One carrier and two larger companies–Ryder and Costco–find themselves in what looks like a groundbreaking enforcement action
Excerpt: AB5 enforcement trucking leads to a $868K penalty for misclassification in California. Explore the implications for the industry.
An enforcement action in California against three companies–one a carrier and two that hired it–appears to be the first time the state’s independent contractor law AB5 and its successor have resulted in penalties against trucking.
The California Labor Commission said in a prepared statement released in late October that it had cited the companies for misclassification of independent contractors and other labor law violations.
The trio is carrier Mega Nice Trucking, Ryder Last Mile (NYSE: R), and Costco Wholesale Corp (NASDAQ: COST). Ryder Last Mile is under the company’s Supply Chain Solutions segment.
According to the release, Mega Nice was a subcontractor for Ryder Last Mile and Costco.
In the statement, Labor Commissioner Lilia García-Brower said the Labor Commissioner’s Office (LCO) found that Costco and Ryder Last Mile “exercised both direct and indirect control over the delivery drivers. They scheduled deliveries, mandated uniforms, enforced specific protocols, and closely monitored driver performance. These actions establish a joint employer relationship with Mega Nice Trucking and make Costco and Ryder Last Mile equally liable for the misclassification and resulting wage theft.”
The investigation was carried out by the Labor Department’s Bureau of Field Enforcement (BOFE).
Not mentioned but confirmed
AB5 is not mentioned by the Labor Commissioner in its formal statement, nor is AB2257, which replaced AB5 with a series of amendments.
But in response to questions sent to the department by FreightWaves, the Labor Commission said AB5 had been used in reaching its conclusion.
“The LCO reviews all misclassification cases under the ABC test in AB5, unless a legal exemption applies,” a commission spokeswoman said in the email. “In this case, AB5 was used, and Mega Nice was found to be an employer under both the ABC test and the Borello standard.”
The Borello standard is another method of determining whether a worker is truly independent or effectively an employee. It was the legal standard generally used by courts and regulators in California prior to the adoption of AB5 in 2019. It is also a standard used in many other states.
The Borello test, while considered strict, still is generally seen as being more lenient than AB5 in answering the question of whether a worker is truly independent.
AB5’s core regulation to determine if a worker is effectively an employee is the ABC test.
The ABC test
Under AB5, an employer, in order to prove a worker is an independent contractor, must be able to prove that he or she:
- 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;
- Performs work that is outside the usual course of the hiring entity’s business
- Is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
While AB5 went into effect for the rest of the state at the start of 2020, it was kept at bay in trucking by litigation that resulted in an injunction in place until mid-2022. That injunction disappeared after the Supreme Court declined to hear an appeal from CTA after the injunction was overturned by a Ninth Circuit appellate court in April 2021. The injunction had remained in place after that while the CTA appealed to the Supreme Court.
The Supreme Court rejection of the CTA appeal paved the way for the law’s implementation against trucking.
Since then, the trucking industry has been waiting on both market reaction to AB5 or any combination of regulatory or legal action powered by AB5. If there have been regulatory actions, the regulators or legal beagles using AB5 in litigation have done a pretty good job of keeping themselves hidden.
But with the action against the three companies, that search for tangible evidence of an impact may have come to an end.
No earlier actions on a webpage
As for whether this is the first AB5-related action hitting California trucking, the Division of Labor Standards Enforcement webpage lists years’ worth of enforcement actions it has taken against various companies. That agency has always been seen as the one most likely to enforce misclassification questions under AB5/AB2257.
A search through the archives back to mid-2022, when AB5 became reality for the Golden State’s trucking sector, reveals no enforcement actions against trucking taken by the agency.
Queries sent by FreightWaves to observers of the California regulatory landscape for trucking elicited several responses along the line of “there may have been some actions.” But nobody was able to cite any actual examples.
As for the market, SONAR’s Outbound Tender Rejection Index between July 2022 when the legal injunctions against AB5 in trucking were removed and the present shows the national OTRI–a measure of capacity–recently running lower out of Ontario, California, a key warehouse center that serves as a way station for much of the freight coming off the ports of Long Beach and Los Angeles, than the national rate. The two haven’t always been in sync during that time, but they have never diverged all that far.
That the state’s OTRI out of a key logistics center is generally aligned with the national rate is undercutting the narrative that AB5/AB2257 is seriously disrupting trucking in the state.
A statement supplied to FreightWaves by the California Trucking Association also was less apocalyptic than what is heard in other quarters.
“While some owner-operators chose to leave the State of California, others have adjusted their business practices to conform with the law,” a spokesman said. “Because employee mandates were previously found preempted by federal law, the State was required to make compliance options available for owner-operators wishing to remain independent.”
One of those options is the business-to-business exception, a test that is considered difficult to comply with.
As one market observer noted, the recent action taken by the Labor Commissioner’s Office (LCO) does not mean it was the first time the state had looked to the AB5/AB2257 statute for guidance in a case of potential misclassification. Instead, it’s just likely the first time that it resulted in action.
While AB5 was viewed as displacing the Borello standard in determining whether a worker is an employee rather than an independent contractor, sources close to the investigation suggested the use of Borello in the recent enforcement action may be tied to the fact that AB5 only has been in effect in trucking for a few years, and the statute of limitations would have drawn in use of the Borello test for the period in question.
The documentation provided by the Commission about its enforcement action said there were 58 drivers who are covered under the penalties assessed against the three companies.
The usual charges in IC actions
Those documents spell out the various violations found by the state and their penalties. The infractions are the sorts of charges that are often seen in independent contractor litigation or enforcement action: minimum wage violations (because if a worker is an employee and not an independent contractor, they are under minimum wage requirements); violation of overtime, rest period and meal period rules; and failure to provide sick leave payment.
The combination of penalties assessed plus interest totals $868,127.76. Of that, about $663,000 is expected to be paid to employees.
California’s action is not a settlement with the three companies. Sources said the three are expected to appeal and the LCO spokeswoman said the case remains “in litigation.”
According to state documents, the appeals process is not in state or federal courts, though presumably an unhappy company could turn to those venues at some points. Rather, they are with the state’s Labor Commissioner.
An email sent to the various attorneys for the three companies identified in LCO documents had not been responded to by publication time.
The battle against AB5 was mounted at first by the CTA. After the Supreme Court denied certiorari and kicked the case back to the district court, the CTA was joined as a plaintiff by the Owner Operator Independent Drivers Association.
But after the same lower court that implemented the 2020 injunction against AB5 in trucking rejected the arguments of CTA and OOIDA for a new injunction, the CTA threw in the towel, leaving OOIDA to fight on alone.
But in July, an appellate court for the 9th Circuit denied a request by OOIDA for an en banc hearing, bringing to an apparent close the saga of the anti-AB5 fight that began in the waning days of late 2019.
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