FAAAA May Preempt Massachusetts Independent Contractor Law | Practical Law

FAAAA May Preempt Massachusetts Independent Contractor Law | Practical Law

This wage and hour update addresses Massachusetts Delivery Association v. Coakley, in which the US Court of Appeals for the First Circuit reversed the district court decision. The lower court had held that the Federal Aviation Administration Authorization Act (FAAAA) did not preempt a portion of a Massachusetts state law requiring workers be classified as employees unless they perform services outside of the employer's usual course of business. The First Circuit held that the clause could be preempted by the FAAAA, that the district court did not sufficiently credit the broad language of the FAAAA's express preemption provision and that the matter should be remanded to the district court. A state law is pre-empted if it has a connection or reference to the prices, routes or services of carriers. The FAAAA's preemption clause is to be read broadly to include state laws that have direct or indirect connection with or reference to carrier rates, routes or services.

FAAAA May Preempt Massachusetts Independent Contractor Law

Practical Law Legal Update 5-584-1485 (Approx. 7 pages)

FAAAA May Preempt Massachusetts Independent Contractor Law

by Practical Law Labor & Employment
Published on 14 Oct 2014 • Massachusetts
This wage and hour update addresses Massachusetts Delivery Association v. Coakley, in which the US Court of Appeals for the First Circuit reversed the district court decision. The lower court had held that the Federal Aviation Administration Authorization Act (FAAAA) did not preempt a portion of a Massachusetts state law requiring workers be classified as employees unless they perform services outside of the employer's usual course of business. The First Circuit held that the clause could be preempted by the FAAAA, that the district court did not sufficiently credit the broad language of the FAAAA's express preemption provision and that the matter should be remanded to the district court. A state law is pre-empted if it has a connection or reference to the prices, routes or services of carriers. The FAAAA's preemption clause is to be read broadly to include state laws that have direct or indirect connection with or reference to carrier rates, routes or services.
On September 30, 2014, in Massachusetts Delivery Association v. Coakley, the US Court of Appeals for the First Circuit reversed the district court decision. The lower court had held that the Federal Aviation Administration Authorization Act (FAAAA) did not preempt a portion of a Massachusetts state law requiring workers to be classified as employees unless they perform services outside of the employer's usual course of business. The First Circuit held that the clause could be preempted by the FAAAA, that the district court did not sufficiently credit the broad language of the FAAAA's express preemption provision and that the matter should be remanded to the district court. The FAAAA's preemption clause is to be read broadly to include state laws that have direct or indirect connection with or reference to carrier rates, routes or services. (13-2307, (1st Cir. Sept. 30, 2014).)

Background

The FAAAA preempts any state law "related to a price, route, or service of any motor carrier . . . with respect to the transportation of property" (49 U.S.C. § 14501(c)(1)). Section 14B of the Massachusetts Independent Contractor Statute (Section 14B) says:
"For the purpose of this chapter and chapter 151, an individual performing any service, except as authorized under this chapter, shall be considered to be an employee under those chapters unless: (1) the individual is free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact; and (2) the service is performed outside the usual course of the business of the employer; and, (3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed."
(Mass. Gen. Laws ch. 149 § 148B.)
Massachusetts Delivery Association (MDA) is a trade organization representing same-day delivery companies. MDA filed this action seeking a declaration that the second prong of Section 148B is preempted by the FAAAA. For purposes of the litigation, MDA used Xpressman Trucking & Courier, Inc. (Xpressman) as an example of one of its companies. Xpressman used 58 couriers as independent contractors to provide delivery services for Xpressman's clients. None of Xpressman's employees perform courier functions. The couriers:
  • Are paid for each completed delivery, not by hourly or weekly rates.
  • Do not receive health or retirement benefits.
MDA argued that it is required to designate its couriers (for Xpressman and its other companies) as employees rather than as independent contractors because the couriers will never meet Section148B's second prong which requires an individual to perform his services outside of the usual course of the employer's business to be considered an independent contractor. MDA further argued that being required to classify its couriers as employees would alter the Xpressman business model and affect prices, routes and services offered to its customers. Specifically:
  • Increased compensation, benefits and taxes would have to be paid to the workers.
  • Routes would change because couriers would:
    • have to drive to and from the Xpressman facility;
    • have less flexibility to accept short routes;
    • be unable to drive long routes without mandatory breaks; and
    • be unable to provide on-demand services to employees.
MDA moved for summary judgment, arguing that FAAAA preempted the second prong of Section 148B. The Attorney General also filed a cross-motion for summary judgment against MDA, arguing that:
  • The case did not present a justiciable case or controversy.
  • The FAAAA did not preempt Section 148B.
  • MDA should provide additional discovery (the Attorney General filed a motion to compel additional depositions and discovery documents).
The district court:
  • Denied the Attorney General's cross-motion for summary judgment because there was a justiciable case or controversy.
  • Held that the FAAAA did not preempt Section 148B.
  • Dismissed MDA's preemption claims on the merits.
  • Denied the Attorney General's motion to compel since the now-dismissed preemption claims made this motion moot.
MDA appealed the district court's holding to the First Circuit.

