Expert Legal Analysis On What’s Happening With AB5 Law & The PRO Act

TRANSCRIPT

Announcer:
Welcome back to The Trucker CFO Podcast.  Thanks for connecting with us again here on PodWheels.  Colton Lawrence, The Trucker CFO will be your host for this episode of the podcast.  As you'll hear, Colton will be taking a look at what's happening with the court challenges to California's AB5 law.  That’s an effort by various parties within the trucking industry that has gone all the way to the US Supreme Court.  

Colton will also be examining the latest happenings with the PRO Act, a piece of federal legislation which if it becomes law, would have an impact on independent contractors and owner-operators.  Colton will be joined on this episode of the podcast by Doug Grawe, an attorney with more than a decade of experience in the trucking industry. 

Doug is the founder and CEO of the Grawe Group, a law firm that also serves as a business consultant and managed services provider to companies in the transportation, logistics, distribution, and supply chain industries.  Doug is an expert in the areas of owner-operator and independent contractor relationships with truck fleets.  Over his years of service within the trucking industry, Doug has dedicated considerable time to lobbying on behalf of owner-operators and independent contractors, and as you hear during the podcast, Doug participated in the development of a brief.  It was submitted to the Supreme Court in the AB5 case.  Now as we take you to the interview, Colton connected with Doug through Zoom.

Colton Lawrence:
Hello everybody.  Colton Lawrence back with you on the podcast.  As you heard in the opening, we're talking with Doug Grawe on AB5, The Pro Act, and what's happening on those and other fronts impacting owner-operators and independent contractors.  Doug welcome to the podcasts.  I'd like to give you just a moment to introduce yourself and tell us a little bit about the Grawe Group and what you guys do.

Doug Grawe:
Thanks Colton, happy to be here today.  Yeah, I run the Grawe Group.  I've been in business for a little while now.  We are legal and consulting to the transportation industry.  I grew up with a good sized trucking company based in the upper midwest that is a very old company, that really sits bread and butter, is independent owner operators.  Big believer in the independent owner-operator model, whether that's owner-operators with their own authority or owner-operators working with larger motor carriers.  Big believer in the freedom of drivers to choose what works for them.  So what I'm doing today is continuing to help trucking companies and companies around the transportation industry however I can.  A lot of that related to independent owner-operators.

Colton Lawrence:
Great, because today we're gonna spend some time talking a lot about that. As you know, as we discussed prior to the podcast, Trucker CFO, like most of the listeners of this podcast, are owner-operators and independent contractors that rely on that model to make their living.  We're going to talk today about some of the greatest risks out there today to that model and with that probably one of the ones that is front and foremost in everybody's minds is AB5 and then we'll kind of transition from that to the Pro Act.  Just let me have you start by telling us a little bit about AB5 from your perspective.  What it is and why it's important to our listeners.

Doug Grawe:
Yeah, thanks. So AB5 is obviously probably the biggest thing going on on independent contractor status in the trucking industry these days.  AB5 is a piece of California legislation.  It actually applies to much more than trucking, but it probably has its most significant impact on trucking and maybe a couple other industries as well.  One thing that's frustrating for trucking is that AB5 as a piece of California legislation has, it's something like 30 some odd exemptions.  20 or 30 exemptions to it for all sorts of industries.  Realtors, beauticians, musicians, doctors, lawyers.  Lawyers always get exemptions because we write the rules.  It's frustrating when well, hey, if you think this is such a great piece of legislation, why are all these people getting exemptions? What you're really doing is you're after the trucking industry.  Well, I'm not going to say they're solely after the trucking industry, make no mistake about it, California has its sights on independent contractors in transportation.  They can try to say they're not, but it's just not true they are after it.  What the legislation does is it puts into statute what a court had already done.  A court a couple of years ago, the California Supreme Court, adopted what is called the ABC Test.  The problem with what California did, both in the court case and what they've done in the statute, is they have this ABC test that is different from every other ABC Test in the country except Massachusetts.  So the ABC Test is a three factor test about what it means to be an employee or an independent contractor.  Keep in mind as an owner-operator when you file your taxes as an independent contractor, the IRS has their definition of what it means to be independent.  The US Department of Labor has a different definition.  And then every state has definitions, and sometimes 2, 3, or 4 of those definitions.  So California is just regulating its definition and they put in these three factors as you might guess, they're an A factor, a B factor,  and a C factor.  What California's version does, is it's stricter than everybody's.  It essentially says you're not going to be an independent contractor if the work that you do is a significant part of your contracting company's business.  In common terms, the question is, how can a driver be independent of a trucking company.  If you don't know anything about the law that's kind of like, well yeah that makes some sense.  But as people who are in the industry like you and I are, we know there is a huge difference between an employee driver and an independent contractor and that's what's frustrating, is this law in California does not take that into consideration.  And the law is so strict on this one point that says, if you are an integral part of the contracting company, you're a driver for a trucking company, you really can't be an independent contractor.  There's a whole bunch of nuances to it at its core.  That's what it does.

