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California’s ABC Test: The Fundamentals

California. Great place for movie stars, techies and wine lovers. But not such a great place if you’re an owner-operator or motor carrier that relies on them, thanks to the California Supreme Court’s 2018 decision in Dynamex Operations West, Inc., case.

Essentially, in what is being labeled a landmark decision, it classifies all independent contractors (ICs) as employees unless companies can demonstrate otherwise based on the so-called ABC test. Unfortunately, this won’t be an easy test to pass for most of California’s 70,000+ owner-operators. That puts drivers and motor carriers in the Golden State in the dark about what to do—or if they should do anything at all.

 

What the Heck is the Dynamex Case?

The Dynamex ruling changed the rather open-ended and long-prevailing S.G.Borello and Sons precedent of nearly 30 years. Now, the burden is on companies to prove drivers are ICs by demonstrating they pass the ABC test:

A) the worker is free from the control and direction of the employer

B) the worker is doing a job that’s outside the employer’s main business and

C) the worker ordinarily operates in an independently established trade, occupation or business.

Greg Feary, a partner in the Indianapolis-based trucking law firm of Scopelitis, Light, Hanson & Feary, P.C., says the second one, the so-called “B prong” is the hard one for motor carriers! Plaintiffs’ attorneys seeking reclassification of their clients to employee status assert that motor carriers do what owner-operators do—an assertion made by the attorneys in the Dynamex case.

 

Who Should be Concerned?

If the ABC test is enforced, motor carriers will have to respond. “Making” their owner-operator drivers into employees is only one option and it is contingent on whether these drivers want to join the company’s ranks. The vast majority of them value their independence. Otherwise, they would take one of the numerous employee driver jobs available in California and across the country.

Shippers and retailers should also be concerned. According to Feary, this is because of Bill 1402 in California which essentially holds shippers liable when their motor carriers don’t pay their wage and hour violations. In other words, retailers could be held responsible if their carrier misclassifies its drivers, gets penalized and doesn’t pay.

 

What’s the Risk to Carriers?

Civil penalties for misclassifying In California range from $5,000 to $25,000 per violation. Businesses can also be on the hook for paying back taxes, interest on back-pay and FICA taxes that weren’t withheld. And if it can be proven that the misclassification was intentional, there could be criminal and civil penalties.

 

What is a Motor Carrier to do?

Feary laid out the options this way. First, if you’re a motor carrier and you doubt you’ll be able to prove your drivers perform distinct and different work than you offer as a motor carrier, you could hire them as employees.

Your second option, according to Feary, is becoming a property broker or third-party logistics provider (3PL) and tendering freight to motor carriers. If the drivers operating as independent businesses want to obtain motor carrier authority, he explains, that would create a compelling argument that those businesses have the requisite distinction in the trade occupation or profession.

The third option is simply practical. Feary describes it as complying with Wage Order Number 9, which is the trucking wage order dealing with minimum wage, overtime, meals, rest breaks and wage statements. According to Feary, carriers could allow ICs to remain independent and just provide them compensation that meets the requirements of the wage order for employees, by, for instance, paying them for breaks and work that does not involve the movement of truck piece rate—for example, pay based on mileage.  

 

What Happens in California Doesn’t Always Stay in California

Think you’re immune from what happens ‘out there’ in California? New Jersey and Massachusetts have laws restricting businesses in their classification of workers as ICs; in fact, New Jersey also uses the ABC test. In recent years, there have been suits regarding employee classification in Wisconsin and Connecticut, too.

Map of the Dynamex decision's impact on other states.

 

Hold off the Nail-Biting, For Now

California’s third-party carriers are predominantly in a wait-and-see mode. Feary believes there are a number of cases that in the next 12 to 18 months will flesh things out—especially with regard to interpreting and applying the B prong of whether the IC performs work that’s outside the employer’s main business.  

Feary believes all of this requires study with regard to both the regulations associated with compliance and the economics of what's going on. After all, moving to an all-employee model or model based on complying with Wage Order Number 9 will impact businesses’ costs. And in the case of the employee model, they may lose committed ICs and then be saddled with a new staffing and training challenge—in a market where there’s already a labor shortage!

All of this amounts to yet another ‘Big One’ that the state perched on the edge of the San Andres Fault anxiously awaits.