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AB5 California... What does this mean?

We have yet again completed another quarter and, as cliché as it may sound, it always kills me how quickly time goes by. Thank you all for making our everyday so enjoyable, it’s genuinely a pleasure to have the opportunity to work with you all!!!

Wanted to take a moment and clarify some of the recent legislation that’s impacting transportation.

AB5 – Let’s briefly summarize recent events:

AB5 is anti-gig economy legislation aimed to prevent employers like Uber and Lyft from taking advantage of contractors. As with most legislation, hearts are in the right place but doesn’t account for unintended consequences. While this is not new law originally going into effect in 2020, it was deemed unconstitutional and had a mixed bag of exemptions provided which gave trucking time to continue working as they were. On June 28th, In denying a review of the appellate court decision, the Supreme Court returned the case to the 9th U.S. Circuit Court of Appeals. A 9th Circuit ruling in 2021 overturned a lower court injunction that had kept AB5 at bay from California’s trucking sector, even as the law that seeks to define independent contractors was implemented in other parts of the economy. While I cannot speak for other industries, AB5 is particularly problematic for the trucking sector because it is based on the ABC test to define independent contractors, the B prong of which is being interpreted as a possible death knell or at least a major hindrance to the independent owner-operator model in trucking. The B test defines an independent contractor as a worker who is engaged in “work that is outside the usual course of the hiring entity’s business.” A trucking company hiring an independent owner-operator to move freight is seen as likely in violation of the B prong.

Explaining the above simply:

  • Truckers often own and operate their own rigs, hence the term owner operator (aka O/O).
  • When purchasing a truck and trailer, an O/O will typically submit his DOT, Motor Carrier Number, and bonding application.
    • Along with DOT, MC #, and Bond an O/O will need to purchase insurance, billing support, dispatching/track&trace support and much more. O/O will usually opt out of doing this and lease onto another company that offers this in return for a % of the profit. They will often even provide the work as they have a sales department that reaches out to new clients.
    • This is a great deal for both O/O and the carriers they work with because it allows for both to focus on their core competencies (i.e., what they are best at); the drivers on executing the labor and carrier companies maintaining the relationship with the clients.
  • AB5 is essentially saying this is no longer an option, these carriers MUST employ these drivers OR these drivers must provide all the above services through their own business.

Intended and unintended consequences of the above:

  • Driver’s have no dispatching, billing, pricing, or track & trace services.
    • This means less updates for you from the drivers, longer billing times, LONGER wait times for capacity in general and less drivers.
  • This also means less money per load for the drivers, not because of cost but rather because of the way taxation will work on independent business vs. an independent contractor, again leading to higher prices.
  • This means that prices will increase to account for the additional need to hire in the services, due to simply less supply of drivers.
  • Longer time for capacity means less loads per year which means drivers will need to raise prices per load to account for less loads.

Yesterday and into Monday, the owner operators of CA protested at the port LA/LGB and have planned protests at the Oakland/SF ports. Unfortunately, this only garners attention but does little to affect the opposition. Striking at the port only adds more money to the government who own 30% of the port from which one of their biggest revenue streams is storing containers. Yesterday the port was so blocked that no containers could get out, meaning private clients would have to pay storage into today to get their containers out. While we are happy the attention is coming, this is not the strategy that will accomplish much. People that work in trucking trying to get their containers out and loads moved are already upset at this legislation.

What does this mean for clients, shippers, consignees etc.?

  • If you move freight TO California, I would adjust accordingly and any recent bids that have gone out should take a moment and be reviewed.
  • If you are moving freight OUT OF California, you may have a nice window NOW to get better pricing.
    • My thoughts are that the drivers that have their businesses held in CA will remain for at least a period of time but will be looking to move out of their as quickly as possible. I would not take too long however, with the exodus (which by calculations are about 70,000 drivers) prices will rise due to the lack of supply.
  • If you import/export into the Port of LBG or the Port of Oakland, prepare for the bottom line to increase.
    • This is not simply due to a direct price increase from the carriers, this is due to less capacity leading to longer storage times/more demurrage cost
    • Having to break up the move into prepull > store at yard > delivery which leads to longer container outage times which will lead to per diem costs.
    • ….And, of course, less supply of drivers leading to higher average costs of move.

All the above doesn’t take into account the rising fuel costs that we are also dealing with…

Some saving grace?

  • Thankfully, many of our carriers are already under the employee model where their drivers are not owner operators but rather employed with benefits under their MC number.
  • We’ve already reached out to every option we have to get a general feel of how AB5 will affect them, and thankfully have received many positive repsonses.
  • Some drivers will remain and continue to try and operate in CA, this may present an opportunity with some newer carriers coming into existence and should temporarily have “starter” rates to gain new business that they’ll have to release due to no longer operating with.

Mikhail Rasner