ASK THE CALIFORNIA EMPLOYMENT TAX AND PAYROLL TAX ATTORNEY – THE IMPACT OF AB5 AND THE CALIFORNIA TRUCKING INDUSTRY – PART 2

By Robert S. Schriebman

2024

Introduction

This is Part 2 of a 2 Part series on the impact of AB5 and the 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 discussed 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).

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 AB5 was superseded by AB2257 on January 1, 2021, without significant changes.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.

The California Trucking Association Case California Trucking Association, et al, and Owner-Operator Independent Drivers Association (Case No. 18cv2458-BEN-BLM).

The California Trucking Association (CTA) is an association of licensed motor-carriers; companies that manage, coordinate, and schedule the movement of property throughout California. Many of CTA’s motor-carrier members contract with owner-operators as independent contractors. Many own and operate their own trucks, and contract as independent contractors with different motor-carriers and brokers in California to perform various trucking services. The Owner-Operator Independent Driver’s Association (OOIDA) has members located throughout the country. Many members own and drive their own trucks and work as independent contractors. They are located in California, Arizona, Nevada, Oregon, and Washington. They are involved in interstate commerce.

“For decades, the trucking industry has used an owner-operator model to provide for the transportation of property in interstate commerce. That model generally involves a licensed motor carrier contracting with an independent contractor driver to transport the carrier-customer’s property. Individual owner-operators commonly use the independent contractor business model in California and across the country. They typically buy or lease their own trucks and may, in turn, lease both their trucks and contract for their driving services to freight hauling businesses.” (Decision page 3)

The plaintiffs made several arguments before District Judge Benitez. The first argument involved the Federal Aviation Administration Authorization Act (FAAAA) Title 49 USC § 14501(c)(1). Their argument was that federal law preempted the State of California from passing any law impacting domestic and interstate trucking. The second argument involved the Commerce Clause of the US Constitution Article I, § 8, Clause 3. The enactment of AB5 interferes with interstate commerce. Let’s look at both arguments.

FAAAA

Within the FAAAA, Congress included an express presumption provision providing that states “may not enact or enforce a law, regulation, or other provision having the force and effect of law related to price, route, or service of any motor carrier with respect to the transportation of property.” (49 USC § 14501(c)(1)). Judge Benitez ruled that Congress did not intend to preempt laws that implement California’s traditional labor protection powers, and only affect carrier’s rates, routes, or services in tenuous ways. California retains the ability to execute its police powers with laws that do not significantly impact carrier’s rates, routes or services.

AB5 impacts a motor-carrier’s business at the point where the motor-carrier interacts with its workers and primarily focuses upon worker classification laws. AB5 does not significantly impact rates, routes, or services.

The Commerce Clause US Constitution Article I, § 8, Clause 3

 The purpose of the Commerce Clause is to restrict the ability of states to regulate and interfere with interstate commerce. It is designed to prohibit economic protectionism. The Framers of the Constitution wanted to prevent a State from retreating into economic isolation or jeopardizing the welfare of the Nation as a whole, as it would do if it were free to place burdens on the flow of commerce across its borders.

“AB5 is democratically adopted legislation addressing the undesirable situation of worker-drivers in California who should be classified as employees being misclassified against their will or without their understanding as independent contractors. AB5 does not apply to out-of-state worker-drivers while they work and drive outside of California. So, AB5 does not run afoul of the extraterritoriality doctrine forbidding laws that control commerce outside the state.” (Decision page 11)

AB5 may cause some uncertainty in the treatment of motor-carriers who operate exclusively within California and those companies operating nationally whose motor-carriers may operate in California as part of their routes. The US District Court stated, “The State benefit of potentially overclassifying all independent contractor -worker drivers as employees may be debatable, may be even illusory, but the…Commerce Clause does not protect a ‘particular structure or method of operation.’” Nat’l Pork Producers Council v. Ross, 143 S. Ct. 1142 (2023)

The EDD and Motor-Carriers

From where things now stand, if motor-carriers wish to retain independent contractor status, their best safe harbor lies in the business-to-business exemptions known as the B2B exemption. Having said this, the B2B exemption, standing alone, is not going to guarantee independent contractor status and insulation from an EDD audit. Even if the B2B exemption applies, the EDD will turn to the Borello test and all its hurdles in its never-ending efforts to reclassify all workers as W2 wage earners. If you are seeking the B2B exemption don’t forget to have a written contract and a business license where required.

The B2B exemption is found in new Section 2776 of the Labor Code. The section must be carefully reviewed as there are at least 12 requirements that must be reviewed and complied with. The most important requirements relate to the absence of control and direction by the service provider and the necessity for a written contract and the obtaining of a locally required business license. In addition, the service provider must advertise and hold him/herself out to the public as available to provide the same or similar services. The first thing the EDD auditor will look for is the written contract. This requirement cannot be overemphasized.

There is a paradox when it comes to EDD audits. The statute will require a written contract, and the auditor will certainly demand a copy to review. However, be prepared for the auditor to disregard the contract no matter how well it is drafted.

Conclusion

All things point to AB5 and AB2257 withstanding Constitutional and other federal law challenges. Judge Benitez’s decision appears to be well reasoned and well written.

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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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