Federal Appellate Court Rules that Massachusetts’ Anti-Independent Contractor Law Can Be Challenged by Delivery Companies

The Massachusetts Delivery Association (MDA) has succeeded in its appeal of a federal district court’s dismissal of its lawsuit to invalidate the Massachusetts Independent Contractor Law as an impermissible law “related to a price, route, or service of any motor carrier . . . with respect to the transportation of property.”

The MDA brought suit in federal court against Massachusetts Attorney General Martha Coakley.  It alleged that because the state’s IC Law requires delivery companies operating in Massachusetts to classify their drivers as employees instead of ICs, the effect of the law would cause an increase in the price of deliveries to consumers and would result in a number of delivery companies being driven out of business.  The two bases for the lawsuit are:  (1) the Federal Aviation Administration Authorization Act (FAAAA), which expressly pre-empts all state laws that attempt to regulate “a price, route, or service” of a motor carrier [see 49 U.S.C. § 14501(c)(1)]; and (2) the Commerce Clause of the U.S. Constitution, which has been construed to prohibit certain types of burdens on interstate commerce.

The MDA argued that its members must change their fundamental business model – the use of IC delivery drivers – to comply with the state statute or risk penalties.  No other state has made unlawful this use of the historic business model, the MDA alleged.

Attorney General Coakley moved to dismiss the MDA lawsuit, arguing that it was an impermissible effort to have another court interfere with three ongoing lawsuits by drivers in Massachusetts against delivery companies that are members of the MDA.  The federal district court in Massachusetts agreed with the Attorney General and dismissed the case.

The MDA appealed to the U.S. Court of Appeals for the First Circuit, which last week issued an Massachusetts Delivery Association v. Coakley that reversed the federal district court and remanded the case to the federal district court to determine if the Massachusetts IC Law is pre-empted by federal law.

Analysis

The Massachusetts Independent Contractor Law, which is more appropriately an “anti-independent contractor law,” is by far the most restrictive in the country and essentially bans many types of ICs from providing services as ICs in the state.  This is because the statute defines “employees” in such a broad manner as to include virtually all workers that would qualify as ICs under the laws of the other states and the District of Columbia.  The Massachusetts law is a form of “ABC law,” but it is unlike any other ABC law in the county.

Specifically, the Massachusetts IC Law not only requires the individual in question to be “free from direction and control with respect to the performance of the service,” and requires the individual to be “engaged in an independently established trade, occupation, profession or business,” but it also requires the service being performed to be “outside the usual course of the business of the employer.”

While many other states have a form of an ABC law (referred to as ABC laws because there are usually three factors that must be satisfied, usually preceded by an (A), (B), and (C) in the statutory code), none has a factor that requires the service to be one that is outside the usual course of the business.  (Most ABC laws govern unemployment and workers compensation laws; in contrast, Massachusetts’ IC Law covers most ICs for most purposes.)

There have been attempts at legislative action to amend the Massachusetts’ IC Law to bring it more in line with other states’ ABC laws, or to eliminate it altogether as a way of preserving jobs in that state (instead of seeing ICs move their businesses to New Hampshire or Rhode Island).  To date, though, no such legislative efforts have succeeded.  This lawsuit by the MDA, even if successful, would only apply to a small segment of ICs – those using motor carriers providing services in the transportation industry.

Takeaway

Many companies doing business in Massachusetts under an IC business model are at risk that their operations in that state may be subject to the severe penalties imposed under Massachusetts IC Law.  Companies operating in in that state may be wise to evaluate their business operations there.  As part of Pepper Hamilton’s IC Compliance Practice, the publishers of this blog advise companies of the alternative courses of lawful conduct that can be utilized to avoid the very costly penalties associated with a violation of this Massachusetts law.

Richard Reibstein
Lisa Petkun
Andrew Rudolph

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