California Employee Classification Bill and the Impact on the Drayage Industry

Posted on: Sep 19, 2019

Lawmakers in California are on track to pass a law that would fundamentally alter the relationship between trucking companies and draymen, potentially reshaping the market more toward a broker-carrier model used in the truckload industry.
 
Beneficial cargo owners (BCOs) have a stake in the legislation because they are already financially liable if they use a port trucking company on the California Division of Labor Standards Enforcement's list of unsatisfied court judgments for employee misclassification.  
 
Trucking lobbyists hoped the California Senate wouldn't pass Assembly Bill 5 without an exemption for trucking, but that scenario is growing increasingly unlikely. Weston LaBar, CEO of the Harbor Trucking Association (HTA), believes AB5 will pass and be signed ahead of the Intermodal Association of North America (IANA) conference in two weeks. Governor Gavin Newsome supports the legislation.
 
AB5 would formally adopt the "ABC test" to determine whether a worker is an independent contractor or employee, codifying into law the California Supreme Court's 2018 ruling in Dynamex Operations West v. Superior Court. The ABC test requires a company to clear three hurdles to prove a worker is an independent contractor. The worker must be "free from the control and direction of the hiring entity," "perform work that is outside the usual course of the hiring entity's business," and "engage in an independently established trade, occupation, or business of the same nature as the work performed." Motor carriers often fail the second provision, known as prong "B," because drivers perform work within the hiring entity's business.
 
Trucking industry lawyers want a federal court to rule the Federal Aviation Administration Authorization Act (F4A) preempts California law. F4A gives the federal government - not individual states - power to set rules for interstate trucking. The Commerce Clause of the US Constitution gives Congress the power to "regulate commerce with foreign nations and among the several states."
 
"There is still a reason to at least carefully consider your model in light of the fact that two federal courts have said this type of test cannot apply without violating federal preemption," said Greg Feary, managing partner of Scopelitis, Garvin, Light, Hanson & Feary, a transportation law firm. He cites two cases - Valdez v. CSX Intermodal Terminals LLC, and Alvarez v. XPO Logistics Cartage LLC.
 
Federal court intervention, however, is unlikely to happen before January's enforcement date, according to Feary, so trucking companies will have to respond to AB5. There are three options.
 
Option 1: Do nothing for now
Greg Stefflre, CEO of Rail Delivery Services, believes most of his drayage peers will stick with the existing model they have traditionally used until the federal courts make a ruling. 
If the courts agreed on federal preemption of California law, then the ABC standard is no longer an issue. "The significant players will stick with the model they have used for years. And if, ultimately, we don't win with F4A preemption before the US Supreme Court of prong B, most companies I believe will turn to the employee model," Stefflre said. 
 
To make any changes before the federal courts rule would be premature, he said, especially because the current National Labor Relations Board is viewed as pro-business. The board loosened the standards earlier this year in the SuperShuttle DFW, Inc. case, then cited the case in an Aug. 29, 2019 decision backing medical courier Velox Express' classification of a worker as an independent contractor.
 
Stefflre also said that showing up on the Division of Labor Standards Enforcement blacklist is not an overnight occurrence because it requires litigation, an adverse court ruling, and a decision not to pay out any damages - a lengthy process.
 
Option 2: Broker-carrier model
Port truck drivers usually work under the operating authority of a trucking company. To comply with the ABC test, drivers would have to obtain their own operating authority similar to over-the-road (OTR) drivers to qualify as independent contractors.  
 
In truckload and less-than-truckload (LTL), many independent contract drivers obtain their operating authority and sign up as an approved small carrier with freight brokers. These intermediaries call carriers on their list to secure capacity for a haul. The carrier/driver has complete autonomy to refuse, accept, or negotiate price and terms on any load. This would clear up any confusion on the A test: "free from the control and direction of the hiring entity." It might satisfy the B test because the hiring entity would be a property broker, similar to an insurance broker or real estate broker. 
 
"Trucking companies are either going to convert some or all drivers to employees with a company fleet, or drivers will have to get their own permits, own operating authority, own trucks, and have no fleet affiliation," LaBar said. "I see a scenario in which most companies will have a skeleton crew of their own trucks and employee drivers and then they will use for-hire owner operators as capacity boosters."
 
Port truck drivers would get more negotiating leverage in this operating model. The truckload spot market, though, has shown in the last 18 months how quickly negotiating power can flip between drivers and brokers.
 
Option 3: Drivers are employees
How many would choose this option over brokerage is unclear. However, there is the question of how BCOs would view each option. In the highly competitive field of drayage, does a provider with company drivers have an advantage over a provider using the brokerage model?  
 
Does a BCO consider an asset-owning trucking company with company drivers as preferable when choosing a customer-nominated trucker? Will service be better with company drivers? Or is it all about price? Fleets may also decide on a mixture of options 2 and 3, as LaBar noted, using company drivers for some customers and brokerage for others. Premium customers might be treated differently than smaller ones.
 
There are clearly many questions, but not many answers about how exactly service and rates would be impacted by choosing an employee or brokerage model. Either way, BCOs should prepare for their relationship with trucking companies doing business in California to change in 2020.

 

Source: Journal of Commerce