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What is AB5 law? Are California towing rates going up?

Views: 124     Author: Site Editor     Publish Time: 2022-07-12      Origin: Site

On June 30, the U.S. Supreme Court made a decision not to hear the California Trailer Association (CTA)’s appeal on the AB5 Act, and the case was sent back to the U.S. Ninth Circuit Court of Appeals. Because the court has already overturned the district court's temporary injunction that AB5 does not apply to the trailer industry in 2021, which means that AB5 has come into effect. When the news came out, the California tow truck industry was suddenly mourning.


What is California AB5? Why is this bill fundamentally changing the ecology of California's trailer industry? Will California trailer prices skyrocket? I will share with you what I have learned in a short period of time.


Here is the content list:

What is AB5 law?

Owner-Operator (OO) Driver

The industry's response

So how should towing companies respond?


What is AB5 law


What is AB5 law?

The full name of AB5 is Assembly Bill No. 5, which is the California Assembly Bill No. 5. The starting point of the bill is to protect the legitimate rights and interests of atypical labor providers (freelancers, independent contractors, etc.) in the gig economy. AB5 has made stricter regulations on the identification of labor providers, especially for the commonly used Independent Contractor. If it is a regular employee (employee), the company must provide relevant benefits: unemployment benefits, medical insurance, pension, etc. If companies want to prove they are hiring independent contractors, AB5 proposes a strict test commonly known as the "ABC". In simple terms, workers who provide paid services should be identified as employees, not independent contractors, unless the employer can demonstrate these three points: the worker is not under the control of the employed company at work; the worker is engaged in the main A business outside the scope of business; the worker is usually engaged in a separate trade, occupation or business. Article 2 of them stipulates that the lethality is very powerful, which will be mentioned later.


In fact, the AB5 bill was passed as early as 2019 and will take effect in January 2020. The program does not directly target the towing industry. Many gig economy practitioners, such as hair stylists, doctors, and dentists, have been granted immunity and can continue to work in related industries as independent contractors. The California Tow Truck Association (CTA) filed for a temporary restraining order by citing a federal statute that AB5 should not apply to the towing industry. The local court approved the temporary restraining order, which was later overturned by the Federal Ninth Circuit Court of Appeals. The California Trailer Association then took the case to the Supreme Court. As a result, the Supreme Court decided not to hear the case, and the case was sent back to the Federal Ninth Circuit. The Court of Appeal, the temporary restraining order lapsed, and the bill came into effect. It should be pointed out that although the Supreme Court made a ruling on June 30, the AB5 Act has retrospective effect, and the effective date begins on January 1, 2020. This lays the groundwork for a lot of lawsuits: If a towing company is found to have violated employee-definition rules, the violations will begin on January 1, 2020, increasing the company's chances of being sued by drivers and the government.


Owner-Operator (OO) Driver

Why is the California Tow Truck Association so vehemently opposed to the bill? This starts with the Owner-Operator (OO) owner-operator model, which is a relatively unique business model in the trailer industry.

Generally speaking, towing companies hire drivers to pull goods. The drivers are employees who pay on time and enjoy various benefits and insurances. The drivers do things according to the company's instructions and obey the dispatcher's assignment. However, in the United States, this kind of towing company that implements the driver-employee system is rare, and most of the towing companies implement the owner-operator model. In California, about 70 percent of truck drivers are owner-operator models. There are about 350,000 registered owner-operator drivers in the United States, and 70,000 in California alone.


There are several types of agreements between owner-operator drivers and towing companies. Under the lease-purchase agreement, the driver, as an independent contractor, pays a fixed monthly trailer usage fee to the towing company, and the driver is responsible for the maintenance and repair of the vehicle. After the agreement expires, the driver can choose to buy the vehicle. The other is a simple lease program, in which the towing company leases the trailer to the driver, who pays the contract and does not need to buy the vehicle when the agreement expires. The first two situations are more suitable for drivers who are just starting out and do not have enough financial resources to purchase a vehicle by themselves. There is also a way called Lease-on agreement. The driver rents his car to a towing company and pulls the goods in the name of the towing company (all licenses use the towing company). The towing company is responsible for the related paperwork and fuel taxes. Or, drivers don't have to find work themselves, the company will assign the work to the drivers, and the drivers will be paid according to the agreement, which can be paid per mile or per load. This model is very suitable for drivers who have their own cars. First, they save a lot of insurance, vehicle maintenance, tax and paperwork, and second, the company can help find the goods, instead of having to do the work themselves. Most owner-operator drivers in California are currently on a lease-on agreement model.


If the driver owns the car, there is another way of doing business: The driver applies for all the license plates, including the U.S. Department of Transportation's DOT license. This mode is called operate under own authority in English. In this mode, the driver is responsible for all taxes, goods, vehicles and personal insurance by himself, and if he has more work to do, he has the final say on who he wants to pick up, which is equivalent to running a company by himself.


