California’s Assembly Bill 5 (AB5) was signed into law last year, but the legislation, which lays out rules to classify workers as either employees or independent contractors, continues to cause debate and disruption, with the trucking industry, one of the most heavily affected markets.
Large trucking organizations have historically been heavily reliant on independent owner-operators, but AB5 now places the future of those independent owner-operators in doubt. While some trucking firms have opted to avoid compliance issues by nixing use of these professionals entirely, there is another avenue the industry is taking: independent owner-operators can become their own standalone fleet companies to continue working with large trucking companies.
It’s a complex process, however, and one that comes with significant adjustments to the way these professionals conduct business, as CarrierHQ CEO Scott Prince and Chief Operating Officer and General Counsel Brian St Amour told PYMNTS.
As St Amour explained, many large trucking firms will operate two arms of their business. One operates under their federal trucking authority and involves managing their own trucks to move loads. The other is a brokerage business to match loads with drivers.
“The question in California is whether these trucking companies can run independent contractors under their trucking authority, or if they need to have them be their own carriers and run them under their brokerage business,” he said.
A New Business Model
Making the shift from an independent contractor to a standalone fleet company comes with barriers and complexities.
For instance, insurance is among the largest barriers for these new players. Companies must provide proof of insurance to federal authorities — it’s what Prince described as a “first, most important cost” of forming a standalone fleet. Yet it’s one that’s particularly expensive, with high premiums and a large down payment.
Once in operation, these new fleet companies are also going to face disruption in the way they manage finances.
St Amour said that when these professionals operate as independent contractors, their payment terms are typically 15 days, and often less than a week. Yet when they make the switch to running under a broker authority, those payment terms will extend to 30, or even 90 or 120 days.
“That’s a significant change for them between, ‘I get paid every week, and my deductions come out,’ to, ‘Now, I have to wait on my payment.’”
There will also be changes in how they invoice and transact with large trucking firms, which could cause even greater disruption to financial management strategies.
“For these independent contractors forming their own authority, cash flow is king,” added Prince, noting these professionals must also need access to solutions that can support their cash flows, like factoring.
Easing The Transition With Technology
There remains significant legislative uncertainty for this industry as California, other states, and federal lawmakers take their own paths to employee classification. But the way the legal climate is shifting, St Amour said this is likely a “new normal” for the industry, and “independent contractors will have to get to true independence.”
Having a technology partner that can guide them through these shifts and help new standalone fleets operate will be key.
Prince pointed to CarrierHQ’s new service that helps independent owners make this change while wielding technology to lower the financial barriers that have historically burdened new fleet businesses. Use of vehicle ELDs (electronic logging devices), for example, means CarrierHQ’s insurance partner Aon can reassess premiums on a monthly basis and reward users for safe driving.
“That’s really helpful to help folks manage cash flow and increase margins,” he said, adding that working with a platform like CarrierHQ for factoring, invoicing and payments needs will also support these businesses beyond their launch date as they navigate a new way of doing business.
Emerging legal challenges and disputes over the logistics of enforcement mean California has yet to see how the impact of AB5 on the trucking market will truly play out. But it’s not the only driver of change in this industry.
Dramatic fluctuations in load capacity are likely to add even more pressure to smaller fleets. Economic downturns and market events like coronavirus have led to a surge in capacity, meaning smaller fleets must compete with larger ones to secure loads for less profit. Yet after the coronavirus panic passes, predicted St Amour, a “capacity crunch” is likely ahead, and convincing an independent owner to establish a standalone fleet will likely be a challenge.
As trucking firms wade through these disruptions, Prince and St Amour said there are other, positive changes impacting the market driven by a growing demand for technology to drive efficiency and a shift away from paper.
New, digital-first firms like Uber Freight are driving modernization of the market, said St Amour, but there is still plenty of room for innovators to improve the way these companies operate, and to integrate their back offices, with a focus on enabling smaller fleets to compete critical to the overall health of the market.