Ask The California Employment Tax And Payroll Tax Attorney – The Impact Of AB5 And The California Trucking Industry – Part 1

By Robert S. Schriebman

2024

Introduction

This is Part 1 of a 2 Part series on the impact of AB5 and a recent US District Court decision impacting the trucking industry in California.

AB5 has impacted many businesses in California and the trucking industry is no exception. In Part One we will discuss AB5 generally in conjunction with its predecessor, the Borello case. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341, 350 (1989)

On March 15, 2024, US District Judge Robert T. Benitez issued his decision in California Trucking Association, et al, and Owner-Operator Independent Drivers Association (Case No. 18cv2458-BEN-BLM). This decision will be discussed in Part Two.

AB5 and Its Impact on the Trucking Industry

AB5 was enacted to address a widespread problem of the misclassification of employee workers, including freight-hauling drivers, classifying them instead as independent contractors. In effect, the operation of AB5 deems most, if not all, freight-hauling drivers driving in or into California as employees of a freight-hauling business. This occurs by application of a test known as the “ABC Test.” AB5 was superseded by AB2257 on January 1, 2021, without significant changes.

As applied to the motor carrier context, AB5 provides a mandatory test for determining whether a person driving/hauling freight for another contracting person or entity is an independent contractor or an employee for all purposes under the California Labor Code and other legislation.

Under AB5’s new ABC Test, an owner-operator is presumed to be an employee unless the motor carrier can establish each of three requirements:

There is rebuttable presumption that a worker performing services is an employee rather than an independent contractor. Proof of independent contractor status includes satisfactory proof of these factors:

• That the individual has the right to control and discretion as to the manner of performance of the contract for services in that the result of the work and not the means by which it is accomplished is the primary factor bargained for.
• That the individual is customarily engaged in an independently established business.
• That the individual’s independent contractor status is bona fide and not a subterfuge to avoid employee status.

There are many exceptions to both AB5 and AB2257. Unfortunately, too many people read only the exception and breath a sigh of relief that AB5 etc. does not apply to them. They usually forget two additional fundamental factors impacting most exceptions. The first factor is that there must be a written contract between the parties in order for the exception to apply. Secondly, the factors under the Borello test must also be met. Let’s look at them.

Borello Factors

These factors include:

• Whether the worker is engaged in a distinct occupation or business
• The amount of supervision required
• The skill required
• Whether the worker supplies the tools required
• The length of time for which services are to be performed
• The method of payment
• Whether the work is part of the regular business of the principal
• Whether the parties believe they are creating an employer-employee relationship.

Bottom Line

The test under AB5, AB2257, and Borello caused everyone to jump through one hoop after the other. This may be why the conservative approach is to treat the worker as an employee. That is the primary objective of all this Legislation.

Conclusion

In Part Two we will look at the US District Court decision in the California Trucking Association case and examine several of the main arguments.

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Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States. He has successfully dedicated more than 50 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments. Mr. Schriebman is in private practice. He is not affiliated in any way with the EDD, and he is not employed by the EDD or any other agency of the State of California.
Robert Schriebman has written the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House in addition to the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.
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