Strengthened Agreements with California Owner-Operators Vital to Maintain Their Independence

A federal appeals court has ruled that trucking companies must classify owner-operators as employees unless the relationship meets California’s highly restrictive “ABC” criteria for independent contractor status.  Thus, haulers not in a position to change their independent relations with owner-operators must swiftly determine if they can meet the detailed “business-to-business” exception to the ABC test.

“Assembly Bill (AB) 5,” effective January 1, 2020, imposed a three-part “ABC test” for classifying independent contractors, with prong B almost certainly fatal to the traditional relationship between trucking companies and small owner-operators: “a person [i.e., the owner-operator] performs work that is outside the usual course of the hiring entity’s business.”

The California Trucking Association quickly took action, winning a January 16, 2020 injunction for interstate drivers, a San Diego judge ruling that the Federal Aviation Administration Authorization Act of 1994 (F4A) overrode AB-5.

However, in California Trucking Ass’n (CTA) v. Bonta (Bonta) (April 28, 2021), a Ninth Circuit panel  overturned that injunction, agreeing with the state that California’s ABC criteria did not improperly interfere with the federal government’s exclusive powers over the prices, routes, or services of the interstate transportation of property.

Unless overturned in turn by the U.S. Supreme Court, the decision requires trucking companies to hire owner-operators as employees unless the parties can meet the ABC test (again, a virtual impossibility for the traditional relationships) or can meet an exception the California law provides to that test.

While not yet confirmed by any court decision, Labor Code 2776 (effective September, 2020) may provide such an exception for hauling companies and their independent operators provided the relationship can meet the strict, detailed “business-to-business” criteria of that section.

To qualify for the exemption, the service provider [owner-operator] must:

• be free from the contracting business’s control and direction both under the contract and in fact;
• be customarily engaged in an independently established business of the same nature as the work performed;
• advertise and hold itself out to the public as available to provide the same or similar services;
• negotiate its own rates and set its own hours and location of work;
• obtain any required business license and/or tax registration; and
• refrain from performing construction-type work that requires a license from the Contractor State Licensing Board.

In addition:

• the service provider’s [owner-operator’s] employees may deliver such contracted services directly to the contracting business’ [hauling company’s] customers so long as they do so under the service provider’s name and the service provider regularly contracts with other businesses;
• The service provider’s written contract with the contracting business must specify the payment amount, including any applicable rate of pay, for services to be performed, as well as the due date of payment for such services;
• The service provider must maintain its own separate business location (can be a personal residence);
• The service provider must be allowed to contract with other businesses without restrictions. Thus, a service provider working exclusively on a large job for a single contracting business does not have to literally perform work for other businesses simultaneously to qualify for the exemption; and
• Consistent with the nature of the work, the business service provider provides its own tools, vehicles, and equipment to perform the services.

Even if a trucking company – owner/operator relationship can meet all the criteria of this exception, the parties must still satisfy the requirements of the traditional “Borello” factors to properly classify that owner-operator as independent.

Take away: if they are to maintain the independence of owner-operator relationships in California, trucking companies must be sure to meet all the criteria of an exception of this state’s ABC test.  Otherwise, best practice is to reclassify such owner-operators as a hiring company’s employees.

See also,

• What’s New in 2021: California’s Newest Independent Contractor Law Part I – Revamped Business-To-Business Exceptions (September 17, 2020)
• Dodging the Bullet: The Industries and Professions Not Subject to California’s New Independent Contractor Restrictions (October 9, 2019)

For further assistance, please contact Tim Bowles, Cindy Bamforth or Helena Kobrin.

Helena Kobrin
Tim Bowles
May 7, 2021