The Basics of the AB5 Law in California & Broker Liability

March 29, 2023
Cassandra Gaines

How does the AB5 law in California affect your business? Even though some consider this law doesn't affect their business, it's vital to understand why it's in motion and what could happen if you're unaware of its implications.

The CH Robinson Case

The CH Robinson Case serves as a significant legal precedent, highlighting brokers' potential liability in accidents caused by motor carriers they select. This case specifically addressed the duty of brokers to ensure the safety of the carriers they contract with, especially in situations where negligence in carrier selection leads to personal injury claims.

The lawsuit stemmed from a 2016 accident in which a truck driver caused injury. The injured party argued that C.H. Robinson, the broker who hired the trucker, should be held liable because they failed to vet the carrier's safety record properly. C.H. Robinson initially won legal arguments, but later courts ruled there was a legal exception for safety concerns, allowing the lawsuit to proceed.

The C.H. Robinson case highlights a critical lesson for brokers: thorough carrier safety checks are essential before awarding contracts. This proactive approach mitigates legal risks and puts safety at the forefront of the broker’s concerns.

The AB5 Law

California's AB5 law requires companies that hire independent contractors to reclassify them as employees. All company employees are considered workers eligible to receive W-2s. That is unless a company can prove that certain individuals can be classified as independent contractors, according to the ABC test in the state.

The ABC test marks a significant shift in determining worker classification. This legal framework, set forth by the California Supreme Court, places an enormous burden on companies to establish independent contractor status.

The ABC test sets stringent guidelines for classifying workers as independent contractors rather than employees. Under this test:

A: The worker is free from the control and direction of the hiring entity in connection with the performance of the work.

B: The worker performs work that is outside the usual course of the hiring entity’s business.

C: The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Part B of the test focuses on whether the worker's role falls within the company's core business. In this case, a transportation company hiring a driver to deliver goods wouldn't meet that criteria. This creates a potential vulnerability, as drivers working as independent contractors could later argue they were employees, seeking benefits and wages through legal action.

The AB5 Law makes it very difficult to hire independent contractor drivers. The issue is that, in the trucking industry, it’s vital to build your driver fleet using independent drivers, and this law becomes a considerable challenge for trucking companies to try to do so.

How to Avoid Broker Liability?

California's Assembly Bill 5 (AB5) changed the classification of many independent contractors to employees. This has major implications for brokers, who need to be extra careful about who they're working with to avoid broker liability. Here are some ways to avoid broker liability:

  • Check what processes you have in place to vet carriers.  
  • Be sure to have carrier selection standards.  
  • Have these standards written down and comply with them.  
  • Select a carrier that historically has a low frequency of violations.  
  • Be sure to review contracts, especially for the shippers.
  • Ensure you have indemnity shifting provisions and insurance in those contracts.

Can Shippers Hire Brokers and Push the Liability to Them?

They could, but they could still be dragged into a lawsuit. Therefore, they should know the entity they’re hiring, whether they are carriers or brokers. There are many contracts that incorrectly name the parties involved in the transportation process.  

Will There Be More Double Brokering Due to the AB5 Bill?

It’s essential to understand that there will probably be double brokering. With the stringent regulations imposed by AB5, carriers are facing increased pressure to comply with classification standards for their workers, which can inadvertently push some towards double brokering.

In addition, many carriers struggle to reclassify independent contractors as employees under AB5. This can be expensive due to benefits and payroll taxes. Double brokering allows them to shift some of that burden by working with brokers who manage independent owner-operators who may meet the stricter "ABC" test for independent contractors under AB5.

Shippers need to be aware of this situation and understand that there are carriers who are not asset-based and have other business models that may allow for double brokering. There must be certain flexibility in the industry, and companies must find ways to avoid issues by checking and vetting the companies they are working with.  

Relying on Carrier Assure

A platform like Carrier Assure will ensure you have the data you need to hire the right partners for your transportation services. It’s an additional step in your vetting process that will help you reduce risks and avoid hiring a carrier with a bad safety record or a low-performance score, according to real data points.  

Want to know more about Carrier Assure and how it can help you hire the unicorns of the industry?