Federal Court Rules Dynamex “ABC Test” Preempted by Federal Law!

by gspencermynko

FAAAA Preempts use of “ABC Test” to Determine if Owner-Operators are Independent.

FAAAA Preempts Application of Dynamex ABC Test to Motor Carriers according to a recent California Federal District Court Decision

California District Court Finds Dynamex ABC Test Preempted By FAAAA

Since April 30, 2018, when the California Supreme Court issued its decision in Dynamex Operations West. v. Superior Court, California motor carriers have been struggling to deal with the unexpected new “ABC test” for deciding who is an independent contractor and who is an employee. According to the “B” part, the new Dynamex ABC test requires that for a person to be an independent contractor the work he or she does must be outside the usual course of the hiring entity’s business. For a motor carrier, the practically impossible challenge is arguing that a truck driver is performing a service outside the usual course of the motor carrier’s business. However, a significant ruling by a Federal court – the Central District Court for California – has found that federal law preempts Dynamex for determining the classification of truck drivers.
The practical effect of this ruling is that motor carriers will be able to rely on the decades old common law test to determine if an owner-operator is an Independent contractor.

On November 15th, the United States District Court for the Central District of California held that the Federal Aviation Administration Authorization Act (“FAAAA”) preempts the application of the “Dynamex” ABC Test to a motor carrier for purposes of determining whether owner-operators are considered employees under California’s Wage Orders. See Alvarez v. XPO Logistics Cartage, LLC, 2018 WL 6271965, at *5 (C.D. Cal. Nov. 15, 2018). The court distinguished the Ninth Circuit’s decision in Dilts v. Penske Logistics, LLC, reasoning that Dilts addressed the preemption of “parts of the California Labor Code itself,” not “whether the ABC test-used to interpret wage orders-is preempted.”

As Dynamex has left motor carriers uncertain about their long-established business models, courts have also been struggling with this new decision in cases pending in state and federal courts. Some of those cases have been brought specifically to challenge the application of Dynamex to motor carriers such as those filed by the California Trucking Association and Western States Trucking Association. These cases squarely present the argument that the Dynamex test compels the use of employee drivers and is incompatible with the Federal Aviation Administration Authorization Act (FAAAA) which provides that states “may not enact or enforce a law, regulation, or other provision having the force and effect of law related to a price, route, or service of any motor carrier.” Because federal law preempts state law (meaning when Federal and State law conflict, Federal law controls and state law is invalidated), if the Dynamex/ABC test affects a price, route, or service of any motor carrier, then under the federal preemption doctrine, the Dynamex test may not be enforced. In other words, if forcing California trucking companies to classify all drivers as employee affects prices, routes, or services of motor carriers, the Dynamex ABC test cannot be applied to determine if a driver is an Independent Contractor.

While the CTA and WSTA cases were specifically brought to challenge Dynamex and the ABC test, other worker classifications cases were working their way through the courts when the Dynamex decision was issued. The trucking companies and courts in those cases have had to respond to this sudden change in the law. One of those cases was Alvarez v. XPO Logistics Cartage, LLC, pending in the United States District Court for the Central District of California. In that misclassification case, application of the Dynamex ABC test was challenged by XPO, a motor carrier treating truck drivers as independent contractors. The Alvarez court held that the FAAAA preempts the application of the Dynamex ABC Test to a motor carrier for determining whether owner-operators are considered employees under California’s Wage Orders. This means that determining whether a truck driver is an independent contractor or employee would be determined under the older multi-factor standard created by S. G. Borello & Sons, Inc. v. Department of Industrial Relations (a.k.a. the “common law” or “Borello” test) which has been around for nearly 30 years. Because Borello has been around so long and is so well understood, properly operating motor carriers have been able to safely use independent contractor truck drivers for many years.

The XPO Logistics decision generally comes as welcome news to motor carriers facing misclassification claims under wage orders in California, where once again the multifactor Borello test should apply. The owner-operator plaintiffs at issue scored a few wins in this case too. For example, the court also found the FAAAA does not preempt misclassification claims brought under California’s Unfair Competition Law. Perhaps more importantly, the court found the Federal Leasing Regulations preempt only the owner-operator plaintiffs’ claims for reimbursement of their truck lease payments, not the plaintiffs’ claims for reimbursement of various other business expenses (including, e.g., insurance coverage costs). The court’s conclusion in this regard is key, as other courts applying California law have found the Leasing Regulations preempt a wider range of expense reimbursement claims.

For now, trucking companies need to carefully watch if the District Court decision gets appealed to the US Ninth Circuit Court of Appeals. Unfortunately, it may not be the final word on Dynamex’s application to the transportation industry. However, the judge’s careful and thoughtful decision should give hope to motor carriers using Independent Contractors. And, as the Alvarez court noted, “while the Ninth Circuit in California Trucking Assoc. v. Su, … declined to affirmatively address whether the ABC test was preempted by the FAAAA, it nevertheless distinguished the two standards, noting that ‘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.’ Su, 903 F.3d at 955.” Again, the inescapable conclusion is that the ABC Test affects “Prices, Routes and Services” when applied to real world trucking scenarios. Eventually, the Ninth Circuit Court of Appeals will likely have to rule whether Dynamex is preempted by the FAAAA. While the outcome is not certain, the Ninth Circuit does seem to understand Dynamex would compel the use of employee truck drivers. And, back in 2011, when the Ninth Circuit considered a regulatory rather than judicially-created mandate for the use of employee drivers in Am. Trucking Ass’ns v. City of L.A, it found that such a mandate was preempted by the FAAAA.

This ruling breathes new life into the Independent / Owner-Operator Business Model

The independent contractor business model in trucking has been under attack for many years in California. However, by carefully following the law, Motor Carriers could still utilize independent contractor truck drivers legally. That all changed when the Dynamex decision was handed down, because it appeared to make the use of independent contractor truck drivers in California impossible.

This federal court decision however makes it clear that the Dynamex “ABC” test, by prohibiting the use of independent contractor truck drivers, directly affects “price, route, and service” and therefore is unenforceable due to federal preemption by the FAAAA.

While many commentators, including myself, we’re concerned that the Dynamex case was the deathblow to the independent contractor business model, The federal court seems to have made it clear that, at least as far as trucking is concerned, The Dynamex ABC test has gone too far and flies in the face of well-established federal law.

Therefore, this is a good time for trucking companies to reevaluate their procedures and policies, their independent contractor contracts, vehicle lease agreements, and other corporate paperwork to confirm that they are operating in a legally defensible manner.