Ninth Circuit Holds That The FAAA Does Not Preempt California’s Common Law Independent Contractor Test, But Holds The Door Open For Preemption Of The More Restrictive “ABC” Test

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Ross Boughton

Executive Summary:  In recent years, courts throughout the nation have grappled with the interplay and potential conflict between state employment laws and the Federal Aviation Administration Authorization Act (“FAAAA”), which generally prohibits states from enforcing any law  “related to” a motor carrier’s “price, route, or service. . . with respect to the transportation of property.”  49 U.S.C. § 14501(c)(1).  The issue typically arises when a state employment law imposes employee requirements or restrictions that have an actual or potential impact on how a motor carriers operate or the price they charge.   

In Cal. Trucking Ass’n v. Su, 2018 U.S. App. LEXIS 25567, __ F.3d __ (9th Cir. 2018), the Ninth Circuit addressed the interplay between the FAAAA and California’s common law test to determine whether a motor carrier has properly classified its drivers as independent contractors, often referred to as the Borello standard.  In Su, the California Trucking Association (“CTA”) asserted that the Borello standard improperly regulated how a motor carrier and its drivers structured their relationship (as employees or independent contractors) and that hindrance directly impacted price, route, and service, requiring preemption.  The Ninth Circuit, however, disagreed and held that the Borello standard did not sufficiently impact price, route, or service to qualify for preemption.

In an interesting twist, potentially the most important part of the decision was not the holding itself, but a brief and passing discussion regarding the FAAAA and a different independent contractor test – the “ABC” test.  In April, the California Supreme Court held that the “ABC” test, not the Borello standard, applied to claims raised under California’s Wage Orders, which have broad application.  See https://www.fordharrison.com/the-new-abcs-of-independent-contractor-classification-in-california.  In dicta, the Court in Su made clear that it was only ruling on the Borello standard, not the “ABC” test, and held the door open for a potentially different result for a FAAAA challenge to the later.

Case Background:

The FAAAA was passed in 1994 to prevent perceived inefficiencies, lack of innovation, and lack of competition caused by non-uniform, state-by-state regulation of motor carriers.  Put simply, Congress believed that motor carriers would operate most efficiently if they were subject to one uniform set of laws (federal) and did not have to comply with a new set of rules each time they crossed a state line.  To effectuate this goal, the FAAAA prevents states from enacting or enforcing “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.”

While the FAAAA’s preemption is broad, it is not unlimited.  As a large swath of state laws could, in the broadest sense, be found to “relate to” the price, route, or service of a motor carrier, courts have placed limits on what laws are preempted.  Specifically, as set forth in Rowe v. N.H. Motor Transp. Ass’n, 552 U.S. 364, 370–71 (2008), the FAAAA does not preempt state laws that have only a “tenuous, remote, or peripheral” impact on a carrier’s prices, routes, or services.

Against that legal backdrop, both the Ninth Circuit and sister Circuits have grappled with the application of the Rowe standard to particular state employment laws.  In previous decisions, the Ninth Circuit has been less inclined to find preemption than some other Circuits, holding, for example, that California’s meal and rest period requirements, Dilts v. Penske Logistics, LLC, 769 F.3d 637, 640 (9th Cir. 2014), and prevailing wage requirements, Californians For Safe & Competitive Dump Truck Transp. v. Mendonca, 152 F.3d 1184, 1187 (9th Cir. 1998), did not sufficiently impact a carrier’s price, route, or service to be preempted.

In Su, the Ninth Circuit addressed a similar issue: whether the FAAAA preempted California’s common law independent contractor test, typically known as the Borello standard after the seminal case S. G. Borello & Sons, Inc. v. Dep’t of Indus. Relations, 48 Cal. 3d 341. (Cal. 1989).  Su was filed by the CTA, which sought declaratory and injunctive relief to prevent California’s Labor Commissioner from utilizing the Borello standard to determine whether a motor carrier has properly classified its drivers as independent contractors.  The CTA argued that the application of the Borello standard disrupted the contractual arrangements between owner-operators and motor carriers, introducing inefficiencies into the market and conflicting with the FAAAA’s deregulation goals.

The Ninth Circuit disagreed.  CTA relied heavily on prior cases which found broad preemptive protections against a state interfering with the terms of a motor carrier’s contracts with its customers.  The Ninth Circuit, however, differentiated between “customer” contracts, which, under the Ninth Circuit’s view, enjoyed broader preemption protections, and contractual relationship is between a carrier and its “workforce”, i.e. the drivers.  Relying heavily on Ditls and Mendonca, the Ninth Circuit reiterated its view that generally applicable employment regulations that do not directly impact prices, routes, or services are not preempted, even if employers must factor those provisions into their pricing, routing, and scope of service decisions.

CTA further argued that the Borello standard was preempted because laws or regulations that compel motor carriers to classify drivers in a certain manner, e.g. as employees, have historically been found to be preempted by the FAAAA.  The Ninth Circuit rejected this argument as well.  While agreeing with the underlying premise, the Ninth Circuit found that the Borello standard, which is relatively flexible and not draconian, did not compel a motor carrier to classify its drivers in any specific manner.  Rather, it merely provided a framework to determine what classification should apply in each specific situation.

After rejecting CTA’s preemption arguments, the Ninth Circuit held that the Borello standard was not preempted by the FAAAA and upheld the ability of the Labor Commissioner to utilize that standard in making determinations.

Potentially, the most important portion of Su was not the holding, but passing dicta in one paragraph and a few footnotes.  In April, the California Supreme Court in Dynamex Operations West, LLC v. Superior Court set a new test, the “ABC” test, for determining if an individual qualifies as an independent contractor under California’s Wage Orders.  See https://www.fordharrison.com/the-new-abcs-of-independent-contractor-classification-in-california.  While not as universally applicable as California’s Labor Code, the Wage Orders regulate many aspects of the employment relationship and have broad application.  As the new “ABC” test is a more restrictive standard than the traditional Borello standard, the “ABC” test is likely to be the main battleground for misclassification litigation for the foreseeable future in California.  Accordingly, the applicability of FAAAA preemption to the “ABC” test will be a key question for motor carriers and drivers throughout the state.  In Su, via a footnote, the Ninth Circuit explicitly passed on answering that question, explaining:

We do not believe Dynamex has any impact here (nor have the parties argued that it does). CTA seeks relief from California’s common law definition of employee, as reflected in Borello. CTA has not alleged that the Commissioner employs the “ABC” test, nor has it sought relief on this basis.

In dicta, however, the Ninth Circuit appeared to strongly imply that at least portions of the more restrictive “ABC” test may well be preempted by the FAAAA, stating:

Like American Trucking Ass’ns, Inc. v. City of Los Angeles, 559 F.3d 1046 (9th Cir. 2009)  (where the Ninth Circuit opined that the FAAAA likely preempted the Ports of Los Angeles and Long Beach’s directive that carriers must use only employee drivers and not contractors), the “ABC” test may effectively compel a motor carrier to use employees for certain services because, under the “ABC” test, a worker providing a service within an employer’s usual course of business will never be considered an independent contractor.  For a motor carrier company, this means it may be difficult to classify drivers providing carriage services as independent contractors.  But California’s common law test – as embodied in the Borello standard – is to the contrary.  Whether the work fits within the usual course of an employer’s business is one factor among many – and not even the most important one.  CTA has not alleged or shown how the Borello standard makes it difficult for its members to use independent contractors to provide their services.

Employers’ Bottom Line:  Employment classification is a hot topic in California and all companies operating in the state should carefully consider how they classify their workforce.  Su clarifies that motor carriers are, at least under the Borello standard, no exception.

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