Truckers Protest California’s Independent Contractors Act Shuts Port of Oakland | Holland & Knight LLP
The United States Supreme Court recently denied the California Trucking Association’s (CTA) request for certiorari related to a case involving a federal preemption of California Assembly Bill 5 (AB-5), a law that changed the statutory requirements for independent contractor status in California which has been targeted to a large extent at the trucking industry’s use of independent owner-operator contractors. There are approximately 70,000 independent owner-operators in California who will be affected by the law, which could lead to additional supply chain disruptions at a time when the industry is already facing challenges. The decision sparked protests that closed the Port of Oakland for five days, and the future of extensive use of independent drivers in the trucking industry faces a bleak future in California.
Briefly, AB-5 went into effect on January 1, 2020. AB-5 codified the “ABC” test for classifying employees versus independent contractors adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Los Angeles Superior Court (Dynamex), 4 Cal. 5th 903 (2018). It is common in the trucking industry for independent owner-operators to drive their own truck for a motor carrier under the operating authority of the motor carrier. AB-5 makes it very difficult for an independent driver to work for a motor carrier without being considered an employee. Indeed, in part “B” of the ABC test, to be an independent contractor, the driver must “perform work that is not within the business of the hiring entity”. It is difficult, if not impossible, for a motor carrier driver to meet this standard. (See previous Holland & Knight Transportation blog posts, “Update on Top Motor Carrier Issues Involving Independent Contractors,” May 20, 2021, and “Federal Court Expands Temporary Injunction to Restrain AB-5 from S ‘Apply to Motor Carriers Operating in California’, Jan. 15, 2020.)
In a federal court case brought by the CTA, on December 31, 2019, U.S. District Judge Roger T. Benitez of the U.S. District Court for the Southern District of California issued an order temporarily blocking the enforcement of AB -5 against the trucking industry given its finding that AB-5 was pre-empted by the Federal Aviation Administration Authorization Act (FAAAA) and on January 16, 2020 the court issued a preliminary injunction against the application of the ” ABC test” against any motor carrier operating in California, pending entry of final judgment in the action. (California Trucking Association et al. vs. Attorney General Xavier Becerra et al., Case No.: 3:18-cv-02458-BEN-BLM.) The preliminary injunction decision was appealed by the State of California and the Teamsters as interveners to the US Court of Appeals. United States for the Ninth Circuit in California Trucking Ass’n v. Bontacase no. 20-55106.
On April 28, 2021, the Ninth Circuit reversed the district court’s decision, finding that AB-5 was generally applicable state law that was not preempted by the FAAAA. The court held that “a state law of general application is not ‘related to the price, route, or service of a motor carrier’ for purposes of the [FAAAA] unless state law’related the carrier to a particular price, route, or service” or freezes or determines them to any significant extent.” The ruling conflicts with a contrary ruling by the United States Court of Appeals for the First Circuit in this Regarding a similar law in Massachusetts, the CTA filed a petition for certiorari, seeking review by the United States Supreme Court.
The Supreme Court sought the opinion of the Solicitor General, who recommended that the Court deny cert. The Court followed that advice, denying the certificate on June 30, 2022. On remand, District Court Judge Benitez has scheduled a new hearing on the matter for August 20, 2022. The CTA will likely present its plan to try the case. on the background. or to request other preliminary measures associated with the consideration of the case on the merits.
Following the Supreme Court’s decision not to entertain the case, the CTA announced that it was seeking to amend AB-5 to allow for the application of the “business-to-business exception” in the statute. apply more easily to truckers, and is working with other related industry groups to achieve effective changes to retain owner-operators. CTA and more than 70 trade associations also sent a letter to California Governor Gavin Newsom asking him to issue an executive order delaying the implementation of AB-5. Governor Newsom’s office has since released a statement that it is “reviewing the concerns raised by the California Trucking Association,” but also noted that the industry has “two years to plan for compliance.” At the same time, the Governor highlighted the Governor’s Office of Business and Economic Development (GO-Biz), which “helps businesses navigate state tax incentive programs, financing options, and resources of local economic development partners”. This includes companies not only looking to add or retain employees, but also “people considering establishing their own business authority for the very first time.” Among these economic programs is the California Office of the Small Business Advocate (CalOSBA), which is focused on “small business/start-up” funding. It reads like a cautious nod to the fact that one response to lifting the preliminary injunction is to help truckers start their own businesses.
