The supply chain is bracing for yet another strain or break, as California’s controversial “AB5” legislation takes full effect this month. AB5 is California Assembly Bill 5, which was passed at the end of 2019 and technically went into law on January 1, 2020. The bill was designed to regulate companies like Lyft, Uber and Doordash, by requiring companies to reclassify independent contractors as workers if they did not meet certain exemption criteria. Their reasoning may have been somewhat altruistic, as they claim to be protecting gig-workers and providing the same protections and benefits that traditional W2 employees would receive.
However, over the last 2+ years, there have been many legal challenges, injunctions, exemptions, and other roadblocks that have altered the original bill – such as Proposition 22, a ballot measure funded largely by Lyft, Uber and DoorDash, that exempted ride-based and delivery services as independent contractors – the exact group that the bill was written for.
There are a lot of moving parts to AB5 but the big impact to the supply chain comes in like a wrecking ball to the trucking industry. At the end of June, the U.S. Supreme Court declined to hear an appeal that could have exempted independent owner-operator truck drivers from AB5, instead they required an earlier injunction to be reversed almost immediately. To fully understand the affect of this decision, we have to dive into AB5 a little more.
AB5 required independent contractors to become employees of the companies for which they provided services unless they could meet a three-pronged requirement to continue their independent status, referred to as the ABC Test:
- The worker is free to perform services without the control or direction of the company,
- The worker is performing work tasks that outside the usual course of the company’s business activities, AND
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed
Owner-operator truck drivers are getting hung up on the second prong, as the nature of both their business and the companies they are working for are the same – freight services. A great number of exemptions have been made for professions such as photographers, freelance writers, hair stylists, insurance agents, physicians, etc. However, one major exemption missing from the list is the truly independent owner-operator truck driver.
Generally speaking, these are individuals who own their own truck, have a licensed trucking business (often consisting of just one person – the owner-operator), and find loads through a brokerage or larger freight carrier. AB5 has essentially rendered this process illegal in California, forcing owner-operators to either attempt to be hired as an employee at one specific company or be 100% independent of all major carriers and brokerages. This is especially difficult for operators who have never had to find and book their own loads or handle all paperwork from start to finish, as the firms they contract with do most of the heavy lifting in these areas.
California has been at the center of major supply chain issues stemming from port congestion and other port matters that have slowed or even stopped the import process, and AB5 is likely to have 
a major impact on the ports. There are more than 70,000 independent owner-operators in the state of California, all of whom are now questioning if they are able to continue operating. The Port of Oakland, the 9th busiest container port in the US in 2021, has approximately 9,000 trucks that serve the port on a daily basis, nearly all of which are independent contractors. AB5 could grind freight services out of Oakland to a complete halt. The two busiest ports in the US are also in California – Long Beach and Los Angeles – and the number of independent contractors serving those ports is likely higher.
Earlier this month, hundreds of drivers staged protests in California by slowing traffic and a significant number of loads being refused from the ports, costing substantial financial damage to all facets of the supply chain. With back-to-school shopping coming up around the corner and holiday imports on the horizon, AB5 could not be coming at a worse time for the trucking industry. However, it does not appear that a clear plan is in place to enforce AB5 and some expect that many drivers and companies will continue operating as they have until they know who will be enforcing AB5, how they will be enforcing it, and what the consequences will be for violating it.
The difficulty of the situation is that this legislation is meant to protect workers. Ted Gotsch of the International Brotherhood of Teamsters states, “Companies purposefully and deceptively misclassify their workers as independent contractors to deny works fair wages and benefits, and to avoid paying employee-related expenses like unemployment insurance, workers’ compensation, and Social Security. This corporate greed damages the economy, leaves workers’ lives in jeopardy and puts good employers who play by the rules at a competitive disadvantage.”
However, on the surface, independent owner-operators appear to fall into a different category than those who may be misclassified. Dave Heller, of the Truckload Carriers Association (TCA), says, “Independent contractors are independent contractors because they want to be, not because they’re being forced into this business model. They want to be their own businessperson.” Since AB5 was initially passed, hundreds of owner-operators have come forward with their stories, confirming Heller’s statement – they bought their own trucks so they could own their own business, taking loads as they saw fit and letting the brokers handle the bulk of the paperwork, as well as procuring the customer base. This system has been mutually beneficial to carriers and brokers, as they do not have to invest in trucks, repairs, and other costs involved with maintaining vehicles in their fleet.
All of this will be something to watch very closely, as well as how other states respond. Currently, Illinois, New Jersey, and New York have similar bills at various stages of the legislative process. The US House has also passed the “Protecting the Right to Organize Act of 2021,” which includes restrictions for independent contractors similar to AB5, though it appears to be stagnant due to fierce opposition that makes the bill unlikely to pass the Senate. If the measure were to pass as-is on a federal level, more than 300,000 owner-operators could be forced out of their own businesses, sending the trucking industry into a tailspin of epic proportions and causing a complete breakdown of the US supply chain.