Dive Brief:

• Assembly Bill 5 (AB-5) does not apply to the trucking industry in California, according to a ruling handed down Wednesday by the Superior Court of the State of California. Judge William Highberger concluded the legislation is preempted by the Federal Aviation Administration Authorization Act​ (FAAAA) of 1994, according to documents the firm representing the defendant in the case provided to Supply Chain Dive.
• The Los Angeles City Attorney’s office accused NFI Industries and its subsidiaries of misclassification two years ago. When AB-5 passed the state legislature in September, the prosecution argued the legislation supported their case. The defense argued the federal regulations preempted the legislation.
• "After careful consideration, the Court agrees with Defendants that the currently operative legal requirements for determination of employee versus independent contractor status are preempted as to certain motor carriers and their drivers by an act of Congress," Highberger wrote in the order.

Dive Insight:

To be considered an independent contractor under AB-5 the worker would need to "perform work that is outside the usual course of the hiring entity's business," according to the bill. A truck driver working for a carrier performs work that is within the company's usual course of business, a violation under AB-5.

The trucking industry, which relies heavily on owner-operators, has been looking for creative ways to comply with the legislation. This ruling means the industry likely won't have to comply with the changes; at least one other legal challenge leaves open the possibility of a conflicting ruling in federal court.

One hearing on a potential injunction is scheduled for next week. U.S. District Judge Roger Benitez granted a temporary restraining order last week briefly exempting the trucking industry from AB-5 compliance while the injunction is considered. The California Trucking Association (CTA) brought the suit that prompted the hearing with a similar argument saying the law is preempted by the FAAAA. Benitez wrote CTA's case was "likely to succeed on the merits," in granting the restraining order.

Highberger said other state and federal courts have concluded similar ABC Tests were preempted by the FAAAA because they essentially prohibit "motor carriers from utilizing independent owner-operator truck drivers." When Congress passed the FAAAA in 1994 it included language that preempted state motor carrier regulations in an attempt to create a common, nation-wide system, according to the American Trucking Associations.

Highberger concluded AB-5 would have resulted in impacts to carriers prices, routes and services, which helped lead to the preemption decision.

"Such an application of state law poses a serious potential impediment to the achievement of the FAAAA's objectives because a court, rather than the market participant, would ultimately determine what services that company provides and how it chooses to provide them," he concluded of AB-5's effect on the market.

Gibson, Dunn & Crutcher, the lawfirm that represented NFI, said this is the first case to reach a final decision determining if AB-5 applies to the trucking industry.

"This is a win for trucking companies and independent truckers nationwide," Joshua Lipshutz, counsel for NFI, said in a statement emailed to Supply Chain Dive.

Highberger made sure to clarify, though, that this doesn't let trucking companies off the hook when it comes to misclassification.

"[A] labor law distinguishing employees from independent contractors can, in appropriate circumstances, be applied to motor carriers as it could to other businesses, and motor carriers can face consequences if they misclassify their drivers," he wrote, acknowledging that this was never contended by the defendants in the case.