SJC Holds that Second Element of Independent Contractor Test is Preempted by Federal Law

The Massachusetts Supreme Judicial Court today weighed in on the hot topic whether and to what extent the state’s Independent Contractor Statute is exempted as applied to courier drivers and the companies they work for. Like a federal court that ruled on the same question last year, the SJC concluded that the second of the law’s three elements is preempted by the Federal Aviation Administration Authorization Act (FAAAA).

Legal battle over the applicability of Mass. Gen. L. ch. 149, §148B has raged for years, with courier companies seeking to avoid application of what’s referred to as Prong B of the statute – the requirement that all individuals who perform services within a company’s regular course of business be classified as employees. The companies rely on the FAAAA’s restriction against state laws that impact the prices, routes or services of covered businesses. Because Prong B is so broad, they contend, it effectively bars all uses of contractors to make deliveries. This, in turn, forces courier companies to eliminate services, increase costs, alter routes, and make other business changes.

Though two state judges had previously ruled that the entire Independent Contractor Statute was preempted by the FAAAA, the SJC rejected this approach. The law’s first and third elements thus remain intact. In order to avoid classifying their drivers as employees, courier companies must demonstrate that they do not control the performance of their work and that the drivers are customarily engaged in an independent business. There are currently several active cases on this topic, including two class action suits being handled by my office.

Small Employer Forced to Pay more than $100,000 for Wage Violations

A local grocer is learning the hard way how important it is not only to properly pay employees under state wage laws but to keep good records demonstrating that it did so. Following an investigation by the Massachusetts Attorney General’s wage and hour office, the employer was compelled to pay $84,000 in back wages and $21,000 more in penalties. As if that’s not enough, the store and its owner also had their names posted on the Attorney General’s web site so that all could read about their violations of state laws.

The case illustrates the importance of understanding and complying with Massachusetts laws that cover the payment of wages. They include the state’s Wage Act, which requires that employees receive pay for all hours — and minutes — they work and provides mandatory triple damages and legal fees against employers who fail to comply. Massachusetts also has its own overtime and minimum wage statutes, each of which provides broader benefits to employees than do federal counterparts. The state mandates that all employers keep accurate records of hours worked by and payments made to their employees, among other things, and generally requires that workers be treated as employees and not independent contractors. The mandatory triple damage and legal fee rules normally apply to legal transgressions in any of these areas.

The Long Reach of the Wage Act

Employers need to be careful about a number of issues when dealing with their employees. Communicating policies clearly, enforcing rules consistently, and applying anti-discrimination rules appropriately are all on the list. While all are important, a seemingly fundamental but often overlooked issue is the one that most often gets employers into trouble – the regular payment of earned wages. Mistakes in this area can lead to automatic tripling of amounts owed and the payment by employers of hefty legal fees incurred by both sides to a legal dispute. Obviously, then, understanding and properly applying wage payment rules is essential for all employers.

Even when employees are properly paid all they may be owed under Massachusetts law, the automatic penalties embedded in the state’s Wage Act can apply. Federal court decisions in Massachusetts confirm the long reach of the Act. For example, where overtime wages are not owed under Massachusetts law (Mass. Gen. L. ch. 151, §1A) but are due but unpaid under its federal counterpart, the Fair Labor Standards Act, amounts owed to a former employee may be tripled under the Wage Act. The rule is consistent with the broad interpretation given to the Wage Act by other decisions at both the state and federal levels.

To avoid the quicksand-like experience that employers often face in Wage Act cases, a conservative approach to paying employees is essential. When in doubt, employers are normally better served to pay workers what they might be owed than to take a hard stance – regardless of the emotions that may be involved in relationships with former employees. Large damages can result from failures to pay minimum wages, withholding commissions and bonuses, improperly deducting money from pay, and misclassifying workers as independent contractors. Obtaining a clear understanding of what’s required in these and other wage payment areas should be an essential element of all employee management plans.

Federal Courts Bar Application of Independent Contractor Law to Courier Drivers

The federal court system in Massachusetts is taking a bite out of the state’s independent contractor statute. Beginning last Fall and continuing through last month, three otherwise valid class action suits seeking to apply the law to courier drivers have turned in favor of the courier companies involved. The most recent decision involves a courier association’s contention that one of three prongs of the independent contractor statute  is preempted as applied to its industry by federal law. Though things went poorly for that argument early on, the tide recently turned in a big way.

