Court rules state employee/independent contractor classification standard not preempted

Image: Jim Allen / FreightWaves

Image: Jim Allen / FreightWaves

The United States Court of Appeals for the Third Circuit, which is based in Philadelphia and has federal jurisdiction over Delaware, New Jersey, Pennsylvania, and the U.S. Virgin Islands, recently issued an important decision related to the classification of drivers as independent contractors. Carriers who classify some or all of their drivers as independent contractors—particularly in the aforementioned states under the Third Circuit’s control—should pay attention to this case.

Background

The logistics company provides delivery services to various medical organizations. A group of delivery drivers filed a state law class action lawsuit against the logistics company seeking a declaration from the court that these drivers are employees of the logistics company rather than independent contractors. As employees, the drivers would fall under the protection of certain state wage and hour law statutes.

The logistics company moved for a judgment based solely on the initial documents filed by both sides in the lawsuit. That is, the logistics company took the position that even if everything the delivery drivers were alleging in their lawsuit was true, the logistics company should nonetheless prevail in the lawsuit. The logistics company took this position based on the company’s contention that the drivers’ claims are “preempted” by the Federal Aviation Authorization Administration Act of 1994 (FAAAA).

In this context, “preempted” means that the FAAAA, rather than the state law, controls the resolution of the case. The logistics company took this position because it believed that if the FAAAA applied, the delivery drivers would be found to be employees rather than independent contractors. The delivery drivers sought to have state law determine the issue of whether the drivers were employees or independent contractors because the drivers believed state law was more favorable to them.

The trial court determined that the FAAAA did not preempt the state law at issue and the company’s motion for a judgment was accordingly denied. The logistic company then appealed to the federal appeals court. The decision of the appeals court is the focus of this article.

Applicable Law

Congress enacted the FAAAA to “level the playing field” between air carriers and motor carriers so that both could benefit from federal deregulation. The FAAAA includes the following preemption provision:

a State . . . may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier … with respect to the transportation of property

he United States Supreme Court has ruled that the “related to” language found above gives the clause a broad scope and encompasses any state actions that have “a connection with, or [make] reference to … rates, routes, or services” of a motor carrier. In addition, the FAAAA controls where the state law impacts prices, routes, or services even if the impact “is only indirect” and where the state law has “a significant impact on carrier rates, routes, or services.”

Court’s Decision

The court considered the state law at issue to determine if the FAAAA preempted that state law. The state law at issue was the state’s classification test which is used to determine whether an individual is an employee or an independent contractor. The state law here, which was New Jersey state law, is commonly referred to as the “ABC test.” A number of other states also use this basic test for classifying workers.

Under the ABC test, a worker will be deemed an employee unless the employer can demonstrate each of the following:

A. Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and

B. Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and

C. Such individual is customarily engaged in an independently established trade, occupation, profession, or business.

The court considered the impact of the ABC test and ultimately concluded that “it has neither a direct, nor an indirect, nor a significant effect on carrier prices, routes, or services.” The court found that any effect the ABC test has on prices, routes, or services is “tenuous.” The court continued: “[t]he test does not mention carrier prices, routes, or services, nor does it single out carriers.” And further: “the test applies to all businesses as part of the ‘backdrop’ they ‘face in conducting their affairs.’”

Accordingly, the appeals court agreed with the trial court and found that the FAAAA did not preempt New Jersey’s ABC test for employee/independent contractor classifications.

Takeaway

This decision has a potentially significant impact for carriers within the jurisdiction of the Third Circuit. Carriers will continue to have to deal with state law based lawsuits related to classifying drivers as independent contractors. Carriers would be wise to review the requirements of the state law tests applied in those states where they operate and are subject to that state’s jurisdiction to determine whether their operations run afoul of the test or standards applied by the particular state. Carriers should consider consulting with experienced employment counsel when undertaking such a review if uncertainties arise.

R. Eddie Wayland is a partner with the law firm of King & Ballow.  You may reach Mr. Wayland at (615) 726-5430 or at rew@kingballow.com.  The foregoing materials, discussion and comments have been abridged from laws, court decisions, and administrative rulings and should not be construed as legal advice on specific situations or subjects.