Judge Denies Latest Challenge to California’s AB5 Independent Contractor Law

Before I get started on this update, I just wanted to remind everyone that Assemblywoman Lorena Gonzales, a Democrat, was the one who sponsored this bill back in 2018.

In January of 2022, she announced her resignation from her 80th District for a leadership at the California Labor Federation, AFL-CIO.

The judge on this case, basically said this matter should be handled by the legislature to remedy this problem. So just remember who is on your side when it comes time to vote. California is known for it’s antibusiness nature.

A California federal judge on March 15 rejected trucking’s latest legal challenge to block the state’s enforcement of its Assembly Bill 5 law that severely restricts the use of independent contractors.

Passed in 2019, AB5 put in place a strict “ABC test” for determining whether a worker is an independent contractor or an employee.

All three prongs of the ABC test must be in place for a worker to be considered an independent contractor. The “B” prong says workers cannot be classified as independent contractors if those workers are in the same business as the employer. It’s nearly impossible for trucking’s traditional leased owner-operator model to clear that bar.

The California Trucking Association and the Owner-Independent Drivers Association had renewed motions for a preliminary injunction to keep the law from being enforced against the trucking industry. Oral arguments were held last fall.

The U.S. District Court for the Southern District of California rejected the associations’ arguments that AB5 violates several federal laws and denied its request for a preliminary injunction.

On its website, the California Trucking Association said, “We will be discussing remaining options moving forward with counsel and supporters of the litigation.”

The trucking attorneys at Scopelitis, Scopelitis, Garvin, Light, Hanson & Feary, in a March 18 email alert, said “We anticipate CTA will appeal the decision, but there will be no relief from AB 5 in the meantime.”

“The district court judge was sympathetic to the disruptions and burdens AB 5 places on the trucking industry,” said the Scopelitis attorneys. “However, he indicated it was better left to the legislature to remedy the problem.”

In his decision, Benitez wrote, “Remedying complexities and perceived deficiencies in AB5 are the kind of work better left to the soap box and the ballot box than to the jury box.”

Five Years of Litigation Fighting California’s AB5

2019: AB5 was signed into law and was swiftly challenged in court.

2020: The law was scheduled to go into effect Jan. 1, 2020. On the last day of December 2019, trucking was able to get a preliminary injunction granted to keep it from being enforced against the industry while the California Trucking Association’s legal challenge made its way through the courts. That decision was made by Roger Benitez of the U.S. District Court for the Southern District of California — the same judge who wrote this new decision rejecting the latest challenge.

2021: The preliminary injunction was reversed by the U.S. Court of Appeals for the 9th Circuit in 2021, with a panel of the court ruling that California Trucking Association was unlikely to succeed on the merits with respect to its claim that AB5 is preempted by FAAAA. However, the court kept the injunction in place pending CTA's petition for review by the US Supreme Court.

2022: In the summer of 2022, three years after the bill’s passage, the Supreme Court declined to hear CTA’s challenge to AB5. Soon afterward, Judge Benitez lifted the injunction.

However, CTA at that time said the case was not over, arguing that AB5 as applied to trucking in California violates parts of the Federal Aviation Administration Authorization Act was only argued through motions on the injunction, not in a full court procedure.

OOIDA joined the litigation, and both CTA and OOIDA filed for a renewed motion for preliminary injunction, which was ultimately combined with the full merits trial. Oral argument took place last fall.

On March 15, Benitez denied those claims, saying among other things that the Ninth Circuit decision reversing the court’s prior preliminary injunction negated them.

AB5 Advice for Motor Carriers and Owner-Operators

CTA advised owner-operators and entities who do business with them continue to consult with legal counsel.

Since AB 5 was adopted, both the courts and briefs in CTA’s litigation have suggested that the business-to-business exemption to the ABC Test (CA Labor Code Section 2776) could apply to owner-operators and the entities who hire them, the association notes.

“However, businesses must continue to carefully examine their contractual relationships in the face of AB5 and still-evolving case law.”

FAAAA: Interstate Commerce vs. State Labor Laws

The primary challenges to AB5 have been that the law interferes with interstate commerce and violates the Federal Aviation Administration Authorization Act of 1994.

In the FAAAA, Congress said states “may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.”

Benitez’ decision in this latest case references the Ninth Court decision, which said of FAAAA, “Congress did not intend to preempt laws that implement California’s traditional labor protection powers, and which affect carriers’ rates, routes, or services in only tenuous ways.”