On July 8, the court in Mass. Delivery Assoc. v. Healy issued a ruling after a remand by the First Circuit Court of Appeals. Following its instructions, the U.S. District Court issued judgment in favor of the delivery association. It concluded that a key component of the independent contractor law, Mass. Gen. L. ch. 149, §148B, was preempted as applied to courier drivers by the Federal Aviation Administration Authorization Act (FAAAA).  That law bars application of any state law that affects the prices, routes or services of motor carriers involved in interstate commerce.

Though the import of the decision is unmistakable, it may not fully foreclose the application of the independent contractor statute to couriers and other motor carriers. Class action lawyers argue that, even if one of the three prongs of the law cannot be applied, courier drivers still must be treated as employees, not contractors, because the two remaining elements of the statute require it. In a separate U.S. District Court decision earlier this year, that argument was rejected. Though the court’s logic seems sound – it makes no sense to separate one prong of the Ch. 149, §148B test from the other two, since the conflict with federal law will remain – counsel have not given up. FAAAA issues have yet to play out in the state court system.

The preemption question is a huge one for motor carriers. Numerous courier companies have been hit with class action suits in recent years, and many have paid substantial settlements because meeting the rigid requirements of the independent contractor law is virtually impossible. Courier companies generally use an independent contractor model under which drivers are paid for deliveries, receive no benefits, and are considered independent contractors, not employees. When those drivers are found to have been misclassified under Mass. Gen. L. ch. 149, §148B, the law’s mandatory triple damage and legal fee awards frequently means that damages in class action suits rise into the multi-millions.

States Highest Court Rules that Real Estate Agents can be Treated as Contractors, but Leaves Substantial Questions Unresolved

In a major decision that impacts a huge number of Massachusetts businesses, the state’s highest court today affirmed the concept that real estate salespeople may properly be classified as independent contractors and not employees. In doing so, the Supreme Judicial Court concluded that the Massachusetts Independent Contractor Statute, which generally governs classification issues and makes it extremely difficult for companies to properly treat workers as contractors, does not apply to real estate agents. Its reasoning relies on the existence of a distinct statutory scheme that governs real estate sales work and expressly provides that salespeople may be treated as either employees or contractors. Because the court saw major conflicts between the two sets of laws, it held that the more specific one dealing with the real estate industry governs.

The decision does not, however, resolve the ultimate issue whether real estate agents at work today are employees or contractors. Noting a lack of clarity on the question how to determine this question, the SJC left it for another day. It held simply that real estate sales people are not subject to the framework spelled out by the Independent Contractor Statute, Mass. Gen. L. ch. 149, §148B, a framework that would render every salesperson an employee. The SJC expressly permitted the plaintiffs to continue to pursue their misclassification claims, though without relying on Chapter 149. The court invited the Massachusetts Legislature to “clarify how a real estate salesperson may gain employee status under the real estate licensing statute.” It is patent that this cannot be done by simple declaration in a written contract.

The industry should stay tuned. The case is Monell v. Boston Pads, LLC, decided on June 3, 2015.

Attorney General Proposes Regulations to Govern Massachusetts Sick Leave Law

In accord with the new sick leave law passed by Massachusetts voters in November and set to take effect on July 1, 2015, the Massachusetts Attorney General’s office has issued draft regulations. Once adopted, the AG’s rules will govern sick leave issues in substantial respects by filling in gaps in the law and adding important interpretations. Following are some highlights of the AG’s current proposal.

— Sick leave accrual will apply to all employees, broadly defined to include anyone who “performs services for an employer” as set out in the state’s independent contractor statute. It is thus highly unlikely that businesses will avoid the accrual and pay requirements of the new statute by classifying workers as contractors.

— All employees whose primary place of work is in Massachusetts will be covered by the law, even if they also work in other states.

— Workers who are employed on April 1, 2015 will start accruing leave (at the rate one hour for every 30 worked) on July 1 and can use it as it accrues. Others will also accrue leave beginning July 1 (if then employed) but cannot use it until employed for 90 days. [Read more…]

State’s Highest Court Finds that Boston Cab Drivers are Independent Contractors, not Employees

The Massachusetts Supreme Judicial Court today released an important decision regarding the status of Boston cab drivers, concluding that the drivers were properly classified as independent contractors and not as employees. In addition to putting asunder the apparent plans of the Plaintiffs and their lawyers for huge paydays, the court’s ruling sheds lights on situations when the broad Massachusetts Independent Contractor Statute may not apply to turn an otherwise agreed-upon business relationship into an employment agreement.

