Update on Key Issues for Motor Carriers Involving Independent Contractors

This Holland & Knight Transportation Blog post provides an update on several developments of interest that impact motor carriers and their logistics operations.

FMCSA Meal and Rest Break Rule Preempts California's "ABC Test" for Truck Drivers Regulated by Federal Hours of Service Rules

In a previous Holland & Knight Transportation Blog post, it was reported that the U.S. Court of Appeals for the Ninth Circuit issued an order in Intl Brotherhood of Teamsters, et al v. FMCSA, Case No. 18-73488, 986 F.3d 841 (Jan. 15, 2021), upholding the meal and rest break rule (MRB Rule) promulgated by the Federal Motor Carrier Safety Administration (FMCSA). (See "Ninth Circuit Decides Federal Law Preempts California Meal and Rest Break Rules," Jan. 21, 2021.) This meant that California's onerous meal and rest break requirements (and by extension similar meal and rest break requirements promulgated by other states) were preempted by federal law and could not be imposed with respect to truck drivers who were regulated by the federal Hours of Service rules. The plaintiffs in the consolidated proceedings filed for rehearing and rehearing en banc, and, on March 25, 2021, an order was issued denying the petitions. The Teamsters may seek review by the U.S. Supreme Court of the FMCSA MRB Rule decision by filing a petition for a writ of certiorari, but as of the date of this posting, no petition has been filed.

Adverse Ruling by the Ninth Circuit Overturns District Court's Injunction Against California's AB-5 and the "ABC Test" as it Applies to Motor Carriers

The logistics sector did not fare as well with the Ninth Circuit's decision in California Trucking Ass'n v. Bonta, Case No. 20-55106 (April 28, 2021). The issue in that case was whether California's "ABC Test," adopted and codified by AB-5, was preempted by the Federal Aviation Administration Authorization Act of 1994 (FAAAA), and, if so, whether the U.S. District Court for the Southern District of California's preliminary injunction enjoining enforcement of AB-5 against motor carriers would continue in full force and effect. In the 2-1 panel decision issued on April 28, 2021, the Ninth Circuit ruled against the trucking industry. The decision, written by Judge Sandra S. Ikuta, adopted a well-worn route to avoid federal preemption, finding as it did in Dilts v. Penske Logistics, LLC, that because AB-5 is a "generally applicable labor law that impacts the relationship between a motor carrier and its workforce, and does not bind, compel, or otherwise freeze into place a particular price, route, or service of a motor carrier at the level of its customers, it is not preempted by the [FAAAA]." The decision further solidifies replacement of the long-standing common law Borello test for independent contractor status with the narrow "ABC Test," which sets high, if not impossible, hurdles for many motor carriers in demonstrating the independent contractor status of the truck drivers contracted to provide logistics services. As the panel majority decision found, "The ABC test was thus significantly different from the Borello test: while Borello considered 'whether or not the work is a part of the regular business of the principal' as only one factor in the classification analysis (citation omitted), the ABC test presumed a worker was an employee unless the worker met that condition." The court held that, "a generally applicable state law is not 'related to price, route, or service of any motor carrier' for the purposes of the [FAAAA] unless the state law 'binds the carrier to a particular price, route or service' or otherwise freezes them into place or determines them to a significant degree."

The dissent provides a roadmap for further appeal. As Judge Mark J. Bennett wrote, "I do not agree, however, that a law like AB-5—which affects motor carrier's relationships with their workers and significantly impacts the services motor carriers are able to provide their customers—is not related to motor carriers' services and thus is not preempted." The dissent noted that, "AB-5 mandates the very means by which CTA members must provide transportation services to their customers. It requires them to use employees rather than independent contractors as drivers, thereby significantly impacting CTA members' relationships with their workers and the services that CTA members are able to provide to their customers." The ABC Test sets forth three factors, all of which need to be established in order to find independent contractor status. One of these factors, Prong B, requires that the truck driver "performs work that is outside the usual course of the hiring entity's business." Judge Bennett found that under Prong B, the truck drivers would never be considered independent contractors, even if they owned their own trucks. The "self-evident" reason, in the words of the dissent, is that "independent-contractor truckers hauling goods for the hiring entity are perforce not performing work outside the usual course of the hiring entity's business, which is, of course, hauling goods." This "all or nothing" rule would result in reclassifying all independent-contractor drivers to employees. The dissent further noted that the majority opinion was at odds with well-established Ninth Circuit precedent in the 2009 American Trucking Associations decision, which resulted in the elimination of port concession agreements that required motor carriers to use employee truck drivers, as well as the U.S. Court of Appeals for the First Circuit's decision in Schwann, which found the Massachusetts "ABC" test preempted, and the U.S. Court of Appeals for the Third Circuit's decision in Bedoya which, although it found no FAAAA preemption, noted that New Jersey's "ABC" test provided an escape route from the "all or nothing" rule. The dissent warned that the "damage to the policies mandated by Congress will likely be profound."

