California’s AB5 Law: What This Means for Owner-Operators

Last Updated September 23, 2024

California Assembly Bill 5 (commonly known as the California AB5 law) has had an outsized impact on owner-operators in California. Though not necessarily intended as a California truck law, the bill heavily influences when truck drivers are classified as employees within the Golden State. California owner-operators have even taken to protesting the loss of their right to choose whether to work as an owner-operator or company driver.

So, what is AB5, and how do these California trucking laws affect owner-operators? Here’s what you need to know about the rules for independent contractors in California and what the AB5 law means for the industry as a whole.\

What Is the California AB5 Law?

California Assembly Bill 5 was signed into law in September 2019 and went into effect on January 1, 2020. This law was designed to restrict the ability of businesses to classify workers as independent contractors instead of employees. Because so many truck drivers work as independent owner-operators, the law has a large effect on the trucking industry.

What Is the Purpose of AB5?

The stated purpose of AB5 is to ensure that workers in a wide range of industries are treated as employees, rather than independent contractors. By working as full-time employees, these individuals are guaranteed certain key rights, such as being paid at least minimum wage and receiving health insurance and paid time off, as well as workers’ compensation benefits, overtime pay, and more.

Who Is Affected by AB5?

AB5 applies to workers who live in California. While there are some exemptions to AB5 (more on those later), by and large, the law requires that employers treat their workers who reside in California as full-time employees unless they can prove that these individuals qualify as independent contractors based on the AB5 ABC test developed in conjunction with the law.

What Is the AB5 ABC Test?

The AB5 ABC test is a crucial element for employers of California residents who want to prove that a worker is an independent contractor rather than an employee.

The ABC test uses three key factors to determine if a worker could be considered an independent contractor. Most notably, a worker must meet all three factors to be considered a contractor rather than an employee—two out of three won’t do.

The three “prongs” of the test are:

1. The worker is free from the hiring entity’s control and direction in connection with how they perform the work.
2. The worker’s tasks are outside the usual course of business for the hiring entity.
3. The worker is “engaged in an independently established trade” or business that is of the same nature of the work they perform for the hiring entity.

For California owner-operators, the second prong is the most problematic. Owner-operators work in shipping and logistics—the “usual course of business” for the trucking companies they lease-on with. Because of this, they cannot qualify as independent contractors under the AB5 California law.

AB5 Law Exemptions

The controversial implementation of AB5 led to the passage of Assembly Bill 2257 in September 2020, and the voter-approved Proposition 22 in November 2020. These measures have created a large list of job categories that were exempt to AB5 requirements. However, it is important to note that neither of these changes apply to the trucking industry.

Proposition 22 was specifically focused on app-based transportation and delivery drivers, such as individuals who work for Lyft or Uber. Assembly Bill 2257’s list of exemptions was much wider-ranging, with the affected roles being instead subjected to the Borello test (which makes it easier to qualify as an independent contractor).

Some notable AB5 law exemptions include:

• Musicians and other select music industry roles
• Certain licensed insurance agents and brokers
• Certain licensed physicians, dentists, surgeons, and psychologists
• Certain licensed attorneys
• Certain architects, engineers, and accountants
• Certain direct salespersons

What the California AB5 Law Means for Trucking Owner-Operators

So, what does AB5 mean for owner-operators? In a nutshell, the law entails that owner-operators based in California who lease-on with trucking companies must be treated as employees, rather than independent contractors. With this in mind, here’s a look at some potential options that trucking owner-operators could consider as they confront this law.

1. Obtain Employee Status

At face value, the California AB5 law means that owner-operators who lease on with a trucking company must be treated like full-time employees. This gives owner-operators access to employee benefits such as health insurance and workers’ compensation, but it also fundamentally changes the nature of their employment. After all, many drivers who work as independent contractors do so by choice.

2. Moving Out of State

Many owner-operators are actually electing to move out of California, so they won’t be affected by AB5. By living in another state, owner-operators can maintain their independent status and continue to lease-on with their preferred carriers. Of course, moving comes with its own challenges.

3. Obtain Operating Authority

Wondering how to get around AB5 law? Meeting the qualifications to obtain operating authority and changing your working status could help. Drivers with their own operating authority who drive for a brokerage division rather than leasing-on won’t be subject to AB5. However, this strategy can result in significantly increased costs, administrative responsibilities, and compliance responsibilities for the driver.

4. Deadhead

Finally, owner-operators could work around California AB5 law by deadheading. This means that while drivers can deliver loads into the state, they won’t be able to pick up outbound loads while in California.

AB5 Law 2024 Update

The AB5 law has been highly controversial since it was passed, with several challenges to the law coming directly from the trucking industry itself. So, what’s the latest AB5 update? Unfortunately, the most recent events regarding challenges to AB5 don’t bode well for owner-operators.

U.S. District Court for Southern California Dismisses Trucking Industry’s AB5 Challenge

The latest blow in the fight against AB5 came in March 2024 when the U.S. District Court for Southern California rejected a challenge that had been submitted by the California Trucking Association and the Owner-Independent Drivers Association. They had renewed motions to implement an injunction that would keep the law from being enforced on the trucking industry based on arguments that AB5 violated federal law.

The federal judge who oversaw the case ultimately determined that addressing AB5 was the responsibility of the legislature rather than the court system. While the California Trucking Association is expected to appeal the judge’s ruling, this outcome means that owner-operators are still subjected to AB5.

This case dismissal is just the latest in a series of legal setbacks the trucking industry has faced in its battle against AB5. While the trucking industry was able to obtain a preliminary injunction in 2020, that injunction was reversed by the U.S. Court of Appeals in 2021. The California Trucking Association petitioned to have its case reviewed by the U.S. Supreme Court, but the court declined to hear the case in 2022, which resulted in the injunction getting lifted.

Time will tell if the California Trucking Association is able to successfully make its case elsewhere, but for now, owner-operators in California must be mindful of how AB5 affects their work and carefully consider their options.

California AB5 Law FAQs

What is the new independent contractor law in California?

California’s independent contractor law, known as AB5, is designed to determine whether a worker in California qualifies as an independent contractor or employee. This law establishes a set of three conditions that a hiring entity must prove are present in order for a worker to be considered an independent contractor rather than a full-time employee.

How does AB5 affect truck drivers?

Motor carriers in California must comply with AB5. While this law does not ban California owner-operators, it makes it difficult for them to contract with trucking companies. Under AB5’s ABC test, truck drivers would generally be considered employees since their work tasks fall within the course of a trucking company’s standard business activities.

Does AB5 apply to contractors outside of California?

No. AB5 only applies to workers who live in California, regardless of where their employer is based. Contractors who live outside of California are not affected by the California AB5 law.

Who is exempt from AB5?

Several types of jobs have AB5 exemptions and are instead subject to the Borello test to determine whether a worker is considered an independent contractor or an employee. However, the trucking industry is not exempt.

Among the positions that are exempt from AB5 are certain musicians, licensed insurance agents, physicians, dentists, attorneys, landscape architects, direct salespersons, competition judges, and home inspectors. A full list of AB5 exemptions can be found on the State of California’s Department of Industrial Relations website.

What is California Proposition 22?

California Proposition 22 is a ballot initiative that was passed in 2020 in response to the AB5 California law. This voter-approved initiative defines app-based transportation and delivery drivers as independent contractors. This law only applies to these types of drivers and does not include the trucking industry. The law has been subject to back and forth court battles in the state since it was passed.