The industry's response

After AB5 goes into effect, towing companies that want to hire owner-operator drivers as independent contractors must meet 100% of the three provisions of the aforementioned ABC test. The problem is that the towing company cannot pass the second (Prong B) test: the laborer is engaged in a business outside the main business scope of the employed company. Towing companies hire drivers for the purpose of pulling goods, which is precisely the main business scope of towing companies. Continuing to hire drivers as independent contractors violates the AB5 program, and the California Department of State (EDD) will sue the tow company for breaking the law, with a maximum civil penalty of $25,000 per violation. As mentioned earlier, the bill has retrospective force. If a towing company starts to hire a large number of drivers as independent contractors from 2020, it has violated the new plan and may face the danger of being prosecuted.


So how should towing companies respond?

Now that the bill is in effect, towing companies and drivers must make decisions and changes within seven days, which is by Friday, to remain compliant. Based on various opinions, there are probably several options.

First, and most directly, the towing company hires drivers as employees, and the drivers enjoy various employee benefits, which is definitely in line with the provisions of the AB5 program, which is also the original intention of the AB5 Act. However, the labor cost of the towing company will increase significantly. In addition to medical, pension, unemployment benefits, paid leave, and overtime benefits, towing companies must buy workers' compensation for drivers. As a high-risk occupation, the cost of work injury insurance is a huge expense. The smaller the company, the greater the expense. Generally, the purchase is based on the proportion of the employee's annual income, up to 30%! Originally, the towing company did not need to manage this part of the expenses. After the driver became an employee, the company had to bear it. However, the seemingly perfect solution is not for everyone. The Los Angeles Dock Trailer Association did a survey and found that most drivers don't want to be employees of the company. As company employees, drivers have no autonomy and choice, and a 2016 survey report found that owner-operator drivers generally earn more than hourly wage employees because the former can usually pick more lucrative jobs.


The second option is to change or increase the business scope of the towing company, which can be converted into a freight forwarder or a freight broker. Because the company's business scope has changed, it is no longer a towing company. At this time, drivers can still be hired as independent contractors to pull goods, because cargo transportation is not within the company's main business scope. Some companies already have two licenses: a towing company and a freight broker. Under the name of the towing company, the driver is an employee. The brokerage company will hand over the work to an individual tow truck company when the tow truck company's own capacity is insufficient. This hybrid model is likely to be the way many companies will go.


For drivers with a car, they can consider registering a company with a license to become a small business owner, that is, operate under own authority, and then sign a transportation agreement with a trailer company or a freight broker company in the name of the cooperation between the company and the company. . It should be pointed out that some tow truck drivers have several vehicles under their name, and in addition to driving themselves, they also hire other drivers through independent contractors or other more casual methods. Under the AB5 Act, driver bosses must also treat other drivers as regular employees, so the cost will definitely increase. AB5 provides immunity from company to company, but all 13 requirements are met. With such strict compliance requirements, it is still difficult to implement this regulation. Also, the relationship of freight brokers and towing companies with operators who are registered as companies and have their own license plates but only have one truck are subject to scrutiny. In past cases, California auditors have treated this one-car company owner/driver as an employee.


Under the situation that the congestion of California terminals is becoming more and more serious and the bottleneck problem of land transportation has not been solved, the "sudden" implementation of AB5 Act poses a major challenge to the operation mode of tow truck companies, and it will inevitably cause people to worry that there will be problems with trailer capacity and lead to freight rates. skyrocketed. Some towing companies deployed early in the years before the bill was passed, set up freight brokers, and changed their drivers to company employees. The towing company has only seven days to change its business model to be compliant. The tow truck driver also has to make a decision as to how to proceed.


If towing companies are currently using owner-operator drivers heavily, which is the norm in the industry, they have until Friday to make a decision to communicate compliance plans with lawyers and drivers. Is it buying the driver's car and then hiring the driver as a company employee? In doing so, buying a car is a significant capital expenditure. How to reach a pay agreement with drivers is also a complex issue. As mentioned earlier, owner-operator drivers usually earn more than employees themselves, and when they become employees, it is a challenge to balance driver income with company costs.


Whether it is a towing company applying for a broker's license or a driver applying for a towing license and registering the company himself, it will take at least a few months. However, given the tight schedule, it is said that as long as the towing company and the driver make compliance preparations, such as submitting relevant application documents, they are considered compliant. The market capacity will not plummet in a short period of time, but it will only exist in different modes of operation. It is estimated that the industry will eventually adapt to the new regulations in three hybrid models: the towing company becomes/adds the function of a broker; the driver becomes a small business owner; and the driver becomes an employee of the towing company. This week, the towing company has been busy discussing various countermeasures, and has not heard the news of the towing company raising the price. However, once the format of the trailer industry is adjusted and the company is more aware of the additional cost after the adjustment, it seems inevitable that the price of the trailer will increase.


By the way, there are actually two biggest beneficiaries of the bill: lawyers and the tow truck driver union. It is obvious that a lawyer needs the services of a lawyer for how to comply with the regulations in a short time and in order to prepare for a potential lawsuit. The tow truck drivers' union is one of the biggest drivers of AB5 for no other reason: Independent contractors can't be union members, they have to be company employees. The union has already succeeded in the first step, "forcing" the towing company to turn its drivers into company employees. In the next step, the union will certainly actively monitor the compliance of the trailer industry, conduct lobbying work, and try to persuade drivers who become company employees to join the union.


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