Federal Court Grants Temporary Restraining Order Prohibiting AB-5 from Applying to Motor Carriers Operating in California

California Assembly Bill 5 (AB-5), a law aimed at classifying most workers as employees rather than independent contractors, went into effect Jan. 1, 2020. However, the day before the law took effect, U.S. District Judge Roger T. Benitez of the Southern District of California granted the application of the California Trucking Association (CTA) for a temporary restraining order enjoining enforcement of AB-5 against any motor carrier operating in California. (California Trucking Association et al. v. Attorney General Xavier Becerra et al., Case No.: 3:18-cv-02458-BEN-BLM, Dkt. No. 77.) The TRO is in effect at least through Jan. 13, 2020, when the court is set to hear CTA's motion for a preliminary injunction. Holland & Knight's Transportation Blog will provide an update following the court's Jan. 13 hearing.

Among other things, AB-5's newly created Section 2750.3 of the California Labor Code codifies the "ABC" test for employee versus independent contractor classification adopted by the California Supreme Court in Dynamex Operations West, Inc. v. Superior Court of Los Angeles (Dynamex), 4 Cal. 5th 903 (2018). The "ABC" Test provides that:

a person providing labor or services for remuneration shall be considered an employee rather than an independent contractor unless the hiring entity demonstrates that all of the following conditions are satisfied:

(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 work and in fact.

(B) the person performs 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.

The court found that AB-5's Prong B is likely to be preempted by the Federal Aviation Administration Authorization Act (FAAAA), because that prong "effectively mandates that motor carriers treat owner-operators as employees rather than the independent contractors that they are. In other words, because contrary to Prong B, drivers perform work within 'the usual course of the [motor carrier] hiring entity's business,' drivers will never be considered independent contractors under California law." (Slip Op. 5.) The court further found that the CTA established the likelihood of imminent, irreparable harm "because without significantly transforming their operations to treat independent contracting 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."

CTA initiated its lawsuit in response to the "ABC" test under Dynamex. Dynamex was limited to California Industrial Welfare Commission (IWC) Wage Order violations. However, AB-5 codifies Dynamex and expands the reach of the "ABC" test generally to Labor Code violations, as well as to California unemployment insurance and workers' compensation proceedings. In an amended complaint, the CTA added AB-5 as a target of its lawsuit.

AB-5 includes seven categories of "exemptions" for 1) certain specified occupations, 2) certain contracts for "professional services," 3) certain real estate licensees and repossession agencies, 4) certain bona fide business-to-business contracting relationships, 5) certain relationships between contractors and individuals working under a subcontract in the construction industry, 6) certain relationships between referral agencies and service providers, and 7) certain relationships related to motor club services.

However, the "exemptions" are not true carve-outs – an individual whose work meets the exemption requirements is not automatically an independent contractor. Rather, for individuals whose work meets an exemption, the hiring party must still be able to demonstrate that contractor status is appropriate under S. G. Borello & Sons, Inc. v. Department of Industrial Relations, 48 Cal. 3d 314 (1989) and/or by other statutory provisions as specified in the law.

AB-5 specifically provides that it "does not constitute a change in, but is declaratory of, existing law, with regard to wage orders of the [IWC] and violations of the Labor Code related to wage orders." Thus, the strong indication is that the ABC test will apply retroactively, at least as to wage and hour claims. However, AB-5 also provides that the exemptions in categories 1 through 7 above will apply retroactively to existing claims and actions to the maximum extent permitted by law.

In addition to adding Section 2750.3 to the Labor Code, AB-5 also amends Section 3351 of the Labor Code, the workers' compensation definition of "employee." AB-5 provides that for purposes of workers' compensation, "employee" will include individuals who are employees under Section 2750.3 "[b]eginning on July 1, 2020," but that the subdivision "shall not apply retroactively."

AB-5 also amends Section 621 of the Unemployment Insurance Code to restate the ABC test as one of the definitions of "employee" for unemployment insurance purposes. However, there is no similar statement as to retroactivity and, given that the addition just became effective on Jan. 1, 2020, it remains to be seen whether the ABC test will apply retroactively for unemployment insurance purposes.

Please read our update on the extension of this temporary injunction.