and direct sales marketers (such as Amway representatives), along with human-resources professionals who hold advanced degrees.

Commercial fishermen are generally exempt but must pay unemployment insurance. You also may be happy to learn that estheticians, electrologists, manicurists, barbers and cosmetologists are exempt, but only if they set their own rates, are paid directly by clients, schedule their own appointments, and follow several other requirements applying to independent workers rather than employees.

The Teamsters union, which since the 1990s has been fighting to unionize the state’s port drayage truckers—along with Uber and Lyft drivers—hailed the new law’s enactment.

“Misclassification is an attempt to weaken the power of workers, including the thousands of truck drivers in California who deserve a living wage and full rights as employees,” declared Teamsters General President James Hoffa. “With this vote, the California Senate has taken a strong stand with workers who should earn a living wage and have the protections to which they are entitled.”

Expressing disappointment was Shawn Yadon, CEO of the California Trucking Association (CTA), which has fought to preserve the owner-operator model since the Dynamex decision, both in court and throughout the legislative debate. “AB5 could have been amended to address worker misclassification issues, as well as protect the 70,000 predominantly minority-owned truckers currently operating as independent contractors,” he asserted.

“There is no reason why protecting workers does not include defending the rights of tens of thousands of drivers who have built their businesses around the independent owner-operator model, invested hundreds of thousands of dollars in their trucks and have operated their own businesses for decades.”

Yadon also argued that many of these drivers will not migrate to employment in fleets, and thus worsen an already bad shortage of qualified drivers. “This measure will aggravate the problem by removing thousands of drivers from rosters as many have indicated they will move to other states or seek a different line of work all together.”

CTA and other truckers mounted court challenges over last year’s state Supreme Court decision and may choose to do so over the new law. A major stumbling block for this approach is that the federal courts historically have allowed states to make their own determinations of who is and who isn’t an independent contractor, so the prospect of success seems remote.

As for its part, Uber says its business model passes the test. Since its founding, the ride-share company has claimed it only provides an app for drivers and passengers to use in order to connect with one another. However, given the remarks made by legislators like the bill’s author Assemblywoman Gonzalez Fletcher, it seems obvious that Uber was a prime target.

“Just because the test is hard doesn’t mean we won’t be able to pass it,” declared Tony West, Uber’s chief legal officer. “Several previous rulings have found that drivers’ work is outside the usual course of Uber’s business, which is serving as a technology platform for several different types of digital marketplaces.”

(West is the brother-in-law of presidential candidate Sen. Kamala Harris (D-CA), who strongly supported AB5, which should make for an awkward Thanksgiving dinner this year.)

One thing you can count on is that policymakers in other Blue states have been paying close attention to this legislation and will be watching its implementation with a view of possibly adopting similar laws in their jurisdictions.

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