Keep On Truckin’—California State Court Judge Finds ABC Test Does Not Apply to Owner-Operators; Federal Court Extends TRO In Favor of California Trucking Association
Keep On Truckin’—California State Court Judge Finds ABC Test Does Not Apply to Owner-Operators; Federal Court Extends TRO In Favor of California Trucking Association

On January 8, a trial court judge in Los Angeles issued an order finding the ABC Test—now used to determine independent contractor status in California—could not be applied to independent contractor truck drivers (“owner-operators”) due to federal pre-emption concerns.  While the decision represents a major victory for trucking companies, it will be subject to challenge.

In April 2018, the California Supreme Court issued its decision in Dynamex Operations West v. Superior Court, and implemented a new test for classification of workers as employees or independent contractors. The Court announced it would no longer rely on the “control” test set forth in the 1989 decision of S. G. Borello & Sons, Inc. v. Department of Industrial Relations, but would instead rely on a three-part “ABC Test” to evaluate working relationships.  Our detailed explanation of that decision is here.

Subsequently, Governor Newsom signed legislation—AB5—codifying and expanding the ABC Test. That legislation went into effect January 1, 2020, and we explain it here. Importantly, AB5 contained a number of exceptions to the ABC Test, including the “business-to-business exception.”  Under that exception, the ABC Test does not apply to a “bona fide business-to-business contracting relationship.”

On January 8, however, Judge Highberger of Los Angeles Superior Court concluded the ABC Test runs afoul of federal law—the Federal Aviation Administration Authorization Act (“FAAAA”)—when applied to owner-operators regulated by that law.  Judge Highberger noted the FAAAA was intended to create a uniform national rule permitting the use of owner-operators in order to increase competition and reduce the cost of trucking services.

To the extent Prong B of the ABC Test (the worker must perform work outside the usual course of the hiring entity’s business) bars the use of independent contractor truck drivers, the court concluded it is preempted by federal law. 

Notably, Judge Highberger concluded the business-to-business exception does not apply to independent owner-operators. For example, the court explained, the business-to-business exception requires the worker to hold a business license, where required by law.  Under federal law, this would mean owner-operators need to hold a motor carrier operating license. However, various federal authorities have concluded the absence of a motor carrier operating license is a “core attribute” of independent owner-operators. Along the same lines, Judge Highberger noted the business-to-business exception requires owner-operators to negotiate their own rates with carriers, which is inconsistent with federal regulations requiring the carrier to provide “clearly stated” rates to owner-operators.

Further, the court concluded the business-to-business exception creates a number of “barriers to entry” for independent owner-operators, including the requirements of maintaining a separate business location and entering into contracts with multiple carriers. Given that the FAAAA was intended to remove such barriers, the court found, the ABC Test undermines federal law.

Finally, Judge Highberger observed that, even under the business-to-business exception, the ABC Test will still be used to evaluate the working relationships between owner-operators and the drivers they utilize.

Based on the above—and because AB5 would have a “substantial impact on trucking prices, routes, and services,” the court concluded the ABC Test is preempted by the FAAAA as applied to owner-operators.

Immediately on the heels of Judge Highberger’s decision, U.S. District Judge Roger Benitez extended a temporary restraining order preventing enforcement of AB 5 against motor carriers in California, in a case brought against the state by the California Trucking Association. That case also asserts AB 5 is preempted by the FAAAA.  The Western States Trucking Association has a similar suit pending against the state.

What This Means for Employers

Trucking companies are anxiously awaiting the outcome of a number of legal challenges to the ABC Test, on a variety of grounds.  While these legal decisions bode well, they will need to work their way through the state and federal appellate courts before companies can safely rely on them. For the time being, trucking companies are cautioned to consult with counsel before making important decisions about the use of independent contractors.

This AALRR publication is intended for informational purposes only and should not be relied upon in reaching a conclusion in a particular area of law. Applicability of the legal principles discussed may differ substantially in individual situations. Receipt of this or any other AALRR publication does not create an attorney-client relationship. The Firm is not responsible for inadvertent errors that may occur in the publishing process. 

© 2020 Atkinson, Andelson, Loya, Ruud & Romo

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