If AB5 comes to California trucking, there may be a way out: the B2B exception

It has now been almost six months to the day since a three-judge appellate court heard arguments about whether an injunction that has kept California’s AB5 independent contractor law out of the state’s trucking industry should be overturned.

Soon after the arguments were made, the Scopelitis law firm suggested in an email that at least two of the judges appeared to be leaning toward overturning the injunction. If that were to happen, it would presumably be based on the idea that a federal law, the Federal Aviation Administration Authorization Act, did not actually preclude AB5 from governing independent contractor relationships in the state. It was a lower court interpretation that the so-called F4A law superseded AB5 that has kept it out of the state’s trucking sector.

If the court goes ahead and overturns that injunction, it is going to drive a mad rush by trucking companies and their attorneys to learn a part of AB5 that might be the only tool available to maintain the independent owner operator model: the business-to-business exception. 

The B2B exception is part of AB5. It is a list of 13 tests that if a company can show it is meeting, it can engage an independent contractor for performing a task that might otherwise fall short under the provisions of AB5.

The most problematic part of AB5 for trucking is its language that mostly matches the so-called B prong of the groundbreaking Dynamex decision. The B prong says a contractor that is hired by a company is not truly an independent contractor if it is brought on board to perform the primary business activity of the hiring entity. A trucking company hiring an independent owner-operator would presumably fall under that provision.

Conceding that the B2B exception has huge hurdles but still might be the only path for independent owner-operators in California was made clear in an interview with Brigham Cheney, a partner with the law firm of Atkinson, Andelson, Loya, Ruud & Romo. After reviewing the many steps that a trucking company might have to accomplish to fully meet the requirements of the B2B exception, Cheney told FreightWaves that he’d still advise his clients to seek shelter under it. 

Using the B2B exception might not be for every client, Cheney said, “but I certainly wouldn’t say it is not worth considering. It might be a viable option.”

Laura Curtis, who had been a policy advocate for the California Chamber of Commerce, wrote for the Chamber’s website last year a piece that was far more negative than Cheney’s relatively hopeful view. Under the headline “Oh, what a relief it isn’t,” Curtis described the exemption as “basically inoperable.”

Meeting the test laid out in the exception is still huge. Whether a hiring entity can meet the B2B exception has a fairly high passing score: 100%. Flunk one of the 13 tests and the exemption is not a path out of AB5.

The tests that must be met under the B2B exception are some of the familiar provisions of long-standing battles in the contractor vs. employee wars. In an article on the Lexology blog from 2019, Cheney dissects all 13. They include the question of control “measured both by the terms of the agreement with a contractor and by the actual practice between the contracting business and the contractor.” Some seem easy to meet, like the fact that the relationship between the two must be in a formal written document. But then others raise the same issue that is inherent in the problems that the B prong brings to the trucking industry: “The individual performs work that is outside the usual course of the hiring entity’s business.”

If a federal preemption of AB5 by the FAAAA is rejected by the appellate court, the trucking industry is going to need to look back to state law. And that’s where Cheney said he is optimistic, because the law won’t just be AB5 and the B2B exception. It will also include the findings of a decision in the so-called Cal Cartage case.  

Late last year, in the Cal Cartage case, California’s Court of Appeals ruled that the F4A did not preclude imposition of AB5. The impact of the case is moot for now; as long as the injunction is in place, that federal court ruling effectively knocks out what the state court said in Cal Cartage.

But the findings in Cal Cartage become more important if the AB5 injunction is overturned. And Cheney said what he read in the Cal Cartage decision gives him some hope that the B2B exception might be able to be met. 

For example, one of the toughest hurdles for a company to prove is that the independent contractor hired under the B2B exception serves the carrier rather than a customer. But as has been pointed out, how is that possible? But Cheney said the Cal Cartage decision’s argument about that was “actually good for employers who want to meet the exception.”

In the Cal Cartage decision, the court wrote that it would be carriers who would contract with the owner-operators, “direct their action and pay them.” “Services would be provided by the owner-operators directly to the motor carriers, notwithstanding that those services would include moving freight belonging to the motor carrier’s customers,” the Cal Cartage decision said, appearing to put aside any requirement of a responsibility to a customer as determining the legal status.

Cheney also said the licensing requirements in the B2B exception appear daunting at first. But Cheney said the Cal Cartage decisions clarify them to be far less onerous. 

But those are some of the hopeful signs for the B2B exception being a viable workaround for the trucking industry. Curtis, in her blog post from last year, does not agree. For example, one of the provisions under the B2B exception requires that an independent contractor hired under the exception advertises and “holds itself out to the public” as a provider of that service. That was one of several provisions she said that “make it nearly impossible for businesses to benefit from this ABC test exemption.”

Cheney acknowledged that “a lot of times drivers want to stick with one good company.” “If they do that and don’t drive for multiple sources and don’t work for others, then that certainly can jam an employer up,” he added, noting that some independent drivers do virtually all their business with one company but still remain independent.

He doesn’t view that hurdle or others as impossible. But if AB5 does become the law of the trucking sector in California, and a company does want to try to continue to hire independent owner-operators, Cheney said it is “going to take a lot of record-keeping to bring a company in compliance with the law.” 

“You’re going to have to stay on top of all of your contractors,” Cheney said. “You’re going to have to make sure they have the evidence that they are legitimate businesses. You’re going to need to set up evidence and make sure they are set up right.”

If they do all of that right, and a company gets a pass from AB5, they still have another test to meet: Borello. The Borello standard was what governed the definition of independent contractors before the ABC test of Dynamex and AB5, which codified Dynamex. 

The Borello test is not viewed as restrictive as ABC/AB5. But it does have several tests that need to be met, largely focused on the issue of control, equipment and skill. How much control does the employer have over the contractor? Is the contractor getting the job done with its own equipment? And what are the skills the contractor has relative to the entity employing it?

If the AB5 injunction is put aside, all these questions and more will govern the California trucking business for months and years to come.

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