Labor & Employment Law Daily FAAAA did not preempt New Jersey’s ‘ABC’ test for independent contractor status
Thursday, January 31, 2019

FAAAA did not preempt New Jersey’s ‘ABC’ test for independent contractor status

By Lisa Milam, J.D.

The Third Circuit found the state’s ABC test did not have a significant effect on “prices, routes, or services,” and was unpersuaded by the carrier’s contention that the test could drive up labor costs and thus prices.

The Federal Aviation Administration Authorization Act (FAAAA) did not preempt delivery drivers’ state-law claims they were misclassified as independent contractors under New Jersey law, the Third Circuit held on interlocutory appeal, upholding a federal district court’s refusal to dismiss the claims against a logistics company. The company argued that the state’s “ABC” test for determining independent contractor status was preempted in that the test, as applied, would drive up its labor costs, thereby having an effect on the carrier’s “prices, routes, or services.” The appeals court disagreed. “Congress sought to ensure market forces determined prices, routes, and services. Nothing in that goal, however, meant to exempt workers from receiving proper wages, even if the wage laws had an incidental impact on carrier prices, routes, or services,” the court wrote (Bedoya v. American Eagle Express Inc., January 29, 2019, Shwartz, P.).

New Jersey independent contractors. The plaintiffs in the underlying suit perform deliveries for the defendant, a logistics company that provides delivery services to medical organizations. New Jersey residents, they filed a putative class action alleging they were misclassified as independent contractors. Their complaint sought a judgment declaring that they are in fact employees under the New Jersey Wage and Hour Law (NJWHL) and New Jersey Wage Payment Law (NJWPL) and, as such, are covered by the statutes’ minimum wage and overtime requirements.

The defendant moved for judgment on the pleadings arguing that their claims were expressly preempted by the FAAAA, the federal statute enacted in 1994 with the goal of deregulating interstate trucking. The district court denied the motion, finding no Congressional intent to bar state wage actions; moreover, it reasoned, any connection between the regulation of the defendant’s workforce and the “prices, routes, and services” provided to consumers was too attenuated to justify such preemption. The Third Circuit agreed, concluding that the FAAAA does not preempt New Jersey’s “ABC” test for determining employment status under the NJWHL and NJWPL.

Factors in determining preemption. Employment regulations such as wage laws enacted by states to ensure that workers are fairly paid fall within states’ police power and as such, are presumed not to be preempted by federal law. This presumption can be overcome, though, if Congress had a “clear and manifest purpose” to preempt state laws, the appeals court explained. FAAAA preemption applies solely to state laws that relate to “prices, routes, or services ‘with respect to the transportation of property.’” As the Supreme Court has observed, this qualifier “massively limits” the scope of the statute’s preemptive reach. In sum, the FAAAA preempts a state law that affects prices, routes, or services, either directly or indirectly, and state laws that have “a ‘significant impact’ on carrier rates, routes, or services.”

To analyze the directness of a state law’s effect on prices, routes, or services, courts look at whether the challenged law: (1) mentions a carrier’s prices, routes, or services; (2) specifically targets carriers as opposed to all businesses; and (3) addresses the carrier-customer relationship rather than non-customer-carrier relationships (e.g., carrier-employee). In deciding whether a state law has a significant or insignificant impact on prices, routes, or services, courts consider whether: “(1) the law binds a carrier to provide or not provide a particular price, route, or service; (2) the carrier has various avenues to comply with the law; (3) the law creates a patchwork of regulation that erects barriers to entry, imposes tariffs, or restricts the goods a carrier is permitted to transport; and (4) the law existed in one of the jurisdictions Congress determined lacked laws that regulate intrastate prices, routes, or services and thus, by implication, is a law Congress found not to interfere with the FAAAA’s deregulatory goal.” A state law also may be deemed to have a significant effect where it undermines Congress’ goal of having competitive market forces dictate prices, routes, or services of motor carriers.

The test, applied. After applying these factors to New Jersey’s ABC test, the Third Circuit found it was not preempted by the FAAAA. The test has neither a direct nor indirect, nor a significant effect on carrier prices, routes, or services—any effect is tenuous at best, the court reasoned. It does not mentioned carrier prices, routes, or services, or expressly single out carriers. Rather, the ABC test applies to all businesses, and merely as a “backdrop” or “background regulation” to which they must adhere in conducting their affairs. Moreover, the court found, the test does not regulate carrier-customer interactions or how the carrier’s service is performed, but concerns only how a carrier “behaves as an employer.” As such, the test is “steps removed” from regulating customer-carrier interactions through prices, routes, or services, according to the appeals court.

Nor does New Jerseys’ ABC test have a significant effect on prices, routes, or services. It does not bind the defendant carrier in this case to a particular method of providing services. Here, the appeals court drew a sharp distinction between the New Jersey test and Massachusetts’ independent contractor statute, which the First Circuit held was FAAAA-preempted in that it essentially dictated that carriers may not utilize independent contractors in providing services. Importantly, “[n]o part of the New Jersey test categorically prevents carriers from using independent contractors,” the court explained.

Effect on wages unavailing. According to the company, the New Jersey law may require it to shift its model away from using independent contractors, which will lead to an increase its costs, and in turn, prices. If it can no longer use independent contractors to perform its delivery services, the employer lamented, “then it will be forced to recruit employees, bring on a human resources department to manage them, acquire and maintain a fleet of vehicles and pay expense reimbursements, provide fringe benefits, plan and dictate delivery routes and timing, and pay overtime wages and employment taxes.”

But the Third Circuit was not persuaded: The company offered no showing of causation between the ABC test and its list of potential cost hikes, adding that, like its sister circuits, it has rejected such conclusory impacts. The company’s reference to other legal requirements that would arise from reclassification, such as Affordable Care Act mandates, was also unavailing. At bottom, though, the appeals court conceded that the “disruption of a labor model” alleged to have resulted from the New Jersey classification test “could have negative financial and other consequences for an employer.” However, the court continued, “this impact on the employer does not equate to a significant impact on Congress’ goal of deregulation.”

The carrier also argued that New Jersey’s ABC test differs from the FLSA’s economic realities test, leading to a patchwork of laws regulating how motor carriers must perform delivery services, and thereby implicating FAAAA concerns. But in the Third Circuit’s view, New Jersey’s test was similar to classification tests used by many other states. Consequently, the “patchwork” line of attack failed.

Ultimately, the defendant carrier could not establish that New Jersey’s ABC classification test has a “significant impact” on Congress’ efforts to deregulate motor carriers. Nor do the NJWHL and NJWPL—”typical state wage and hour laws,” the court noted—reflect “the kinds of preexisting state regulations with which Congress was concerned when it passed the FAAAA.”

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