Colton Lawrence:
Yeah, so for our listeners as we look at this, we look at California.  It's a California specific law.  In your opinion, why is it so important then for my listeners to understand or recognize the impact that a California law could have on the rest of the country?

Doug Grawe:
Great question.  And it is frustrating that it does have such an impact.  Think about a couple of different ways. First California, I believe would be the fifth largest economy in the world if it were its own country.  So to say that we're just not going to go to California.  Yes, some people can do that.  That does work for some business owners, some owner-operators.  It doesn't work for a lot of people because it is such a big economy.  Look at what's going on with the ports and how much freight is trying to come in and all that kind of, there's tons of opportunity there.  The other problem is, okay, when does California's law apply?  Does it apply only if you live there?  Does it apply if you go in there every week?  Does it apply if the dispatcher that you work with is based there?  There are all sorts of questions about when does California's rule apply?  So you may think to yourself, well I don't live in California, I only go in there sometimes.  Why would it apply to me?  We don't have the time to go into all the details of when it might.  So if you have three reasons.  First, it's a big economy.  Second, it's a little bit gray as to when it will apply to you.  And third, there are states.  I live in Minnesota.  The Minnesota legislature really enjoys watching to see what California does because they like adopting similar things.  I don't know if they're going to adopt their own version of the ABC Test and AB5, I don't know, but I know they've done it in other areas.  I wouldn't be surprised if they wanted to adopt it.  Illinois, again Massachusetts, a lot of your coastal states Oregon, Washington.  You can see this stuff happening and oh, by the way, you hear whispers of it creeping up in some other states.  As someone said to me one time, we're talking about states and legislation passing and they said, well, if they play SEC football, they'll probably pass it if they play Big 10 football, they probably won't.  That's not necessarily a terrible way to look at this too.

Colton Lawrence:
Yeah, I like that analogy.  So tell me then where things at now?  I know you have played a big part in some of the legal challenges to this, you were part of the amicus brief that was sent to the Supreme Court.  Tell us a little bit about where it stands now and what we can expect moving forward?

