A lighter load for motor carriers: The Massachusetts independent contractor statute and federal preemption

Issue March/April 2017 By Barry J. Miller and Anthony S. Califano

The Massachusetts Independent Contractor Statute, G.L.c. 149, § 148B ("IC Statute"), makes it difficult and risky for most companies to classify workers in the commonwealth as independent contractors. Thanks to the Federal Aviation Administration Authorization Act, 49 U.S.C. § 14501 et seq. (FAAAA), and recent appellate decisions, motor carriers may be able to find a path around the IC Statute and limit the risks associated with the use of contractors. In fact, as explained below, careful and proactive motor carriers involved in the transportation of property may no longer have to satisfy the most challenging component of the IC Statute.

The IC Statute is Tougher than Others

The IC Statute assumes that all workers are employees, regardless of the titles and tax forms that parties use to define their working relationships. Under this law, a worker is an employee unless the company can satisfy a three-prong test for establishing independent contractor status, commonly referred to as the "ABC Test." Under the ABC Test, a worker is an independent contractor only if the company can prove all of the following:

(A) the worker is free from direction and control under the parties' contract and in fact;

(B) the worker provides services outside the company's usual course of business; and

(C) the worker is customarily engaged in an independently established trade, occupation, profession or business.

Prong B, the "usual course of business" prong, sets the IC Statute apart from most other independent contractor standards under federal law and the laws of other states. The First Circuit Court of Appeals has referred to it as "something of an anomaly." Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d 429, 438 (1st Cir. 2016). What does "usual course of business" mean? The IC Statute does not answer that question and there are no regulations to add clarity. The Massachusetts Attorney General's Office (AGO), however, has said that a company's "usual course of business" is not governed by how the company defines its operations but by "whether the service the individual is performing is necessary to the business of the employing unit or merely incidental." See Massachusetts Attorney General Advisory 2008/1, at 6. The AGO offers as an example a drywall company that classifies drywall installers as independent contractors. Id. This, says the AGO, would constitute a misclassification under the IC Statute because the drywall installers perform services in the drywall company's "usual course of business." Id.

Based on this line of reasoning, independent truck operators have sued the companies for which they drove, alleging that the companies misclassified them as independent contractors. These lawsuits are based substantially on Prong B in the ABC Test and the assertion that the drivers' work is tied up in the companies' usual course of business (i.e., transporting goods). Because companies that classify workers as independent contractors must satisfy each prong of the ABC Test, failure to satisfy Prong B is fatal to the independent contractor classification, even if the truck driver is free from control and works in an independently established trade or profession.

Misclassification in Massachusetts Carries Extraordinary Penalties

The consequences of misclassification are serious and expensive. An employee who has been misclassified as an independent contractor is entitled to the benefits that stem from an employment relationship, including the protections afforded to employees under the Massachusetts Wage Act. This means that a driver who prevails on a misclassification claim could be entitled to overtime compensation for hours worked above forty hours per workweek (if not subject to an exemption), minimum wage, and reimbursement for a host of work-related expense that employers typically cover, such as insurance costs. Some plaintiffs have even argued that they are entitled to recover costs of maintaining their vehicles. Under the Massachusetts Wage Act, plaintiffs who prove misclassification are awarded mandatory triple damages, in addition to their attorneys' fees and costs. There is no good faith defense to allow companies avoid these multiple damages. Although historically rare, violation of the Massachusetts Wage Act can also result in criminal penalties.

There are additional consequences stemming from misclassification. In 2008, the Massachusetts Governor signed an Executive Order that created the Joint Enforcement Task Force on the Underground Economy and Employee Misclassification. As its name implies, one of the Task Force's goals is to combat employee misclassification, and the agencies that participate in the Task Force aim to recover funds resulting from misclassification, including taxes and other mandatory contributions. The Massachusetts Department of Revenue and the Massachusetts unemployment and workers' compensation authorities are among the agencies that participate in the Task Force and share information. Thus, on top of the potential damages awarded in civil action lawsuits, misclassification claims can draw the attention of a host of government agencies and lead to imposition of back taxes and other penalties.

The FAAAA Offers Good News for Certain Motor Carriers

Fortunately, certain motor carriers may be able to avoid the restrictive standards and harsh penalties stemming from the IC Statute. The Supreme Judicial Court and the First Circuit have held recently that efforts by the Massachusetts Legislature to narrow or eliminate the use of independent contractors may be overridden by federal laws governing the transportation industry. In these decisions, the courts have held that the FAAAA preempts the IC Statute, at least in part and at least as to some motor carriers involved in the transportation of property. See Chambers v. RDI Logistics, Inc., 476 Mass. 95 (2016); Schwann, 813 F.3d at 437-440.

Congress passed the FAAAA in 1994 to prevent states from placing an unreasonable burden on the transportation of property in interstate commerce through over-regulation. The idea was to avoid a patchwork of state laws that might hamper the transportation of goods in interstate commerce and, consequently, result in increased prices on consumers. To that end, under the FAAAA, states 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." Chambers, 476 Mass. at 101; Schwann, 813 F.3d at 435 (quoting 49 U.S.C. § 14501(c)(1)).

