Motor Carriers and California - No Clear Preemption Road Ahead

Federally licensed motor carriers that operate trucking companies in the Ports of Los Angeles and Long Beach, two of the largest ports in the United States, often contract with owner-operator truck drivers to perform drayage, or the short distance movement of cargo. Since these trucking companies often classify the owner-operator truck drivers as independent contractors, when doing so they do not pay unemployment insurance taxes, employment training fund taxes, or disability insurance taxes. For purposes of this article, it is assumed that such trucking companies do not provide workers’ compensation or reimbursement for business expenses, such as fuel, truck insurance, parking, and routine maintenance costs.

In People v. Cal Cartage Transportation Express, LLC, et al. (“Cal Cartage”), (2020), the Los Angeles City Attorney filed complaints against several trucking companies in the Ports of Los Angeles and Long Beach for violations of California’s Unfair Competition Law (Bus. & Prof. Code § 17200), alleging they misclassified truck drivers as independent contractors, resulting in numerous Labor Code violations and failure to pay necessary taxes.

The Cal Cartage trial court ruled on a motion addressing the issue of whether California’s ABC test is preempted by federal law, holding that California’s ABC test prohibits motor carriers from using independent contractors; and thus, the ABC test has an impermissible effect on motor carriers’ prices, routes, and services and is preempted by the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”). 

In response, the California Court of Appeal, Second Appellate District, reversed the trial court’s ruling and determined the ABC test is not preempted by the FAAAA; and thus, federally licensed motor carriers must comply with requirements under California law to ensure truck drivers are not misclassified as independent contractors. People v. Superior Court of Los Angeles City (2020) 57 Cal. App. 5th 619.

In Dynamex Operations West, Inc. v. Superior Court, (2018)4 Cal.5th 903(“Dynamex”), the California Supreme Court adopted the ABC test, which was a new standard for determining whether a worker can be classified as an employee or an independent contractor.  The ABC test requires a worker to be classified as an employee unless:

(A) That the worker 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) That the worker performs work that is outside the usual course of the hiring entity’s business; and
(C)  That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the hiring entity.

In 2019, the California legislature passed AB5, which codified the ABC test. While it and subsequent legislation have created a variety of exemptions, one potentially relevant for trucking is that for business-to-business contracting relationships. AB5 was signed into law as Labor Code section 2750.3, which was repealed and replaced in 2020 by Labor Code section 2775.  Labor Code section 2776(a) further provides that the ABC test does not apply to a business-to-business contracting relationship if certain specific criteria are met.

The FAAAA, enacted by Congress to preempt state trucking regulation, specifically provides that states may not enact or enforce laws or regulations related to a price, route, or service for transportation of property by a motor carrier.  In People ex rel. Harris v. Pac Anchor Transportation, Inc. (“Pac Anchor”), (2014) 59 Cal.4th 772, 785-87, the California Supreme Court held that the FAAAA does not preempt generally applicable worker-classification laws.

The Pac Anchor Court discussed the purpose of the FAAAA, concluding that nothing in the Congressional record establishes that Congress intended to preempt states’ ability to tax motor carriers and enforce labor and insurance laws.  In fact, the Court noted that there was indirect evidence that prevailing wage laws were not preempted by the FAAAA because at the time when the FAAAA was enacted, Congress identified states that did not have laws regulating interstate trucking and those states had prevailing wage laws – many of which were laws governing classification as an independent contractor. Of course prevailing wage laws apply to covered projects and work performed, and owner-operators have always been part of that regulatory scheme.

The California Supreme Court has observed that an Unfair Competition Law (“UCL”) action based on the improper classification of drivers as independent contractors does not prevent businesses from using independent contractors; it only prevents businesses from misclassifying drivers.  In essence, a UCL claim based on such misclassification would only have a tenuous, remote, or peripheral effect on rates, routes, or services.

Currently, federal district courts are divided on the impact of preemption doctrine.  The Ninth Circuit recently heard argument on this issue and has a case under submission entitled, California Trucking Ass’n, et al. v. Becerra, et al., (Case Nos. 20-55106 and 20-55107).

The First Circuit previously held that prong B of Massachusetts’ ABC test - which is essentially the same as California’s test – was preempted by FAAAA. 

In Cal Cartage, the Court indicated the ABC test is a law of general application just as the labor laws addressed in Pac Anchor were laws of general application.  The Court stated, “The ABC test does not mandate the use of employees for any business or hiring entity.  Instead, the ABC test is a worker-classification test that states a general and rebuttable presumption that a worker is an employee unless the hiring entity demonstrates certain conditions.  That independent owner-operator truck drivers, as defendant currently use them, may be incorrectly classified, does not mean the ABC test prohibits motor carriers from using independent contractors.”

The Court found that the business-to-business exemption in Labor Code section 2776 further supports the reasoning that the ABC test does not prohibit motor carriers from using independent contractors. Although defendants argued that independent owner-operators can never meet several of the requirements laid out in Section 2699(a), the Court was not persuaded by that argument. The Court explained that owner-operators can obtain a business license from their local government and owner-operators can transport goods on behalf of the motor carriers to the motor carrier’s customers without being deemed to be providing services to the customers instead of the contracting motor carrier. The latter is a complex point as owner-operators regularly hold such licenses and meet DMV requirement as operators. It is common they are required to obtain insurance coverage by those who engage them

The Court nonetheless concluded that California’s ABC test is not preempted by FAAAA, arguing that because the application of the ABC test does not prohibit motor carriers from using independent contractors it does not directly affect motor carrier’s prices, routes, or services. 

It is worth noting that the impact of this decision may well be to accelerate thought on when and how motor carriers can contract with outside carriers or brokers, who employ (correctly classified) truck drivers, and provide them to the motor carriers as part of a business-to-business relationship.

Final Interim Thoughts

Certainly, owner and counsel’s focus will remain on the California Supreme Court and, potentially, on state legislation that may refine application of AB5 to sectors of the logistics industries. Careful ongoing consideration continues to be essential to contractual rules of engagement – with special emphasis on when interstate logistics operations are performed.

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