Massachusetts High Court Rules Prong Two of Independent Contractor Test is Severable for FAAAA Preemption Purposes
Author: Robert M. Shea (Boston)
Published Date: January 5, 2017
Massachusetts’s highest court recently issued a decision that impacts the ability of delivery companies operating in the commonwealth to use independent contractors in providing delivery services. In Chambers v. RDI Logistics, Inc., the Massachusetts Supreme Judicial Court (SJC) ruled that the second prong of the state’s three-pronged independent contractor test is preempted by federal law when applied to motor carriers. Significantly, however, the SJC also ruled that the three prongs of the test are severable and that, even when the second prong is preempted, an employer must satisfy the other two prongs to avoid misclassification liability. The SJC ruling aligns with the First Circuit’s decision in Schwann v. FedEx Ground Package Sys., Inc.
Massachusetts Independent Contractor Test
The independent contractor test used in applying Massachusetts wage statutes is arguably the most difficult such test in the nation. Massachusetts General Laws chapter 149, section 148B creates a presumption that an individual performing a service for an employer is an employee. To rebut the presumption of employee status, the employer must satisfy all three prongs of the following test:
(1) The individual must be free from control and direction in connection with the performance of the service, both under his contract for the performance of service and in fact;
(2) the service must be performed outside the usual course of the business of the employer; and
(3) the individual must be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.
After prong two of this test was modified in 2004 (to its current form), many businesses operating in Massachusetts have curtailed their use of independent contractors, as worker misclassification exposes employers to payment of mandatory treble damages and attorneys’ fees for wage statute violations. Some businesses in the transportation industry, however, have successfully challenged the independent contractor test, arguing that it is preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA).
Congress enacted the FAAAA in 1994 after it determined that state governance of intrastate transportation of property had become unreasonably burdensome to free trade, interstate commerce, and American consumers. Congress included in the FAAAA a preemption clause that expressly preempts any state “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.”
Chambers v. RDI Logistics, Inc.
RDI Logistics, Inc. is a furniture delivery company providing delivery services for large retail furniture companies. RDI used independent contractors to handle its deliveries and required the contractors to form corporate entities. RDI entered into contracts with the contractors, and the contracts contained nonsolicitation and noncompete provisions that effectively prevented the independent contractors from performing delivery work for RDI’s competitors.
RDI required the contractors to display signs on their trucks bearing RDI’s logo or the logos of RDI’s customers, and required delivery personnel to wear uniforms. RDI charged the contractors for the costs of uniforms, truck lease payments, and for the costs of repairing any damage done to customers’ property in the course of delivery. RDI regulated how furniture was loaded on trucks, which customers received deliveries, and the specific windows of time in which deliveries were to be made. RDI also required that contractors follow prescribed routes to reach their customers and use global positioning system devices to ensure that they did not deviate from assigned routes.
After their contracts were terminated by RDI, two delivery contractors filed a class action against RDI claiming that they and other delivery contractors were misclassified as independent contractors, that they were therefore entitled to the rights and protections afforded to employees under Massachusetts wage statutes, and that RDI violated these statutes by, among other things, making unlawful deductions from their pay and failing to pay overtime. Following discovery, RDI successfully moved for summary judgment on the ground that the FAAAA preempted the Massachusetts independent contractor test in its entirety. The plaintiffs applied to the SJC for direct appellate review, which the SJC granted.
The SJC’s Ruling
RDI argued to the SJC that the FAAAA preempts the Massachusetts independent contractor test because prong two of that test dictates that motor carriers like RDI perform their services using employees rather than independent contractors, and therefore has an impermissible impact on motor carriers’ services. RDI further argued that prong two cannot be severed from the statute because the legislature drafted the statute as a conjunctive test with three inseparable, intertwined prongs.
The SJC agreed with RDI that prong two “provides an impossible standard for motor carriers wishing to use independent contractors” and that this “de facto ban constitutes an impermissible ‘significant impact’ on motor carriers that would undercut Congress’s objectives in passing the FAAAA.” The SJC noted that, “[u]nlike the first and third prongs, prong two ‘stands as something of an anomaly’ amongst State laws regulating the classification of workers,” and stated that prong two’s “distinctiveness both undercuts Congress’s intent to prevent a ‘patchwork of [S]tate service-determining laws, rules, and regulations,’ and suggests that Congress did not intend to allow such provisions to stand as a ‘type of pre-existing and customary manifestation of the [S]tate’s police power.’”
However, the SJC disagreed with RDI’s argument that prong two could not be severed from prongs one and three. The SJC concluded that upholding the independent contractor test as severed would not frustrate the legislative purpose of the law “to protect workers by classifying them as employees, and thereby grant them the benefits and rights of employment, where the circumstances indicate that they are, in fact, employees.” The SJC agreed with the First Circuit’s reasoning in Schwann that the Massachusetts legislature “would have preferred ‘two-thirds of this loaf over no loaf at all’ in order to provide the most protection for workers in the Commonwealth.”
The SJC ruled that the independent contractor test as severed does not have a “significant impact” on motor carriers because it does not “target or restrict” them in any way. Without prong two, the SJC stated, “the statute contains only commonly used State and Federal tests of employment, indicating that it does not fall within the intended scope of the FAAAA’s preemption.”
Practical Effect of the Decision
As the SJC noted, the application of the independent contractor test contained in Massachusetts General Laws, chapter 149, section 148B to entities other than motor carriers is unaffected by the Chambers decision. For delivery companies and other motor carriers operating in Massachusetts, the decision clarifies that prong two of the Massachusetts independent contractor test is preempted by the FAAAA, consistent with the First Circuit’s decision in Schwann issued earlier in 2016. Certainly this is significant, as prong two made the test impossible for motor carriers to meet. Nevertheless, the application of prongs one and three to delivery businesses like RDI will present significant challenges to those businesses intending to use independent contractors.
Before classifying any individual as an independent contractor, Massachusetts delivery businesses may want to carefully evaluate whether they can prove the individual (1) is free from control and direction in connection with the performance of the service, and (2) customarily engaged in an independently established business of the same nature as that involved in the service performed. It appears unlikely that RDI could meet these two prongs in light of the rules RDI imposed on contractors as summarized in the SJC’s decision. Lastly, businesses may want to keep in mind that the Massachusetts independent contractor test presumes employee status and that the test will be applied to individuals performing services through their own business entities, including corporations.
Bob Shea is a Shareholder in the Boston office of Ogletree Deakins. Bob’s practice includes working closely with clients to develop best practices, and providing advice on discipline and discharge, discrimination, harassment, worker misclassification, wage-hour compliance, disability, non-competition, and workforce reductions. He also focuses on drafting employment agreements, independent contractor agreements and separation agreements, and he regularly conducts workplace training for...