Massachusetts has one of the most employee-friendly independent contractor laws in the country, creating a heavy presumption of employee status. For a refresher on the law and whether a worker should be classified as an employee or an independent contractor, you should refer to Johanna Matloff’s and Adam Santeusanio’s detailed discussion of the Massachusetts Independent Contractor Law, G.L. c. 149, § 148B. In brief, a worker is presumed to be an employee unless the employer is able to prove each of the following.
- The worker is free from the employer’s control;
- The worker performs services outside the usual course of the employer’s business; and
- The worker customarily engages in an independently established trade, occupation, profession, or business.
Thanks to the First Circuit, this heavy burden just got a little lighter for some employers. In Schwann v. Fedex Ground Package System, Inc., the First Circuit recently held that the Federal Aviation Administration Authorization Act (the “FAAAA”) preempts the “usual course of business” prong of the three-prong test. The First Circuit did not, however, go so far as to hold that the entire law was preempted, recognizing that two-thirds of a loaf is better than no loaf at all.
Fedex, a federally licensed motor carrier providing nationwide package pick-up, transportation, and delivery services, does not customarily perform so-called “first- and last-mile” pick-up and delivery services directly to its customers. Instead, it contracts with individuals to perform these services. It treats these individuals as independent contractors and uses an operating agreement to govern its relationship with them. Under these operating agreements, each individual obtained an exclusive interest in customer accounts located in a designated area in return for assuming the responsibility of providing daily pick-up and delivery services for FedEx in that area.
The Plaintiffs in Schwann were several of these individuals. They claimed that FedEx should have treated and paid them as employees, rather than as independent contractors, because FedEx could not satisfy its burden under Section 148B.
Unsurprisingly, FedEx disagreed. In addition to challenging the alleged misclassification on substantive grounds, FedEx argued that the FAAAA preempted Section 148B. The FAAAA prohibits states from enacting or enforcing laws that relate to the price, route, or service of any motor carrier with respect to the transportation of property. According to FedEx, Section 148B imposed a significant impact on its rates, routes, and services. Therefore, enforcement of the law would prevent FedEx from carrying out its business decision to use independent contractors for “first- and last-mile” pick-up and delivery services in violation of the FAAAA. It claimed that requiring FedEx to use statutory employees to perform these deliveries would undermine its business model and directly impact prices and services.
While the trial court initially agreed with the Plaintiffs, it vacated its decision after the First Circuit decided Massachusetts Delivery Association v. Coakley, 769 F.3d 11 (1st Cir. 2014) (“MDA”). In MDA, the First Circuit held that another trial court had applied an unduly narrow interpretation of the FAAAA’s preemption provision. After supplemental briefing on whether the FAAAA preempted Section 148, the trial court issued a second decision, this time agreeing with FedEx. The trial court concluded that the FAAAA preempted Section 148 in its entirety, because the second prong could not be separated from the first and the third. The Plaintiffs appealed.
The First Circuit’s Decision
In MDA, the First Circuit held that because Section 148 governed the classification of couriers for delivery services, the law clearly concerned a motor carrier’s “transportation of property” and “potentially impacts the services the delivery company provides, the prices charged for the delivery of property, and the routes taken during this delivery,” but it stopped short of deciding whether the FAAAA preempted Section 148. In Schwann, the First Circuit picked up where it left off and held that the FAAAA preempted the “usual course of business” prong.
In doing so, the Court highlighted how unusual the “usual course of business” prong in the Massachusetts law is when compared to federal and the majority of other state laws. In Massachusetts, any person who performs a service within the usual course of a company’s business automatically is rendered an employee. By contrast, the Fair Labor Standards Act and the majority of state laws look at the “usual course of business” as merely one among many factors to consider. In other words, the Plaintiffs could be found employees under Massachusetts law but independent contractors under federal law and the law of the majority of states. The First Circuit concluded that preempting the prong was necessary to avoid a patchwork of state laws.
The Court’s next task was to determine if the “usual course of business” prong could be separated from the first and third prongs. It held that it could. This is significant. FedEx still needs to establish that the Plaintiffs are free from FedEx’s control (prong one) and that the Plaintiffs customarily engage in an independently established trade, occupation, profession or business (prong three) before the Plaintiffs may be considered independent contractors. Had the First Circuit agreed with the trial court that there could be no separation, then FedEx (and other delivery service companies) would be free from this proof.
The First Circuit was careful to note, however, that its decision was limited and it was not giving FedEx free rein to classify workers as independent contractors by fiat. State laws that are more or less nationally uniform (which pose no patchwork problem) or laws that have less of a reference to and effect on delivery carrier’s routes may not be preempted.
Worker misclassification claims pose significant financial risks for companies facing such claims, given that Massachusetts law providers for the awarding of treble damages and attorneys’ fees. The First Circuit’s decision that the “usual course of business” prong is preempted lessens the burden on delivery service companies when facing these claims.
While the FAAAA is not applicable to all employers, employers who are subject to federal laws that contain preemption provisions should take note of the First Circuit’s commentary about the “usual course of business” prong when planning their defense strategy.