Illinois Wage Payment and Collection Act Not Preempted by FAAAA: Seventh Circuit

Practical Law Legal Update w-001-3669 (Approx. 5 pages)

Illinois Wage Payment and Collection Act Not Preempted by FAAAA: Seventh Circuit

by Practical Law Labor & Employment

Background

BeavEx, a same-day delivery service, classified its couriers as independent contractors and did not treat them as employees for purposes of federal and Illinois employment laws, including the IWPCA. BeavEx:

Paid the couriers for each route or delivery and not by the hour.
Deducted expenses from the couriers' wages for among other things:
- insurance;
- mandatory uniforms bearing the BeavEx logo;
- cell phone fees incurred by the couriers; and
- chargebacks if the couriers made an unsatisfactory delivery.

In 2012, some of BeavEx's couriers filed a class action lawsuit in US district court alleging that they should have been classified as employees under the IWPCA and that BeavEx made unlawful deductions from their pay in violation of the IWPCA. BeavEx moved for summary judgment, claiming that the FAAAA preempted the IWPCA and that the deductions it took from the couriers' pay were therefore valid. The district court denied BeavEx's motion for summary judgment, holding that the FAAAA did not preempt the IWPCA and that the couriers were employees of BeavEx under the IWPCA. BeavEx appealed.

Outcome

The Seventh Circuit affirmed the district court's denial of summary judgment to BeavEx, holding that:

The FAAAA does not preempt the IWPCA's employee definition because the IWPCA:
- has a tenuous or remote impact on motor carriers' prices; and
- regulates motor carriers in their capacity as employers, not in a way that would impact their prices.
BeavEx can be held liable for misclassifying its couriers as independent contractors and making invalid deductions to their pay in violation of the IWPCA.

The Seventh Circuit noted that:

The IWPCA prohibits employers from taking deductions from an employee's wages unless the deductions are:
- legally required;
- for the employee's benefit;
- based on a valid wage deduction order; or
- made with the employee's written consent.
(820 ILCS 115/9.)
The IWPCA provides that for an employer to treat an individual as an independent contractor, the individual must perform work that is outside the employer's "course of business" (820 ILCS 115/2).
The FAAAA provides that it preempts any state law that relates to a motor carrier's "price, route or service" (49 U.S.C. § 14501(c)(1)).
The US Supreme Court held that the FAAAA:
- preempts state law if the state law has a direct or indirect connection with, or specifically refers to, a carrier's prices, routes or services (Morales v. Trans World Airlines, Inc., 504 U.S. 374, 384 (1992); and
- does not preempt state laws that relate to a carrier's prices, routes or services in only a "tenuous" or "peripheral" way (Rowe v. N.H. Motor Transportation Association, 552 U.S. 364, 371 (2008)).
The First Circuit reversed a district court ruling that the FAAAA did not preempt a Massachusetts law with a similar test as the IWPCA for determining whether an individual is an employee or an independent contractor. The First Circuit directed the district court to assess whether the law could potentially have a significant impact on a carrier's prices, routes and services. On remand the district court applied the First Circuit's "significant impact" preemption standard and held that the FAAAA preempted the Massachusetts employment test statute. (Massachusetts Delivery Association v. Coakley, 769 F.3d 11 (1st Cir. 2014).)
Circuit courts have found that state labor laws that generally regulate motor carriers in their capacity as employers (such as a Massachusetts prohibition on employers retaining service charges and a meal break law in California) are too remote from a carrier's prices, routes or services to be preempted by the FAAAA (DiFiore v. American Airlines, Inc., 646 F.3d 81, 88 (1st Cir 2011); Dilts v. Penske Logistics, Inc., 769 F.3d 637, 650 (9th Cir. 2014)).

The Seventh Circuit found that:

The IWPCA:
- regulates BeavEx in its capacity as an employer;
- has only a tenuous or remote impact on BeavEx’s labor costs; and
- would not have a significant impact on the prices that BeavEx charges its customers.
The IWPCA is more limited in scope and does not trigger state employment laws to the same extent as the Massachusetts law from Massachusetts Delivery Association, which was relied on by BeavEx.

Practical Implications

The Seventh Circuit's decision in BeavEx takes the position that the FAAAA does not preempt state laws that:

Affect motor carriers in their general capacity as employers.
Indirectly raise a motor carrier's labor costs but at enough of a distance from the point at which the motor carrier would increase the prices it charges its customers.

The court denied that it was adopting a "categorical rule" by which "all generally applicable state labor laws" will be found not to be preempted by the FAAAA. The court did not disagree with the First Circuit's decision in Massachusetts Delivery Association, but instead distinguished between the two state employment tests, viewing the Massachusetts law as triggering more employment laws than the IWPCA. The Seventh Circuit's apparent test for FAAAA preemption is whether the increased labor cost from a state statute distinguishing between employees and independent contractors will have a significant impact on a motor carrier's prices.

Illinois Wage Payment and Collection Act Not Preempted by FAAAA: Seventh Circuit | Practical Law