What Freight Brokers Need to Know About California’s A.B. 5
January 1st, 2020 is going to bring interesting changes for our carrier partners in California. The state recently passed Assembly Bill 5 (A.B. 5), which is legislation that will “codify a landmark ruling issued by the state Supreme Court last year.” The new law “would apply a definitive ‘ABC test’ to determine which workers can be classified as independent contractors and would put the burden of proof on employers.” It’s a complicated topic, so we’re going to tell you what you need to know.
The ABC Test
California and several other states loosely categorize workers according to the aforementioned ABC test.
A) 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.
B) The worker performs work that is outside the usual course of the hiring entity’s business.
C) The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
As James Jaillet from CCJ pointed out in a recent publication on the topic, “the ABC test’s B-prong prevents employers from contracting with workers that perform the same work as the business itself — such as contracted owner-operators hauling loads for fleets.” This could create some sticky situations for brokerages with freight agent models as well.
What This Means for LDI Freight Agents
LDI is a true third party logistics company with an agent development program. All our freight agents are independent contractors brokering freight under our authority. When a freight agent contracts with us, he or she submits a W-9.Every year at tax time he or she receives a 1099 form rather than a W-2, which is what an employee would receive. Hence, in this industry, we colloquially refer to independent contractor freight brokers as 1099 freight agents.
We do not have brokers in-house performing freight brokering, which makes us stand apart from other companies with agent programs that do have in-house brokering teams. We provide the back office functions needed for our freight agents to be successful: proprietary TMS software development and maintenance, billing, accounting, claims, carrier on boarding, marketing, business development, and more, but our business model operates to support brokers. This means our agents aren’t competing against in-house brokers, nor are they at risk of us poaching their customers, and they have full autonomy over their direct sales.
When a freight agent partners with LDI:
A) The freight agent is free to operate his or her brokerage according to their own preferences,
B) Perform work that we do not do in-house (direct sales), and
C) Many already ran an established brokerage or agency with their own book of business and partnered with LDI to better support their business growth needs. They are already established freight brokers who were engaged in the same work they perform when aligning with LDI or another 100% agent based 3PL.
Independent Contractors or Employees?
Independent contractors aren’t entitled to employee benefits. There is no overtime pay, no mandated breaks, and workers receive full pay (i.e., no taxes are withheld).
The “gig economy” has created a grey area in regards to the B-prong section of the ABC test, which is the same section giving trouble to our CA motor carriers. The entrepreneurial websiteThe Balance Small Business elaborates:
The ‘work outside’ status is a new twist to classification. [….] Even if the ‘control and direction’ requirement of the [Uber] driver is met, it looks like an Uber driver is doing work that is WITHIN the usual course of Uber’s business. Uber is about driving people and Uber drivers, drive people.
This leads to our predicament: large logistic companies who classify themselves as Carriers or Brokerages but include an independent contractor (1099 agent/owner-operator) arm of the business are running into issues. Technically, their independent contractors are performing work that is within the logistics company’s usual course of business. Therefore, per A.B. 5, those contractors should be brought in-house as employees to receive employee benefits.
The Good, the Bad, and the Ugly
However, some truck drivers—and many other independent contractors—don’t want to be employees. They chose to run their own business and partner with others for mutual benefit to both businesses. UC Berkeley Labor Center pointed out that independent contractor jobs range from low-paying (janitorial work, grounds maintenance, and personal/child care providers) to high-paying work (architects, doctors, nurses, and engineers).
It’s absolutely possible for low earners to suffer exploitation in the gig economy. For example, the catalyst for A.B. 5 was the court case Dynamex Operations West, Inc. v. The Superior Court of Los Angeles County. The delivery company Dynamex reorganized their company so their W2 employees all became 1099 drivers. However, the plaintiff complained the drivers were performing the same tasks in the same manner as when they were classified as employees. The only difference now was they were not entitled to workers compensation, insurance benefits, and other rights reserved for employees.
California’s A.B. 5 was then drafted to protect the low earning independent contractors from exploitation. Now that it has been signed into law, USA Today’s Gabrielle Canon reported it will secure labor protections like minimum wage, overtime, and workers compensation for more than a million Californians; bring in more tax revenues from businesses; and enable unionization efforts spreading through the gig industry.
While A.B. 5 will certainly help protect vulnerable workers, independent contractors earning livable wages with favorable working conditions will also be affected by the legislature. Those who enjoy the independence that 1099 work offers, such as this barber interviewed by the Los Angeles Times, preferred the freedom from mandated hours and uncapped earning potential. A lot of individuals aren’t letting this go into effect quietly.
Courses of Action
While the law goes into effect January 1, 2020, there’s still a lot of uncertainty about how this will play out. Here are a couple approaches logistic companies are taking:
Wait and See
The Dynamex decision is currently being challenged by two other cases in federal court at the 9th Circuit Court, and CCJ’s James Jaillet reports a third might challenge it as well: “Those lawsuits assert that federal law pre-empts state law and, if successful, could offer relief to carriers operating in California.”
This may or may not turn out in the plaintiffs’ favor. Based on the developments in the cannabis market, it was a hard fight to allow carriers to lawfully transport substances that are still illegal on a state by state basis. However, as CCJ News Editor Matt Cole pointed out recently, the Department of Agriculture has yet to finalize the rules making hemp hauling legal, and therefore drivers still run the risk of being “arrested and charged with felony counts of marijuana trafficking.” It’s clearly risky to continue to operate while appeals are under review.
It’s hard to say precisely how this bill will be interpreted on a law enforcement basis, so some companies like Swift are already cutting ties with their contracted owner-operators in California. Landstar is quietly providing their California contractors with options. Jaillet reports some companies are cutting ties with California all together. Many private fleets have stated in order to be entirely compliant, they intend to only send their company drivers into the state on business.
Broker Freight to Owner Operators
A work-around solution the Western States Trucking Association has been advocating since last year is for motor carriers to set up a brokerage arm of their company. They also want owner-operators to obtain their own operating authority to move brokered freight in order to maintain their independence.
That’s not a great option. As many are familiar, obtaining authority is an expensive process. Bypassing those initial capital and operating expenses is a common reason entrepreneurs align with motor carriers, brokerages, and 3pls in the first place. It’s not only the cost to obtain authority through US DOT, but the cost to secure insurances, bonds, and other business operations expenses, that can price drivers out of running their own business profitably.
If you’re a carrier looking to set up a brokering authority, give LDI a call and we can talk you through your options. We’ve helped out a few small carriers, and we’re happy to help more.
Come What May
Uber and Lyft are working with other similar companies to form a coalition and “agree to meet certain conditions.” Jaillet from CCJ lists those as “paying above minimum wage, aiding in fuel and maintenance costs, and, in some cases, offering some health care benefits.” Basically, they’re intending to model their changes after many carrier companies’ existing independent contractor policies.
Episode 10 of LDI’s The Midnight Freight Broker briefly discusses more of this topic, and we’ll follow up in weeks to come. For now, our own Joe Adinolfi pointed out there is a list of exempted professions including direct sales, which a freight agent could argue they classify as that exemption.
Listen to Episode 10 of The Midnight Freight Broker Right here!