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What Is the AB5 Protest and What Does the Law Mean for Supply Chains?

July 20, 2022 Kevin Baxter

Trucks Parked

UPDATE (July 22): Just a couple days after first writing about the AB5 law protest and its impact on supply chains, the latest has the Port of Oakland essentially closing down for the end of this week due to a five-day protest from affected truckers. Officials say they've had trouble getting dockworkers to their work locations due to the picket lines, but they do expect to reopen under "heavy congestion" next week as they play catch-up. The protests are by owner-operator truckers and their supporters who the California's AB5 law reclassifies into employees rather than independent contractors. While the supply chain implications relating to cargo ships being unable to load/unload at Oakland are fairly obvious, some ships are skipping the port altogether. But the ripple effects go beyond the water. For instance, some intermodal service - including some of those we utilize - transport loads via empty ocean containers that must return to the port and be officially terminated there. With the port closed, that action cannot occur, meaning empty containers must sit, accumulating fees and taking up valuable chassis, which are also in short supply. While other options are available to keep freight moving, these empty containers will continue to accrue storage fees or other accessorial charges in the meantime, and moving boxes off of chassis also constitutes a fee. In the meantime, California officials do appear to be heading forward with the enforcement of the controversial law. At any rate, stay tuned for more supply chain impacts... 

Original Story: Supply chain issues of various types continue to pop up, and the latest has to do with the so-called AB5 bill in California possibly nearing enforcement. The AB5 bill, commonly referred to as the gig worker law, makes it especially complicated for workers to be classified as independent contractors. The supply chain upshot is, that's exactly what independent truckers have been all along - and independent truckers (aka owner-operators) have made up a huge part (roughly 70%) of drayage drivers at California ports - which happen to be the busiest ones in the country. With a stay on the law as it applied to trucking about to be lifted thanks to the Supreme Court declining to hear a California Truckers Association appeal, some of these independent truckers - estimated at about 70,000 statewide - who want to remain so have taken to the picket line in protest. The combination of these protests and the law potentially taking effect in full force, means ports such as Los Angeles, Long Beach and Oakland - and every supply chain associated with them - may be dealing with repercussions of AB5 for some time.

What is the AB5 law?

California's AB5 law passed in 2019 and was signed by Governor Gavin Newsom in early 2020. It's often called the "gig worker" law because it was ostensibly designed to protect drivers of rideshare services like Uber and Lyft by forcing these companies to provide more benefits and classify those drivers as employees. But an additional consequence of the crux of the law - which creates a three-step test to determine whether someone can be classified as an independent contractor - is its effect on the owner-operator trucking industry. The so-called  ABC test, involves these three criteria:

  1. The company does not control or direct what the worker does, either by contract or in actual practice.
  2. The worker performs tasks outside of the hiring entity’s usual course of business.
  3. The worker is engaged in an independently established trade, occupation, or business.

Only if all three questions are answered in the affirmative can an individual be classified as an independent contractor. Otherwise, the person must be classified as an employee and granted all the benefits employees are entitled to under California law, including minimum wage protection, healthcare coverage, retirement benefits, expense reimbursements, employee benefits, unemployment insurance, rest breaks, etc. The law has not yet taken effect as applied to trucking as appeals relating to a lawsuit by the California Truckers Association to throw it out were litigated, but the last major legal avenue was the U.S. Supreme Court, which declined to hear the case at the end of June. Despite that, it's still not exactly clear when or how enforcement will begin.

Why are there AB5 protests?

While some labor organizations have supported AB5 citing its worker protections even as applied to truckers, a number of owner-operators in California would prefer to maintain that classification but would fail the test to do so. These independent truck drivers - primarily dray operators who move loads short distances to and from the ports - would have to either work as an employee for a larger company or basically incorporate themselves, providing their own insurance and other benefits at a significant cost. These drivers are concerned about the hefty expense of the latter option, while also concerned about losing their independence and ability to choose which loads to transport if they worked under a larger company. And some businesses used to using owner-operators are worried they no longer could as well without hiring them as employees. So protests got underway this month at multiple ports including Los Angeles, Long Beach and Oakland. And with other labor issues at these West Coast hubs, unionized dockworkers and others were not about to cross the picket line.

What are the supply chain implications of AB5?

The effects of California's AB5 law on supply chains are unclear at this point, but with many at least initially negative possibilities. The first and clearest negative impact is that intermittent protests can essentially shut down major California ports, causing (or exacerbating) container and container ship backups. And then there's the potential enforcement. If the law is fully enforced, the entire owner-operator model in California will change. At the very least, that would mean some growing pains, and at worst, potentially significant loss of drivers in an already stressed environment - meaning potentially more delays. There are also questions of added costs related to compliance with the law that may pass along to carriers, shippers and eventually consumers. And then, there is always a chance that other states may enact similar laws that could have the same effects on their trucking industry and supply chains. On the plus side, some feel owner-operators have been overworked and underpaid, and left without any traditional employee benefits. So those who migrate to a model in compliance with AB5 will see remedies there. But at least in the near term, changing this system entirely will likely impact supply chains with delays, potential driver shortages and added costs, especially as owner-operators indicate a lack of clarity on what to do next.

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