Following five years of legal challenges, a federal district court has cleared the way for the state of California to impose an almost insurmountable barrier to trucking companies’ use of independent contractors who drive their own trucks. This removes the final legal barrier to the elimination of these kinds of owner-operator arrangements, although it is unclear whether the change will have much of an effect at this point.
At the same time, other court challenges have placed the U.S. Department of Labor’s (DOL) independent contractor and National Labor Relations Board’s joint employer rules in legal doubt while those cases work their way through the court system.
The California independent contractor law, called AB 5, was adopted in 2019 by the state legislature and immediately became embroiled in controversy. Objections were raised by freelancers and other contractors, resulting in passage of legislative fixes passed later removing certain professions from the law’s reach, such as musicians.
The California Trucking Association (CTA) and Owner-Operator Independent Drivers Association (OOIDA) also took the state to court over the law’s application to truckers. As a result, AB 5’s enforcement in regard to trucking had been stayed while the legal challenges proceeded, including an appeal to the U.S. Supreme Court, which refused to hear the case, sending it back to a lower court to adjudicate.
Although recourse to the courts to stop the law seems to have come to an end, CTA said in response to the federal district court’s decision, “We will be discussing remaining options moving forward with counsel and supporters of the litigation.” OOIDA also issued a similar response.
In a separate development that began years ago, a public referendum held in California saw voters remove Uber and Lyft ride share and Instacart and DoorDash delivery drivers from the law’s embrace. This set off another round of litigation seeking to overturn the referendum results, leading most recently to a review of the referendum by a federal appeals court, a process that is still underway.
Now that the state can go ahead with enforcement of AB 5 in trucking, the immediate question arises regarding what impact it will have on trucking in the state (truckers based out-of-state are excluded from the law’s reach). Because AB 5 has been hanging over the industry’s head for the past five years, it is not surprising that various workarounds have been crafted in the interim and the CTA continues to argue that many owner-operators could be excluded from the law because of the way it is worded.
“Owner-operators and entities who do business with them should continue to consult with legal counsel,” CTA suggested. “Since AB 5 was adopted both the courts and briefs in CTA's litigation have suggested that the business-to-business exemption to the ABC Test [three-part contractor criteria in the law] could apply to owner-operators and the entities who hire them. However, businesses must continue to carefully examine their contractual relationships in the face of AB 5 and still evolving case law.”
CTA does not cite any examples of anyone who has said they intend to take this approach, but it seems more than likely that if someone does, it will only lead to more costly litigation because it’s unlikely that California government officials will grant that argument a friendly reception.
Other avenues of escape are being explored, primarily to avoid AB 5’s declaration that no one working in the same line of work as the person hiring them can be considered an independent contractor. Thus, truck owner-operators cannot be considered independent contractors if they hire themselves out to a trucking company—a practice that has been common since the beginnings of the modern commercial trucking industry in the 1930s.
One way to get around the law is for the trucking company to turn in its motor carrier operating authority and operate as a freight broker that contracts with an owner-operator to haul specific loads. Another approach is for the fleet operator to help two or three drivers start their own small trucking company, which it then can do business with legally. Earlier news reports indicated that some of California’s port drayage firms chose to switch to an employee-driver model.
It is impossible to get a handle on how many of these arrangements currently exist because no one in California’s trucking industry seems to want to talk about them, probably because they don’t want to become the targets of state enforcers and find themselves ending up being defendants entangled in expensive test case litigation.
DOL Gets in the Act
In early January, the DOL issued a final rule changing the criteria it will use to define an independent contractor. The major change is that the department will look at the “totality-of-the-circumstances” when determining whether a worker should be classified as an employee or an independent contractor instead of relying on specific criteria.
“Even though the DOL’s final rule isn’t necessarily controlling for courts weighing employment status issues, it’s likely to be considered persuasive authority. Moreover, it will guide DOL misclassification audits and enforcement actions,” point out attorneys for the Elliott Davis law firm.
Previous to the new rule, classification cases were decided primarily on the basis of a few criteria, mainly the degree of control by management over the work being performed and the opportunity for profit or loss depending on managerial skill displayed by the worker. The “totality-of-the-circumstances” test will make it much more difficult for management to defend against a DOL finding that a worker is not a contractor.
The totality of circumstances includes six factors DOL says will guide its analysis of whether a worker is an employee under the FLSA:
1. The worker’s opportunity for profit or loss depending on managerial skill (the lack of such opportunity suggests employee status).
2. Investments by the worker and the potential employer (if the worker makes similar types of investments as the employer, even on a smaller scale, it suggests independent contractor status).
3. Degree of permanence of the work relationship (an indefinite, continuous or exclusive relationship suggests employee status).
4. The employer’s nature and degree of control, whether exercised or just reserved (control over the performance of the work and the relationship’s economic aspects suggests employee status).
5. Extent to which the work performed is an integral part of the employer’s business (if the work is critical, necessary or central to the principal business, the worker is likely an employee).
6. The worker’s skill and initiative (if the worker brings specialized skills and uses them in connection with business-like initiative, the worker is likely an independent contractor).
The contractor rule went into effect on March 11 but is embroiled in litigation seeking to have it overturned. Among those who have challenged the rule in court are trucking independent owner-operators and freelance writer-editors. Also among those who are opposing the change are the National Retail Federation and Customized Logistics and Delivery Association.
Court Blocks NLRB Rule
A federal district court in Texas has blocked an NLRB rule changing how joint employment status is determined before the board could start enforcing it. The rule had been challenged by the U.S. Chamber of Commerce on behalf of employers.
Fiona W. Ong, an attorney with the law firm of Shawe Rosenthal, called the judge’s action “a victory for employers.” Under federal labor law, a joint employer can be forced to unionize by jointly employed workers. Labor unions have long sought a broadening of this status in situations involving large franchise operations like McDonald’s and personnel staffing firms.
The court’s decision means that the 2020 definition of joint employer established by the Trump-era NLRB remains in force. The 2020 rule included an exclusive list of the essential terms and conditions of employment used to determine joint employer status—wages, benefits, hours of work, hiring, discharge, discipline, supervision and direction.
By contrast, the 2023 rule rescinding the Trump-era standard set out a much simpler and broader two-step test: The entity must qualify as a common-law employer of the workers in question, and if that is the case, then the entity has control over one or more essential terms and conditions of employment.
The 2023 rule also established that a business could be defined as a joint employer not only when it could be shown to exert control over the terms and conditions of the other company’s employees, but also when the company could be shown to possess the capacity for possibly exerting such control any time in the future.
Such an employer would have been considered a joint employer not only when it had the right to exert control over terms and conditions of another company’s employees, but also when evidence exists of reserved, unexercised, or indirect control over any working conditions. The Texas federal court decision has stopped that criteria from coming into play.
In spite of the fact that the court decision is definitely a positive development for employers, Ong warns that companies in contractual relationships with others must remain keenly aware that the potential impact of the joint employer doctrine may differ depending on the context and jurisdiction.
“Employers must choose whether to take actions to minimize the likelihood that they will be deemed a joint employer or accept the reality of a joint employment relationship and the resulting obligation to verify compliance with applicable laws,” Ong stresses.
