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California Trucking Industry Faces Continuing Legal Uncertainty After the California Court of Appeal Finds the Expanded AB 5 ‘ABC’ Test Not Preempted by the FAAAA

In the latest Chapter of the continuing saga of whether the Federal Aviation Administration Authorization Act (FAAAA) of 1994 preempts either California’s expanded Dynamex “ABC” test set forth in AB 5 or the recent statutory amendments implemented on September 4, 2020 in AB 2257 when applied to a decision by a federally-licensed motor carrier to classify its drivers as “independent contractors,” a unanimous California Court of Appeal held that it does not because, in the Court’s view, the current ABC test is a “generally applicable worker-classification law that does not prohibit the use of independent contractors” and, therefore, “does not mandate the use of employees for any business or hiring entity.”

Background

In brief background, the Defendants (Cal Cartage, CMI, and K&R) in this latest case are federally licensed motor carriers that operate trucking and drayage companies in and around the Ports of Los Angeles and Long Beach and utilize the services of independent owner-operator truck drivers who lease their vehicles and services to Defendants under their operating authority to perform drayage (transportation of cargo for short distances to and from the ports) work. In enacting SB 1402 in 2018, the California Legislature found that port drayage drivers were “rampantly” misclassified as independent contractors and not employees which caused them “wage theft and [left them] in a cycle of poverty.” As a result, the Los Angeles City Attorney, on behalf of the People of California, filed complaints in Los Angeles Superior Court against the three Defendant motor carriers alleging that this continuing misclassification violated BPC Section 17200, California’s Unfair Competition Law, in several material ways, including alleged failures to: (1) pay taxes for unemployment insurance and employment training; (2) withhold state income and disability taxes; (3) provide workers’ compensation insurance; (4) pay minimum wages; and (5) reimburse drivers for work-related expenses “amounting to tens of thousands of dollars per year.”

While the case was pending, the California Legislature passed AB 5 which became effective on January 1, 2020, and expanded upon the ABC test set forth by the California Supreme Court in Dynamex in April of 2018 (which replaced the long-standing Borello standard which had been in effect since 1989 regarding claims brought under California’s Wage Orders) to essentially make it the default test for all Labor Code, Unemployment Insurance and Wage Order claims; created numerous exemptions for specified industries to the expanded ABC standard which, if applicable, were to be determined by the prior, more flexible Borrello standard; and significantly broadened governmental enforcement powers. However, only eight months later on September 4, 2020, while the petition for writ of mandate was pending in this case, the Legislature passed AB 2257, which repealed and replaced AB 5; revised certain of the numerous exemptions to the expanded ABC test, including broadening the business to business exemption, adding numerous businesses to the referral agency and professional services exemptions, and creating several new music industry and performer exemptions, but continued to exclude, among others, the gig economy, franchising, trucking, motion picture, and television industries.

However, in this latest motor carrier case, because the parties could not voluntarily agree after the passage of AB 2257 regarding which test, the expanded ABC or Borrello, should be applied to the misclassification-based UCL claims as alleged, after much procedural wrangling, the Superior Court obliquely sided with the Defendants that the expanded ABC test was preempted by the FAAAA and, thereafter, the People petitioned the Court of Appeal for a writ of mandate to make a determinative decision on the issue.

The Court of Appeal Decision

After reviewing the “relatively thin” factual record in the case; the evolution of the Borrello, Dynamex, and expanded ABC tests and subsequent legislation discussed above; the principles of federal preemption; and the legislative history of the FAAAA; the Court of Appeal, in reliance on the California Supreme Court’s Opinion in People ex rel. Harris v. Pac Anchor Transportation, Inc., et al, (2014) 59 Cal4th 772, 785-87 (Pac Anchor), concluded that the current ABC test was a “generally applicable worker classification law that [did] not prohibit the use of independent contractors” and was, therefore, not preempted by the FAAAA.

In support of its holding, the Court of Appeal rejected Defendants’ argument that, “under the clear terms of Pac Anchor,” the application of prong B of the ABC test – namely, that the worker performs work outside the usual course of the hiring entity’s business – would make it impossible for them, as motor carriers, to contract with an owner-operator as an independent contractor without “significantly affecting [their] prices, routes, and services” and forcing them to reclassify drivers as employees and, accordingly, it should be preempted by the FAAAA. Rather, the Court of Appeal found that, in accordance with Pac Anchor (which also involved an “essentially identical” UCL claim based on Section 17200), because the present claims also arose under the UCL, “nothing…would prevent defendants from using independent contractors [to drive their trucks]” as long as they “classif[ied] these drivers appropriately and compl[ied] with generally applicable labor and employment laws.” Thus, in the Court’s view, the fact that the independent owner-operator truck drivers, as currently used by the Defendant motor carriers, may be incorrectly classified did “not mean that the ABC test prohibits [them] from using independent contractors,” and, therefore, the ABC test was not the type of law that Congress intended the FAAAA to preempt as it was not contrary to its “deregulatory purpose,” and did not, either directly or indirectly, have “a connection to or reference to carrier rates, routes or services.”

Accordingly, the Court granted the People’s writ of mandate because the recent “statutory amendments implemented by AB 2257 are not preempted by the FAAAA,” but, in so doing, expressed no view on whether the ABC test, as amended, either violated the Dormant Commerce Clause or could be applied retroactively.

Practical Observations

In a footnote to its Decision, the Court of Appeal recognized that the exact same issue, namely, whether the FAAAA preempts application of the expanded ABC test, has been the subject of extensive litigation in the federal courts including: (1) a lawsuit filed by the California Trucking Association in the United States District Court for the Southern District of California in late 2019 resulting in a preliminary injunction of AB 5 as preempted by the FAAAA that was recently argued and is under submission in the federal Ninth Circuit Court of Appeals; (2) a decision by the First Circuit Court of Appeals holding that prong B of the Massachusetts’ ABC test, containing the same language as California’s, was preempted by the FAAAA; and (3) other decisions pre-dating AB 2257, in which the United States District Courts for the Northern and Central Districts of California found, as did the Southern District above, that the FAAAA preempted the ABC test; and one in the Eastern District, utilizing the same analysis as the Court of Appeal here, holding that the ABC test was not preempted by the FAAAA.

In these circumstances, as the issue of FAAAA preemption of AB 5 is by no means “settled law” in California, motor carriers (or other transportation companies) who may want to continue utilizing independent owner-operator truck drivers to lease their vehicles and services and move freight under their operating authority, should exercise great care to make certain that those relationships are in compliance with AB 2257.

In sum, in this currently labyrinthine world of litigation and legislation impacting the appropriate classification of independent contractors in California, we suggest that you seek the advice of your AF Labor & Employment or other trusted professional to determine to which test your Company may be subject regarding whether a worker is or should be classified as either an independent contractor or employee.

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