Doug Grawe:
Yes.  So California's test has been challenged to the US Supreme Court and it received two challenges.  The first is privately from a company called Cal Cartage.  They appealed to the Supreme Court saying, hey this law doesn't work and it should be overthrown.  If you want later on, maybe we can talk about the legal arguments, but essentially they want to throw it out.  Then also, basically just a couple of weeks behind that, the California Trucking Association also appealed to the US Supreme Court and a whole bunch of people have joined this appeal.  The Owner-Operator Independent Drivers Association joined.  The Western States Trucking Association joined.  All sorts of State and Federal Trucking Association.  Shipper Alliance, a lot of people are trying to overturn this law.  The US Supreme Court takes less than 1% of the cases that try to go before it every year.  They have wide discretion on what they're going to take.  Out of the gate, everybody needs to understand it is highly unlikely that any case gets taken by the US Supreme Court, they just take so little.  Then they look for a couple of different things.  They want to say, does the case at issue impact the country in a major way?  Well transportation is, depending on whose research you look at, either the second or third largest part of the US economy.  So clearly transportation and issues that impact transportation impact the United States quite a bit.  The second thing that they look for is is there a difference of opinion between parts of the country?  Is there a circuit split?  There is.  The east coast, Massachusetts has one opinion on this issue.  And California has a different opinion on this issue. They're just straight opposite of one another.  So there's a split.  So those are good signs that the case might be taken.  Now, like I said, there are two cases.  Unfortunately the first one, Cal Cartage, it was rejected.  The Supreme Court did not take it.  But we still have the California Trucking Association Case and yes, I was a part of both cases.  The California Trucking Association case is the better case. It's cleaner.  There's not a lot going on to it.  It's just one issue.  There was always going to be a better chance that this case gets taken.  I think we will hear sometime before the end of the year whether or not the Supreme Court is going to take it.  If they take it, meaning they hear it, they decide to make a decision, it'll probably be another year to 18 months for them to make a decision because they've got to go through briefs and arguments and all that kind of stuff.  I for one believe in the issue, I believe it will get taken, and I believe ultimately the freedom of owner-operators to choose the path that works for them will win out and AB5 will be overturned.  That's what I believe.  I think the tea leaves suggest that's the case.  But I started out with the math. The math says there's a likelihood it won't get taken. I think there's a strong case here though.

Colton Lawrence:
So in the meantime, my understanding is that there's an injunction that has AB5 on hold.  Tell us just a little bit about that.

Doug Grawe:
Yes. And that's exactly right.  There's an injunction, the Court of Appeals, I believe it would be the Ninth Circuit Court of Appeals which is California, said, hey, while this goes to the US Supreme Court we're going to put an injunction or quote unquote, stay the decision.  And what that means is, for the time being, the state can't enforce the rule.  Now, what happens is if the court decides not to take the case, then that stay probably gets taken away pretty quickly.  I can't quote exactly what the procedure would be.  But relatively quickly that that stay would be lifted and then it would be enforced.  And unfortunately I wish I could say something lighter than this, but California will be ready to enforce it.

Colton Lawrence:
That sounds good.  So let's talk now about the Pro Act.  We've discussed AB5 and we know that there is the Pro Act.  It has been considered as a part of the reconciliation bill.  I know that it is currently not in the reconciliation bill, but let's dive into that a little bit.  And why don't you start by maybe comparing and contrasting the Pro Act and AB5.

Doug Grawe:
Yeah, good question. The Pro Act essentially adopts AB5.  What it doesn't adopt are all those exemptions that I referred to.  That's actually a good thing.  And the reason I say it's a good thing is think of the politics of it.  When AB5 was passed, the reason there's all those exemptions was because they complained.  The lawyers complained, the realtors complained, the beauticians complained, everybody complained and then they got an exemption. Well, the Pro Act has no exemptions.  So all those people are back to complaining.  So owner-operators have brothers in arms, so to speak, who also don't want to have the choice to be independent taken away from them.  That's actually a good thing.  But the law itself, the three factor test of the Pro Act is the same as AB5 and unfortunately the Supreme Court couldn't do anything about it.   The reason I think that California will lose on AB5 is because I believe federal law preempts state law.  For the Pro Act would be a federal law.  So there's nothing to preempt it, it is the law of the land.

Colton Lawrence:
So we mentioned reconciliation and that it's a federal level bill.  Reconciliation without getting into too many details for our listeners, is a way by which a law can be pushed through Congress with only 50 votes in the Senate.  51 votes with the tiebreak going to the Democrats.  But tell us a little bit about that process.  How or if it can be included, we know now it's not, but could it in the future be included in the reconciliation process?

