A California law that sought to reclassify certain independent contractors as full-time employees is nearly four years old, but the controversy over the definition of what constitutes a “gig” worker in the transportation industry is far from over.

Taking effect on January 1, 2020, California’s Assembly Bill 5 required that companies using independent contractors redefine them as permanent hires, unless the employees in question meet the requirements of a three-part “ABC” test that allows for limited exceptions to the rule.

The law was prompted by the proliferation of gig workers hired by online, platform-based employers such as Uber, Lyft and DoorDash. By defining the majority of their workforces as consisting of independent contractors, employers could avoid paying benefits and meeting other legal requirements of maintaining permanent employees.

AB5 was subsequently watered down by Proposition 22, a California ballot initiative, which allowed Uber, Lyft and other platforms to continue to classify their drivers as independent contractors (while providing gig workers with certain benefits), and AB2257, which broadened the list of exemptions under the ABC test.

Under AB5, the ABC test says a worker is considered by default to be a direct employee unless: 

• The worker is free from control by the hiring entity over performance of the work;
• The worker performs work that is outside the usual course of the hiring entity’s business, or
• The worker is engaged in an independently established trade, occupation, or business.

Current exemptions include artists, lawyers, architects, engineers and construction truckers. But the status of trucking providers generally remains an open question and subject to multiple legal challenges.

The controversy is especially relevant to commercial trucking, where the status of “independent” drivers becomes blurred in cases where those individuals are working exclusively for one company on a full-time basis, yet being denied the benefits of permanent employment. 

Despite court rulings upholding the follow-ups to AB 5, key legal questions remain unresolved. In the transportation industry, “most of the companies that have independent contractor models in place that are operating in California are working with their legal teams to determine whether they have risk or exposure associated with their current setups,” says Russell Norris, national managing partner for transportation with the audit, tax and accounting firm Grant Thornton. Several class-action lawsuits are in progress, especially with the potential to impact larger carriers.

“A lot of carriers are planning for what happens if all of those lawsuits go through and AB5 gets upheld,” Norris adds.

Both truckload and less-than-truckload carriers doing business in California are affected by the law, whether headquartered there or operating in the state as part of national networks. And the fate of AB5 is likely to have repercussions for carriers in other states as well, Norris says. New York and Illinois are among those contemplating similar legislation.

The outcome also has important tax and investment implications for carriers, Norris says. If their drivers are determined to be employees, then companies that were historically asset-light would have to purchase equipment for their drivers. That could have a severe impact on the financial health of the transportation industry, which is already facing near-recessionary pressures.

In addition, Norris says, depreciation allowances have become less accommodating for carriers. In 2017, under “bonus” depreciation rules, they were permitted to write off 100% of the cost of their equipment immediately. On January 1, 2023, that amount dropped to 80%, and will continue to shrink by 20% each January 1 until 2027, when regular depreciation rules will be reinstated. Employers forced to purchase equipment in the coming years stand to be hit hard by a tightening up of the depreciation allowance.

Transportation providers are also facing higher capital costs due to rising interest rates, along with stricter limitations on how much interest expense they can deduct, Norris notes.

As for the drivers, they’re split as to their preference for employee or independent status. In the case of the former, they enjoy the perks and salary security that comes with permanent employment. In the latter, they retain flexibility and control over their own schedules, and the work they’re willing to accept.

Other states are adopting a wait-and-see approach while the lawsuits play out in California. Meanwhile, Norris says, some carriers are rethinking their employment models and considering a hybrid format that would deliver the advantages of both options. They’re also aware of the need to pivot if the independent contractor model doesn’t hold up in the courts. But given the prolonged nature of legislative and legal processes, the issue isn’t likely to be resolved for transportation providers anytime soon. Says Norris: “It will be years before the dust settles.”