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What is California AB5? California AB5, or Assembly Bill 5 (AB5), is a law that restricts businesses from classifying workers as independent contractors, forcing companies to shift classification of these workers to employees. Experts warn that AB5 CA will increase labor costs, reduce the quality of service, create higher costs for consumers, and undoubtedly reduce the flexibility of workers.
Unfortunately, the bill will unintentionally affect independent contractor truck drivers in the state of California by making it difficult if not impossible for drivers to work for themselves. AB5 presumes all workers are employees, and it’s up to the companies themselves to prove the status of workers by applying the ABC test.
Dynamex and the ABC test
On April 30, 2018 the California Supreme Court ruling on a case known as Dynamex set the AB5 precedent. The ruling established a presumption that workers are employees unless the hiring company can prove otherwise. Prior to Dynamex, there was an 11-prong measure known as the Borello test (in place since 1989) that most independent contractors (owner-operators) were able to pass. The Dynamex ruling replaced the owner-operator friendly Borello test with a new ABC test with only 3-prongs.
The three prongs of the ABC test are:
- The worker is free from the control and direction of the hirer in connection with the performance of the work.
- The worker performs work that is outside the usual course of the hiring entity’s business.*
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
*This is the prong that owner-operators leased to trucking companies are having difficulty passing with their current hiring model.
What does this mean for motor carriers and owner-operators in the trucking industry?
Currently, freight carriers must evaluate their existing business model to ensure they are compliant with the new ruling. If the motor carrier is found NON-compliant, the fines are up to 25,000 per violation.
AB5 compliance options for motor carriers
Carriers and owner-operators have three options in a post AB5 world including:
- Carriers can terminate agreements with ICs and hire new drivers directly.
- Carriers can convert all independent contractors to employees.
- Eliminates misclassification suits.
- Increases burden, cost, and exposure.
- Cost prohibitive purchasing equipment/or creating lease agreements.
- Owner-operators can utilize or establish a brokerage (subjected to ABC test).
- Drivers obtain their own operating authority.
- Limits liability for future lawsuits.
- Creates loss of operating control for customers.
- Could increase losses.
- Establishing a brokerage can be time consuming and costly.
- Brokerages may be tried as employers in the future under Dynamex.
Get AB5 compliant with TransForce Group
By partnering with TransForce Group, we can help you get compliant with AB5 regulations quickly and eliminate the risk of misclassifying workers – so you can continue to keep your trucks moving without disruption to your customers.
For more information on AB5 compliance, check out the following:
- What are the Business-to-Business Exemptions for California AB5?
- AB5 Compliance – Comprehensive Resource Guide for Motor Carriers
- Exempt Job Categories Under California’s AB5 Law
- What You Need to Know About the AB 5 “Business-to-Business” Exemption
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