The Boston cab industry is regulated under a 1930s grant of authority to the city’s police commissioner. Cab drivers must, among other things, obtain medallions and undergo specific training in order to conduct business. They have long been independently employed individuals who frequently leased cabs and medallions from their owners, who were named as the defendants in the lawsuit. The court rejected the plaintiffs’ arguments that they provided services to the defendants and therefore must be treated as employees. Although it found that the Independent Contractor Statute applied to the taxi cab industry, it concluded that the drivers met the three criteria set out in it. The case is Sebago v. Boston Cab Dispatch, Inc.

Large Jury Verdict Highlights Risks Tied to Misclassification of Workers

One commonly overlooked risk to misclassifying workers as independent contractors rather than employees was recently highlighted when a jury awarded more than $500,000 to a painter who was hurt when he fell from a ladder while working at an apartment building. The problem: the putative employer and owner of the building did not have workers’ compensation insurance because, he claimed, he did not have any employees. The jury’s disagreement led to the large damages award, which exceeded $700,000 with interest and costs.

Under Massachusetts law, all employers are required to provide workers’ compensation insurance to their employees. Most do so through insurance policies while some choose to be self-insured. Employers who fail to provide coverage can face penalties and, as here, lawsuits from injured workers. While many companies who use independent contractors deal with these risks by requiring them to obtain their own accident policies or providing coverage for workplace injuries to them, the defendant here apparently failed to do so.

The Massachusetts independent contractor statute requires all workers to be treated as employees unless they are free from control in the performance of their duties; perform work that is outside the scope of a company’s normal course of work; and operate their own independent businesses. Penalties for violations of the law can be severe. In addition to the lawsuit successfully pursued here, workers can seek back wages, tax liabilities, and other damages. State agencies can perform audits, assess back wages and other expenses, and impose penalties. Offending employers can be forced to pay a worker’s legal fees, and triple damage awards are mandatory in private cases.

Massachusetts Domestic Workers Bill of Rights Takes Effect April 1, 2015

The new Massachusetts domestic workers statute — captioned in the Legislature as a “Bill of Rights” for this class of employees — is set to take effect on April 1. It provides  variety of rights to housekeepers, nannies, caregivers, cooks, and others who work in residences across the Commonwealth.

The law was enacted in June 2014. Among its highlights are requirements that individuals who work more than 40 hours per week in covered job categories receive a 24-hour rest period each week and a 48-hour rest period each month; that employees who don’t live at the home where they are providing labor be paid for every hour they work up to 24 consecutively; that, for those employees who do live in the home, sleep-time hours deductions and meals/ lodging deductions be written; and that domestic workers receive maternity leave rights. The statute also requires employers of domestic workers to keep records of wages paid and hours worked. It grants privacy rights to domestic employees, who may also request job reviews from their employers. Advance notice or severance pay may be required when employment of live-in workers is terminated without cause. Babysitters are not covered by the new statute.

The statute also expressly prohibits sexual advances that are tied to a domestic worker’s job security or benefits. Sexual harassment of domestic workers is also expressly prohibited. The remedies provided by the Massachusetts Anti-Discrimination Statute, Mass. Gen. L. ch. 151B, apply. They include potential damages for lost wages, emotional distress and sometimes punitive damages, and legal fee reimbursement.

Legislators Again Propose Banning Noncompetition Agreements in Massachusetts

Despite past failures, including the defeat of bills proposed by former Governor Deval Patrick in 2014, the Massachusetts Legislature is again taking up the idea of banning noncompetition agreements in the Commonwealth. Several proposals were submitted at the start of the new session in 2015. Given proponents’ track record, success this year seems unlikely.

One proposal would apply prospectively to ban the enforcement of new agreements that block employees from working for competitors. The bill would not, however, prevent employers from otherwise restricting the activities of their former employees in important areas. These include the solicitation of employees, independent contractors and, perhaps most importantly, customers. The proposal would also exempt non-competes that derive from business sales or other non-working relationships.

Competing bills were also filed, as were several bills regarding trade secrets.