Doug Grawe:
Yeah, that will come down to an interpretation under what's called the Byrd rule.  The Byrd rule is an old rule.  It's a procedural rule.  It's really inside politics kind of stuff.  That really what it means is you cannot put something in a budget bill that isn't budget related.  It has to have a strong financial component.  Reconciliation is reconciling budgets.  You have the budget passed by the House, you have the budget passed by the Senate and they're going to try to reconcile and come up with a budget, but it's all budget related. So you can't throw in policy things that aren't budget items.  That's the Byrd rule.  Who decides whether or not something is financial or not financial is what's called the parliamentarian.  It's not an elected official, it's not the President, not the Majority Leader is not a Democrat, not a Republican.  It's someone who's been in that job for decades.  Every signal that that person is sent out during this version of reconciliation is that Pro Act like stuff would not be considered financial.  You and I both know when it comes down to the nitty gritty, we never can guarantee.  Maybe the parliamentarian earlier would switch their lens right at the end.  But every signal that they're providing is no, they would not consider this to be financial, and it would not be allowed to go through reconciliation.  Which if that remains the case, then it's all about watching the filibuster and to make sure the filibuster rule doesn't change.

Colton Lawrence:
So as we talk about this, we look at AB5, we look at the Pro Act.  They're clearly game changers when it comes to the independent contractor and owner-operator model.  It would very likely result in the end if not a severe degradation of that model.  What do you think then is the endgame politically, when we look at the two sides of the aisle, why or what is their goal in trying to push laws such as these?

Doug Grawe:
Depends on the people you're talking to, their goals will differ.  But it's an interesting coalition that is built.  This is a very old issue.  It's funny you can read cases and articles decades old that are talking about this issue, but if you think back to the early 2000s, one time that this became really loud was the ports of Los Angeles, the ports of Long Beach.  Both of those ports with the aid of the city of Los Angeles and the city of Long Beach tried to pass laws that banned owner-operators.  And the reason for that ban was actually environmental.  Really wasn't about independent contractor status. It was just, we don't want old trucks at the port.  They're polluting.  And there was a coalition of green companies, green organizations, actually local churches and nonprofit organizations and local civic leaders.  And the argument is all about pollution and idling.  We can actually go into a whole other discussion about why there is so much idling and how it's really not the owner-operators fault, it's other issues.  But suffice it to say that was the argument.  That argument still is today.  There's a belief among some, that owner-operators only drive around in old raggedy equipment that's just coughing out pollutions constantly. You and I both know, owner-operators are such a wide variety.  Yeah, some are driving around some old stuff, some are driving a brand new stuff.  Most of our drive around and something in between.  So there's that coalition of folks. They don't really care about status.  They just care about the equipment.  So we can figure out equipment issues, which I think some of that stuff has changed and is continuing to change.  I don't think there's as much pressure there.  There is no doubt an organized labor component.  They want to increase their membership, they cannot organize independent contractors.  So that's an argument.  And then there are local government folks who see independent contractors as a tax dodge.  They want to make them employees so they can collect more taxes.  I think you and I both know owner-operators and the companies that use owner-operators do pay taxes.  So that's a significant myth, but it is out there. So what is the endgame?  I think the end game is this US Supreme Court settling this issue once and for all.  And I think federally it is so hard to pass something, I just don't think anything will happen at the federal level.

Colton Lawrence:
Well Doug, thank you very much for that conversation on AB5 and the Pro Act.  There are lots of other things impacting transportation that we can talk about.  I want to get your thoughts on just a couple others in the last few minutes that we've got.  Let's talk about supply chain.  Supply chain is clearly in the news.  There's a supply chain crisis.  Tell us a little bit about what your thoughts are on whether this supply chain crisis that we hear about is good or bad for the independent contractor and owner-operators out there.