When does a state law "related to a price, route, or service of any motor carrier" trigger FAAAA preemption? According to the First Circuit, "in a broad sense, everything relates to everything else in some manner," so a limited or abstract relationship between a state law and the price, route, or service of a motor carrier may not trigger FAAAA preemption. Schwann, 813 F.3d at 436. Rather, "a state statute is preempted if it expressly references, or has a significant impact on, carriers' prices, routes, or services," as opposed to a "tenuous, remote, or peripheral" impact. Id., at 436; see also Chambers, 476 Mass. at 101-102.

The SJC and the First Circuit have gone on to observe that Prong B of the IC Statute is unique among federal and state independent contractor laws "because it makes any person who performs a service within the usual course of the enterprise's business an employee for state wage law purposes." Schwann, 813 F.3d at 438; see also Chambers, 476 Mass. at 101-102. The IC Statute therefore "runs counter to Congress's purpose to avoid "a patchwork of state service-determining laws, rules, and regulations" that it determined were better left to the competitive marketplace." Schwann, 813 F.3d at 438; see also Chambers, 476 Mass. at 103.

Applying these principles, the SJC in Chambers and the First Circuit in Schwann both held in 2016 that the FAAAA preempted Prong B of the IC Statute. In each case, the plaintiffs were delivery truck drivers who alleged that the defendants misclassified them as independent contractors when, in reality, they were employees under the IC Statute. Under the similar facts of these cases, the SJC and the First Circuit concluded that Prong B of the IC Statute both referenced and likely would have a significant impact on the defendants' routes and services because it would essentially require the defendants to use employees rather than independent contractors to provide delivery services. Chambers, 476 Mass. at 102; Schwann, 813 F.3d at 438-439. Requiring motor carriers to use employees to provide delivery services likely would raise the costs of providing such services. Chambers 476 Mass. at 103; Schwann, 813 F.3d at 438. Moreover, both courts observed that the fact that Prong B is unique among state independent contractor classification standards contravenes the congressional goal of avoiding "a patchwork of state service-determining laws . . . that it determined were better left to the competitive marketplace." Schwann, 813 F.3d at 438; Chambers, 476 Mass. at 103.

Notably, neither the SJC nor the First Circuit expressly held that Prong B is preempted by the FAAAA in all cases involving motor carriers involved in the transportation of property. Rather, the courts held that Prong B was preempted as the plaintiffs proposed to apply it in the particular cases at issue.

Equally important, neither court held that the FAAAA preempts the IC Statute entirely. Instead, the courts severed Prong B from the IC Statute and remanded the cases to the lower courts for findings regarding Prongs A and C. In other words, the courts held that the defendants did not have to prove that the delivery drivers at issue provided services outside their usual courses of business. On the other hand, the courts held that the defendants must prove that the delivery drivers at issue were (1) free from direction and control under their contracts and in fact, and (2) customarily engaged in an independently established trade, occupation, profession, or business.

Finally, the SJC's and the First Circuit's holdings and reasoning, while persuasive, do not have binding effect outside of Massachusetts or the First Circuit's jurisdiction. In addition to Massachusetts, the First Circuit's jurisdiction includes Maine, New Hampshire, Rhode Island, and Puerto Rico. Courts outside of Massachusetts and the First Circuit have reached conflicting results in similar cases regarding FAAAA preemption.

Be Proactive

The SJC's and the First Circuit's rulings regarding the FAAAA's preemptive impact on Prong B of the IC Statute certainly represent a win for motor carriers involved in the transportation of property. However, these courts relied on the specific facts at issue to find that FAAAA preemption applied. Companies involved in the transportation of property, wherever they operate, would therefore be wise to consult with attorneys experienced in the law regarding independent contractor classification and audit relationships with delivery drivers. An array of factors impacts the propriety of an independent contractor classification, and there are often adjustments that can be made in a motor carrier's business practices to strengthen the classification. Such proactive steps could be an important step toward establishing FAAAA preemption of Prong B of the IC Statute. They also may better position a motor carrier to satisfy the control and independence factors that are important under the IC Statute and other federal and state independent contractor classification laws.

Companies would also be wise to evaluate other potential avenues of risk management. For example, companies that contract with drivers of trucks that meet minimum size or capacity thresholds may not have to pay overtime, regardless of employee or independent contractor status, based on statutory exemptions provided under the Fair Labor Standards Act and Massachusetts law. Thus, while a company may still face exposure for other damages stemming from misclassification, a company may be able to alleviate significant overtime exposure.

As a final note, the laws discussed above are complex and changing. An independent contractor classification that is proper under one state or federal law may be deemed improper under another state or federal law. Also, measures that are sufficient to ground a proper independent contractor classification under a particular state or federal law today may be insufficient tomorrow based on developments in case law or statutes. Staying aware of relevant developments in this area of the law is critical to limit risk and exposure.

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