A lawsuit against a trucking company for allegedly misclassifying drivers as independent contractors under California’s Unfair Competition Law (“UCL”) was not preempted by the Federal Aviation Administration Authorization Act of 1994 (“FAAAA”), the California Supreme Court has ruled unanimously. P. ex rel. Harris v. Pac Anchor Transp., Inc., No. S194388 (Cal. July 28, 2014). The Court found the lawsuit did not relate to the company’s “price, route or service,” the concerns of the federal law. Therefore, the Court allowed the State of California’s lawsuit for unfair competition arising from the company’s alleged violations of California’s labor and insurance laws to proceed.

Background

Pac Anchor Transportation, Inc., a Long Beach trucking company, employed drivers to deliver cargo. It classified these drivers as independent contractors. The State of California sued Pac Anchor for allegedly misclassifying its drivers, thereby engaging in unfair competition under the state UCL by failing to pay unemployment, disability and workers’ compensation insurance, failing to pay overtime, and failing to withhold state taxes, among other things. The company asked the trial court to dismiss the complaint as preempted by the FAAAA. The trial court granted the company’s motion, and the Court of Appeal reversed. The California Supreme Court granted the company’s petition for review.

Applicable Law

An express preemption provision in the FAAAA prohibits states from enacting or enforcing any law “related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.” 49 U.S.C. § 14501(c)(1). In Rowe v. New Hampshire Motor Transp. Ass’n, 552 U.S. 364 (2008), the U.S. Supreme Court held the FAAAA’s preemption provision applied only to claims that (1) derive from the enactment or enforcement of state law, and (2) relate to a motor carrier’s prices, routes, or services with respect to the transportation of property. In Rowe, the Supreme Court ruled the FAAAA preempted a provision of Maine’s tobacco delivery law requiring distributors to use delivery services that would verify whether “the person to whom the package [was] addressed [was] of legal age to purchase tobacco.” The Court found Maine’s law fell within the FAAAA preemption provision because the state law required carriers to “offer tobacco delivery services that differ significantly from those that, in the absence of the regulation, the market might dictate.”

In contrast, the Supreme Court ruled in Dan’s City Used Cars, Inc. v. Pelkey, 133 S. Ct. 1769 (2013), that the FAAAA did not preempt New Hampshire’s Consumer Protection Act. The Supreme Court noted it was not “sufficient that a state law relates to the ‘price, route, or service’ of a motor carrier in any capacity; the law must also concern a motor carrier’s ‘transportation of property.’”

No Preemption Found

Pac Anchor argued the FAAAA preempted the California UCL action because the action would affect the quality and price of the company’s transportation services. The California Supreme Court disagreed. It ruled that, notwithstanding the UCL’s “sweeping” coverage, the UCL was a law of general application and did not specifically address motor carriers, their prices, routes, or services or transportation. Further, the Court found Congress did not intend the FAAAA to preempt the “basic regulation of employment conditions” even though such regulations would “invariably affect the cost and price of services.” The Court found that while the UCL action may have some indirect effect on the company’s prices or services, that effect was too tenuous and remote.

The company next argued the UCL action was preempted because, as applied, the action would regulate motor carrier competition, that is, whether motor carriers could use independent contractors. It argued that if the state’s UCL action were successful, the company would be forced to reclassify its drivers, and this would drive up their cost of doing business. The Court rejected this argument, noting the state’s UCL action did not prevent the company from using independent contractors. To the contrary, the Court emphasized the company remained free to classify drivers as independent contractors, as long as it did so correctly and in conformity with state law.

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The misclassification of workers can lead to widespread liability in many areas under California and federal law. Employers should consult with counsel when making decisions with respect to independent contractor status.