Harris v. Pac Anchor: Federal Law Does Not Preempt Independent Contractor Misclassification Action

In People ex rel. Harris v. Pac Anchor Transportation, Inc. (5/18/11) 195 Cal.App.4th 765, 2011 WL 1879209, the Court of Appeal held that the Federal Aviation Administration Authorization Act ("FAAAA") does not preempt an action alleging that a motor carrier violated the Unfair Competition Law ("UCL") by misclassifying its employee drivers as independent contractors. Here are the facts:

Pac Anchor is a trucking company in Long Beach, California. Barajas is an owner of Pac Anchor, where he works as a manager and truck dispatcher. Pac Anchor has contracts with shipping companies to transport shipping containers from the ports of Los Angeles and Long Beach to locations in Southern California, including warehouses and railroad freight depots.

Barajas owns 75 trucks. He recruits drivers, then leases his trucks and the drivers to Pac Anchor. Barajas and Pac Anchor classify the drivers as independent contractors. As a result, Barajas and Pac Anchor do not obtain workers' compensation insurance, withhold state disability insurance or income taxes, pay unemployment insurance or employment training fund taxes on behalf of the drivers, reimburse business expenses, insure payment of the state minimum wage, or provide itemized written statements of hours and pay to the drivers.

The drivers do not invest any capital, however, or own the trucks that they drive. They use trucks, tools, and equipment furnished by Barajas and Pac Anchor. The drivers are employed for extended periods of time, but can be discharged without cause. The drivers take all their instructions from Barajas and Pac Anchor. They are not skilled workers and do not have substantial control over operational details. The drivers do not have other customers or their own businesses. The drivers do not have Department of Transportation operating authority or other necessary permits and/or licenses to independently engage in the transport of cargo. They are an integrated part of Barajas's and Pac Anchor's trucking business, because they perform the core activity of delivering cargo.

Slip op. at 2-3.

The State of California filed suit, alleging that Pac Anchor and Barajas violated the UCL. Defendants moved for judgment on the pleadings, arguing that the action was preempted by the FAAAA. The Court (Los Angeles Superior, Judge White) granted the motion:

First, the court concluded that the holding of Fitz-Gerald v. SkyWest, Inc. (2007) 155 Cal.App.4th 411 (Fitz-Gerald) required finding all UCL causes of action against motor carriers preempted by the FAAAA. Second, the court found that requiring Barajas and Pac Anchor to treat its truck drivers as employees would increase the motor carrier's operational costs, and therefore, the action related to the motor carrier's prices, routes, and services. Third, the court concluded that the action threatened to interfere with the forces of competition by discouraging independent contractors from competing in the trucking market.

Slip op. at 4. The Court of Appeal reversed.

The Court began by discussing FAAAA preemption:

The FAAAA preempts state and local regulation relating to the prices, routes or services of motor carriers with respect to the transportation of property. (49 U.S.C. § 14501(c).) Specifically, section 14501(c) of title 49 of the United States Code provides in pertinent part: “(1) . . . Except as provided in paragraphs (2) and (3), a State . . . 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 . . . with respect to the transportation of property.

Slip op. at 5-6. After discussing a number of cases that deal with FAAAA preemption, the Court stated that it declined to follow Fitz-Gerald, supra:

We disagree with Fitz-Gerald’s cursory citation to Morales and Wolens to support the conclusion that all state unfair business practices statutes are preempted by the [Airline Deregulation Act of 1978, which is analogous to the FAAAA]. Where a cause of action is based on allegations of unlawful violations of the State's labor and unemployment insurance laws, we see no reason to find preemption merely because the pleading raised these issues under the UCL, as opposed to separately stated causes of action. We respectfully disagree with Fitz-Gerald’s contrary conclusion as to preemption of causes of action under the UCL.

Slip op. at 8. The Court then held that the State's UCL action "is not preempted by the FAAAA, because it is not related to the price, route or service of any motor carrier." Slip op. at 8. After explaining the broad scope of the UCL and the fact that wage violations also violate the UCL, the Court concluded:

In this case, the State's action to enforce Barajas's and Pac Anchor's statutory obligations as an employer is not related to Pac Anchor's prices, routes, or services, even though it may remotely affect the prices, routes, or services that the motor carrier provides. Case law supports finding that the effect of California's minimum wage law (Lab. Code, § 1194) on a motor carrier's prices, routes, and services is too tenuous for preemption under the FAAAA. (See Fitz-Gerald, supra, 155 Cal.App.4th at p. 423 [connection of minimum wage law to higher fares, fewer routes, and less service is tenuous]; Mendonca, supra, 152 F.3d at p. 1189 [California's prevailing wage law applicable to public works contractors is not preempted by the FAAAA].) Other California labor and unemployment insurance provisions that Barajas and Pac Anchor allegedly violated have a similarly indirect and tenuous connection to Pac Anchor's prices, routes, and services. We hold that the State's UCL action based on Barajas's and Pac Anchor's alleged violations of generally applicable state laws governing an employer's relationship with employees is not an action related to the price, route, or service of a motor carrier and, therefore, not preempted by the FAAAA.

Slip op. at 10. The opinion is available here.