Preliminary Injunction Bars Enforcement of AB 5 Against Motor Carriers Operating in California

In California Trucking Association, et al. v. Xavier Becerra, et al.,¹ U.S. District Court Judge Roger T. Benitez issued a preliminary injunction on Jan. 16, 2020, enjoining the State of California from enforcing the ABC test set forth in California Assembly Bill 5 (AB 5) as applied to motor carriers operating in California. AB 5 establishes that the ABC test shall be used in nearly all situations to determine an individual's classification as an employee or independent contractor. The preliminary injunction will remain in place pending final judgment in the lawsuit.

As discussed in a previous Holland & Knight alert ("New California Law Codifies – and Expands – Strict ABC Test for Independent Contractor Status," Sept. 25, 2019), AB 5 codified the strict 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). Under the ABC test, 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

Background

The California Trucking Association (CTA) and two independent owner-operators (Plaintiffs) filed a federal lawsuit on Oct. 25, 2018, challenging the ABC test established by Dynamex, arguing that it was, among other things, preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA), 49 U.S.C. §14501. On Nov. 12, 2019, Plaintiffs filed a Second Amended Complaint to incorporate AB 5 in their legal challenge. Plaintiffs then filed a Motion for Preliminary Injunction against AB 5 on Dec. 2, 2019, and two days later filed a Motion for a Temporary Restraining Order against the enforcement of AB 5 as to motor carriers. On Dec. 31, 2019, the District Court granted a Temporary Restraining Order barring enforcement of AB 5 as to motor carriers in California, ruling that the restraining order would remain in place until the Court ruled on the Motion for Preliminary Injunction.

District Court Decision

After a lengthy hearing on Jan. 13, 2020, the Court issued its Jan. 16 decision granting Plaintiffs' Motion for Preliminary Injunction, finding that the Plaintiffs met all of the requirements necessary for issuance of a preliminary injunction, i.e., that Plaintiffs were 1) likely to succeed on the merits of their challenge to AB 5, 2) likely to suffer irreparable harm if a preliminary injunction did not issue, 3) that the balance of equities tips in their favor and 4) that the issuance of an injunction is in the public interest. The Court observed that based on the evidence before it, "the ABC test appears to be rigged in such a way that a motor carrier cannot contract with independent contractor owner-operators without classifying them as employees." Accordingly, Judge Benitez held that "[b]y effectively prohibiting motor carriers from contracting with independent contractors, AB-5 and its ABC test would transform California into its own patch in the very 'patchwork' of state-specific laws Congress intended to prevent."

Judge Benitez further reasoned that "there is little question that the State of California has encroached on Congress' territory by eliminating motor carriers' choice to use independent contractor drivers, a choice at the very heart of interstate trucking" and "in so doing, California disregards Congress' intent to deregulate interstate trucking, instead adopting a law that produces a patchwork of state regulations Congress sought to prevent." After a lengthy discussion and analysis of binding precedent holding that "all-or-nothing" state laws mandating that motor carriers use employees in lieu of independent contractors are preempted, the Court concluded that "[w]ith AB-5, California runs off the road and into the preemption ditch of the FAAAA."

Judge Benitez's decision also favorably cited to a Jan. 8, 2020, decision by California Superior Court Judge William F. Highberger in pending misclassification litigation brought by the State of California against various port logistics companies, State of California v. Cal Cartage Transportation Express, LLC, et al.² and related cases in the California Superior Court in and for the County of Los Angeles. In the Cal Cartage litigation, Judge Highberger decided that Dynamex and AB 5 were preempted by the FAAAA as applied to the motor carrier defendants, that the business-to-business exception contained in AB 5 did not protect AB 5 from FAAAA preemption, and that the common law employment test set forth in the seminal California Supreme Court Case S.G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 48 Cal. 3d 341 (1989), would be the appropriate standard in the litigation. Judge Highberger's preemption decision was made in the context of a motion in limine on the classification standard to be applied at trial.

Conclusion

The strongly worded CTA decision, even though limited to motor carriers, may provide solid grounds for challenging AB 5's mandate in other industries engaged in business in California. Even given the potential for appeal to the U.S. Court of Appeals for the Ninth Circuit in the CTA litigation and the possibility of an interlocutory appeal to the California Court of Appeals in the Cal Cartage cases, the CTA decision undoubtedly will be met by many businesses with cautious optimism that federal preemption finally is having its day in court, even in California.

Notes

¹ U.S. District Court, Southern District of California, Case No. 3:18-cv-02458-BEN-BLM.

² California Superior Court, Los Angeles County, Case No. BC689321.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.