Workers’ Compensation Law Prof Blog

More on California ABC and the FAAAA/Trucker Preemption Issue

The general challenge to California’s AB 5 is now on its way to trial absent a successful pre-trial motion by California state authorities. But readers may recall that a California federal district court recently upheld a challenge of the law as applied to truckers on Federal Aviation Administration Authorization Act of 1994 (FAAAA) preemption grounds in California Trucking Association (CTA) v. Becerra. It may be some time before we know the outcome of that case, but it seems clear the dispute will be analyzed by the 9th Circuit under its previous opinion in Dilts v. Penske Logistics, LLC, 769 F.3d 637 (9th Cir. 2014) (cert denied in 2015), which addressed whether California laws on meal and rest breaks were preempted by the FAAAA. The heart of that case concluded:

California's meal and rest break laws plainly are not the sorts of laws “related to” prices, routes, or services that Congress intended to preempt. They do not set prices, mandate or prohibit certain routes, or tell motor carriers what services they may or may not provide, either directly or indirectly. They are “broad law[s] applying to hundreds of different industries” with no other “forbidden connection with prices[, routes,] and services.” . . .. They are normal background rules for almost all employers doing business in the state of California. And while motor carriers may have to take into account the meal and rest break requirements when allocating resources and scheduling routes—just as they must take into account state wage laws . . . or speed limits and weight restrictions . . . the laws do not “bind” motor carriers to specific prices, routes, or services . . . Nor do they “freeze into place” prices, routes, or services or “determin[e] (to a significant degree) the [prices, routes, or] services that motor carriers will provide,” . . . Further, applying California's meal and rest break laws to motor carriers would not contribute to an impermissible “patchwork” of state-specific laws, defeating Congress' deregulatory objectives. The fact that laws may differ from state to state is not, on its own, cause for FAAAA preemption. In the preemption provision, Congress was concerned only with those state laws that are significantly “related to” prices, routes, or services. A state law governing hours is, for the foregoing reasons, not “related to” prices, routes, or services and therefore does not contribute to “a patchwork of state service-determining laws, rules, and regulations.” . . . It is instead more analogous to a state wage law, which may differ from the wage law adopted in neighboring states but nevertheless is permissible . . .

The analytical problem with the preemption provisions in the FAAAA, the Airline Deregulation Act (upon which the FAAAA provision was modelled), and ERISA (the granddaddy of all the sweeping preemption provisions) is, of course, their breadth, and it matters not whether that breadth results from laziness or lobbying. (Jim Wooten at University of Buffalo has done masterful work on the mysterious emergence of the ERISA preemption provision). In the context of the FAAAA, the Court in Dilts further observed:

. . . generally applicable background regulations that are several steps removed from prices, routes, or services, such as prevailing wage laws or safety regulations, are not preempted, even if employers must factor those provisions into their decisions about the prices that they set, the routes that they use, or the services that they provide. Such laws are not preempted even if they raise the overall cost of doing business or require a carrier to re-direct or reroute some equipment . . . Indeed, many of the laws that Congress enumerated as expressly not related to prices, routes, or services—such as transportation safety regulations or insurance and liability rules . . . are likely to increase a motor carrier's operating costs. But Congress clarified that this fact alone does not make such laws “related to” prices, routes, or services. Nearly every form of state regulation carries some cost. The statutory text tells us, though, that in deregulating motor carriers and promoting maximum reliance on market forces, Congress did not intend to exempt motor carriers from every state regulatory scheme of general applicability . . .

 

Nor does a state law meet the “related to” test for FAAAA preemption just because it shifts incentives and makes it more costly for motor carriers to choose some routes or services relative to others, leading the carriers to reallocate resources or make different business decisions . . .

