Class Actions Quarterly Update: Employee Misclassification in the Logistics Industry

In particular, as state legislatures continue to propose and pass strict independent contractor statutes, such as AB5 in California, or S2404/S863 in New Jersey, truck drivers across the country have brought class action claims alleging misclassification and attendant wage violations.

One key question that Courts have been grappling with is whether these restrictive state laws are preempted when applied to certain motor carrier operations by the Federal Aviation Administration Authorization Act of 1994 (FAAAA). Circuit Courts across the country have come out differently on the issue over the past few years. The Ninth Circuit is the most recent Court to take up the issue, which we predict will soon find its way to the Supreme Court.

Additionally, the US Department of Labor recently issued proposed regulations on the classification of workers under the Fair Labor Standards Act (FLSA). Although the regulations are limited in their application to the FLSA, they reflect recognition by the federal government of the importance of this issue as the structure of the workforce changes. Find Arent Fox’s alert on the DOL proposed regulations here.

Preemption by the FAAAA

The FAAAA includes an express preemption provision, providing that states “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.” 49 USC § 14501(c)(1).

Motor carriers have argued that the FAAAA preempts the application of state misclassification statutes to truck drivers because those statutes have the effect of impacting the “price, route, or service” of a motor carrier. This is due in part to the business model by which motor carriers operate. By way example, in the case of drayage work, when a boat comes into a port carrying containers, there often is an immediate need for those containers to be unloaded and transported to their destination. The number of containers, the timing of the arrival, and the destination location are different each time. Therefore, the carrier’s demand for truck drivers is constantly in flux. The independent contractor model provides flexibility and allows for this kind of on-demand service to be maintained.

Misclassification statutes vary by state, but the more restrictive statutes follow the ABC test, providing that an individual, in this case, a truck driver, is presumed to be an employee unless the motor carrier can demonstrate each of the following:

1. The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact;

2. The person performs work that is outside the usual course of the hiring entity’s business; and

3. The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

Classes of drivers and unions, however, have argued that these state misclassification statutes are not “all or nothing” standards – that is, they do not categorically prevent the use of independent contractors – and that they, therefore, cannot be uniformly preempted under the FAAAA because they do not bind the motor carriers to a particular method of providing services, thereby impacting prices, routes, or services.

A Brief History of Circuit Level Decisions 

In 2016, the First Circuit took up the issue of FAAAA preemption in Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d 429 (1st Cir. 2016). The First Circuit analyzed the second prong of the Massachusetts independent contractor statute, which required that an employer prove that the individual performs work that is “outside the usual course of the business of the employer” in order to qualify as an independent contractor. The Court found that under this prong, it would be impossible for motor carriers to utilize independent contractors to make deliveries since delivering goods was within the usual course of business for the carrier. Forcing the use of employees would necessarily affect rate routes or services. As a result, the Court found that the second prong of the statute was preempted by the FAAAA.

In Costello v. BeavEx, Inc., however, the Seventh Circuit, analyzing a similar three-pronged misclassification test found within the Illinois Wage Payment and Collection Action (IWPCA), ruled that the FAAAA did not preempt the statute as it related to the compensation of truck drivers. 810 F.3d 1045, 1048 (7th Cir. 2016). The Court noted that the IWPCA was not specifically directed toward motor carriers and that any impact on the prices, routes, or services that motor carriers offered their customers was too tenuous, remote, or peripheral to warrant FAAAA preemption. Likewise, in January 2019, the Third Circuit found that the FAAAA does not preempt New Jersey’s ABC test for determining whether a worker is an independent contractor, in part because the B prong of the New Jersey version of the ABC Test provided an additional, alternative method for reaching independent contractor status by demonstrating either that the work being performed is outside the usual course of the business of the employer, or that the worker provides services outside of the putative employer’s “places of business.” Bedoya v. Am. Eagle Express Inc., 914 F.3d 812 (3d Cir.), cert. denied, 140 S. Ct. 102, 205 L. Ed. 2d 29 (2019).

Most recently, this quarter, on September 1, 2020, the Ninth Circuit heard oral argument in the case of California Trucking Association v. Xavier Becerra.  

United States Court of Appeals Ninth Circuit - CTA v. Xavier Becerra

The backdrop to Becerra is the California Supreme Court’s ruling in Dynamex Operations W. v. Superior Court, 416 P.3d 1 (2018). In Dynamex the Court replaced an earlier test for independent contractor status with the more onerous ABC test. Shortly thereafter, the California legislature passed AB5, which codified the ABC test. AB5 was due to go into effect on January 1, 2020.

