CA AB-5 Impact on Logistics and What Shippers Need to Know

Within the 48 continental states, California has often been in a class of its own. Fuel prices, environmental initiatives, and even fashion choices have set the Golden State apart from its counterparts. However, the latest West Coast quirk is about to take summer freight risks to a new level for Californian shippers. On June 30, 2022, CA AB-5 On June 30, 2022, the California bill, known as AB-5, went into effect. The bill, which provided employment status to hundreds of thousands of 1099 workers, was retroactively instated to its original January 1, 2020, launch after the Supreme Court denied the hearing requests from California Trucking Association and C.H. Robinson.

This article teaches what CA AB-5 is, its impact on West Coast logistics, and why using data is critical when optimizing logistics networks.

What Is CA AB-5, and how does it affect logistics companies

CA AB-5 centers on the labor classification for gig workers and other independent 1099 contractors. The California Labor and Workforce Development Agency utilized the three-prong ABC test to determine when an independent contractor is considered an employee. They stated that, "The worker 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; The worker performs work that is outside the usual course of the hiring entity's business; and The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed."

Carriers that hire owner-operators would be directly impacted by this definition. State legislators insisted that by becoming employers, companies must take responsibility for paying fair wages and absorbing some of the hardships being placed on truck companies by new environmental protection mandates. The most substantial aspect of this law is that the US Supreme Court decision allowed the law to be immediately instituted even amidst the continual disruptions within the current supply chain.

How Will CA AB-5 Impact Logistics?

John Kingston with FreightWaves reported, "Given the state's focus on regulatory issues surrounding the ports, it is reasonable to think actions by California under AB-5 might first arrive in the drayage industry." Disruptions are already commonplace within the state of the retail supply chain. Therefore this bill will magnify the great resignation among logistics workers as the industry adjusts to an employment change of 70,000 owner-operators.

Freight costs will likely increase for shippers as the requirement for AB-5 for these owner-operators to make minimum wage. According to the Department of Industrial Relations, the current state of California hourly salary, effective January 1, 2022, is $14.00 per hour for those with 25 employees or less; meanwhile, companies with 26 employees or more must abide by a $15.00 minimum wage. While hourly wages have not become an industry standard in any state, many are moving toward that anyway in an attempt to find better quality carrier capacity. Regardless, the changes in employment status will likely produce new types of freight invoice errors, especially among companies not versed in the new wave of business.

What Are the Options for Shippers Utilizing Owner-Operators?

Cost-saving opportunities have been the top supply chain topics for the last few years, with searches for new capacity sourcing strategies spiking. While the most obvious solution is for shippers and carriers to expand their carrier and driver networks, this solution does not work for everyone. Due to the vast needs of small to mid-size businesses, maintaining their fleet is costly.

  • Leveraging the Business-to-Business Exemption - While this exemption may not apply to all situations, the AB-5 Business to business exemption allows business service providers who are established as, "a sole proprietorship, partnership, limited liability company, limited liability partnership, or corporation," to enter a contractual arrangement with a business. Find the criteria for the AB-5 business-to-business exemption provisions here.
  • Contracting Drivers Through a Brokerage Service - Independent contractors and shipping companies can utilize a broker as a middleman to legalize their transactions.
  • Reroute All Freight Movement Out of California - Although this may be an extreme option, companies that are not native to the Golden State or hold a significant business stake there can simplify their services by altogether avoiding it.

Gain an Edge on California Shipping Complications with Intelligent Audit's Industry Experts

Although this industry legal decision may impact overall transportation spend management for shippers, adding yet another component in your freight and packages' journey, industry expertise and technology is critical for better decision-making and management. By ingesting all shipping data, normalizing that data, and implementing machine learning technology to find anomalies, i.e., sudden spikes in shipping spend, Intelligent Audit can provide actionable analytics that guides shippers through industry shifts such as AB-5. Contact Intelligent Audit today to gain insight and set your AB-5 worries aside.

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