Benitez explained in his decision that AB5’s employee classification scheme does not directly conflict with the FAAAA.

“First, it is not impossible for truck drivers to comply with both federal and state law because there is simply no federal standard of classification requiring compliance. The FAAAA does not dictate that truck drivers must be classified as independent contractors or that drivers are not subject to state wage and hour laws. Among the 50 states there are various methods used for classifying workers."

In addition, he said, “While the jury is out as to whether AB5 substantially affects carrier prices, routes, or services, it does not attempt to do so directly.”

Dormant Commerce Clause

The judge also ruled against the suit’s claims that AB5 violated the Dormant Commerce Clause and the Equal Protection Clause of the U.S. Constitution and the California constitution

“As to CTA’s dormant Commerce Clause claim, the court found that AB 5 has no discriminatory intent or effect that would favor California truckers, and without that, courts should generally not engage in a weighing of benefits versus burdens,” explained the attorneys at Scopelitis in an email alert.

In citing a case precedent involving the National Pork Producers Council, Benitez wrote, “the mere fact that a firm engaged in interstate commerce will face increased costs as a result of complying with state regulations does not, on its own, suffice to establish a substantial burden on interstate commerce.”

Benitez said, “California’s interest in protecting in-state drivers from being misclassified as independent contractors and losing statutory entitlements under state labor laws cannot be weighed on a scale opposite the additional dollars spent on compliance by freight hauling businesses.

“While AB5 has economic effects, the effects do not confirm purposeful discrimination against interstate commerce in the design of AB5," the decision explained. "Although courts are not well-equipped to do such weighing… it does not appear that the pure economic burdens on out-of-state worker-drivers and freight hauling firms substantially outweigh the in-state benefits of correctly classifying worker-drivers as employees.”

Benitez several times cited decisions from the Supreme Court, including this quote: “Preventing state officials from enforcing a democratically adopted state law in the name of the dormant Commerce Clause is a matter of ‘extreme delicacy,’ something courts should do only ‘where the infraction is clear.’”

Benitez said that the asserted AB5 infraction is not clear.

Equal Protection Clause

The legal challenge also charged that AB5 violated the Equal Protection Clause of the Constitution.

“CTA also claimed that the legislature improperly targeted the trucking industry under the Equal Protection Clause, pointing to bill sponsor Assemblywoman Gonzales’ public statements to that effect,” said the Scopelitis attorneys. “The court indicated that one legislator’s comments could not be attributed to the entire legislature’s motives for enacting a law.”

The Scopelitis brief also explained that CTA had relied heavily on a recent Ninth Circuit decision in which the appellate court found an Equal Protection violation in favor of Uber, Lyft, and other gig companies. Yet that decision was subsequently vacated for rehearing by the full Ninth Circuit, so it’s no longer a precedent in this case.

Truth in Leasing Rules and AB5’s B2B Exemption

OOIDA tried to make the case that AB5’s B2B exemption violates federal truth-in-leasing rules, making the law irrational.

Under the B2B exemption, a driver-worker need not be classified as an employee if he or she contracts as a sole proprietor or a business entity.

However, Benitez denied that claim.

“At best, Plaintiffs’ contention seems to be an argument that if a motor carrier must exercise exclusive possession and control of a leased truck, then by implication, it must also exercise exclusive control over the owner-operator who may drive the truck,” he wrote.

He said that OOIDA “simply does not explain how [truth-in-leasing] erects an obstacle to using the B2B exemption. Whatever the effect of the federal Truth-in-Leasing regulations are on the ability of interstate owner-operators to take advantage of the B2B exemption (when hauling freight into or inside of California), it is not at all clear that AB5 treats interstate owner-operators in an irrational manner. It is too far of a drive to go from saying that federal leasing disclosure regulations reveal that California’s B2B exemption is irrational.”

Why is the ABC Test Such a Problem for Trucking?

AB5 codified into state law a previous California Supreme Court decision setting forth an “ABC” test in determining whether a worker is an employee or an independent contractor. That test says a worker is an employee, unless it can be certified that:

• 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; and
• C the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

FINALLY, the Business to Business regulations for Motor Carriers & Independent Contractors can be found in NTA’s Members Portal under Independent Contractor Resources – Federal Regulations