By Lisa Milam-Perez, J.D.
The Federal Aviation Administration Authorization Act (FAAAA) preempts application of the “usual course of business” prong of the Massachusetts Independent Contractor Statute to FedEx “first- and last-mile” delivery drivers, the First Circuit held. However, looking to the intent of the state legislature and concluding that it likely “favors two-thirds of this loaf over no loaf at all,” the appeals court held the preempted prong was severable from the remaining two criteria necessary for a worker to be designated an independent contractor (and not an employee) under the statute. The court also saw fit to hold FedEx to its puzzling decision to expressly disavow arguing that the other prongs are preempted and, “for that reason alone,” it vacated and remanded the case for the lower court to consider whether the drivers can prevail in their wage suit, which hinges on their contention they were misclassified as independent contractors, by relying on either of the other two criteria to show they were statutory employees (Schwann v. FedEx Ground Package System, Inc. dba FedEx Home Delivery
, February 22, 2016, Kayatta, W.).
FedEx is a federally licensed motor carrier that provides nationwide package pick-up, transportation, and delivery services. The company doesn’t customarily perform "first- and-last mile" pick-up and delivery services directly to customers, though; instead, it contracts with individuals such as the plaintiffs in this case to do so. Under this business model, these end-point drivers are designated and treated as independent contractors, a relationship governed by an operating agreement. Massachusetts drivers filed suit, challenging the model, and their independent contractor status, under the Massachusetts Independent Contractor Statute (Mass. Gen. Laws ch. 149, § 148B(a)). To be deemed an “independent contractor” under this employee-protective state statute: (1) the individual must be “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”; (2) the service carried out by the individual must be “performed outside the usual course of the business of the employer”; and (3) the individual must be “customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.”
The countervailing force at issue here is the FAAAA's express preemption provision, under which all state laws that "relate to a price, route, or service of any motor carrier . . . with respect to the transportation of property" are preempted. (This preemption is “purposely expansive,” the appeals court observed—as Congress had intended, and as the Supreme Court condoned.) FedEx argued here that application of the second, “usual course of business” prong of the Massachusetts statute to its first- and last-mile deliveries was preempted. To mandate that the courier may only use statutory employees to perform these deliveries would undermine the company’s business model and directly impact prices and services, it claimed.
Something of an anomaly.
Indeed, the disputed provision is “something of an anomaly,” the appeals court noted, in that it automatically renders anyone who performs a service within the usual course of a company’s business an employee; in contrast, the FLSA and the laws of most states look at this “usual course of business” criteria as merely one among many factors to consider. In other words, “Prong 2, as Plaintiffs would apply it, thus requires FedEx to use persons who are employees to perform first-and-last mile pick-up and delivery services even if those persons could be deemed independent contractors under federal law and the law of many states,” the appeals court observed.
The First Circuit had grappled with much of this in its 2014 decision in Massachusetts Delivery Ass’n v. Coakley
. There, it rejected a lower court’s finding that the “usual course of business” prong was not preempted, noting that it was unduly narrow in its interpretation of the FAAAA’s express preemption provision. Here, the appeals court picked up where its MDA
decision had left off and, in doing so, it wrote in broad strokes, quite favorably of the independent contractor model—or, perhaps more accurately, a company’s freedom to adopt that model free of regulatory interference should it opt to do so.
“The decision whether to provide a service directly, with one's own employee, or to procure the services of an independent contractor is a significant decision in designing and running a business. As this case shows, that decision implicates the way in which a company chooses to allocate its resources and incentivize those persons providing the service,” the appeals court wrote. “Imagine, for example, state legislation that barred any company from vertically integrating (that is, performing all connected services itself through its own employees). Legislation of that type would directly and substantially restrain the free-market pursuit of perceived efficiencies and competitive advantage that some competitors might otherwise choose to pursue in designing the manner in which they perform their services to meet market demands.”
The second prong of the Massachusetts law, if applied as the plaintiffs would hope, “is simply the flip side of this same type of market interference,” the court reasoned. “It requires a court to define the degree of integration that a company may employ by mandating that any services deemed ‘usual’ to its course of business be performed by an employee. Such an application of state law poses a serious potential impediment to the achievement of the FAAAA's objectives because a court, rather than the market participant, would ultimately determine what services that company provides and how it chooses to provide them.” As such, it runs directly counter to the FAAAA’s preemptive purpose.
On the other hand, “[w]e do not hold that FedEx has free rein to classify workers by fiat as independent contractors,” the appeals court was careful to note. “Such state laws that are more or less nationally uniform, and therefore pose no patchwork problem, or that have less of a reference to and effect on a carrier's service and routes” might present a bigger challenge, but in the case of the statute at issue here, it wasn’t a close question.