Doug Grawe:
Well, I'm going to say it's both.  On the one hand right now, there's no doubt about it.  There's some good stuff on the rate side for anybody providing capacity.  If you're out there willing to provide a truck, you can demand higher rates.  So that's a good thing.  What is a bad thing is a, the blame that we're getting, which is unfair that's going towards the owner-operators.  That's just not the case.  They're not to blame this issue.  And the wait times that are occurring if you are providing services directly to the ports, that's obviously very hard to deal with and there aren't any great answers to that.  What I think is a big issue is in the US, there's no group, there's no organization, there's nobody looking at the supply chain top to bottom.  So there's no one making sure that we're developing policies, whether they're legal policies, regulations and statutes, or just business policies for things to go smoothly into adapt and so on.  And I think that's one of the reasons we're in this mess is no one's looking out at the whole thing.  Maybe you could say there's some good to it. That perhaps some better coordination, some better global view of the supply chain, and some raising of the alarms on what's going on in transportation. That's maybe some good stuff can come out of that.  So I'll say a negative and two positive.  Good rates, terrible wait times, and maybe this pain will lead to better policies down the road.  That's probably wishful thinking, but maybe I'll call myself an optimist.

Colton Lawrence:
Right, appreciate that.  Let's talk real quick then about the infrastructure bill.  So we just recently, I believe last week, had an infrastructure bill, bipartisan infrastructure bill that was passed through the House.  We're now waiting for it to get presented to the Senate.  I'm sure there's gonna be some changes that are made before that happens. The Senate will have their own bill.  Talk to us about the infrastructure bill, how that you believe will impact independent contractors and owner-operators in the short term, and then maybe if you've got some insight on what that means long term.

Doug Grawe:
Yeah, a couple of things.  First is, I mean, it's always nice whenever we get some funding for our roadways.  What we've done to ignore keeping them maintained is almost criminal.  Yes, there's some cash coming in, that's a good thing.  The other good thing is not a lot of policy stuff.  There's some tasks force, there's some studies, but not a lot of robust policy changes.  And to me, I'm usually a fan of the status quo.  More often than not. I think doing nothing is actually the better path.  People can deal with the status quo. Something that would be good for owner-operators, one of the task force that could be adopted out of this is a lease purchase task force, a leasing task force, to talk about leasing equipment and what it's like for owner-operators in the transportation industry.  I do not think that lease purchase in and of itself is an evil thing, but you and I both know there are some bad lease purchase programs out there.  I think some amount of investigation and light shining is not a terrible thing.  I kind of go both ways on that.  There can be some bad out of that.  But if I put just my owner-operator hat on, I'm thinking to myself, hey, the government's going to look at this and maybe we can get rid of some bad actors in the lease purchase game.

Colton Lawrence:
Let's talk just generally then, general economic outlook.  Where do you think things are at?  Freight obviously has been going gangbusters.  I mean our clients, our listeners have had the best years they've ever had.  Income is up.  Some of their expenses are up, but for the most part the rates are more than covering those expenses.  But we do see inflation.  Inflation, some are saying it's transitory.  I personally believe that it is not transitory that we're going to see that continue.  How long is the big question, what are your thoughts on all that?

Doug Grawe:
You and I are gonna line up quite a bit there.  My concern is all in the inflation and I'm with you.  I don't see it as being transitory.  Maybe there's a little element of it that is, but I do think inflation is an issue.  I think it's here and it will continue to be here and to what degree is going to be the big question.  I'm with you that rates are strong.  Everything I read is you're talking well into 2022 if not into 2023 before you see much softening there on the rate side and the demand side.  We still need to get trucks too, we've got all sorts of issues there.  So I think there's going to be good negotiating leverage for people providing capacity well into 2022.  Meaning we're talking deep into Q3, if not into Q4, and into 2023.  And even when it does, it's not going to go all the way backwards.  There's been so many cost increases that are just not going to reverse.  Hopefully, maybe we can get one thing out of here.  I hope as an industry, I say this to shippers, carriers, owner-operators, everywhere in between, let's make sure that we're paying people for all the work that they're doing and paying it at a rate commensurate with the risks and the lifestyle that they're taking on.  The whole industry needs more money.

Colton Lawrence:
I think that's something that our listeners could definitely be excited about. And then like I said, I agree with you, I think the environment for the short term is looking up for them.  What I say to my clients is anybody can make money when the times are good, but this is the time for them to tighten their belts and act like they are driving in a down time so that they can survive when it does flip.