Just one day before AB5 would have gone into effect, the District Court entered a temporary restraining order, precluding the application of AB5 to any motor carrier in California. California Trucking Association v. Becerra. 433 F. Supp. 3d 1154 (S.D. Cal. 2020). The Court found that the B-prong of the AB5 test meant that drivers could never be considered independent contractors in California. As a result, the Court ruled that AB5 likely was preempted by the FAAAA. On January 16, 2020, the Court issued a preliminary injunction.

The decision was appealed by the state attorney general, Xavier Becerra, and the Teamsters union, which intervened in the case. The Ninth Circuit Court of Appeals heard oral argument on September 1, 2020.

Appellants Becerra and the Teamsters argued that the lower Court incorrectly found that AB5 would force motor carriers to use only employee drivers rather than independent contractors because AB5 includes a” business to business” exception, which allows motor carriers to contract with other drivers or carriers provided the stringent requirements for this exception are met. They further argued that in passing the FAAAA, Congress sought to deregulate the transportation industry with respect to prices, routes, and services, but did not mean to displace laws of general applicability in traditional areas of state regulation, such as labor and employment. Appellants argued that because AB5 is a general employment law that is applied equally to all employers in California, it does not target the trucking industry or affect “prices, routes, or services” as would be required to support a finding of preemption.

Lawyers for the CTA, on the other hand, argued that given the exceptions for certain industries and professions, AB5 could not possibly be categorized as a law of general applicability. Rather, the statute specifically targets the trucking industry, as demonstrated by statements made on the floor of the legislature when describing the purpose of AB5. And, even if it were a law of general applicability, it would still be subject to preemption under the FAAAA because it necessarily impacted the prices, routes, or services of motor carriers. The CTA also argued that the application of AB5 to the commercial trucking industry would have significant negative repercussions, requiring a “sea change” as motor carriers reclassified owner-operators as employees.

The oral argument did not provide any clear indication of how the Court will rule. Video of the oral argument can be viewed here.

Weeks after oral argument in the CTA v. Beccera case, on November 3, 2020, Proposition 22 passed the popular vote in California. The proposition exempts app-based transportation and delivery companies, like Uber, from the AB5 test and allows them to treat drivers as independent contractors. The definitions section in the Proposition is narrowly drafted such that it likely does not extend to the traditional motor carrier model.   

Nevertheless, lawyers for the CTA submitted a letter to the Court in November arguing that with the passage of Prop 22, “AB-5 is not a generally applicable law—not even in the transportation industry, much less more broadly.”

California Court of Appeals Weighs In 

While the 9th Circuit deliberates, the California Court of Appeals weighed in on the issue of preemption, unanimously holding that the FAAAA does not preempt the ABC test because, in the Court’s view, the current ABC test is a “generally applicable worker-classification law that does not prohibit the use of independent contractors” and, therefore, “does not mandate the use of employees for any business or hiring entity.” People v. Superior Court of Los Angeles Cty., No. B304240, 2020 WL 6791475 (Cal. Ct. App. November 19, 2020). The Court relied heavily on the business-to-business exception to the strict AB5 test, noting that motor carriers were not prohibited under AB2257 from using independent contractors so long as they could follow the 13 requirements set forth under the exception.  

Read Arent Fox’s in-depth analysis of the case here.

Are we heading to the Supreme Court?

Regardless of how the Ninth Circuit ultimately rules, there is a clear split among the Circuits. Given the conflicting holdings coming out of the Circuit Courts, it is expected that the issue of FAAAA preemption will soon find its way to the United States Supreme Court. The recent confirmation of Justice Amy Coney Barrett secured a conservative majority on the bench, making it is more likely that the Supreme Court will find that the FAAAA preempts application of state misclassification statutes to truck drivers.  

Key Takeaways 

It is important to keep in mind that states are incentivized to pass and enforce strict misclassification statutes because they lose payroll tax revenues when employers utilize independent contractors. As the COVID-19 pandemic continues to drain state coffers, we may see more states focusing on this issue and following in California’s path. Motor carriers and others in the logistics industry should keep abreast of these developments. Transitioning to an employee model as might be required under strict misclassification statutes could mean a wholesale overhaul of the motor carrier model, impacting prices, routes, and services of those motor carriers.

Motor carriers should carefully review their independent contractor agreements in relation to the misclassification statutes in the states in which they operate. They should consider including, when permitted by applicable law, class action waiver provisions and/or mandatory arbitration provisions. Motor carriers might also consider whether to include choice of law provisions in their independent contractor agreements for jurisdictions that have found preemption under the FAAAA, or that do not follow the ABC test at all. Experienced counsel can assist motor carriers in navigating these issues in the logistics space.