Chaos in California! U.S. Appeals Court panel rules against truckers in owner-operator case

Major trucking companies’ use of owner-operators in California has been thrown into legal limbo after the U.S. Court of Appeals for the Ninth Circuit recently ruled 2-1 against the California Trucking Association (CTA) in a closely watched case with far-reaching ramifications.

The three-judge panel said CTA was unlikely to succeed on the merits with respect to its claim that AB-5, the California legislature’s imposition of a restrictive ABC test, is preempted by the Federal Aviation Administration Authorization Act of 1994 (F4A).

The ABC test is one that employers must pass to classify a worker as an independent contractor in many states, according to the U.S. Department of Labor. Employers are responsible for the correct categorization of workers or they could face costly fines.

The CTA and trucking interests say the ABC test is overly restrictive and discourages owner-operators from operating under normal business practices.

As a result, the injunction CTA had obtained from the district court against enforcement of AB-5 against motor carriers is overturned and will be dissolved in the near future. Both outside attorneys and those involved in the case say the matter could land in the hands of the U.S. Supreme Court late this year.

CTA has until May 12 to ask for the three-judge panel to reconsider. If not, the CTA can appeal to the full Ninth Circuit for review. If the CTA loses there, it has 150 days to file for certiorari for discretionary review as the First Circuit (Boston) and Ninth Circuit (San Francisco) have issued conflicting decisions.

“It could upset the apple cart if this doesn’t get overturned,” said James Hanson, partner in Scopelitis, Garvin, Light, Hanson & Feary, Indianapolis, a top law firm that handles many trucking labor issues.

“The problem with the 9th Circuit has been its inconsistent opinions and inconsistent ways in which they deal with the preemption situation. I believe CTA will appeal to have the entire ninth circuit appeal it en banc,” Hanson told LM.

Hanson added that it’s probably time for the U.S. Supreme Court to “step in and clear up the confusion” regarding F4A preemption for trucking companies involved in interstate commerce.

Hanson said because California’s AB5 law doesn’t apply just to the trucking industry, any effect it has on prices, rates and services is “tenuous and remote.”

In September 2019, California put into place AB 5. That stated a worker should be considered an independent contractor only if they met each of these three criteria:

The worker is free from the control and direction of the hiring entity in connection with the work's performance, both under the contract for the performance of the work and in fact.

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.

The AB5 law already is having an impact on trucking capacity and rates in the Golden State. Schneider, the nation’s second-largest truckload carrier, stopped using owner-operators domiciled in California about two years ago because of confusion over the new law. Schneider is not alone.

“There are a group of carriers not making decisions to do anything and are waiting to see if this (preemption ruling) is reversed,” said Hanson. “People are hesitant to make any large shifts in their operations until this is resolved.”

Insiders say that while large TL carriers such as Schneider have done away with using owner-operators in California, there are other methods for filling truck capacity. One is by using a broker-carrier model where the trucking company obtains broker authority from the Federal Motor Carrier Safety Administration (FMCSA) and then brokers loads to other authorized drivers.

So while the owner-operator may be getting the same load of freight that he or she would otherwise obtain, legally they are not in the same business. Instead, they are acting as a broker, not an owner-operator.

“But that requires carriers to broker loads,” Hanson explained. “Whether customers acknowledged that can be done, that’s unclear. But that’s one thing that’s being done now because of the confusion surrounding all this.”

Hanson detailed an illustrative example of what’s wrong with the California AB law. He said one of his clients is an owner-operator who largely works the lucrative business of the bustling California ports of Los Angeles and Long Beach. Hanson said he earned in excess of $225,000 last year.

 “It’s interesting,” Hanson said. “This guy knows how to run his business, he works very hard and he has done well with it. He doesn’t want to become a company driver making $50,000-to-60,000 a year.”

 That’s an illustration, Hanson says, of trying to take a law like AB5 which was designed to cover everything from freelance writers and Uber drivers and trying to make it apply to the trucking industry. It’s just a bad fit, he said

“But in trucking, the owner-operator business model has been around for a long time,” Hanson said. “They don’t want to be an employees. They want to do what they want, when they want to do it. And carriers like the flexibility to expand its fleet without buying trucks.

He said large truckload giants such as Schneider and J.B. Hunt would have never been allowed to grow into the billion-dollar businesses they are if this restrictive law covering owner-operators had been in existence.

“It would be nice if we had a test for employee vs. owner-operators that would flush out those who are not legitimate and allow legitimate ones to exist,” Hanson said. “As it is now, you can be an independent contractor under one statute and an employee under another statute.”

The Ninth Circuit panel ruled AB-5 is not preempted because it “is a generally applicable labor law that impacts the relationship between a motor carrier and its workforce, and does not bind, compel, or otherwise freeze into place a particular price, route, or service of a motor carrier at the level of its customers.”

 It may be up to the U.S. Supreme Court to ultimately clear up the confusion.