Outcome

The First Circuit reversed the district court's decision and held that the FAAAA's preemption clause is to be read broadly and that the FAAAA could preempt Section 148B.
The First Circuit agreed with the district court's finding that there was a justiciable case or controversy in this matter, noting that:
  • The Attorney General argued that MDA was just seeking an advisory opinion on whether the second prong of Section 148B is preempted.
  • The divide between a declaratory judgment and an invalid advisory opinion can be narrow (MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007)).
  • To warrant a declaratory judgment, there must be a substantial controversy of sufficient immediacy and reality.
  • MDA argued that since many of its members engaged independent contractor drivers, it was at risk of facing enforcement action or civil actions for violating Section 148B.
  • MDA's concern was legitimate, as MDA members faced several civil lawsuits regarding Section 148B misclassification.
  • The First Circuit's review of Section 148B's second prong would not be advisory or irrelevant because it would address the barrier to the couriers' classification as independent contractors.
In reaching the conclusion that Section 148B may be preempted by the FAAAA, the First Circuit separately addressed two clauses from the FAAAA preemption provision, both of which it held were misapplied by the district court:
"A state . . . may not enact or enforce a law . . . related to a price, route or service of any motor carrier. . . with respect to the transportation of property."
(49 U.S.C. §14501(c)(1).)
The First Circuit held that the district court misapplied the first clause of the FAAAA preemption provision, "related to a price, route or service of any motor carrier," by reading it too narrowly. In addressing this clause, the First Circuit noted that:
  • The phrase "related to" refers to state laws having a direct or indirect connection with or reference to carrier rates, routes or services (Dan's City Used Cars, Inc. v. Pelkey, 133 S. Ct. 1769, 1778 (2013)).
  • A state statute is preempted if it expressly references or has significant impact on, the prices, routes or services of carriers. Reading the phrase broadly, the Supreme Court has said that a statute "relates to" these items if it has a "connection with or reference to" them. (Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384, 388 (1992).)
  • Congress intended to incorporate the broad preemption interpretation of Morales when applying the "related to" language of the FAAAA.
  • State laws that have only a tenuous, remote or peripheral effect on the prices or services of airline operation are not preempted (Rowe v. N.H. Motor Transp. Ass'n, 552 U.S. 364, 371 (2008)).
  • The Attorney General argued for a categorical rule that "background" state labor laws (laws that are too remotely connected to carriers' prices, routes or services to be "related to") are not preempted if they are:
    • generally applicable; and
    • not directed to a particular area of federal authority.
  • The Attorney General's proposed construct:
    • runs counter to Supreme Court precedent which broadly interprets the FAAAA's "related to" language;
    • is not supported by First Circuit jurisprudence, which has not suggested a categorical rule to determine which cases fall beyond preemption; and
    • is contradicted by the cases it relied on, which declined to create a rule that generally applicable laws could not be preempted.
  • In Morales, the Supreme Court dismissed the idea that a state statute can only be preempted under the FAAAA if it regulates or specifically addresses the airline industry.
  • MDA argued that Section 148B is preempted:
    • on its face because of its effect on the same-day delivery industry; and
    • by implication due to its impermissible significant effect on Xpressman's prices routes and services.
  • The First Circuit held that the district court made several errors in reaching the holding that Section 148B's connection to prices, routes and services were insufficient to be preempted by the FAAAA:
    • a statute's potential impact on carriers' prices, routes and services can be sufficient if it is significant, and courts may look at the logical effect that a law has on services or rates;
    • a law's logical effect on services or rates can be sufficient even if it has only indirect impact on pricing decisions; and
    • the district court failed to consider Section 148B's impact on routes and services.
The First Circuit held that the district court misinterpreted the second clause of the FAAAA preemption provision, "with respect to the transportation of property," by overbroadly reading it as imposing an independent, severe FAAAA preemption requirement. The First Circuit noted that:
  • The district court relied heavily on Dan's City, which held that the second clause greatly limited the scope of FAAAA preemption. In that case, the Supreme Court stated that the law must "concern" transportation of property by motor carriers to be preempted.
  • The district court misread Dan's City to limit FAAAA preemption to those laws that "regulate" the motor carrier's transportation of property.
  • The district court's strict reading of the second clause would essentially overrule the first clause and disallow the preemption of a general statute with indirect but significant effect on motor carriers' prices, routes or services.
  • The First Circuit understands Dan's City to ensure that FAAAA preemption applies when a state law affects a motor carrier's transportation of property.
  • Section 148B clearly concerns a motor carrier's transportation of property, but the district court must determine, on remand, whether the law's effect on motor carriers' prices, routes or services requires preemption under the FAAAA.

Practical Implications

In this decision, the First Circuit addressed the highly-examined issue of employee and independent contractor misclassification. The First Circuit read the FAAAA's preemption clause broadly, so employers must be aware that state laws, including those that are generally applicable, that significantly affect motor carriers' prices, routes or services for transporting property may be preempted by federal law. Employers must be sure to take note of whether the state or federal law prevails when determining whether to treat its workers as employees or independent contractors. Failure to properly classify these individuals could lead to labor law violations and significant financial repercussions.