Owner-operator business model under assault in California, Congress

The owner-operator business model in trucking, an essential part of the industry that uses upwards of 1 million independent contractors at any given time, is under attack in California and the U.S. Congress in Washington.

In California, a state law known as AB5 that would largely treat owner-operators in the trucking industry as company employees is being challenged in court by the California Trucking Association. It is arguing the 1994 Federal Aviation Administration Authorization Act (F4A) blocks states from enacting such laws, creating an interstate commerce exemption for trucking companies.

While that case is still being litigated, it is having a real-world impact on large interstate truckers. Schneider, the nation’s second-largest truckload carrier, already has stopped using California-domiciled owner-operators until the issue is settled.

“It’s still hung up in the courts,” Mark Rourke, president and CEO of Schneider, told LM. “There’s some concern that the new (Biden) administration in Washington may be more favorable to that position.”

The uncertainty of the owner-operator situation, Rourke added, “places another issue on capacity in the industry. I don’t see it going away. But we don’t believe the California initiative makes sense.”

If truckers don’t think AB5 in California makes sense, they really get apoplectic over something called the Protecting the Right to Organize (PRO) Act of 2021. It recently passed the U.S. House of Representatives in a party line vote.

The PRO Act, according to the Wall Street Journal editorial page, is “the most radical pro-union labor bill since the 1935 Wagner Act.” It would ease right-to-work laws in 27 states and boost workers’ rights to organize labor unions.

Naturally, unions don’t see it that way. “The PRO Act is a civil rights act,” AFL-CIO President Richard Trumka recently told the New York Times.

The PRO Act uses language similar to California’s AB5, which imposes an “ABC test” to determine the status of an independent contractor.

If passed, the PRO Act would amend the National Labor Relations Act (NLRA) to clarify that an individual performing any service is an “employee” and not an “independent contractor” unless:

• (A) the individual is free from the employer’s control in connection with the performance of the service; 
• (B) the service is performed outside the usual course of the business of the employer; or
• (C) the individual is customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

The U.S. Chamber of Commerce is opposed to the PRO Act. If enacted, the Chamber says, it would “radically rewrite labor law in the United States” and undermine worker rights by dragging employers into unrelated labor disputes, disrupt the economy and force individual Americans to pay union dues regardless of their wishes.

At issue, just as in AB5, is the so-called “B prong.” That would classify a worker as an “employee” of the company unless that worker performs a service “outside the usual course of the business of the employer.”

The American Trucking Associations, Truckload Carriers Association (TCA), and the Owner Operator Independent Drivers Association are aligned to lobby against the PRO Act.

What trucking officials fear is that the PRO Act, if passed, would result in an unprecedented battle for the survival of trucking’s longstanding independent contractor model. It now goes to the Senate, where Majority Leader Chuck Schumer (D-NY) is a sponsor. But it faces an uphill battle there, insiders say.

But President Joe Biden has already signaled support, and recently hosted a meeting that included labor leaders such as the AFL-CIO’s Trumka and others.

One of Biden’s first acts was an executive order halting the Trump Administration’s Department of Labor (DOL) rulemaking seeking to clarify the definition of an independent contractor.

Dave Heller, TCA’s vice president of government affairs, recently told LM that his members are united against the PRO Act.

“The owner operator model is a time-tested business model in the trucking industry for decades,” Heller told LM. “It’s definitely something we’re concerned about. Where it goes in the Senate will decide what happens.”

Asked if his group is actively lobbying senators on the issue, Heller replied, “We are effectively educating Congress on it and what impacts it would have on the trucking industry.”

What should happen, trucking advocates say, is what recently happened in West Virginia. In the Mountain State, the trucking industry is cheering a law passed by the state legislature. Trucking interests call it a significant victory in its ongoing, multi-year campaign to protect the rights of independent contractors (ICs) to earn a living.

In West Virginia, Senate Bill 272 broadly protects the owner-operator model—a critical component of trucking—by establishing a clear test for what constitutes an independent contractor under state law.

Importantly, it also specifically enables motor carriers to require safety improvements of their ICs—whether that be a device, equipment, software, training, practices, policies or procedures—without being held liable as the independent contractor’s employer. The bill now heads to Gov. Jim Justice to be signed into law.

Without this carve out, trucking advocates say, plaintiffs’ attorneys can use a motor carrier’s requirement of safety standards among its independent contractors as evidence of control and a basis for predatory litigation. This in turn creates a disincentive for motor carriers to provide their contracted owner-operators with improved safety training or equipment.

“With this legislation, our lawmakers have put down a marker: trial lawyers can’t keep using the civil justice system to line their own pockets at the expense of middle-class jobs, small businesses and highway safety,” WVTA President Traci Nelson said in a statement. “Other states across the nation would be wise to follow the solid example set by our legislature today.”

American Trucking Associations President and CEO Chris Spear said state lawmakers across the country “are now waking up to the fact that the perversion of wage and hour classification lawsuits into a profit center for trial lawyers hurts a state’s business climate, kills good-paying jobs and raises the cost of living for everyone while also inhibiting safety improvements.” 

To show how trucking companies and independent contractors are being squeezed, LM has uncovered an owner-operator’s specific financial situation at the Southern California ports.

This situation details the profit earned by a Southern California harbor driver. This driver hauls a 40-foot container of 10,000 pairs of Nike shoes that retail at $85 a pair at Dick’s Sports World. That load is worth $850,000 at the retail level and is being shipped across 12 time zones from China.

If the average Long Beach or Los Angeles port truck driver is an owner operator, he or she makes about $200 per pull between Long Beach and a warehouse in Commerce, Calif., a distance of 17 miles.

Considering congestion and LA freeway traffic jams, a port driver can make one turn between pier and warehouse in two hours. That port driver might get three turns daily in this fashion if nothing goes awry.

The port driver’s economic role in this $85 retail transaction is 0.00023529 per cent of the entire container transaction. This financially highly unstable situation is behind the push for company status for many owner-operators.