On July 13, 2022, owner-operators staged a convoy protest at the ports of Los Angeles and Long Beach, slowing traffic on several freeways. Other owner-operators picketed the entrance to the port complex, causing a terminal to close early at the Port of Long Beach. The following week, nearly 1,000 owner-operators blocked access to terminals at the Port of Oakland, effectively halting port operations for five days. Port operations resumed on July 23, 2022, but the shutdown created a backlog. On July 25, 2022, the Port of Oakland filed a lawsuit against protesters seeking a temporary restraining order and injunction to restrain protesters from “illegally blockading marine terminal gates and stopping international commerce.” On August 2, 2022, the Superior Court of Alameda County in California granted the temporary restraining order. A hearing on the preliminary injunction is scheduled for August 29, 2022.
Options for drivers and carriers
If the law goes into effect unchanged, drivers and carriers have a few options, all of which would be disruptive. These options include:
- Employee model: The driver could become an employee of the motor carrier. However, many drivers prefer to be independent, as evidenced by recent protests. Freedom and flexibility are probably the main advantages for those who prefer to be independent. Some carriers also don’t necessarily want salaried drivers, as this adds fixed costs and can be more difficult to adapt to changing demand.
- Staffing model: The driver could become an employee of an employment firm, and motor carriers could hire these drivers in the same way as they do now. This addresses the concern of motor carriers who do not want to add employees, but does not address the concern of drivers who want to remain independent.
- Broker/Carrier Model: If every driver were licensed to operate as a motor carrier, he would probably not be in breach of tier ‘B’, as he would not be driving for a motor carrier, he be a road carrier. However, this poses many practical challenges for existing drivers and carriers.
For existing pilots:
- Drivers would be responsible for obtaining authorization to operate and all the regulatory compliance obligations that come with that responsibility.
- Insurance is expensive, and comparatively more expensive than how insurance is obtained through an owner-operator model.
- Carriers would require their own port access under the Uniform Intermodal Interchange and Facilities Access Agreement, which adds additional expense and administrative burden.
- The newly formed motor carrier still needs business, and it generally cannot obtain business from other motor carriers (interline haulage and voyage leases are limited exceptions to this general rule, but insufficient to form a business around).
For existing carriers:
- Motor carriers are not allowed to simply sub-contract a load to another motor carrier. Instead, they need freight broker authority. The brokers arrange for the motor carriers to carry out the transport but not to carry out the transport themselves. Existing motor carriers that use owner-operators should obtain permission from a broker to quote freight to their former owner-operators who have converted to motor carriers. This model is likely allowed in Stream B, as brokerage and transportation are likely to be considered different activities. However, if the brokerage firm is not sufficiently independent of the trucking entity, it may not circumvent the ABC test, and there are also liability and compliance risks to consider.
While each of these issues is potentially surmountable and there are many small trucking companies across the country, this option adds cost and complexity.
- Cooperative model: Self-employed drivers could band together to form a cooperative or similar member-run limited liability company (LLC) that could be designed to mimic the pros and cons of their current self-employed status. This would be essentially the same as the broker/carrier model, but without each driver needing to start their own trucking company or solve all of the issues identified above themselves. However, the structural complexity might deter drivers from grouping in this way.
Unless the law changes, different carriers and drivers will likely use each of these models to comply with the law. Some drivers simply stop driving. Driver shortages are already plaguing the industry, and fewer drivers will only exacerbate supply chain challenges. Nearly 40% of all US containerized imports pass through the ports of Los Angeles and Long Beach. What happens in California will most likely impact the entire country.