Federal Law Doesn't Preempt California UCL Claim Based on Driver Misclassification

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By Jay-Anne Casuga  

July 28 — A federal motor carrier law doesn't preempt California's unfair competition law claim against a trucking company that allegedly violated state labor and insurance laws by misclassifying its drivers as independent contractors, the California Supreme Court unanimously held July 28.

Combating alleged employee misclassification has been a hot enforcement issue for federal and state governments in recent years, and employers that misclassify workers are subject to liability for violating laws pertaining to minimum wage, overtime pay, workers' compensation, unemployment insurance and payroll taxes.

Writing for the California high court, Justice Ming W. Chin affirmed a May 2011 appeals court decision finding that the state's UCL claim against Pac Anchor Transportation Inc. and owner Alfredo Barajas wasn't “related to a price, route or service” of the company with respect to the transportation of property. The claim therefore didn't fall within the scope of the Federal Aviation Administration Authorization Act's express preemption provision at 49 U.S.C. § 14501(c), the court said.

Even if the state's action has “some indirect effect” on Pac Anchor's prices or services, that effect is “too tenuous, remote, [and] peripheral” for federal preemption to apply, the court ruled.

“We respect the sanctity of the process and the court's decision, and we respectfully disagree with it,” Neil S. Lerner, an attorney with Cox Wootton Lerner Griffin Hansen & Poulos in Los Angeles who represented Pac Anchor, told Bloomberg BNA July 28.

Lerner said the company will evaluate whether to petition the U.S. Supreme Court to review the case. The California Attorney General's office didn't immediately respond to Bloomberg BNA's July 28 request for comment.

Absent certioriari, the case will return to the Los Angeles County Superior Court, where a trial judge will address the merits of the state's misclassification argument.

Last August, FedEx Ground Package System Inc. lost a similar FAAAA preemption argument before a federal district court in New Hampshire.

Justices Tani G. Cantil-Sakauye, Marvin R. Baxter, Kathryn M. Werdegar, Carol A. Corrigan, Goodwin Liu and Richard M. Aronson concurred in the opinion.

Drivers Alleged Misclassification

According to the court, Pac Anchor and Barajas classified their truck drivers as independent contractors.

The drivers didn't own the trucks they drove, didn't use their own tools or equipment and didn't invest any capital. They could be “discharged without cause, have no operational control, have no other customers, take all instruction from defendants, and have no Department of Transportation operating authority or permits to engage independently in cargo transport,” the court recounted.

The state sued Pac Anchor and Barajas in September 2008, alleging that they engaged in unfair competition by misclassifying the drivers as independent contractors rather than employees and illegally lowering their business costs.

Employers are not required to ensure the payment of a minimum wage to independent contractors. Nor must employers pay unemployment insurance taxes and employment training fund taxes, withhold state disability insurance taxes and income taxes or provide worker's compensation for independent contractors.

Even if California's UCL action has “some indirect effect” on Pac Anchor's prices or services, that effect is “too tenuous, remote, [and] peripheral” for federal preemption to apply, the California Supreme Court ruled.

A state superior court in September 2009 granted Pac Anchor's motion for judgment on the pleadings, finding that the FAAAA preempted California's UCL claim. However, the California Court of Appeal reversed in May 2011.

FAAA Doesn't Facially Preempt UCL Claim

Affirming, the California Supreme Court observed that the FAAAA at 49 U.S.C. § 14501(c)(1) provides that a state “may not enact or enforce a law … related to a price, route, or service of any motor carrier … with respect to the transportation of property.”

Pac Anchor argued that the FAAAA facially preempts all UCL claims against motor carriers because such claims “regulate the effect that unfair business practices have on the quality and price of goods and services.”

Rejecting that contention, the state high court said the FAAAA “embodies Congress's concerns about regulation of motor carriers with respect to the transportation of property.”

A UCL claim based on an employer's alleged general violation of state labor and insurance laws “does not implicate those concerns,” it said.

Action Not Related to Prices, Routes, Services

The state supreme court also was unpersuaded by Pan Anchor's arguments that California's specific UCL claim in the present case should be preempted because it is related to and potentially could “significantly affect” its prices, routes and services as a motor carrier.

The court pointed out that the California Labor Code and Unemployment Insurance Code sections that “anchor” the state's UCL claim “make no reference to motor carriers, or the transportation of property.”

“Rather, they are laws that regulate employer practices in all fields and simply require motor carriers to comply with labor laws that apply to the classification of their employees,” it said.

As to Pan Anchor's claim that a requirement to classify its drivers as employees will drive up its business costs and affect market forces, the court said nothing in the state's UCL action would prevent the company from continuing to use independent contractors.

“The [state] merely contend[s] that if defendants pay individuals to drive their trucks, they must classify these drivers appropriately and comply with generally applicable labor and employment laws,” it said.

Furthermore, even if the action has “some direct effect” on Pan Anchor's prices or services, that effect would be “too tenuous, remote, [and] peripheral” to support federal preemption, the court said.

In addition, the California Supreme Court found no merit to Pan Anchor's assertion that the UCL claim should be preempted because it “threatens Congress's deregulatory purpose.”

“Congress passed the FAAAA in order to end a patchwork of state regulations,” it said. “However, nothing in the congressional record establishes that Congress intended to preempt states' ability to tax motor carriers, to enforce labor and wage standards, or to exempt motor carriers from generally applicable insurance laws.”

California Attorney General Kamala D. Harris; Chief Assistant Attorneys General Dane R. Gillette and Mark J. Breckler; Assistant Attorney General Martin Goyette; and Deputy Attorneys General Jon M. Ichinaga, Amy J. Winn and Satoshi Yanai represented the state. Neil S. Lerner of Cox Wootton Lerner Griffin Hansen & Poulos in Los Angeles, and Arthur A. Severance of Trident Law in Whittier, Calif., represented Pac Anchor.

To contact the reporter on this story: Jay-Anne B. Casuga in Washington at jcasuga@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com

Text of the opinion is available at http://op.bna.com/dlrcases.nsf/r?Open=jaca-9mfnf9.