A federal court of appeals in California recently ruled that the state's strict independent contractor test known as "AB5" is not preempted under federal law. The ruling is a blow to motor carriers statewide.
Under AB5, a person is presumed to be an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:
- The person 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.
- The person performs work that is outside the usual course of the hiring entity's business.
- The person is customarily engaged in an independently established trade, occupation, or business of the same nature that is involved in the work performed.
A court had previously ruled that the state could not enforce AB5 because it was "preempted" by federal law. The court last week disagreed. It was not swayed by the California Trucking Association's arguments that the application of AB5 would have an indirect, but significant, effect on prices, routes, or services because it would fundamentally change the way that motor carriers do business, driving up costs, requiring consolidation or elimination of routes, and necessarily passing costs along to the consumer. The court pointed to its decisions in the prevailing wage and meal and rest break context to support the finding that any such impact would not amount to "impermissible effects," as required for preemption.
The dissenting opinion argued that a law such as AB5, which affects both motor carrier's relationships with their workers and also significantly impacts the services motor carriers are able to provide to their customers, should be preempted. The dissent distinguished the prevailing wage and meal and rest break cases that the majority relies on by noting that those laws did not acutely interfere with the motor carriers' businesses and would lead to only modest increases in costs. AB 5, on the other hand, will significantly interfere with motor carriers' operations at the point at which they provide a service to their customers because it determines the means of providing those services. (For example, it will diminish the specialized transportation services motor carriers can provide and eliminate flexibility to accommodate fluctuations in supply and demand.)
This issue is ripe to be resolved by the Supreme Court. In addition to the Ninth Circuit (including California), the Seventh Circuit likewise found that the independent contractor for trucking is not preempted by federal law. On the other side of the aisle are the First and Third circuits, both of which did find preemption. With the current conservative majority, it is conceivable that the Supreme Court would find that federal law preempts application of state misclassification statutes to truck drivers.
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