Another Win Keeps California Truckers Rolling: Preliminary Injunction Blocks Enforcement of California “Gig Worker” Law Against Trucking Industry

On January 16, 2020, U.S. District Judge Roger T. Benitez entered a preliminary injunction, enjoining Californian officials from enforcing Assembly Bill 5 (“AB-5”) against motor carriers operating in California pending entry of final judgment in a case filed by the California Trucking Association (“CTA”) challenging the new law.  The ruling comes after Judge Benitez rang in the New Year by granting the CTA a Temporary Restraining Order against AB-5’s enforcement (about which we previously wrote).

AB-5, California’s new “gig worker” law, was signed in September 2019 by California governor Gavin Newsom, who lobbied on what he described as a need to “curb” employer “misclassification” by re-classifying potentially thousands of freelance workers and independent contractors as company employees. While the law ostensibly targets tech/app-based companies like Uber, Lyft, and Postmates, its impact was acutely feared by an older and more pervasive industry: commercial trucking.  Independent owner-operators make up 9% of the industry that hauls 10.5 billion tons of freight across America’s roadways every year.

The CTA did not wait idly by for the law to take effect.  It filed suit, arguing in its November 2019 amended complaint that AB-5 makes it impossible for motor carriers to contract with owner-operators, effectively putting over 70,000 independent California truckers out of work.  After winning the New Year’s Eve TRO, its next goal was a preliminary injunction.  It got that too.

In his January 16 ruling, Judge Benitez displayed a keen understanding of the realities of the trucking industry (including its varying needs and seasonal fluctuations), the drivers who work in it, and the impact AB-5 would have on both:

For decades, the trucking industry has used an owner-operator model to provide the transportation of property in interstate commerce.  That model generally involves a licensed motor carrier contracting with an independent contractor driver to transport the carrier-customer’s property.  The volume of trucking services needed within different industries can vary over time based on numerous factors. . . .  Motor carriers offer many types of trucking services, including conventional trucking, the transport of hazardous materials, refrigerated transportation, flatbed conveyance, intermodal container transport, long-haul shipping, movement of oversized loads, and more.  Motor carriers meet the fluctuating demand for highly varied services by relying upon independent-contractor drivers.

Individual owner-operators use a business model common in both California and across the country.  They typically buy or lease their own trucks, a significant personal investment considering that the record reflects a single truck can cost in excess of $100,000.  Then, the owner-operators typically work for themselves for some time to build up their experience and reputation in the industry.  Once the owner-operator is ready to expand their business, they contract for or bid on jobs that require more than one truck, at which time, the owner-operator will subcontract with one or more other owner-operators to complete the job.  Many individual owner-operators have invested in specialized equipment and have obtained the skills to operate that equipment efficiently.

AB-5, Judge Benitez explained, changes the industry dynamic.  Under AB-5’s “ABC test,” an owner-operator is presumed to be a motor carrier employee unless the carrier establishes that: (A) the trucker is free from the carrier’s control and direction, under any contract and in fact; (B) the trucker performs work that is outside the usual course of the carrier’s business; and (C) the trucker is customarily engaged in an independently established trade, occupation, or business of the same nature as the carrier’s work.

After quickly affirming the CTA’s standing, Judge Benitez agreed a preliminary injunction was warranted. First, he found the CTA met its burden to show it would likely succeed on the merits in establishing that AB-5 was preempted by the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”) (in turn, deftly side-stepping the CTA’s alternative Dormant Commerce Clause argument). The FAAAA broadly prohibits enactment of state laws that are “related”— “directly or indirectly”—to the “price, route, or service of any motor carrier . . . with respect to the transportation of property.”  According to Judge Benitez, AB-5’s Prong B is its “Achilles heel” because it creates an impermissible “all or nothing” rule “that categorically prevents motor carriers from exercising their freedom to choose between using independent contractors or employees.” Because independent-contractor drivers “necessarily perform work within ‘the usual course of the [motor carrier’s] business,” their use can never satisfy Prong B and they can never qualify as independent contractors in California. Prong B thus effectively forces “motor carriers to artificially reclassify all independent-contractor drivers as employee-drivers.” Put differently, it allows “carriers to contract with independent contractors only if they classify and treat those independent contractors as employees under California law.”

Judge Benitez noted that AB-5’s impact on motor carriers would be wide-reaching because it sets “the test used to classify workers for the purpose of determining whether all of California employment laws,” from the labor code to wage and unemployment insurance laws, “do or do not apply” to such workers. Coupled with the reality that AB-5 and its ABC test effectively prohibit “carriers from contracting with independent-contractor drivers,” he found that AB-5 would “transform California into its own patch in the very ‘patchwork’ of state-specific laws Congress intended to prevent.” Because the “combined effect of all such laws” would be to significantly impact carrier “prices, routes, and services,” FAAAA preemption was triggered.

Second, Judge Benitez found the CTA showed likely irreparable harm because AB-5 gives motor carriers a “Hobson’s choice”: either “continually violate the [] law and expose themselves to potentially huge liability; or violate the law once as a test case and suffer the injury of obeying the law during the pendency of the proceedings and any further review.” In other words, carriers wanting to serve California customers must either “significantly restructure their business model, including by obtaining trucks, hiring and training employee drivers, and establishing administrative infrastructure compliant with AB-5” or break “the law and face criminal and civil penalties” as litigation proceeds. Under either option, carriers suffer obvious harm.

Finally, Judge Benitez found the balance of equities tips in the CTA’s favor because, under AB-5’s plain terms, a non-ABC alternative test governs employee classification if the ABC test is found impermissible; the hardships faced by CTA members thus outweigh the State’s. Likewise, the public interest “tips sharply” toward the CTA given Congress’s decision to control the trucking industry and the Constitution’s clear mandate: “Federal law is to be supreme.”

In the end, Judge Benitez cheekily concluded that AB-5 “runs off the road and into the [FAAAA’s] preemption ditch.” His ruling is a victory for California truckers.  CTA CEO Shawn Yadon hailed it as a “significant win” for owner-operators who invested hundreds of thousands of their own hard-earned dollars in equipment that meets California’s rigorous environmental standards, with the promise that doing so enabled them to haul California loads for carriers big and small.

Other “gig workers” are fighting AB-5, too. Translators and interpreters are lobbying lawmakers for an exemption. Uber and Postmates filed suit seeking their own injunction and, together with DoorDash, promised a ballot box fight, pledging $90 million in contributions to support a ballot measure killing AB-5.  There’s more to come as these fights, and a host of legislative initiatives, move forward. The reach is nationwide: New Jersey, New York, Colorado, and Washington have debated or implemented their own AB-5-style laws.  Litigation seems imminent.  And all the while, the gig economy just keeps on growing.  150 million workers in North America and Western Europe make their paychecks as independent contractors.  By 2020, 43% of the American workforce may be involved in the gig economy in some capacity.

Judges are now being called to wrestle with what that means.  For now, the message to legislators appears clear: At least in the trucking arena, “all or nothing” laws that deprive motor carriers of the opportunity to engage with eager independent contractors to meet legitimate business objectives and satisfy customer demand go too far.

Heather L. Williams is a Partner in our Maryland office.