 

. . . In short, even if state laws increase or change a motor carrier's operating costs, “broad law[s] applying to hundreds of different industries” with no other “forbidden connection with prices[, routes,] and services”—that is, those that do not directly or indirectly mandate, prohibit, or otherwise regulate certain prices, routes, or services—are not preempted by the FAAAA. (emphases supplied)

The argument CTA seems to be making is that the independent contractor model is not merely a cost-saving aspect of the trucking industry but is, rather, essential to it and therefore not “several steps removed from prices, routes, or services.” Moving down the slippery slope, the implicit argument is that the ABC classification will cause carriers to exit the market. (But the proponent of preemption defense usually has the burden of proving its applicability—so it is not clear to me how receptive will be to a mere assertion of horribles). In other words, this argument has limits, and it is worth noting that the Third Circuit expressly rejected it very recently in Bedoya v. American Eagle Express, Inc., 914 F.3d 812 (3rd Cir. 2019) (cert denied)—see pp. 23, 24 in this linked slip opinion. The U.S. Supreme Court in a 2013 FAAAA opinion, Dan’s City Used Cars, Inc. v. Pelkey, 569 U.S. 251, stated,

. . . the breadth of the words “related to” does not mean the sky is the limit. We have refused to read the preemption clause of the Employee Retirement Income Security Act of 1974 . . . which supersedes state laws “relate[d] to any employee benefit plan,” with an “uncritical literalism,” else “for all practical purposes pre-emption would never run its course.” . . . And we have cautioned that [the FAAA preemption provision] does not preempt state laws affecting carrier prices, routes, and services “in only a ‘tenuous, remote, or peripheral . . . manner.’”

At the end of the day that is the question: how “remote” is “intrastate-ABC worker law” to carrier prices, routes, and services when taking due regard of a state’s traditional police powers?

Michael C. Duff

Wyoming’s Continued Struggles with Air Ambulances and Federal Preemption

There is a very close relationship between two federal preemption provisions that are having an impact on state employment law and state workers’ compensation systems. One such provision, in the Airline Deregulation Act (49 U.S.C. § 41713), prevents state workers’ compensation systems—including Wyoming’s—from regulating payments to air ambulance operators for transportation of injured workers. A second such provision, under the FAAAA (49 U.S.C.§ 14501(c)), is (temporarily) interfering with California’s application of the ABC employee test to workers of truck carriers. ADA preemption was “created” in the late 1970s and modelled on the ERISA preemption provision (29 U.S.C. § 1144). FAAAA preemption was modelled on ADA preemption and enacted in the mid-1990s. This post is specifically about ADA preemption as it concerns air ambulance services in Wyoming, but each of the preemption provisions just mentioned creates regulatory “dead zones” in which no substantive federal regulation on certain important state problems exists, and no state regulation on those problems is possible. This is a real federalism mess.

A proposed Wyoming bill related to air ambulance coverage of injured workers has emerged (the bill would tentatively locate the law at W.S. 27-14-401). Under 27-14-401(j) “Emergency and medically necessary air ambulance transport services for an employee shall be covered under W.S. 42-4-123, subject to availability and any limitations specified by the department under W.S. 42-4-123(a). The department of workforce services shall pay reimbursement for services under this section to the department of health as specified under W.S. 42-4-123.

Current 42-4-123 (effective as of 4/1/2020) requires the state department of health, with approval of the governor to apply to HHS for a Medicaid waiver “to make coverage of air ambulance transport services through Medicaid available to all Wyoming residents, except that coverage may be limited to specified groups of Wyoming residents as necessary to obtain approval.” The same 42-4-123 created an “air ambulance transport services program” under the auspices of the state department of health. Following transportation, “the air ambulance provider shall provide services under this section if the provider otherwise makes air ambulance transport services available to persons in Wyoming who are eligible for Medicaid independent of the coverage provided by this section” and “shall accept payment under this subsection as full satisfaction of all charges, costs and fees relating to air ambulance transport services” though “an air ambulance provider shall [in specified instances I won’t discuss here] collect a copay or other cost sharing requirement for services covered under this section . . .

