A California Supreme Court ruling threatens to upend the use of independent-contractor drivers by motor carriers in the state, creating turmoil for the trucking industry.
In Dynamex Operations West Inc. vs. Superior Court, the court adopted a narrower standard for determining if a worker is an employee or an independent contractor in California wage-and-hour disputes.
Most workers should be considered employees based on the intent of decades of California policy, the court said in the April 30 decision.
“It’s too soon to tell, but this could be a huge upheaval,” said Richard Coyle, president of Devine Intermodal, a West Sacramento freight and logistics company that supplements its fleet of employee drivers with independent contractors in some of its business lines.
The ruling was made in the case of delivery drivers contesting their independent contractor status. The court specifically targeted the question of how to define an employee in a class-action lawsuit filed under California wage-and-hour rules, which govern overtime pay, meal breaks and other basic employment rules.
Despite the narrow focus, businesses worry the ruling will spread to cover any dispute over whether a worker is an employee or independent contractor, including, for example, workers’ compensation lawsuits. It also could be found to include any California business or out-of-state firm that does business in state and uses independent contractors.
“Whenever the California Supreme Court speaks, especially so definitively and somewhat clearly, it will be utilized in different types of industries,” said Hillary Arrow Booth, a Los Angeles transportation lawyer and president of the Transportation Lawyers Association.
How drivers should be classified has become a contentious issue in California.
Since 2011, California port truckers have filed 948 claims alleging that they have been misclassified as independent contractors. Drivers have been awarded more than $48 million in about 450 of those cases, according to the latest data from the California labor commissioner’s office.
Both Los Angeles and Long Beach city officials are looking at whether they have the legal power to take action against motor carriers at Southern California’s port complex who they believe are misclassifying drivers as independent contractors rather than employees.
For now, trucking executives are meeting with their lawyers and trying to work out the potential impact of the court ruling.
“Some of the truck company operators are just sifting through this and figuring out what they are going to do,” said Robert Ramorino, president of Roadstar Trucking Inc. and Peppertree Warehouse & Distribution in Hayward, Calif.
He uses a handful of independent contractor drivers, or owner/operators as they are known in the industry.
“Obviously an operation that uses a lot of independent contractors, they’ve got more risk facing them now,” he said.
That risk includes potential worker lawsuits, regulatory actions over misclassification of workers and potentially higher operating costs because employees cost a company more than independent contractors. They might face a shortage of truck drivers if owner/operators are unwilling to work as employees. The ruling also could affect the outcome of current court cases.
At the same time, industry observers say state or federal legislation could be passed that would carve out exemptions, such as exist in New Jersey, or clarify the uncertainty left by the ruling. Federal law, for example, prohibits states from passing direct economic regulations that might affect interstate motor carriers related to prices, routes or services, which the ruling might be interpreted as doing. A key change made in 2004 to a Massachusetts statute created a similar test to the one adopted by the California court but was determined by the state’s high court two years ago not to apply to motor carriers because it ran afoul of that federal law.
THE ABC TEST IN CALIFORNIA
The court adopted the so-called ABC test that exists in some jurisdictions and requires a company to classify a worker as an employee unless it can prove all three of these factors:
Free from control and direction: The worker is free from 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.
Work is outside of hirer’s usual business: The worker performs work that is outside the usual course of the hiring entity’s business.
Independent: The worker is customarily engaged in an independently established trade, occupation or business of the same nature as the work performed for the hiring entity.
The biggest problem for trucking companies that use independent contractors is obviously the second rule.
“That is going to be a very hard threshold for a lot of these employers to meet,” said Doug Bloch, political director at Teamsters Joint Council 7 in Northern California, the Central Valley of California and Northern Nevada.
Previously in California, under the common law known as the Borello test, there were multiple factors to consider, the principal one being whether the hiring company had the right to control the manner and means of accomplishing the desired result.
It’s not just an issue for California trucking companies. Industry players in other states also are looking to see what happens.
“California is a little ahead of, but we are right behind, we are under attack,” said Gail E. Toth, executive director of the New Jersey Motor Truck Association.
New Jersey has had an ABC test for decades, but there are exemptions for many industries, Toth said. As of this year, those exemptions are the potential target of a new state task force on worker misclassification. The California ruling is adding pressure to those efforts, she said.
Some in the industry draw a distinction between entrepreneur owner/operator truck drivers, who know how to run a successful business, and drivers labeled independent contractors by companies that control them as employees but avoid the expense of actually employing them.
Bloch, the union official, said that in the Teamsters national agreement there is language that covers owners/operators. Many trucking companies start with a single truck.
“I would never deny that there is a place in the supply chain for owner/operators,” he said.
“But for the small or large companies that have people that are working exclusively for them, and hiring those people as independent owner/operators, and this is the only place they go for work and they do it more than full– time, I would be nervous about that.”
Yet the California court said the desire of owner/operators to remain independent is outweighed by the need for all workers to be able to access the state’s extensive worker protections under its employee labor laws.
Devine Intermodal previously won an expensive and lengthy court battle with state regulators over alleged misclassification of employees as independent contractors, Coyle said.
“We finally won, completely, but with the new interpretation, we would have lost,” he said.