The ABC’s of AB 5: California’s New Employment Classification Law

Last year, California’s governor signed AB 5 into law, establishing a new test for determining whether a worker should be classified as an employee or an independent contractor. This classification determines the rights and benefits to which a worker is entitled. Commonly referred to as the ABC test, it went into effect on January 1, 2020. Many motor carriers fear this law will significantly impact the motor carrier industry.

Background

Although the codification of the ABC test under AB 5 is a significant development in California employment law, AB 5 is not California’s first experience with the ABC test. The ABC test was first introduced by the California Supreme Court in Dynamex Operations W. v. Superior Court of Los Angeles County, 4 Cal. 5th 903 (2018). In that decision, the Court attempted to reconcile several different worker classification tests that had been developed and relied upon in prior cases. The Court adopted the ABC test as a “simpler, more structured test for distinguishing between employees and independent contractors” to provide workers greater protection.

Although the Dynamex decision marked a significant development at the time, California was not the first state to implement an ABC test for worker classification. At least 14 states have implemented a form of the ABC test through the legislative process.

The ABC Test under AB 5

There are two significant components of the ABC test under AB 5. First, AB 5 established a presumption that all workers are employees. Second, to overcome that presumption to classify a worker as an independent contractor, the hiring entity must satisfy a three-factor test. The hiring entity must demonstrate:

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 the 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.

These factors are drawn directly from the Dynamex decision. Of these factors, Prong B will likely prove the most impactful. For example, motor carriers may find it challenging to satisfy Prong B for its non-employee owner-operators under the assumption that both motor carriers and owner-operators are in the business of transporting goods. This will be a complicated issue to avoid by motor carriers that rely on employee drivers alongside owner-operators (i.e., independent contractors) to transport goods—a distinction between workers that will be difficult to maintain under Prong B of the ABC test.

While AB 5 is broadly written to impact all businesses in California, it also includes several exceptions. Among the most prominent are exceptions for professional services, referral agencies, and business-to-business relationships. These exceptions, however, are either particularly narrow or difficult to satisfy and are likely inapplicable to the motor carrier industry.

The Future of the ABC Test

The future of the ABC test is uncertain as litigation challenging its constitutionality proliferates. The United States Supreme Court recently denied a petition for certiorari out of the United States Court of Appeals for the Third Circuit that argued the ABC test is preempted by the Federal Aviation Administration Act of 1994. The ABC test under Dynamex was also subject to several challenges in California federal district courts, with the courts differing on whether the ABC test could be enforced. At least two new legal challenges against AB 5, relying on federal preemption, Commerce Clause, and equal protection claims, have been filed by associations of motor carriers. Additional litigation is almost inevitable.

It is yet to be seen how the ABC test will be applied to motor carriers that do not exclusively operate within California. Whether interstate motor carriers ship goods into or outside of California will be required to comply with the ABC test, which will also impact future litigation.

For an up-to-date analysis of AB 5, go here. To learn more about the ABC test’s impact on the motor carrier industry, please contact Paul D. Cullen, Jr., (202) 944-8600 or paul@cullenlaw.com.