The California Court of Appeal recently upheld a California statute that precludes the independent contractor classification as it relates to trucking owner-operators unless all three factors of the “ABC test” are met. In People v. Superior Court (Cal Cartage Transportation Express, LLC, et al.) (Nov. 19, 2020, B304240) (Cal Cartage), the Court of Appeal overturned the trial court’s granting of a motion that found that the Federal Aviation Administration Authorization Act of 1994 (FAAAA) preempted the application of the “ABC” test as to the classification of independent owner-operators. Accordingly, owner-operators will now be deemed as employees unless they can satisfy all three conditions of the “ABC” test or satisfy the business-to-business exemption.
As we have been reporting in prior newsletters, the “ABC” test consists of three conditions that must be met before workers can be classified as independent contractors: “(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 the 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.” This test, along with the business-to-business exemption, are currently codified in California Labor Code section 2775, et seq.
Under the business-to-business exemption (Cal. Lab. Code § 2776), there are 12 criteria that must be satisfied to avoid the application of the “ABC” test and instead, apply the Borello standard (a multifactor test in which no single factor controls the determination, thus, an easier standard to achieve independent contractor status). These criteria include:
(1) the owner-operator is providing services directly to the motor carrier rather than to customers of the motor carrier.
(2) if the work is performed in a jurisdiction that requires the owner-operator to have a business license or business tax registration, the owner-operator has the required business license or business tax registration.
(3) the owner-operator is customarily engaged in an independently established business of the same nature as that involved in the work performed.
(4) the owner-operator can contract with other businesses to provide the same or similar services and maintain a clientele without restrictions from the hiring entity.
In Cal Cartage, the defendants (consisting of several federally licensed motor carriers) argued that the “ABC” test prohibited motor carriers from using independent contractors, thus having an impermissible effect on motor carriers’ prices, routes, and services, and therefore a type of law Congress intended to preempt. The Court disagreed, finding that “ABC” test is a “worker-classification test that ‘states a general and rebuttable presumption that a worker is an employee unless the hiring entity demonstrates certain conditions.’ ” One of the main sticking points for the Court was the inclusion of the business-to-business exemption, which it found would allow motor carriers to still use independent contractors.
For instance, the Court disagreed with the defendants’ argument that the licensing requirement of the business to-business exemption would make it impossible for independent owner-operators to qualify for the exemption because it would require the owner-operators to obtain a federal motor carrier operating license. The Court reasoned that “business license” referred to licenses issued by local governments for health and safety regulation and tax purposes.
The Court also found that the defendants failed to provide any support for their argument that providing services directly to the motor carrier is impossible for an owner-operator to meet because it is providing services to the motor carrier’s customers by moving the customer’s goods at the customer’s direction. Rather, the Court noted that because the motor carriers – and not their customers – could contract with owner-operators that services are being provided by the owner-operators directly to the motor carriers, even if the services include moving freight belonging to the motor carrier’s customers.
Finally, the Court noted that with the use of “outside carriers” or “outside brokers,” that these companies are the type of businesses contemplated by the business-to-business exemption and therefore, found that the defendants failed to offer any evidence demonstrating it would be impossible for the trucking industry to meet the requirements of the exemption.
Although the defendants may still petition the Court of Appeal for a rehearing within 15 days from November 19, 2020, or file a petition for review with the California Supreme Court within 30 days from November 19, 2020, the likelihood of a reversal appears slim. Initially, when the plaintiffs (consisting of various prosecuting agencies) petitioned the Court of Appeal for a writ to reverse the trial court’s granting of the motion in limine, the Court of Appeal denied the writ. The California Supreme Court granted the plaintiffs’ petition for review and transferred the matter back to the Court of Appeal with directions to vacate the order denying the writ and to issue an order to show cause why the relief sought in the petition should not be granted.