Trucking Companies Beware: Motor Carriers Must Comply With California Law When Classifying Truck Drivers As Independent Contractors


Federally licensed motor carriers that operate trucking companies in the Ports of Los Angeles and Long Beach, two of the largest ports in the United States, often contract with owner-operator truck drivers to perform drayage, or the short distance movement of cargo.  Since these trucking companies classify the owner-operator truck drivers as independent contractors, they do not pay   unemployment insurance taxes, employment training fund taxes, and disability insurance taxes.  Further, these trucking companies do not provide workers’ compensation or reimbursement for business expenses, such as fuel, truck insurance, parking, and routine maintenance costs.

In People v. Cal Cartage Transportation Express, LLC, et al. (“Cal Cartage”) (2020), the Los Angeles City Attorney filed complaints against several trucking companies in the Ports of Los Angeles and Long Beach for violations of California’s Unfair Competition Law (Bus. & Prof. Code § 17200, et seq.), alleging they misclassified truck drivers as independent contractors, resulting in numerous Labor Code violations and failure to pay necessary taxes. 

The Cal Cartage trial court ruled on a motion addressing the issue of whether California’s ABC test is preempted by federal law, holding that California’s ABC test prohibits motor carriers from using independent contractors; and thus, the ABC test has an impermissible effect on motor carriers’ prices, routes, and services and is preempted by the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”). 

In response, the California Court of Appeal, Second Appellate District, reversed the trial court’s ruling and determined the ABC test is not preempted by the FAAAA; and thus, federally licensed motor carriers must comply with requirements under California law to ensure truck drivers are not misclassified as independent contractors.  People v. Superior Court of Los Angeles Cty. (2020) 57 Cal. App. 5th 619.

The ABC Test and the California’s Legislative Response

In Dynamex Operations West, Inc. v. Superior Court (2018) 4 Cal.5th 903 (“Dynamex”), the California Supreme Court adopted the ABC test, which was a new standard for determining whether a worker can be classified as an employee or an independent contractor.  The ABC test requires a worker to be classified as an employee unless:

  1. That the worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;
  2. That the worker performs work that is outside the usual course of the hiring entity’s business; and
  3. That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed by the hiring entity

In 2019, the California legislature passed AB 5, which codified the Dynamex court’s ABC test and expanded the reach of the ABC test while creating an exemption for business-to-business contracting relationships.  AB 5 was signed into law as Labor Code section 2750.3, which was repealed and replaced in 2020 by Labor Code section 2775 et seq

As discussed in our prior post (here), Labor Code section 2776(a) provides that the ABC test does not apply to a business-to-business contracting relationship if certain specific criteria are met.

Federal Preemption Principles and the FAAAA

The FAAAA, enacted by Congress to preempt state trucking regulation, specifically provides that states may not enact or enforce laws or regulations related to a price, route, or service for transportation of property by a motor carrier.  In People ex rel. Harris v. Pac Anchor Transportation, Inc. (“Pac Anchor”) (2014) 59 Cal.4th 772, 785-87, the California Supreme Court held that the FAAAA does not preempt generally applicable worker-classification laws.

The Pac Anchor Court discussed the purpose of the FAAAA, concluding that nothing in the Congressional record establishes that Congress intended to preempt states’ ability to tax motor carriers and enforce labor and insurance laws.  In fact, the Court noted that there was indirect evidence that prevailing wage laws were not preempted by the FAAAA because at the time when the FAAAA was enacted, Congress identified states that did not have laws regulating interstate trucking and those states had prevailing wage laws – many of which were laws governing classification as an independent contractor.      

Further, the California Supreme Court noted that an Unfair Competition Law (“UCL”) action based on the improper classification of drivers as independent contractors does not prevent businesses from using independent contractors; it only prevents businesses from misclassifying drivers.  In essence, a UCL claim based on such misclassification would only have a tenuous, remote, or peripheral effect on rates, routes, or services.

Currently, federal district courts are divided on this issue.  The Ninth Circuit recently heard argument on this issue and has a case under submission entitled, California Trucking Ass’n, et al. v. Becerra, et al. (Case Nos. 20-55106 and 20-55107).  The First Circuit previously held that prong B of Massachusetts’ ABC test - which is essentially the same as California’s test – was preempted by FAAAA. 

Cal Cartage Court’s Decision

In Cal Cartage, the Court indicated the ABC test is a law of general application just as the labor laws addressed in Pac Anchor were laws of general application.  The Court stated, “The ABC test does not mandate the use of employees for any business or hiring entity.  Instead, the ABC test is a worker-classification test that states a general and rebuttable presumption that a worker is an employee unless the hiring entity demonstrates certain conditions.  That independent owner-operator truck drivers, as defendant currently use them, may be incorrectly classified, does not mean the ABC test prohibits motor carriers from using independent contractors.”

In fact, the Court found that the business-to-business exemption in Labor Code section 2776 further supports the reasoning that the ABC test does not prohibit motor carriers from using independent contractors.  Although defendants argued that independent owner-operators can never meet several of the requirements laid out in Section 2699(a), the Court was not persuaded by that argument.  The Court explained that owner-operators can obtain a business license from their local government and owner-operators can transport goods on behalf of the motor carriers to the motor carrier’s customers without being deemed to be providing services to the customers instead of the contracting motor carrier.

Ultimately, the Court concluded that California’s ABC test is not preempted by FAAAA because the application of the ABC test does not prohibit motor carriers from using independent contractors and does not directly affect motor carrier’s prices, routes, or services. 

What’s Next for California Trucking Companies?

California trucking companies need to ensure that truck drivers are correctly classified.  There are three basic options that came from the Cal Cartage court’s reasoning:

  1. Motor carriers can classify all drivers as employees and abide by all state and federal labor laws and pay all necessary state and federal taxes; or
  2. Motor carriers can ensure that the owner-operators they contract with meet all 12 of the criteria outlined in Labor Code section 2776(a); or
  3. Motor carriers can contract with outside carriers or brokers, who employ (correctly classified) truck drivers, and provide them to the motor carriers as part of a business-to-business relationship.

Motor carriers should consult with the authors or their trusted legal counsel for specific guidance regarding which option best suits their needs.

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. 

© 2021 Atkinson, Andelson, Loya, Ruud & Romo



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