On September 18, 2019, California’s Governor Gavin Newsom (Democrat) signed Assembly Bill 5 (AB 5) into law. Everyone thinks this law only deals with companies like Uber, Lyft and DoorDash type of operations, but that is just not true. Think about your local barber shop or your wife’s beauty salon. These people rent out chairs to independent contractors and now they may be faced with big decisions, as they may be forced to hire these same people as employees. The owners will also be forced to acquire workers compensation. Guess what, your haircut will be costing more in the very near future.
For California employers, this state is a very expensive place to do business in already. Never mind the high gasoline rates, the highest income tax rates, the highest sales tax and the high property taxes, but employers also pay high payroll taxes and high workers compensation rates, and they have a greater risk of being sued than employers in most other states.
For example, in California, under the Private Attorney General Act (PAGA), anybody can file a lawsuit to enforce employment law. PAGA, which took effect in 2004, is the law that allows class-action lawsuits over missed meal breaks or failure to provide itemized wage statements. Employers often settle to avoid huge legal bills. Under the law, 25% of the recovered penalties go to the employees, while 75% goes to the State of California. Yes, you read that right!
There has been quite a bit of confusion on AB 5, so I will attempt to clarify these issues here. The law imposes a new test to determine whether a worker is an employee or independent contractor. To summarize, a worker must satisfy all parts of the so-called ABC test to qualify as an independent contractor. The worker must: A) be free from the hirer’s control and direction; B) perform work that is outside the usual course of the hiring entity’s business; and C) be established in a trade that is the same nature as the work performed for the hiring entity.
Such a test is nearly impossible to satisfy and would make “employee status” the default classification of workers in the State of California. This will affect a lot of people, but let’s talk about the trucking industry. In this day and age, there are a lot of owner operator drivers or independent contractors. They generally satisfy part A. Many truckers own their own trucks and determine when/where they work. They value the flexible hours and freedom they have as independent contractors.
In fact, on 10/13/15, the Wall Street Journal published an article called “Truckers Haul Home Big Increases in Pay” which clearly showed that an independent contractor makes more than an employee driver. But this bill, as written, will surely ensnare the independent contractors, especially the port haulers, because it would be very difficult for many truckers to pass part B, since transportation is the usual course of business of many of the companies that hire them.
Part C would harm countless people who perform contract work to earn supplemental income. These individuals would fail the ABC test because they only have one client and do not market their services to other companies. Such an individual generally does not take steps to establish and promote his or her independent business through incorporation, licensure, advertisements and/or routine offerings to provide their services of the independent business to the public or to any number of potential customers. Quite often, one good customer is enough!
An article in the Press Telegram on October 6 stated the following: “Cutting off an avenue to earning a living is bad enough, but the kicker is that the ABC test is retroactive and exposes businesses up to four years of damages for failure to pay overtime and/or providing meal and rest periods, among other things.” The article went on to say, “A company that complied with the law of the land at the time will be on the hook for damages because a completely new standard is being applied to past conduct.”
I may not be a lawyer, but I believe the U.S. Constitution, Article 1, Section 10 prohibits “ex post facto” laws, as does the California State Constitution, at Article 1, Section 9. So, if some attorney is reading this, I would enjoy some clarification. Clearly, the State of California needs to determine the costs of these damages and the impact it will have on business (never mind the obvious unfairness of holding a company liable for damages when they were in compliance at the time).
Another issue that the legislature didn’t think about was who will pay for the unemployment benefits and workers compensation for these independents that become employees, because no funds have been collected to pay their benefits. Further, during the last recession, unemployment sky-rocketed and many people became contractors because they lost their jobs and could not find traditional employment. Statistics show that between 2010 and 2014, independent contractors grew by 11.1% (2.1 million workers) and represented 29.2% of all jobs added during that time period.
The people in Sacramento need to have a plan to deal with the costs of the law before imposing unrealistic standards. When are the people of California going to put a stop to this harassment of the trucking industry from their legislature? I hope everyone remembers this the next time they vote! NTA will be holding a free webinar on this subject in the near future featuring Miles L. Kavaller. Miles is a regular contributor and writes MLK’s Transportation Law Tips on the NTA website (which can be found under the NTA NEWS tab at www.ntassoc.com).
On a different note, in January 2020, the long-awaited Drug & Alcohol Clearinghouse goes live. This database of positive test results among commercial truck and bus drivers will undoubtedly catch those drivers who have been evading the system. This should improve safety in the motor carrier industry by making it easier to identify drivers who aren’t qualified to operate a commercial motor vehicle (CMV). It will, however, come at a cost to carriers, both financial and in terms of new administrative burdens. Motor carriers should act now to prepare for the clearinghouse.