The Massachusetts Supreme Judicial Court (SJC) has ruled that the most onerous provision of the state’s three-pronged independent contractor statute—the requirement that independent contractors perform a service outside an employer’s usual business—is preempted by federal law as it applies to delivery drivers.

The SJC’s decision reinforces the US Court of Appeals for the First Circuit’s precedent upholding federal preemption of a portion of the Commonwealth’s Independent Contractor law, Mass. Gen. Laws ch. 149, § 148B (the Independent Contractor Statute or the Statute), a law that provides some of the strongest protections in the United States when classifying employees as independent contractors.

Chambers, et. al. v. RDI Logistics, Inc., et. al., SJC-12080, Mass. Lexis 942 (December 16, 2016), reaffirms First Circuit rulings in both Massachusetts Delivery Association v. Healy,^[1] holding that the Federal Aviation Administration Authorization Act of 1994 (FAAAA) preempts Prong 2 of the Statute as applied to motor carriers, and Schwann v. Fedex Ground Package Sys, Inc.,^[2] where the First Circuit determined that the Statute’s prongs are severable and plaintiffs may still bring claims against motor carriers under Prongs 1 and 3. The SJC’s ruling in Chambers is limited to motor carriers and, therefore, application of the Independent Contractor Statute to entities other than motor carriers remains unaffected by this decision.

Background

The Commonwealth’s Independent Contractor Statute requires companies to satisfy a three-prong test to prove that an individual is properly classified as an independent contractor:

• Prong 1 requires that the individual be free from control and direction in connection with the performance of the service, both under the service contract and in fact.

• Prong 2 requires the service to be performed outside the usual course of the employer’s business.

• Prong 3 requires that the individual be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as that involved in the service performed.

Chambers defendant RDI Logistics, Inc. (RDI or the Company) provides self-described “last-mile” delivery services for furniture retailers. RDI contracts with small corporations to perform furniture delivery services, including delivery from a warehouse where furniture is stored to individual customers. RDI’s contracts with its drivers typically include nonsolicitation and noncompetition clauses, effectively preventing its small business contractors from performing any delivery work for RDI’s competitors. RDI requires its contractors to wear uniforms and to display signs on their trucks bearing either RDI's logo or the logos of RDI’s customers. The Company deducts from contractor payments the costs of uniforms, truck lease payments, and damage allegedly done to customers’ property during deliveries. The Company also regulates furniture loading and delivery schedules using GPS devices to track assigned routes.

Plaintiff Timothy Chambers filed a putative class action complaint in Bristol County Superior Court against the Company and one of its managers alleging, among other claims, that he and other drivers were improperly classified as independent contractors. The court dismissed the plaintiffs’ claims and entered summary judgment in favor of the defendants, ruling that the Statute was preempted in its entirety by the FAAAA. The SJC later granted an application for direct appellate review of this and other issues.

Application of the Three-Pronged Classification Analysis

The Chambers defendants argued that Prong 2’s effect on motor carrier services triggered FAAAA preemption of the entire Statute and, therefore, the plaintiffs’ claims were properly dismissed on summary judgment for two reasons: (1) Prong 2 imposes an impermissible “significant impact” on motor carriers because it requires them to perform their services using employees rather than independent contractors, an action that undercut Congress’s objectives in passing the FAAAA, and (2) the nonseverable nature of Prong 2 necessitates preemption of the entire Statute.

The SJC agreed that the FAAAA preempts Prong 2 but rejected the argument that the three prongs were not severable. The decision explained the following.

1. Prong 2’s “significant impact” to motor carrier services triggers FAAAA preemption. The court examined Congress’s enactment of the FAAAA as a means of deregulating the trucking industry while also blocking specific state “service-determining laws” undercutting deregulation. The SJC further pointed to the FAAAA’s preemption of state law affecting the prices, routes, or services of any motor carrier.

   With this backdrop, the SJC found Prong 2 to present an impossible standard for motor carriers like RDI in that it requires the use of employees rather than independent contractors. Specifically, “[a] delivery driver for a motor carrier necessarily will be performing services within ‘the usual course of the business of the employer’ whenever a court concludes that delivery services are part of its usual course of business.” This would create an impermissible “significant impact,” requiring motor carriers to adopt a different manner of providing services from what they otherwise might choose. The SJC found that Prong 2’s distinctiveness undercuts Congress’s intent to prevent a patchwork of state service-determining laws, bringing the Statue within the FAAAA’s preemptive scope.

   The SJC stopped short of finding complete preemption, noting that Prongs 1 and 3 do not have a “significant impact” on Congress’s deregulatory objectives because they do not require the use of employees. Rather, Prongs 1 and 3 fall into a category of generally applicable background regulations that Congress presumptively did not intend to preempt. The defendants’ argument that the plaintiffs’ claims would have some effect on prices or routes under Prongs 1 and 3 was insufficient to warrant preemption.

2. The Statute’s three prongs operate independently. The SJC rejected RDI’s arguments that the Statute’s prongs operate conjunctively and are nonseverable and inextricably intertwined. The SJC instead determined that severing the Statute would not frustrate the legislative intent to provide greater protection to workers in misclassification claims. A severed Statute “would provide two independent tests that motor carriers would have to meet” when determining worker classification.

The SJC overturned the summary judgment ruling in favor of RDI, and the plaintiffs’ claims will proceed before the lower court.

Takeaways

The SJC’s decision in Chambers reaffirms the First Circuit’s view that the FAAAA preempts Prong 2 of the Statute. Although not the result that many motor carriers desired, such employers operating in Massachusetts now have a clear framework within which to work in evaluating independent contractor relationships. Employers should consult legal counsel to ensure that all Massachusetts workers are appropriately classified pursuant to this standard and the law.

_{[1] Massachusetts Delivery Ass'n v. Healey, 821 F.3d 187 (1st Cir. 2016)}

_{[2] Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d 429 (1st Cir. 2016).}