Ninth Circuit precedent shows the FAAAA likely exempts “all or nothing” state laws like AB 5 that categorically prevent motor carriers from exercising their freedom to choose between independent contractors or employees.
A trucking association was granted a preliminary injunction barring the enforcement of California’s AB 5 against motor carriers and owner-operators in the trucking industry. The federal district court in California concluded that Prong B of the ABC test adopted by AB 5 requires motor carriers to artificially reclassify all independent contractors as employee-drivers for all purposes under the California Labor Code, the Industrial Welfare Commission wage orders, and the Unemployment Insurance Code. While the ABC test does not expressly state that motor carriers cannot contract with independent contractors, Prong B permits motor carriers to contract with independent contractors only if they classify and treat those independent contractors as employees under California law (California Trucking Association v. Becerra, January 16, 2020, Benitez, R.).
Business model. The plaintiffs in this action are an association of motor-carrier companies and two owner-operators in California. For decades, the trucking industry has used an owner-operator model to provide transportation of property in interstate commerce. That model generally involves a licensed motor carrier contracting with an independent contractor driver to transport a customer’s property. Individual owner-operators use a business model common in both California and across the country. They typically buy or lease their own trucks, then work for themselves to build up their experience and reputation in the industry.
Right to control. Whether certain laws and regulations in the California Labor Code apply to truck drivers, generally, depends on their status as employees or independent contractors. For nearly three decades, California courts have used the test based on the decision in S.G. Borello & Sons, Inc. v. Department of Industrial Relations to determine whether workers are correctly classified as employees or independent contractors. The Borello standard considers the “right to control work,” as well as other factors. In April 2018, the California Supreme Court, in Dynamex Operations West, Inc. v. Superior Court, replaced the Borello classification test for Wage Order No. 9 with the “ABC test.”
California’s Assembly Bill 5 (AB 5) codified the “ABC test” and expanded its reach beyond Wage Order No. 9, including workers’ compensation, unemployment insurance, and disability insurance. Under AB 5’s ABC test, an owner-operator is presumed to be an employee unless the motor carrier establishes three requirements:
|A.||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.|
|B.||The person performs the work that is outside the usual course of the hiring entity’s business.|
|C.||The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.|
AB 5 went into effect on January 1, 2020. On December 2, 2019, the plaintiffs filed their motion for a preliminary injunction. The court granted a temporary restraining order and enjoined the state from enforcing AB 5 as to any motor carrier operating in California until resolution of the plaintiffs’ motion for preliminary injunction.
Standing. As an initial matter, the court disposed of arguments by the Teamsters union that the plaintiffs lacked standing. It disagreed that the plaintiffs did not establish the ABC test will be used against them, so that they established the requisite actual or imminent injury. Moreover, the court determined that at this stage of the proceedings, the plaintiffs did not have to show with complete certainty that one of their members would be harmed by the ABC test but not by the Borello test; rather, they need only establish a risk or threat of injury to satisfy the actual injury requirement.
Finally, the court rejected the Teamsters’ argument that the association lacked “associational standing” because it had not identified a single member who will be injured by the use of the ABC test to determine whether drivers were employees. Associational standing was present here where the association claimed that many of its members use independent-contractor drivers to provide interstate trucking services to customers in California and other states, and those members have a concrete interest in knowing whether they must fundamentally change their longstanding business structure by shifting to using only employee drivers when operating in California.
Preliminary injunction. Next, the court addressed the four elements required for a preliminary injunction. Here, the plaintiffs argued that they were highly likely to show AB 5 is preempted by the FAAAA and by the Dormant Commerce Clause. The plaintiffs must show that they are: (1) likely to succeed on the merits, (2) that they are likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in their favor, and (4) that an injunction is in the public interest.
FAAAA Preemption. With regard to the plaintiffs’ FAAAA preemption challenge, the court determined they established, at a minimum, that there were “serious questions” on the merits of at least one of their challenges to AB 5’s ABC test. Within the FAAAA, Congress included an express preemption, which provides that 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.”
The court noted that whether the FAAAA preempts AB 5 and its ABC test is a matter of first impression in the Ninth Circuit, but the circuit’s jurisprudence touching on the issue strongly suggests preemption. The court observed that Ninth Circuit cases, American Trucking Assn v. City of Los Angeles, and California Trucking Association v. Su, together with the First Circuit’s ruling in Schwann v. FedEx Ground Package System, Inc. dba FedEx Home Delivery, show that the FAAAA likely exempts “an all or nothing” state law like AB 5 that categorically prevents motor carriers from exercising their freedom to choose between independent contractors or employees.
ABC test. While the ABC test does not expressly state that motor carriers cannot contract with independent contractors, Prong B permits motor carriers to contract with independent contractors only if they classify and treat those independent contractors as employees under California law.
Thus, the plaintiffs carried their burden at this preliminary stage of showing the likelihood of success on the merits as to their FAAAA preemption challenge. Similarly, the plaintiffs carried their burden to show the likelihood of irreparable harm, because without significantly transforming their business operations to treat independent-contractor drivers as employees for all specified purposes under California laws and regulations, they face the risk of governmental enforcement actions, as well as criminal and civil penalties. Accordingly, the plaintiffs’ motion for a preliminary injunction was granted.
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