About AB-5: Capacity, Rates, and Next Steps for Carriers

A trucking capacity environment already stretched to its limits may soon face another layer of compression: A sudden legal pushback against motor carriers in California using independent-contractor drivers to haul freight in the state.

Impact on capacity and rates

A court order reinstating California’s Assembly Bill 5’s (aka A.B.) application to motor carrier operations could snap into place as soon as late May, should efforts by the California Trucking Association come up short in halting a recent court ruling.

Metrics that track the capacity and utilization environment show that domestic trucking capacity is already near maxed out, and that there’s unprecedented pressure in the market and on trucking rates. The economy is expected to continue to gain steam as the recovery continues from the COVID-19 recession last year, and truckbound freight likewise is largely expected to continue its pattern of growth through the spring and summer. 

Should motor carriers suddenly have to comply with A.B. 5’s restrictions on the use of independent contractor workers, such as leased owner-operators, it could stand to only further tighten capacity at this critical point in the economic recovery, with commodities and labor shortages already creating strong headwinds.

Even more critical is the chokepoint this ruling could create for drayage operations, who rely heavily on independent contractor drivers. Major ports on the West Coast are already facing a mounting backlog, and they’ve been working at or over capacity for months to clear the jam-up of container ship arrivals. 

Any measures to curtail use of independent-contractor drivers at ports will likely, at least in the next few months, only stand to exacerbate these issues and further impede the flow of goods from the ports to across the country. 

Politics on the issue aside, A.B.’s sudden implementation for motor carriers could have a pronounced and immediate impact on rates, not only in California but throughout distribution channels.

Background on A.B. 5

Should the restriction take place as expected this month, it would largely block motor carriers’ ability to contract freight to contractor drivers, pushing them instead to use only company employees. 

Though many motor carriers had already began working contingency plans in response to California’s 2019-enacted Assembly Bill 5 (aka A.B. 5), carriers of all sizes in the state still do lean on independent-contractor drivers, those that own their own truck and/or trailer and haul freight on a contracted basis for just one or a handful of other, larger motor carriers. It’s a common practice by motor carriers across the country and across applications and segments.

California’s legislature enacted the law in late 2019, after the state’s Supreme Court instituted the so-called ABC test for determining whether a company can use independent-contractor workers. The second point, the so-called B-prong of the ABC test, blocks companies from hiring independent contractor workers unless the work is “outside the usual course of the hiring entity’s business.” That prong of the ABC test is largely interpreted as preventing motor carriers from hiring independent-contractor drivers to haul loads, since carriers’ “usual course of business” is hauling freight.

State trucking associations in California have been fighting the law’s enactment, arguing it goes too far in regulating the use of independent contractors in trucking. Proponents of A.B. 5’s application to trucking argue that the law is necessary to prevent abuse of the independent-contractor model. 

State associations have also said they’ve been active in transitioning former independent-contractor drivers into full-fledged DOT-registered motor carriers, meaning they could operate under their own DOT authority as an independent motor carrier. Thus, they could accept loads from other carrier’s brokerage operations as a way to comply with the law. 

Next steps in California

The saga surrounding this issue in California, specifically, still must play out fully in court — a process that likely will take place over the next 2-3 years. 

Trucking, and motor carriers, had received a court-ordered reprieve from the law in January 2020. A preliminary injunction issued by the U.S. District Court in Southern California blocked the state from enforcing the law on motor carriers until the California Trucking Associations’ lawsuit against A.B. 5 is fully adjudicated. However, the 9th Circuit Court of Appeals this month lifted that injunction, meaning that motor carriers must comply with the law while the broader lawsuit is adjudicated. 

CTA is appealing that decision. Meanwhile, the underlying lawsuit is set to be heard by the U.S. District Court in Southern California. Any decision there likely will be appealed to the 9th Circuit appellate court again. Any 9th Circuit decision will likely then be appealed to the U.S. Supreme Court for possible final ruling.

Impact on Loadsmart carriers and shippers

Loadsmart intends to maintain its relationship with carriers and shippers and help both parties work through whatever issues may arise from this legal change in California. As always, our carrier and shipper support centers are open, and representatives can help answer questions on any loads or contracts.

If you’ve enjoyed these insights and have questions or comments, start a conversation with us on your loadboard, resource center, or send an email to capacitydevelopment@loadsmart.com 

About Loadsmart

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