Ask The Experts: Will AB5 Rock the Supply Chain?
5 Freight Aficionados Forecast the Future
In 2019, California adopted AB5 which, among other things, established a three-prong test to determine whether a person providing services to a person or entity should be classified as an employee or independent contractor (and thus not an employee). Known as the “ABC Test”, the determination that a contractor was in fact an employee would, among other things, affect the compensation, work relationship, and tax and benefits structure between the parties. The CTA challenged the application of the test to a class of statutory contractors found only in the motor carrier industry called “owner-operators”. While intended as a protective measure for workers to assure fair pay and hours, there has been debate about the actual effect of the statute on owner-operators, many of whom have preferred not to be treated as employees.
Recently, the U.S. Supreme Court decided that it would not review the CTA appeal of its challenge to AB5. We’ve asked five freight aficionados to give their views on the potential impact on driver and equipment capacity in California. See whether you agree.
Guy Byars (SVP, Carrier Growth)
If thousands of drivers in California are hypothetically removed from the ranks, it could, all things remaining unchanged, affect both capacity and rates relating to California shipments (mainly in the drayage area). I consider this scenario unlikely because, historically, implementation of regulatory changes takes a lot of time; and it appears that rates will continue to drop and capacity availability will continue to favor shippers through the end of the year.
There is an inordinate amount of hyperbole and misinformation associated with AB5, both in the media and in the minds of industry stakeholders. Many will be reminded of similar feelings associated with CSA 2010, which took multiple years to implement. In my opinion, we won’t see a tangible major impact on the industry from AB5 this year. That said, investors, banks, and most carrier owners could hesitate to make major investments in California until they fully understand AB5’s ramifications. This could impact the anticipated industry recovery in 2023 directly by limiting anticipated asset expansion and replacement, and–coupled with the widespread uncertainty we’re facing in 2024 with the election cycle and potential economic policy changes–promises to further obscure the mid-term future of freight.
Beth Howard (Director, Carrier Development)
As with any complex legislation, it’s difficult to predict an immediate impact It is too early to tell how AB5 will be enforced and how and when it will affect capacity and the owner-operator community, if at all. I believe that many owner-operators want to retain their perceived benefits of remaining independent contractors and we will see more owner-operators gravitating toward getting their own authority or taking other steps to maintain their independent contractor status. There may be others who don’t feel that their businesses have been or will be affected on a day-to-day basis by the change in classification and there may be others who welcome the opportunity to be classified as employees.
While the perspectives of the owner-operator community may vary, the recent protests by approximately 100 transport workers at the Los Angeles and Long Beach ports illustrate that many owner-operators want to continue to have the benefits of being independent contractors, and will do what it takes to remain that way.
Dean Croke (Principal Analyst, DAT IQ)
It’s too early to be precise, as carriers on the small end of the market are still reacting to AB5 now becoming the law of the land in California. Based on the carriers we’ve spoken with, it seems larger carriers have already made the shift to a driver-centric business model, whereas the small fleet and owner-operator– especially the leased-on owner-operator– have yet to figure out what to do (i.e., “become a company driver and sell their truck” or “obtain their own operating authority”).
The overwhelming sentiment from owner-operators was that they didn’t think it would go through, because to them it was absurd that an owner-operator would be forced out of business. As of today, there’s a lot of confusion and misinformation on various social media platforms, making it even more difficult for carriers to make a solid decision.
Kyle Lintner (Logistics Consultant)
The obvious and immediate impacts will be felt in operations– the physical movements and associated work attached to that– but the longer and deeper effect will be on truck capacity and how that influences price. Truck capacity extends beyond just a truck and a trailer, there is the driver component as well. AB5 forces companies to treat their drivers as employees, which then brings overtime pay into the mix. Detention, dwell times, and possible union influence now pushes driver pay higher on loads that move the same amount of miles as before but take longer periods of time. Trucking companies will only absorb so much before this increased expense gets passed along in the form of higher rates. That part is certain; what happens in response to those higher rates is where it gets really interesting. Do Shippers bypass drayage and opt for port to final destination? Is the drayage price increase so significant that it will force change in the areas of detention and dwell time? Will we see a tangible increase in California’s cross docking and trailer pools?
AB5 could possibly make contracted freight a more attractive move for carriers in Q3, but the ability to lock up capacity at 93% compliance on average right now bears more importance on contract freight than anything AB5 brings. 2021 was exorbitant, but by no means will 2022 look like 2019. The same inability to accurately project volume will push even the highest-paying contract loads into the spot market. The volume will be there like in years past, but the rates will be lower year over year.
Anticipated pricing callouts by the end of Q3 could mean a narrowing of the spread between contract and spot rates. The extreme margins seen by brokerages right now are unsustainable, they’re just too far from historical averages for shippers to permit longer than one or two quarters. No CFO worth their salt can defend paying 6-8% more than their competitors in transportation costs. The domino effect starts with only one enterprise-level shipper requesting new rates on lanes.
If AB5 results in higher freight rates, at some point those costs will find their way onto the sticker prices of consumer goods. If AB5 forces businesses to reexamine our broken supply chain and develop substantial procedural change, I could easily make the argument freight rates decrease by way of increased efficiency. Then, consumers may find their goods cost less if retailers pass along some of their savings.
Vishnu Rajamanickam (Supply Chain & Logistics Reporter)
While it’s evident the AB5 regulation has much goodwill for the working class, its classification of who constitutes an “employee” cannot fly within an industry that’s as fragmented and entrepreneurial as trucking. For one, over 90% of the sector comprises trucking firms that run fewer than six trucks in their fleet. Two, many truck drivers are independent contractors and owner-operators who contract with trucking companies– enabling them to freely pick and choose the carrier they want to operate under.
The AB5 comes as an immediate hurdle to this arrangement, forcing truck drivers to engage with carrier firms as employees rather than independent contractors. Aside from reducing flexibility, organized labor would also strip out the entrepreneurial aspect of trucking, greatly diminishing the profession’s appeal.
The carrier firm’s POV isn’t great, either. A highly fragmented industry worth $800 billion, it is little surprise the industry remains notoriously slow to evolve– cue, the ELD mandate, and the ongoing telematics transition due to 3G sunsetting. Small and medium trucking fleets lack the wherewithal to pay lawyers to understand the legal aspects of this transition and are largely unprepared for the financial and operational ramifications the AB5 could have on their business.
Signaling a recipe for disaster is the fact that these complications happen in California– ground zero to the largest port complex in the US and gateway to roughly 40% of the country’s imports. Ultimately, this regulational chaos will impact trucking capacity in the short term, as thousands of independent contractors will be forced to renege their established businesses and pick a carrier label to work under.
One silver lining to this regulation could be the greater unionization of truck drivers. Unionization must interest dray drivers specifically, considering they predominantly work as independent contractors and have been borderline exploited since the pandemic. But for now, supply chains stemming from the US West Coast will continue facing headwinds, and the trucking ecosystem will need to find new ways to meander around such challenges.
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