How Compliance Requirements in California Impacts the Trucking Industry

Strong Tie Insurance January 21, 2020 Commercial Truck Insurance

Recent legal battles over the definition of an employee vs. a contract worker are raising quite a few eyebrows across California. A series of new laws were passed this past fall and aims for businesses to classify more workers as employees. The reduction of the number of people who can call themselves contractors means several significant impacts upon everyone from commercial truck drivers to dog walkers. Those in the trucking industry will have to reevaluate their commercial truck insurance needs as more contractors are considered employees.

Here are some essential things that the trucking industry will have to consider in order to stay compliant.

Compliance Requirements in the California Trucking Industry

What is California Assembly Bill 5 (AB5)?

Governor Gavin Newsom signed AB5 into law in September of 2019 with changes designed to go into effect at the beginning of 2020. Many people are affectionately calling this the “gig worker bill” since it seems to impact independent contractors the most. The goal of the bill is to force companies to label more of their workforce as employees instead of contractors.

Under the new law, works are considered employees unless the company that hires them can prove the following three items:

  1. The worker is free to perform services without the control or direction of the company.
  2. The worker performs tasks that are outside of the usual course of the company’s business activities.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work being performed.

For many contractors, the second piece of this three-pronged approach is the most impactful. If the contractor does the same kind of work as the hiring company, then the worker is considered an employee. That means a truck driver who is contracted to haul cargo for a trucking company is regarded as an employee of that trucking company.

The Good, the Bad, and the Ugly

Under this new law, more workers will be classified as employees. That means they are entitled to things like minimum wage, expense reimbursements, benefits, rest breaks, and other benefits provided by California state law. For the employee, this creates a more even playing field for those working as contractors and those considered regular employees.

Of course, companies may find adding these benefits to contracted drivers to have higher overall costs than before. Things like payroll taxes, overtime, unemployment insurance, and benefits are not cheap and could result in offering lower wages for contracted work to make up the difference. 

On the flip side, truck drivers might also find they lose a little bit of the freedoms they enjoyed as independent workers. Employees don’t always have the same flexibility in their schedules. Contractors might also dislike having to follow specific policies and practices required of regular employees. Since companies will incur greater costs for hiring contractors, it’s likely that they’ll exert more control.

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Impacts on the Trucking Industry

While the acceptance of AB5 impacts industries across the board, it has extraordinary implications for the trucking industry. 

Over the last decade, there was a trend in more truckers becoming independent contractors or owner-operators instead of employees. Companies were having a hard time keeping up with the costs of having employees and paying their drivers a good wage. The solution was to work with more independent drivers.

AB5 is going to push things back to where they used to be before this shift.

Implications on Commercial Trucking Insurance

Insurance providers have a complex task at hand. Evaluating requirements and programs for work injuries is not easy.

Many companies were pushing for their trucking contractors to carry occupational accident coverage. This coverage is often considered as “workers’ compensation light.” It offers benefits better than most company healthcare programs but isn’t as involved as actual workers’ compensation. Many companies don’t require anything like this from their contractors. 

AB5 mostly takes away the option to pass workers’ compensation insurance on to drivers. The company would be responsible for making up this cost.

A large motor carrier might typically be made up of regular employees and independent contractors. Now, that same company would be required to pay for workers’ compensation insurance for everyone, regardless of their previous status. This could even mean paying significant premiums for drivers who don’t work that often.

A smaller company might be tempted to simply let a driver go without insurance or could be buried in trying to make up the costs. 

Beyond workers’ compensation, there are other types of insurance that are impacted by AB5. Bobtail insurance, for example, is meant for independent contractors who are not covered under a company’s primary liability insurance. Contractors who are now employees may not need to carry their own bobtail insurance as their employers might include all employees under the general liability policy.

For individuals, this could be a great way to save on the cost of insurance. Companies, however, could see a spike in their overall insurance costs since they would be including more drivers. 

Bobtail insurance wouldn’t be the only type of policy that would shift from individual drivers to larger companies. The extra costs could lead some companies to forego specific types of insurance. Of course, not having the right kind of policies in place puts companies at risk. A simple highway collision or damaged cargo could end up costing a trucking business everything. 

Companies might also be tempted to continue to treat drivers who should be employees as independent contractors. While this may seem like a great way to push costs back on to the driver, it could also end in disaster.

If a court finds that a driver causes an accident under the wrong classification, your company would not only be responsible for the damages but would pay hefty non-compliance fines as well. It could turn ugly really fast.

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What Happens Next?

While the law just went into effect, there is still quite a bit to figure out. There is some pushback against the law, and some companies are working on finding ways around AB5.

Everyone in the trucking industry should try their best to be compliant. Most courts are understanding if you put in a reasonable faith effort, even if mistakes are made. The results aren’t set in stone, but AB5 is certainly something worth considering. Certainly, it is not something you can ignore.