Doug Grawe:
And I will say this, and maybe we're going to get to this. I think as we're looking about economic outlook, I am not of the opinion, We're all going to be replaced by autonomous trucks in two years.  I don't think that.  If I were 18 years old and trying to figure out my career is, I don't know, maybe that's a different question.  But if I'm into my career, autonomous trucks, yes there's some exciting things.  There's some interesting things happening there, but we're not being replaced by autonomous trucks near term.

Colton Lawrence:
Anytime soon.  That actually was one of my next questions looking towards the future.  If you see some of these up and coming technologies as being something that will impact the independent contractor and owner-operator model.  So I think we got your answer there.  What do you see as some of the short term solutions to the driver shortage then if it's not some of these autonomous technologies or others?

Doug Grawe:
A couple of different things.  One is the money has to be there and it's not so much always about I think giving people raises.  Yes, raises are nice.  I don't want to balk at getting raises, but I do think we need to, and I say we as an industry, everybody in the industry, we need to rethink the way we pay and what we pay for.  Why is it that an owner-operator gets paid only to drive when in reality, being a good owner-operator, you've got to be good with paperwork, you've got to be good with safety, you're doing good equipment inspections. You're dealing with roadside officials and shippers and so forth.  Why aren't we paying for all of the work that's being done?  So I think that's one thing that can kind of change the job a little bit. I  do think we have to figure out ways to make the job physically, emotionally, mentally more appealing.  Yes, I know that there are plenty of owner-operators who love to go out for months at a time and do that thing.  But the number of them is a lot smaller than it was a generation ago.  We need to figure out ways to reliably get drivers, owner-operators where they want to be.  I think if we can tackle those two things and make the job more appealing, that improves retention.  The other thing that baffles me about transportation is retention is the key and I think we just need to treat people better.

Colton Lawrence:
Absolutely agree on that.  We definitely need to treat our clients better, drivers better, people in general better.  I think the culture is degrading to a point where you can stand behind a phone or a computer and talk about people in a way that you never would have done 10, 15 years ago.

Doug Grawe:
You're right and it's a two way street.  If I'm representing a trucking company and say, hey, you need to treat your owner-operators better.  Or your brokerage company, you need  to treat your owner-operators better.  And I also say owner-operators, you need to treat your carriers and your brokers better too because that's how it gets better for everybody.

Colton Lawrence:
I appreciate your time today.  I just want to wrap up with one last question.  I think I know where this is going to go, but just tell me in short, what is your overall kind of elevator pitch on where you think the owner-operator, independent contractor model is going over the next 5 to 10 years?

Doug Grawe:
I think it survives the AB5 challenge.  I do think the owner-operator will always have a place in transportation because they're going to have equipment and they're gonna be willing to haul freight and at the end of the day we are a consumer society.  We will always be consuming goods and owner-operators can deliver them, in my opinion, safer and better than just about anybody.  There's a future.

Announcer:
Thanks again for connecting with us on The Trucker CFO Podcast.  We would like to thank Doug Grawe, the Founder and CEO of the Grawe Group for sharing his time and perspective on the podcast. You can learn more about the Grawe Group and hear episodes of Doug's podcast, The Grawe Pod, by visiting his firm's website.  That's the Grawe, G-R-A-W-E group dot com.  That web address again, thegrawegroup.com.

Before we close out the podcast, we'd like to talk to you about Trucker CFO.  Do you have a team of tax, accounting, and business advisory professionals who understand the complexities of the trucking industry?  There are a number of ways you can contact the team at Trucker CFO.

Visit the company's website at TruckerCFO.com.  On the homepage, you can fill out the contact us form which will send an email to a Trucker CFO representative.  Also through the Trucker CFO website, you can connect to the company through the find a time to talk button to set up an appointment or you can use the chat feature.

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Thanks again for joining us on The Trucker CFO Podcast.  As always, Colton Lawrence and the entire Trucker CFO team wish you the best for continued safe travels and good health as you work to keep the American economy on the move.