Class action lawsuits seeking to reclassify Owner Operators from independent contractors to employees – and thereby recover damages and attorneys’ fees under various state wage and hour laws – threaten the Motor Carrier Industry. “Reclassification” class actions have resulted in multi-million dollar settlements and judgments and have caused some motor carriers to abandon the Owner Operator model entirely. Some recent examples:
- Fed Ex Ground v. Alexander – $228 million dollar settlement
- Shippers Transport – $11 million dollar settlement
- Hub Group – $5 million settlement and abandonment of the model
- Pacer Cartage – $2.1 million dollar judgment
These claims are growing in number and geographic scope as plaintiffs’ lawyers bring reclassification cases in more and more states. To date, the plaintiffs have found the courts mostly receptive to these claims and motor carriers have had difficulty defending against them. Federal preemption under the Federal Aviation Administration Authorization Act of 1994, 49 U.S.C.S. § 14501 (FAAAA) offers a potential avenue to defeat these claims.
1st Circuit Approach
The 1st Circuit Court of Appeals’ recent decision in Schwann v. FedEx Ground Package Sys., 2016 U.S. App. LEXIS 3050 (1st Cir. Mass. Feb. 22, 2016), holding that a portion of the Massachusetts Wage Act Mass. Gen. Laws ch. 149, §§ 148. (MWA) is preempted, breathes life into the FAAAA preemption defense. Schwann arises from a class action brought against Fed Ex Ground Package Systems seeking to have Fed Ex’s Independent contractor delivery drivers reclassified as employees under the MWA. The FAAAA preempts state laws that relate to prices routes and services provided by motor carriers. The 1st Circuit in Schwann held that the “B” prong of MWA, which precludes the use of owner operators to provide services in the ordinary scope of the principal’s business, directly affected the manner of providing services, substantially impacted routes offered by Fed Ex and was, therefore, preempted. Schwann at 20-21.
Schwann is helpful to the Motor Carrier industry in defending against reclassification claims. The 1st Circuit’s decision supports an argument that a state regulatory provision which effectively precludes a motor carrier from using independent contractors is preempted by the FAAAA. However, there are a number of limitations to the usefulness of the Schwann opinion.
1. The court specifically held that the “A” prong and “C” prongs of the MWA are not preempted, reversing the district court’s ruling that the entire statute is preempted.
2. The court in Schwann specifically noted that their holding did not give Fed Ex free reign to classify their workers as independent contractors by fiat. On remand Fed Ex must still establish that its contractors are free from direction and control in the performance of their work. Thus Fed Ex has won this preemption battle but is still at risk of losing the classification war.
The effect of Schwann beyond the 1st Circuit, and the MWA, remains to be seen.
7th Circuit Approach
The 7th Circuit in Costello v. BeavEx, Inc., 810 F.3d 1045, 2016 U.S. App. LEXIS 862, 166 Lab. Cas. (CCH) P36,412, 25 Wage & Hour Cas. 2d (BNA) 1681 (7th Cir. Ill. 2016), decided shortly before Schwann, held that a similar “B” prong in the Illinois Wage Payment and Collection Act (IWPCA) was not preempted under the FAAAA. The court in Costello reasoned that the impact of the IWPCA was too tenuous to support preemption. The 7th Circuit distinguished the impact of the IWPCA before it, and the MWA, on the grounds that the impact of the IWPCA was much more limited than the MWA. The court found that the only impact of the application of the IWPCA to the drivers, on the record before the court, would be the requirement that no deductions be made from the drivers without signed authorizations, and that there was no basis to conclude that the defendant would be forced to abandon the independent contractor model.
The divergent outcomes in Schwann and Costello provide a road map for the factual record that defense counsel need to make to support an argument of FAAAA preemption. While the 1st Circuit in Schwann stated that empirical evidence of the substantial effect on prices routes and services is not necessary for a finding of preemption, it was the absence of such evidence that lead the 7th Circuit in Costello to find the Illinois statute not preempted. In Schwann, the court found that empirical evidence of a statute’s impact on prices routes and services is not necessary, but can be shown by the logical effect of the regulatory scheme. Conversely, in Costello, the 7th circuit found the IWPCA was not preempted because there was no evidence that application of the IWPCA would substantially affect prices routes or services; there was no evidence that it would require the defendant to abandon the IC model, and the only impact evidenced in the record was a small cost in obtaining signed deduction authorizations from drivers.
Placing Schwann and Costello in juxtaposition shows that while empirical evidence of significant impact on prices routes and services is not legally required, defense counsel hoping to prevail on FAAAA preemption grounds must put forth the strongest empirical case of impacts on prices routes and services. The application of state wage laws to motor carriers can cause and in fact has already caused motor carriers to abandon the independent contractor model. The 7th Circuits’ finding to the contrary in Costello is either naive or disingenuous. Defense counsel need to develop evidence in the record of these cases to show the impact state wage statutes are having on the choice of motor carriers in providing services. The costs of state wage laws, including pay for rest breaks, overtime, minimum wage, waiting time, unemployment insurance and workers compensation premiums, dramatically affect the rates that motor carriers must charge and will cause motor carriers to no longer provide services on routes that become unprofitable. Regulations regarding overtime and meal and rest breaks will make some routes impossible or unprofitable to serve. Strong testimony from experts in truck operations, and economics, needs to be marshaled to prove these substantial impacts to the court.
The 1st Circuit’s decision in favor of preemption in Schwann gives hope to the FAAAA defense. However, the limited nature of the court’s holding in Schwann, and the ruling against preemption by the 7th Circuit, make it far from clear that other state statutes affecting independent contractor classification in other jurisdictions will be found to be preempted. To support claims of preemption, motor carriers need to put forth the best evidence possible to show the effect of the particular statute in question upon motor carrier’s prices routes and services.
While the FAAAA defense offers hope to motor carriers in defending reclassification claims, particularly if the right evidence can be developed and advanced, the preemption defense cannot be a substitute for preparing to defend against such claims. Motor carriers continue to need to review the structure of their model, their independent contractor agreements, and operations in practice to prepare against these claims, while also developing the FAAAA preemption defense.