AB 5 has changed the rules for how employers determine whether a worker is an employee or independent contractor.
In 2019, the California Supreme Court issued a landmark decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles.
Ultimately, the California Supreme Court reinterpreted and rejected the Borello test for determining whether workers should be classified as either employees or independent contractors. The California legislature made this standard law with Assembly Bill No. 5, or AB 5.
After Jan 1st, 2020, AB 5 now applies to every employer in California. The new standard: workers are employees unless proven otherwise.
UPDATE: AS OF JULY, 2022, THE US SUPREME COURT HAS DENIED A HEARING AGAINST AB 5. AB 5 IS ENFORCED AS CALIFORNIA LAW.
June 24, 2021, David Cullen : CTA to Petition Supreme Court on AB5 Ruling : CTA is seeking a review of the appellate court's ruling that CTA v. Bonta that the restrictive "ABC" employment test required by AB5 is not preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAA).
What is AB 5?
AB 5 is a law that significantly restricts the designation of workers as contractors. By default, all workers are considered employees. AB 5 also sets up ABC test defines if a worker is an employee or independent contractor in California.
A worker is considered an independent contractor if and only if the hiring entity meets all three conditions of the ABC test:
The worker is independent of the hiring organization in connection with the performance of the work, both under the contract for the performance of the work and in fact.
The worker performs work that is outside the hiring entity’s business.
The person is routinely doing work in an independently established trade, occupation, or business that is the same as the work being requested and performed.
Does AB 5 apply to me?
Yes. Unless you have already restructured your company to comply with AB 5, your company is subject to the new standard.
If you hire "owner-operators" to run your trucks or pay workers with 1099-MISC instead of W-2, then you run the risk of violating AB 5.
There are only two exceptions in the trucking industry to AB 5: "owner-operators" that own their own truck, and brokerage firms that contract out freight.
AB 5 in Practice
Q: I am an owner operator with two trucks.
I have a driver that I pay with a 1099-MISC to drive one of my trucks. Are they an employee or contractor?
A: Your driver is an employee. You do not pass rule B of the ABC test - the worker MUST perform work outside of the hiring entity's business.
Q: I run a small brokerage.
I have a few "owner-operators" on-call at any time to handle freight. Do I have employee liabilities to them?
A: Possibly not. As long as the drivers you contract have themselves secure operating licenses as Licensed Motor Carriers (LMCs), then you can treat them as contractors. However, if a contractor did not set up their business properly, you will be liable for their benefits.
Q: I am an owner operator with one truck.
I drive my own truck. Do I have to worry about this?
A: No. However, if you are not registered as a Licensed Motor Carrier, you will find it difficult to get work. No trucking company or brokerage is allowed to hire you until you set up your own company.
I heard drivers with Lyft/Uber were exempt from AB 5. Why don't those exemptions apply to my drivers?
The California Supreme Court has taken a hard stance against company-contractors in the trucking industry.
" In April 2021, the Court released an injunction stopping the State from prosecuting companies for AB 5 violations. "
"In October 2021, the California Supreme Court denied a petition for certiorari by Cal Cartage Transportation Express LLC, which claimed a state appeals court's 2020 ruling upholding the law known as AB 5 threatens the longstanding "owner-operator" model in which drivers who own their trucks work as independent contractors. "
- California Trucking Association
The Business to Business Exemption
While trucking companies sadly did not fall under the Proposition 22 umbrella, recent court cases show a possible exemption.
One of the exemptions in AB 5 is for bona fide “business-to-business” contracting relationships. The statute describes these as relationships in which a “business service provider” provides services to a “contracting business.” It is arguably the narrowest exemption in the statute, with approximately a dozen separate criteria.
As far the Court is concerned, the "owner-operator" model is a violation of AB 5 law, and will be punished.
What happens if I misclassify an employee as a contractor?
The purpose of AB 5 is to prevent contractors from losing benefits they normally would have received as employees. If a California worker does not qualify to be an independent contractor, the worker's employer must provide the worker with the benefits and protections mandated by the California employment laws.
California Unemployment Insurance
California Paid Family Leave
California Short-Term Disability
If a misclassified employee did not receive any of these benefits during their time working with you, they can sue you for the financial value of those benefits. You will be forced to reimburse the value of those benefits and additional penalties. Additionally, you will be audited by the EDD for under provision of employee benefits.
Understanding Employee Penalties.
Employee benefits, such as worker's compensation, can be expensive. However, failure to provide worker's compensation will bankrupt your company.
Let's assume a typical scenario: You are a small trucking company with several owner-operator drivers. These drivers are mislabeled as contractors according to AB 5. One day, one of your drivers has an accident and receives medical injuries.
Your driver is sent to the hospital to treat medical injuries. Your workspace is asked for your driver's worker's compensation claim. Since none exists, you are responsible for paying the bills related to illness or injury.
Your employee can file a civil action against you in addition to filing a workers’ compensation claim.
Failing to have workers' compensation coverage is a criminal offense. Section 3700.5 of the California Labor Code makes it a misdemeanor punishable by either a fine of not less than $10,000 or imprisonment in the county jail for up to one year, or both. Additionally, the state issues penalties of up to $100,000 against illegally uninsured employers.
The Uninsured Employer's Benefit Trust Fund (UEBTF) can file liens on your property following an inability to pay.
On average, an uninsured worker's compensation runs from $100,000 - $200,000.