Court Finds that State Worker Classification Law is Pre-Empted

 We are migrating this blog to Facebook and our website.

Please visit www.facebook.com/senneysays and "Like" our page.
~Or~
Send your email address to: jsenney@pselaw.com to receive the latest blog by email.

Classification of a worker as an independent contractor can be a less expensive option for the employer because it shifts the burden of paying payroll taxes, workers compensation premiums and health care insurance costs to the worker. Classification of workers as independent contractors also results in workers not being covered by overtime, wage and hour laws and minimum wage laws.  For these reasons, Federal and state government agencies often look closely at the classification of workers as employees or independent contractors.


Under the accepted common law, a worker is generally an independent contractor when the worker has a risk of financial loss and where the worker contains how the job is done. A worker is generally an employee where the worker has no risk of financial loss and the employer controls how the job is done. The IRS has broken this common law determination down into a 20-factor test. Often some factors point to a worker being an independent contractor while other factors point to the worker being an employee. For this reason it is often difficult to say with 100% certainty whether a worker is an employee or an independent contractor.   This determination is made even more difficult because some states have enacted statutes that include their own definitions and require employers to treat certain workers as employees.


But some relief to this recent explosion of state regulation of the worker classification issue may be on the horizon. A Federal District Court recently granted summary judgment in favor of a motor carrier company and found that the state law in question would have compelled the company to treat its workers as employees (and not as independent contractors) and was therefore pre-empted by the Federal Aviation Administration Authorization Act of 1994 ("FAAAA").


The FAAAA is a federal law which contains provisions regulating the price, route and services of various types of motor carriers including over the road motor carriers of property.  The FAAAA also provides that no state "may enact or enforce a law related to a price, route, or service of any motor carrier." The two operative phrases are "related to" and "prices, routes, or services."  However, the FAAAA offers little insight in terms of its breadth, and its preemption language does not explicitly encompass state regulation of wage and independent contractor laws.


The Court reviewed the FAAAA and its legislative history and concluded that the state worker classification law in question was preempted by the FAAAA because the state law relates to motor carriers' prices, routes, and services. The Court found that the state law was “related to” motor carrier prices, routes and services because the state law (1) dictated the form of employment relationship carriers must utilize, thereby affecting carriers' routes and services; (2) significantly increased motor carriers' costs and thereby had a significant effect upon the motor carriers' prices, routes, and services; and (3) materially altered the common law test for independent contractor status, thereby leading to a patchwork of varying state laws and resulting liability under varying independent contractor regimes.


Many states have their own version of wage and independent contractor laws. These need to be considered along with the IRS 20-factor test and the common law.  Misclassifying workers can cost your business money and can lead to costly penalties. If you have any questions or need assistance with a worker classification issue, please call or contact Matt Stokely, Jeff Senney or one of our other business attorneys at 937-223-1130 or JSenney@pselaw.com.


AND ONE MORE THING. The American Red Cross is organizing a gala, Putting on the Glitz, as a fundraiser to benefit disaster relief and preparedness in the Miami Valley. The event will take place Saturday, April 27, 2013 with the theme, Providing "Hope Like a Bridge Over Troubled Water. As a "model" for the Red Cross gala I need your support to meet my individual fundraising goal. You can check back on my personal page and track the progress made to reaching my final goal. Please donate and help show your support for this great cause.