Atkinson's Answers: Interpreting AB 5

10.18.2019

These opinions are an educated guess on how AB 5 will be interpreted.  These are only opinions and you should seek qualified legal advice on the issues discussed herein

Question:       Do I need to comply with AB 5?

Answer:          Yes. 

It is possible that the statute is unconstitutional.  It is possible that the California legislature will repeal the statute.  It is possible California will vote Republican. 

Question:       Is it probable that the statute will be amended?

Answer:          Yes.

In the legislative history of the statute, the sponsors of the bill state that they intend to “revisit” certain issues “in the future.”  The legislature knows that if they introduce anti-business legislation, they can make a lot of money selling exemptions.  I expect that Uber and Lyft will buy some amendments to the statute. 

Question:       Why was the statute passed?

Answer:          The purpose is to assist union organizing.

About ten years ago the Teamsters Union made a concerted effort to organize the owner operators in the harbors.  The Teamsters spent $30 million dollars in their organizing effort.  The Teamsters won some battles, but they lost the war.  AB 5 makes it much easier for them to organize drivers who will in many cases now be converted to employees.

Question:       I own a trucking company that sometimes uses owner operators to supplement my fleet; can I continue to do so?

Answer:          Yes, but you will likely need to make them employees. 

The purpose of the statute is to require employers to convert owner operators to employees.  Employers can pay the former owner operators a separate check for the use of their equipment.

Question:       I don’t want to make the owner operators my employees, what are my other options?

Answer:         All other options entail risk.  Some things that you can do to reduce the risk are:

  • Have an expert review the agreements that you sign with all owner operators.
  • Only do business with owner operators that are incorporated and have their own employees.
  • Only do business with owner operators who are financially solvent and require them to defend and indemnify you if the courts determine that the relationship converted the owner operators to your employees.
  • Make sure that all owner operators are paid with a 1099. If you have not always used a 1099 to pay owner operators, consult with your tax adviser as to whether retroactive contributions should be made.
  • Make sure all employees are covered by workers’ compensation insurance.

Question:       I am a material supplier who uses owner operators to supplement my in-house delivery services.  If a court determines that these individuals should have been employees rather than owner operators, do I have a substantial financial liability?

Answer:          Yes, potentially, “bet the company.” 

The trial lawyers in the state know how much money they can make suing employers over labor law violations.  I expect a large number of wage and hour class actions seeking damages well into the millions against owner operators and employers alleging joint and several liability.  The trial lawyers know that the owner operators do not have any money, so the key legal issue will be whether employers are financially liable for all the damages, penalties, interest and attorneys’ fees.

Question:       I recently read that McDonald’s was found not to be a joint employer with the franchisees and thus was not financially liable for the actions of the franchisees.  Is that correct?

Answer:          Yes, but that was a federal court decision and the issues may be decided differently if before a California Court or the California Supreme Court.

Question:       I’m an owner operator trucker and want to continue to operate as an owner operator.  What should I do?

Answer:         

  1. Incorporate.  Under the law you will then be an employee of the corporation and thus you are technically no longer an owner operator.
  2. Hire some employees.
  3. Register with the California DIR pursuant to the requirements of AB 5. 
  4. Obtain all possible business licenses.
  5. Make sure all of your insurance policies reflect that you are an employee.
  6. Use a comprehensive written agreement with all your customers.
  7. Have the corporation obtain workers’ compensation insurance on you.
  8. Pay your taxes as an employee.

Question:       I’m an owner operator running a backhoe, should I obtain a state contractor’s license?

Answer:          Yes. 

All owner operators should incorporate and obtain every business license they can obtain.  If the work you perform requires a state contractor’s license and you do not have one, you will be legally presumed to be an employee.

Question:       I’m a company that sells building materials, but I do not have my own trucks.  Can I continue to use owner operators?

Answer:          Probably, if you fit within the business-to-business exception in AB 5.  The business-to-business exception will be addressed in a separate Alert.  However, the exception has many requirements and you should check with legal counsel to make sure your contracts with the owner operators satisfy those requirements.

Question:       I’m a material supplier.  I have some of my own trucks but I also use owner operators. Can I split my business into separate trucking and material supply operations and then use the business-to-business exception? 

Answer:          Maybe. 

We are consulting with a number of companies about the modifications of their business organization to fit within the exceptions.

Question:       I am the owner of a water truck used on construction sites. Can I fit within the exemption if I get a contractor’s license?

Answer:          Maybe. 

Historically water trucks have not needed a contractor’s license although there is an argument that they should have one.  If you are a water truck owner operator, I recommend that you obtain a contractor’s license.  If the courts later determine that water truck drivers require a contractor’s license and you do not have one, you will be presumed to be an employee.

Question:       I’m a trucking broker.  Will it be possible for me to stay in business?

Answer:          Not unless you make substantial changes to the way you operate.

Trucking brokers are a target of AB 5.  If you are a trucking broker, and wish to stay in business, it will be necessary for you to obtain legal counsel and explore possible scenarios.

Question:       I use owner operators, but I do not want to make them employees.  I also do not want to run any risk that I will be liable for not converting owner operators to employees.  What can I do?

Answer:          Quit using owner operators and hire a reputable trucking company.

This law will probably enable smaller trucking companies to substantially grow their business.

These opinions were edited by AALRR Partners: Ronald W. Novotny, Brigham M. Cheney, Amber S. Healy, Jonathan Judge, Scott K. Dauscher, L. Brent Garrett and Anthony P. Niccoli.  

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.

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