In a blow to California’s commercial trucking industry, the Ninth Circuit recently ruled that California law relating to whether workers can be classified as employees is not preempted by the Federal Aviation Administration Authorization Act of 1994 (the “FAAAA”). As a result, it will remain difficult under California’s current test for transportation companies to establish an independent contractor relationship with its drivers, including owner-operators. If drivers are determined by a court or regulatory agency to be employees, they will be entitled to certain wage and hour protections found in California Labor Code, including overtime pay.

California law’s new crabbed view of an independent contractor relationship

For three decades California’s test for characterizing workers as employees or independent contractors was that articulated in the California Supreme Court’s 1989 decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (“Borello”). Borello articulated a multi-factor balancing test to determine worker classification including, among other things: whether the employer has the right to control the manner and means of the work; whether the worker holds himself out as being engaged in an occupation or business distinct from that of the employer; whether the employer supplies the instrumentalities, tools, and place for the work; whether the service provided requires a special skill; whether the work is normally done under the direction of the employer or by a specialist without supervision; and whether the worker’s activity was a part of the hiring entity’s regular business. Borello allowed for a flexible, fact-specific inquiry without focusing on any one particular factor. The Borello test therefore left ample room for a finding of an independent contractor relationship.

In 2018 however, in Dynamex Operations West Inc. v. Superior Court of Los Angeles, the California Supreme Court changed the worker classification landscape by adopting a three-part “ABC test.” The three-part test presumes that a worker is an employee unless the employer demonstrates each of the following three prongs: (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. The new ABC test was a significant departure from prior law as Borello simply considered “whether or not the work is a part of the regular business of the principal” while the ABC test presumed a worker was an employee unless the worker met that condition.

After much public debate, in 2019 the California Legislature enacted Assembly Bill 5 (“AB-5”), which codified the ABC test as Labor Code section 621(b). While AB-5 exempted a number of professions from the ABC test – including doctors, accountant, and songwriters – it did not contain an exemption for commercial truckers. Thus, absent federal preemption, in order to establish an independent contractor relationship an employer must meet all three prongs of the ABC test.

Hope in the District Court…

In California Trucking Association v. Bonta (“CTA”), the California Trucking Association (the “CTA”) and two drivers who owned and operated their commercial vehicles filed a federal lawsuit against the Attorney General of California and other state officials claiming that application of AB-5 to motor carriers because AB-5 is preempted by the FAAAA. The FAAAA explicitly states that it preempts any state law “relating to a price, route or service of any motor carrier … with respect to the transportation of property” The CTA argued broadly that AB-5 effectively eliminated the ability to demonstrate that any owner-operator was an independent contractor, and in that way broadly affects motor carrier routes, services, and prices. The federal district court issued an injunction preventing the state from enforcing AB-5 against the CTA and its members.

… dashed by the Ninth Circuit.

On appeal, in a 2-1 decision the Ninth Circuit held that when evaluating preemption based on a state law “relating to” the price, route, or service of a motor carrier for purposes of FAAAA preemption, the focus is on whether the law impacts motor carriers’ business at the point where the motor carriers interact with their customers. For example, a law that binds a motor carrier to a particular price, route or service, such as requiring a motor carrier to offer services the market does not already provide, would be preempted. On the other hand, state laws of general applicability that are not directed at a specific industry and that merely affect a motor carrier’s relationship with its workforce, such overtime requirements, are not preempted even if such a law raises the overall cost of doing business or makes it more costly for motor carriers to choose certain routes or services. Applying that distinction to AB-5, the Ninth Circuit held that, though AB-5 affects the way motor carriers must classify their workers, it does not bind, compel or otherwise freeze into place a particular price, route, or service that a motor carrier offers its customers. The Ninth Circuit overturned the district court’s injunction and held that AB-5 and the ABC test are not preempted as to drivers within the commercial trucking industry.

Possible remedies

The CTA’s CEO has stated that it will continue its fight, and presumably will seek an en banc rehearing before the entire Ninth Circuit, a petition for which is due by May 26, 2021. Among the arguments the CTA may raise is whether AB-5 effectively requires motor carriers to use employees as drivers and imposes such a significant impact that it necessarily effects price, routes, or services. The Ninth Circuit addressed this head-on in CTA, noting that the dissent could point to no contrary California precedent. The majority went on to compare the text of the FAAAA and the ADA. While the two statutes are “nearly identical,” preemption under the FAAAA is “massively” limited because the statute only applies “with respect to the transportation of property” rather than to prices, routes, or services generally.

The CTA may also petition the US Supreme Court to review the Ninth Circuit’s decision. The Supreme Court may decide to grant such a petition because a circuit split on the issue of FAAAA preemption already exists as the First Circuit held that the FAAAA preempts Massachusetts’ ABC test while the Third Circuit found that the FAAAA does not preempt New Jersey’s version of the ABC test.

Congress too may get involved. In March of this year, the House of Representatives passed the Protecting the Right to Organize Act of 2021 (“PRO Act”) (H.R. 842), which has the support of President Biden and is now before the Senate. The PRO Act would amend the National Labor Relations Act by requiring the use of the ABC test when determining whether workers are employees and, therefore, qualify for collective bargaining rights. While this is not necessary the same as adopting the ABC test on a national level for the purposes of determining employment status for wage and hour laws, if the PRO Act is passed it could embolden labor advocates to further push for the broader use of the ABC test.