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.