Employment Law Daily FAAAA didn’t preempt common law test for whether drivers were misclassified under California labor law
Wednesday, September 12, 2018

FAAAA didn’t preempt common law test for whether drivers were misclassified under California labor law

By Marjorie Johnson, J.D.

Striking a blow to motor carriers who contractually classify certain drivers as independent contractors, the Ninth Circuit held that the Federal Aviation Administration Authorization Act (FAAAA) did not preempt California’s Labor Commissioner from using a common law test to determine whether they were misclassified for purposes of the state’s labor laws. Affirming the district court’s dismissal of a lawsuit brought by the California Trucking Association seeking injunctive relief, the appeals court gave the state the green light to continue using the common law standard since, pursuant to Supreme Court precedent, applicable Circuit law, and legislative history, it was not preempted by the federal deregulatory law (California Trucking Association v. Su, September 10, 2018, Tashima, A.).

Owner-operators classified as independent contractors. This lawsuit was brought by the California Trucking Association (CTA), an association devoted to advancing the interests of its motor carrier members. Based on factors like efficiency and market demand, its members hired either “company drivers” (who drove company-owned trucks) or “owner-operators” (who used their own trucks). Owner-operators entered into contracts which usually provided that they would be responsible for their truck’s operating expenses, have control over how to perform a haul, be paid at an agreed-upon rate, and were classified as independent contractors.

CTA seeks injunction. The CTA filed this lawsuit against the Labor Commissioner of the State of California Department of Industrial Relations, which is responsible for enforcing the California Labor Code, which affords certain benefits and protections to workers who qualify as employees. Seeking injunctive relief, the CTA challenged the Commissioner’s application of the common-law (Borello) standard to assess owner-operators’ claims that they were misclassified as independent contractors. The CTA contended that this practice disrupted their contractual arrangements, which introduced inefficiencies into the transportation services market and was inconsistent with Congress’ deregulatory goals under the FAAAA.

Common law test v. federal deregulation. This case thus involved a purported clash between the common law test used to enforce California’s labor laws and a federal statute aimed at preventing states from undermining federal deregulation of interstate transport. CTA argued that the FAAAA—which expressly preempts certain state regulation of intrastate motor carriage—compelled the Commissioner and courts to accept the parties’ agreements at face value.

The Ninth Circuit noted that Congress passed the FAAAA to achieve two broad goals: (1) “to even the playing field between air carriers and motor carriers;” and (2) to utilize deregulation to address the inefficiencies, lack of innovation, and lack of competition caused by non-uniform state regulations of motor carriers. However, “Congress did not intend to preempt generally applicable state transportation, safety, welfare, or business rules that do not otherwise regulate prices, routes, or services.” Therefore, when assessing preemption, “although Congress clearly intended FAAAA to preempt some state regulations of motor carriers who transport property, the scope of the pre-emption must be tempered by the presumption against the pre-emption of state police power regulations.”

No preemption. A careful analysis of the relevant caselaw led the Ninth Circuit to conclude that the Commissioner’s use of the Borello standard was not preempted since it did not have significant impact on a carrier’s prices, routes or service; rather, the impact was tenuous. In so ruling, it rejected CTA’s contention that the FAAAA preempted the common law standard since the use of it could replace “freely-bargained, efficiency-driven” contract terms with California’s policy judgment about what those terms ought to be.

The appeals court began with the Supreme Court decisions holding preempted state laws that interfered with a carrier’s contractual relationship with its customers, on which CTA heavily relies. These cases—which involved customers objecting to changes that an airline made to its “frequent flyer program”—did not announce a rule that preemption occurs whenever a state law effectively alters freely-negotiated contract terms. Rather, the preemption issues they addressed were quite distinct from the issue here.

Impact on workforce. Moreover, the guiding principle that Congress did not intend to hinder states from imposing “normative policies” on motor carriers as employers could be gleaned from Ninth Circuit caselaw holding that California’s Prevailing Wage Law (CPWL) and its meal and rest break requirements were not preempted. Though neither of the two cases disputed that the workers were employees, the Ninth Circuit permitted California to interfere with the relationship between a motor carrier and its workforce.

Didn’t compel who provides services. The Borello standard also did not necessarily compel a carrier to use employees and CTA failed to show how the standard made it difficult for its members to use independent contractors. The court also rejected its assertion that preemption was necessary based on the potential impact on a motor carriers’ financial arrangements with its drivers and their agreed-upon incentives, since California law required the carriers to reimburse employee drivers for certain expenses carriers regularly passed on to the owner-operators. Moreover, “the mere fact that a motor carrier must take into account a state regulation when planning services is not sufficient to require FAAAA preemption, so long as the law does not have an impermissible effect, such as binding motor carriers to specific services, making the continued provision of particular services essential to compliance with the law, or interfering at the point that a carrier provides services to its customers.”

Historical context. When enacting the FAAAA, Congress identified ten jurisdictions (nine states and the District of Columbia) that did not regulate intrastate prices, routes, and services. Because seven of these ten states had prevailing wage laws similar to CPWL, this was “indirect evidence” Congress did not intend to preempt that law. Moreover, “nothing in the FAAAA’s legislative history indicated that Congress intended to preempt the traditional power to protect employees or the necessary precursor to that power, i.e., identifying who is protected.”

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