On May 3, 2021, the CTA announced that it was going to seek en banc review by the full appellate court, and bring it before the U.S. Supreme Court if needed to vindicate the rights of its motor carrier constituents to use independent contractor drivers.

Biden Administration's Make-Over of FLSA Independent Contractor Test

In a previous Holland & Knight Transportation Blog post, it was noted that the Biden Administration was expected to aggressively pursue changes to independent contractor rules, such as the one promulgated by the U.S. Department of Labor (DOL) under the Trump Administration that was published on Jan. 7, 2021, and was to take effect on March 8, 2021. (See "Another Shift on Joint Employment and Independent Contractors," Jan. 12, 2021.) That rule, the "Independent Contractor Rule," would have adopted an "economic realities" test for independent contractor classification under the Fair Labor Standards Act (FLSA). The Independent Contractor Rule provided that an individual is an independent contractor "if the individual is, as a matter of economic reality, in business for him or herself," and focused on five factors: 1) the nature and degree of the worker's control over the work; 2) the worker's opportunity for profit or loss; 3) the amount of skill required; 4) the exclusivity and length of the relationship between the worker and the potential employer; and 5) the extent to which services rendered are an integral part of the business. Factors 1 and 2 were described as "core" factors.

On Feb. 5, 2021, the DOL proposed to delay the effective date of the Independent Contractor Rule from March 8, 2021, to May 7, 2021, to allow the DOL "to review issues of law, policy, and fact raised by the rule before it takes effect." On March 12, 2021, the DOL issued a Notice of Proposed Rulemaking proposing to withdraw the Independent Contractor Rule. On May 5, 2021, after receiving over 1,000 comments most of which opposed the Trump-era rule, the DOL announced it was withdrawing the Independent Contractor Rule, effective May 6, thereby preventing it from ever taking effect. The DOL's justification for the action included the following reasons:

• The independent contractor rule was in tension with the FLSA's text and purpose, as well as relevant judicial precedent,
• The rule's prioritization of two "core factors" for determining employee status under the FLSA would have undermined the longstanding balancing approach of the economic realities test and court decisions requiring a review of the totality of the circumstances related to the employment relationship, and
• The rule would have narrowed the facts and considerations comprising the analysis of whether a worker is an employee or an independent contractor, resulting in workers losing FLSA protections.

Among the other reasons cited in the announcement by the DOL for withdrawing the rule was that it would "avoid a reduction in workers' access to employer-provided fringe benefits such as health insurance and retirement plans. The withdrawal will also avoid a reduction in other benefits such as unemployment insurance and workers compensation coverage."

With the Independent Contractor Rule withdrawn, the DOL's existing guidance on independent contractor status (revised July 2008) remains in place. (See "Fact Sheet 13: Employment Relationship Under the Fair Labor Standards Act (FLSA)".) This guidance examines the totality of circumstances based on various factors:

• The extent to which the services rendered are an integral part of the principal's business.
• The permanency of the relationship.
• The amount of the alleged contractor's investment in facilities and equipment.
• The nature and degree of control by the principal.
• The alleged contractor's opportunities for profit and loss.
• The amount of initiative, judgment, or foresight in open market competition with others required for the success of the claimed independent contractor.
• The degree of independent business organization and operation.

However, the Biden Administration will now need to contend with the first legal challenge to its action, as the DOL's withdrawal of the Independent Contractor Rule is being challenged in a Texas court action on the grounds that such action violated the Administrative Procedures Act. (See Coalition for Workforce Innovation v. Walsh, E.D. Tex., Case No. 1:21-cv-00130 (Complaint filed March 26, 2021).)

John Haney, an associate in Holland & Knight's Los Angeles office, contributed to the discussion of the DOL Independent Contractor rule.