Federal Court Grants Preliminary Injunction Barring AB-5 from Applying to Motor Carriers Operating in California

California Assembly Bill 5 (AB-5), a controversial law aimed at substantially increasing the number of workers classified as employees rather than independent contractors, went into effect Jan. 1, 2020.  While the law is apparently aimed at the gig economy, other workers have been caught in the wake of the bill, including owner-operator drivers for motor carriers -- which have been a mainstay in the motor carrier industry for decades. 

One chief element of AB-5 is that it codifies the “ABC” test for employee versus independent contractor classification.  This test was adopted by the California Supreme Court in 2018 in  Dynamex Operations West, Inc. v. Superior Court of Los Angeles, 4 Cal. 5th 903 (2018) (Dynamex) for California Industrial Welfare Commission (IWC) Wage Order violations.  In newly created Section 2750.3 of the California Labor Code, AB-5 expands the test to all Labor Code violations, as well as to California unemployment insurance and workers' compensation proceedings.  

The “ABC” test provides that:

a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(A) the person 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 work and in fact.

(B) the person performs work that is outside the usual course of the hiring entity's business.

(C) the person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed.

(emphasis added).   Independent owner-operator drivers typically work for a motor carrier under that carrier’s operating authority, and thus have a hard time satisfying the (B) prong of the “ABC” test.    

The California Trucking Association (CTA) initiated a lawsuit in response to the Dynamex decision, specifically challenging the “ABC” test.  In an amended complaint, the CTA added AB-5 as a target of its lawsuit.  The CTA also asked for a preliminary injunction against the new law. 

The day before AB-5 took effect, U.S. District Judge Roger T. Benitez of the Southern District of California granted the CTA’s application for a temporary restraining order enjoining enforcement of AB-5 against any motor carrier operating in California, until it could have a hearing and decide whether or not to grant a preliminary injunction. (California Trucking Association et al. v. Attorney General Xavier Becerra et al., Case No.: 3:18-cv-02458-BEN-BLM, Dkt. No. 77.)  A hearing followed on Jan. 13, 2020, and on Jan. 16, 2020, the court granted a preliminary injunction preventing the implementation of AB-5 against motor carriers operating in California.

The court found that AB-5's (B) Prong is likely to be preempted by the Federal Aviation Administration Authorization Act (FAAAA), because that prong “effectively mandates that motor carriers treat owner-operators as employees rather than the independent contractors that they are. In other words, because contrary to Prong B, drivers perform work within 'the usual course of the [motor carrier] hiring entity's business,' drivers will never be considered independent contractors under California law.” (Dec. 31, 2019 Slip Op. 5.) The court further found that the CTA established the likelihood of imminent, irreparable harm “because without significantly transforming their operations to treat independent contracting drivers as employees for all specified purposes under California laws and regulations, they face the risk of governmental enforcement actions, as well as criminal and civil penalties.”  As a result, the test for independent contractor status for motor carriers will revert to California’s previous standard under S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 314 (1989) (Borello), for the time being.  The State of California and the Teamsters union has appealed the injunction decision to the U.S. Court of Appeals for the Ninth Circuit. 

AB-5 remains in effect for other industries, including ridesharing and the gig economy.  There are, however seven categories of “exemptions” under the law, for 1) certain specified occupations, 2) certain contracts for “professional services,” 3) certain real estate licensees and repossession agencies, 4) certain bona fide business-to-business contracting relationships, 5) certain relationships between contractors and individuals working under a subcontract in the construction industry, 6) certain relationships between referral agencies and service providers, and 7) certain relationships related to motor club services. 

The “exemptions,” however, are not true carve-outs – an individual whose work meets the exemption requirements is not automatically an independent contractor. Rather, for individuals whose work meets an exemption, the hiring party must still be able to demonstrate that contractor status is appropriate under Borello and/or by other statutory provisions as specified in the law.

AB-5 specifically provides that it “does not constitute a change in, but is declaratory of, existing law, with regard to wage orders of the [IWC] and violations of the Labor Code related to wage orders.” Thus, the strong indication is that the ABC test will apply retroactively, at least as to wage and hour claims. However, AB-5 also provides that the exemptions in categories 1 through 7 above will apply retroactively to existing claims and actions to the maximum extent permitted by law.

In addition to adding Section 2750.3 to the Labor Code, AB-5 also amends Section 3351 of the Labor Code, the workers' compensation definition of “employee.” AB-5 provides that for purposes of workers' compensation, “employee” will include individuals who are employees under Section 2750.3 “[b]eginning on July 1, 2020,” but that the subdivision “shall not apply retroactively.”

AB-5 also amends Section 621 of the Unemployment Insurance Code to restate the ABC test as one of the definitions of “employee” for unemployment insurance purposes. However, there is no similar statement as to retroactivity and it remains to be seen whether the ABC test will apply retroactively for unemployment insurance purposes.

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