Moving Words – AB5 Update

Timothy Brady

“One who gains strength by overcoming obstacles possesses the only strength which can overcome adversity.” – Albert Schweitzer

 The injunction that kept California’s independent contractor law, AB5, out of the state’s trucking sector is officially dead.

In a hearing on August 29, 2022, Federal District Court Judge Robert Benitez formally lifted the injunction that kept AB-5 from being law. The injunction had been in effect since December 31, 2019. Let’s look at this a little more closely.

What is AB-5?
The law specifies all company employees are considered workers eligible to receive W-2s, unless a company can prove that certain individuals can be classified as independent contractors, according to the ABC test.

What is the ABC Test?
The ABC test was established following a legal ruling in a case heard by the California Supreme Court in 2018. The case was filed by a company by the name of Dynamex Operations West, Inc. The court ruled that companies must use the test to determine how workers should be classified. This test assumes that workers are employees unless the company that hires them can prove the following three things:

1. The worker is free to perform services without the control or direction of the company.
2. The worker is performing work tasks that are outside the usual course of the company’s business activities.
3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

This test holds companies to a higher standard in proving workers are independent contractors than was previously used in California. AB5 made this test the requirement for all companies in the state in determining the employment vs. independent contractor status.

Also consider the IRS litmus test in determining whether someone is an employee or an independent contractor:

1. Behavioral: Does the company control, or has the right to control, what the worker does and how the worker does his/her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (Includes how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee-type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

How does this impact moving companies and van lines doing business in California?

The California AB5 Law will impact several aspects of the relocation process. Household Goods (HHG) moving companies often utilize independent contractors and freelancers for their workforce. This is an accepted long-term industry practice.

What should moving companies, agencies and van lines do to avoid misclassification of someone working for them?
In the simplest terms, they should try to avoid even unintentional misclassification at every cost. To that end, here are a few suggestions:

1. Create proper lease agreements – This will form the first line of defense for any mover that hires independent contractors for their day-to-day operations. It must be clearly stated within the Lease agreement that the worker is an independent contractor, and not an employee.
2. Have each of your Independent Contractors create a business entity such as an LLC or Sub Chapter S Corp, so that you are contracting with an established business entity and not an individual.
3. Choose your working associates carefully. Don’t force a worker to become something they have no interest in being.
4. Create awareness – You should leave no stone unturned to ensure fairness by educating your paid workers and the independent contractors in the differences between the two. That will help create awareness and reduce confusion.
5. To protect yourself from potential labor lawsuits, it’s important to ensure that independent contractors and owner-operators are treated fairly, by considering their sizable investment in equipment and other costs in order to provide your shippers with top tier service.
   

Out of the ashes of the lease operators, will the true independent business van operator rise, adding a whole new dimension to the industry? In other words, take the lemon of AB5 and make it into lemonade.

“We don’t develop courage by being happy every day. We develop it by surviving difficult times and challenging adversity.” –  Barbara De Angelis