In Bedoya v. American Eagle Express Inc., the Third Circuit Court of Appeals held that the Federal Aviation Authorization Administration Act of 1994 (FAAAA) does not preempt New Jersey’s wage and hour laws, permitting delivery drivers to continue with a suit claiming they were misclassified as independent contractors. As a result of this decision, motor carriers located in states within the Third Circuit (Delaware, New Jersey and Pennsylvania) will need to ensure their relationships with drivers classified as independent contractors satisfy the so-called "ABC" test.

Background

Delivery drivers for a logistics company, American Eagle Express (AEX), brought a putative class action in New Jersey federal court, alleging that they had been misclassified as independent contractors rather than employees in violation of New Jersey’s wage and hour laws. Under the New Jersey ABC test utilized by the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law, a worker performing a service for a company is properly classified as an independent contractor only where the company can establish all of the following:

1. The individual has been and will continue to be free from control or direction over the performance of  the service, both under contract of service and in fact; and

2. The service is either outside the usual course of the business for which such service is performed, or such service is performed outside of all the places of business of the enterprise for which such service is performed; and

3. The individual is customarily engaged in an independently established trade, occupation, profession, or business.

FAAAA Preemption

AEX moved for judgment on the pleadings, claiming that the ABC test is expressly preempted by the FAAAA, and therefore does not determine the employment status of their delivery drivers. The district court denied the motion.  In considering AEX’s appeal, the Third Circuit found that a presumption against preemption applies because wage laws fall under states’ police power, which can only be superseded by a federal act where that was the “clear and manifest purpose” of Congress.  The court then addressed whether the presumption against preemption is overcome by such a purpose indicated by Congress when enacting the FAAAA.

The court recognized that the FAAAA was enacted as a result of a 15-year congressional effort to deregulate the air travel and interstate trucking industries.  To ensure that state laws would not interfere with that purpose, Congress expressly provided in the statute that “a State . . . may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier . . . with respect to the transportation of property,” with limited exceptions.  Examining congressional intent and Supreme Court jurisprudence, the court noted that while state laws need only be “related to” a motor carrier’s prices, routes, or services to be preempted by the FAAAA, preemption is not “an endless exercise.”  To be preempted, the state law’s impact on prices, routes, or services must be “direct” and “significant.”  To interpret those words, the court looked to the relevant precedent and the text of the FAAAA itself and, in doing so, formulated non-exhaustive lists of factors courts should consider in assessing whether a law’s directness and significance result in preemption. 

To evaluate a state law’s directness, courts should examine whether it:

1. mentions a carrier's prices, routes, or services;

2. specifically targets carriers as opposed to all businesses; and

3. addresses the carrier-customer relationship rather than non-customer-carrier relationships (e.g., carrier-employee).

To evaluate significance, courts should examine whether: 

1. the law binds a carrier to provide or not provide a particular price, route, or service;

2. the carrier has various avenues to comply with the law;

3. the law creates a patchwork of regulation that erects barriers to entry, imposes tariffs, or restricts the goods a carrier is permitted to transport; and

4. the law exists in one of the jurisdictions Congress has determined lacked laws that regulate intrastate prices, routes, or services and thus, by implication, is a law Congress found not to interfere with the FAAAA’s deregulatory goal.

Third Circuit's Analysis

Applying those factors, the court held that New Jersey’s ABC test was not preempted by the FAAAA.  AEX argued that applying New Jersey’s ABC test may require it to shift its business model away from using independent contractors, which would increase its costs, and in turn, its prices, by forcing it to hire employees. The Third Circuit found that New Jersey’s ABC test does not prevent trucking companies from hiring independent contractors, but rather determines whether drivers are properly classified as independent contractors.

More specifically, the court noted that any effect the test has on prices, routes, or services is tenuous because it mentions neither them nor carriers.. It only seeks to regulate the relationship between companies and their “resource inputs,” (i.e., workers), as opposed to their “product outputs” (i.e., goods and services).  The court also found that the ABC test’s impact on motor carriers’ prices, routes, or services was insignificant, highlighting that the test does not bind carriers to a particular method of providing services.  The court explained that even if the test may require carriers like AEX to shift their model away from using independent contractors, which may increase costs, such financial consequences “do[] not equate to a significant impact on Congress’ goal of deregulation.”  The court also pointed to the similarity between New Jersey’s employment status test and those of other states as support for finding no preemption. The court concluded that state wage and hour laws are not the kind of pre-existing state regulations that Congress was concerned about when it passed the FAAAA.

The Bedoya decision will ensure that motor carriers in the Third Circuit continue to face legal challenges when classifying drivers as independent contractors. In light of the court’s pronouncements, carriers should review their relationships with their drivers and other service providers for compliance with the ABC test.