The law means that from here on out, truckers in the state of California will need to abide by new regulations aimed at protecting gig workers. Although the origins of AB5 intended to give better benefits to rideshare app drivers, the law has introduced plenty of complications for truckers, especially for owner-operators.
The news of AB5 means that owner-operators in California may need to make adjustments to their legal status in order to continue carrying freight. But while AB5 certainly adds complications for truckers in California, not every trucker will necessarily experience major workplace changes due to the law. Let’s take a look at the basics of California AB5 — and what the new law means for independent contractors.
What is the AB5 law?
Truckers across the country have probably heard about the new law implemented in California, which has recently begun to affect truckers after a few years in legal limbo. In the most basic terms, AB5 requires independent contractors to be treated as employees — with all the benefits (and restrictions) of full-time employment.
Initially, this law was designed to help gig drivers for rideshare apps get the benefits of full-time employment. However, when California passed Proposition 22 in 2020, it essentially made an exception to independent contractor rules for rideshare companies like Lyft and Uber.
Even though Proposition 22 lessened some of the requirements of AB5 for gig drivers, AB5 still affects truckers, and independent contractors in several other industries. For owner-operators, AB5 can mean a significant change in administrative responsibilities.
The basic goal of the AB5 law is to create stricter requirements for who can be considered an “independent contractor.” For anyone who is hired as a contracted worker, AB5 states that the hiring entity will need to pass the “ABC Test” — a three-part background check to determine whether the relationship between the worker and the hirer is as an “employee” or as an “independent contractor”.
The ABC’s of AB5 are as follows:
- The person is free from the control and direction of the hiring entity, both in contract and in fact.
- The person performs work that is outside the usual course of the hiring entity’s business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
With these requirements, California law aims to make sure “independent contractors” aren’t just employees with slightly different titles. If a hirer does not pass the ABC test of the AB5 law, then the relationship must be considered an employment relationship — not an independent contract.
Within the AB5 law, certain industries are exempt from the ABC requirements. Professions like engineers, accountants, and doctors do not need to approach contract hiring with the ABC test. However, truckers in California are still required to abide by the ABC standards with almost no exceptions. From now on, carriers, shippers, and brokers will all need to clarify that their hiring relationship passes each part of the ABC test as defined in the AB5 law.
What changes will come from the AB5 law?
Even with a good understanding of the AB5 law, it isn’t always easy to tell how the law will affect your business. For the trucking industry, AB5 will have a major impact — potentially even slowing the supply chain in ports like Oakland, Los Angeles, and Long Beach. Because a large majority of the truckers in California ports are owner-operators who contract work with larger carriers, every trucking company will likely need to redefine its relationship with its contract workers in order to continue to transport freight in California.
Many trucking companies use a combination of employees and independent contractors (often hired owner-operators) to transport freight, giving them a flexible workforce that responds to shifting demands in the trucking industry.
Because of the AB5 law, many trucking companies are cutting ties with their owner-operators due to the impossibly high cost of adding every owner-operator as a new employee. At the same time, many owner-operators are uninterested in working as an employee, preferring the flexible work schedule and independent vehicle ownership that comes with being an owner-operator. In short, any owner-operator who wishes to continue transporting freight in California will need to either act as a fully independent carrier or get hired as an employee by a carrier, meaning they will no longer be an owner-operator.
The need to bring on independent contractors as formal employees will bring about further changes for carriers who will now need to fulfill certain requirements, some of which did not apply to independent contractors of the past. These requirements include:
- Paying employment taxes
- Offering PTO and health insurance options
- Paying employees at least minimum wage
- Offering paid overtime for more than 40 hours of work per week
- Meeting other requirements, including offering unemployment benefits and reimbursing certain expenses.
So, what happens to a carrier who fails to comply with these requirements? According to the AB5 stipulation, employers who misclassify employees as contractors can face steep fines of up to $25,000 per employee. These fines could pose a significant threat to smaller carrier businesses, which means every business and contractor will need to ensure they are in compliance with AB5 to avoid serious consequences.
Does AB5 ban owner-operators?
AB5 does not ban owner-operators by any means. However, owner-operators will need to choose whether they will become an employee of a larger trucking company or if they want to take on the full responsibilities of being their own registered carrier.
It’s also important to note that AB5 only applies to owner-operators who pick up freight in California — not ones who deposit it. Carriers that operate in multiple states can avoid some of the major consequences of AB5 by loading up outside the state of California, then dropping off loads at docks in California without needing to pass the ABC check. However, this loophole might not be available for long, since several other states are considering independent contractor bills similar to AB5. It would also mean additional deadheading since drivers won’t be able to pick up more freight until they leave the state, which can quickly become costly.
If you’re an owner-operator who works with many different carriers, you will need to either become an employee of one carrier, or run your own self-sufficient carrier business and connect with brokers. As an owner-operator, understanding your role in the new California trucking industry is important to stay legal and to avoid fines.
Are truckers exempt from AB5?
There are many businesses that do not need to abide by AB5 — but unfortunately trucking companies are not on the list of exemptions. In 2020, AB 2257 was passed to establish a long list of exemptions from AB5 regulations. These new exemptions range from real estate agents to legal contractors, insurance agents, and artists.
It’s important to note that, despite the significant number of exemptions in AB 2257, truckers still need to abide by AB5. As a result, the original AB5 requirements — and the ABC Test for contractors — is still required for practically all trucking companies. The one potential exemption is construction trucking services, which can be exempt from the ABC test as long as their subcontractor is working as a public works contractor with the Department of Industrial Relations.
Ways to adapt to the AB5 law
With the new AB5 law making a major impact on the trucking industry, transportation professionals need to understand how to adapt. Some trucking companies are already taking drastic measures — like recommending that truckers move out of California completely. Other carriers are adjusting their employment requirements to the AB5 law.
Some trucking companies with multi-state operations are designing routes that allow independent contractors to pick up loads outside California, in states where there is no AB5 law. This way, trucking companies would not need to hire contractors as employees if they are only dropping off freight in California — and not picking up new loads.
The most appealing option for many owner-operators is to get California motor carrier authority. This allows truckers to essentially operate their own business, so they can establish themselves as self-employed carriers instead of independent contractors.
As an owner-operator, getting a California MC/DOT number can be a complicated process. But with AB5 complicating matters, many owner-operators are finding it increasingly important to maintain a flexible work schedule and to maintain personal ownership of their vehicle. To keep an independent business with self-directed growth, many owner-operators are putting in the time to get California motor carrier authority and, in some cases, even brokerage authority.
Get ahead of AB5 with DAT Authority
The AB5 law can create complications for truckers in California — but that doesn’t mean all California truckers need to take drastic measures and relocate out of state. With your California motor carrier authority, you can operate as your own carrier, and find freight for your own vehicle without becoming a company driver.
AT DAT, we’re here to help you adapt to AB5. DAT Authority provides cost-effective and professional assistance in getting your own MC number, so you can operate legally and without additional complications in the wake of the new regulations. Our team of experts at DAT can help you to file all the right paperwork, get the necessary permits, and answer any questions you may have about the trucking laws. That way you can start finding freight and get back on the road fast.
To maintain control over your trucking business, getting your California MC number is an important first step. With DAT Authority, we can help you grow your business at each step of the way. Learn more.
Prepare for the future with DAT!
While AB5 may be changing the landscape for owner-operators in California, DAT Authority is here to help make any transitions as smooth as possible. Learn how the experts at DAT Authority can help you stay on the road!
