Although AB5 was signed into law in 2019, it has resurfaced again. Last month, the U.S. Supreme Court declined to take the California Trucking Association’s challenge to California’s AB5 independent contractor (IC) status test. By refusing to take the case the Supreme Court is saying the 9th Circuit’s decision stands in upholding AB5. To use a sports analogy—the Supreme Court is not going to look at the video replay, so the call on the field stands.
This is not ideal for drivers that want to be independent and for companies that like the service they receive from independent contractors.
However, this is not the end of independent contractor work as we know it. Here’s why.
What does SCOTUS’s declination mean legally?
After California passed its version of the ABC test to define ICs in legislation called AB5, the California Trucking Association, its members, and a host of other industry associations and carriers sued the state, arguing that California’s strict ABC test is pre-empted by federal law. The 9th Circuit Court of Appeals ruled federal law did not pre-empt AB5 in transportation, but that decision was stayed, while the industry appealed the decision to the U.S. Supreme Court.
By rejecting the case the Supreme Court is saying the 9th Circuit’s decision stands. This means AB5 is not pre-empted by federal law right now, and California can begin enforcing it against transportation companies. There are still litigation options for the industry. The 9th Circuit and the Supreme Court have not in fact said AB5 is just fine, but rather they said AB5 is probably just fine, unless further evidence says otherwise. The problem is California can enforce the law while the industry decides whether and how to keep trying to present evidence about how AB5 should be pre-empted by federal law.
Remember, AB5 is different from other versions of the ABC test because it requires the worker to be engaged in a trade outside of the usual course of the contracting company’s business. It is difficult for a transportation-based company to successfully argue that a driver is engaged in work separate and distinct from the transportation company’s work. That makes AB5 tough to meet. But this does not mean workers cannot choose to be independent or that you cannot choose to work with ICs.
What does this mean for your business?
Before you decide the sky is falling on your business, ask yourself a few questions:
- Will this impact your business directly? Meaning, do you have California operations? Do you have CA facilities? Do you have dedicated routes within CA, or in and out of CA, or just irregular routes that periodically touch CA?
- Do you need to change your business model substantially, or can you make operational tweaks?
- What if other states push similar legislation?
AB5 impacts businesses operating in CA considerably, but there are options. You can move to an employee model, you can adjust your operating footprint, or you can rethink and strengthen your independent contractor model.
Here are some things to consider as you reexamine your relationships with independent contractors:
- How can you reinforce their independence?
- How can you ensure they have freedom to make key business decisions?
- How can you get them access to choices when it comes to business tools, resources, discounts, benefits, insurance, etc. that help them be successful?
- How can you change the nature of the services you provide to your customers to differentiate it from the services the independent contractor provides (e.g., broker vs. carrier models, 2-check models, etc.)?
The reality is workers do not want to be forced to be employees or independent contractors. Workers want choices. They want work without limits. AB5 does not change the desires of workers who want to build their own small businesses. But AB5 does mean you need to make sure you can prove your independent contractor program is full of independence that helps workers be successful business owners and protects them when they get hurt.
What should you do now?
If you do not have a plan already, get your advisors together to consider AB5’s impact on your business today, and the potential impact if other states follow suit. Include feedback from all the disciplines in your business because the paths you choose will likely impact each area.
Evaluate how much of your existing operation and near-term plans are impacted by California’s freedom to enforce AB5. Do you have no activity in CA, a little, or a lot? Could you make minor changes to the way you utilize ICs to serve CA and avoid using ICs in CA if you were forced? Will you stick with your current model, use more employee drivers, or create a new IC model? Will you need to adjust your business nationwide, or can you regionalize any changes? Are there technology solutions, or other third-party businesses out there that can help you build a better IC program?
[Hint: yes, there are!]
The answers you come up with could impact your recruiting, freight network, dispatching, insurance programs, customer contracts, the way you sell to your customers, and much more. Make sure you evaluate your business with all these aspects in mind. Think about how you can help ensure ICs can enjoy independence, be successful with your business, and be protected with insurance products in the event of injury. Listen to the lawyers, yes, but do not shut out other considerations as you develop and implement plans.
To begin this conversation, Openforce has created a checklist to help guide you and your advisors. Download it for free, today!
Openforce is the leader in technology-driven services that reduce operating costs and mitigate risk for companies using independent contractors. Our cloud-based applications help companies and contractors alike achieve more sustainable, profitable growth by removing financial, operational, and compliance barriers to getting business done.