The state structure goes on from there, but this is enough of an exposition to facilitate discussion. The first time I saw 42-4-123, I surmised the model was an attempt to maneuver the federal government into indirectly limiting the cost of an air ambulance trip, and I wondered why CMS would grant such a waiver. It turns out, as explained in CMS's letter of last month, that it won’t:

Section 1115(a) of the [Social Security] Act cannot be used to circumvent other federal statutes, including the preclusion clause set forth in the Airline Deregulation Act of 1978, which specifically precludes state regulation of matters related to air carrier rates, routes, and services. As noted above, the Secretary may approve a demonstration project under section 1115(a) of the Act if, in his judgment, the project is likely to assist in promoting the objectives of title XIX . . . While the proposed Wyoming Medicaid Coordinated Air Ambulance Network demonstration is expected to serve Medicaid beneficiaries, those services are already authorized in Wyoming’s Medicaid state plan. Using the Medicaid administrative structure to provide services to other individuals in the state as a mechanism to avoid the application of federal aviation law is a clear departure from the core, historical mission of the Medicaid program to provide health coverage to the Medicaid eligible population. (Emphases supplied)

Perhaps even more to the point,

Furthermore, CMS will not approve a demonstration project under section 1115(a) of the Act unless the project is expected to be budget neutral, that is, the demonstration project may not result in Medicaid costs to the federal government that are greater than what the federal government’s Medicaid costs in the state would likely be absent the demonstration. The state's proposed approach to budget neutrality as provided in its application does not indicate that the proposed Wyoming Medicaid Coordinated Air Ambulance Network demonstration is or would ever be budget neutral. (Emphases supplied)

Translation: what the federal government allows for charges under Medicaid for air ambulance transportation is a function of many complex variables, and that cost function “might” be thrown into disarray by allowing an air ambulance carveout Medicaid expansion for a state’s entire population. (It might be worth mentioning here that the Wyoming legislature has rejected Medicaid expansion).

I think there is something to the air ambulance industry’s argument that Wyoming’s proposed approach would essentially ration air ambulance services for its citizens. As a Wyoming Public Radio/NPR story explained last summer before CMS rejected the model:

Wyoming officials propose to reduce the number of air ambulance bases and strategically locate them, to even out access. The state would then seek bids from air ambulance companies to operate those bases at a fixed yearly cost. It’s a regulated monopoly approach, similar to the way public utilities are run . . . “You don't have local privatized fire departments springing up and putting out fires and billing people . . . The town plans for a few fire stations, decides where they should be strategically, and they pay for that fire coverage capacity.” . . . Medicaid would cover all the air ambulance flights in Wyoming — and then recoup those costs by billing patients’ insurance plans for those flights. A patient's out-of-pocket costs would be capped at 2% of the person's income or $5,000, whichever is less, so patients could easily figure out how much they would owe. Officials estimate they could lower private insurers' average cost per flight from $36,000 to $22,000 under their plan.

Injured workers would be captured within the same structure and might be disparately impacted under it. This would raise difficult workers’ compensation quid pro quo questions. On the one hand, Wyoming workers traded tort rights for workers’ compensation benefits, and paying $5000 out of pocket for work-related injury expenses would violate that principle. On the other hand, the quid pro quo did not contemplate a federal benefits structure like Medicaid into which medical costs could be substantially subsumed. The quid pro quo moreover takes on a different complexion if the only remedy to which any state citizen is entitled is a federalized Medicaid recovery (leaving to one side the Wyoming state constitutional requirement, in Art. 10, Sec. 4, that the only exception to the right of tort damages for physical injury is workers’ compensation benefits). In fairness, the Wyoming model—notwithstanding the recent bill, the timing of which I don’t quite understand—never had a chance to get off the ground, so it was not yet clear precisely how the statewide model would interact with Wyoming’s monopolistic workers’ compensation system. Given CMS’s position, the model seems a dead letter now (and I think the statute, if challenged, would still have had to fight off ADA preemption arguments).

Michael C. Duff

Federal Judge Denies Injunctive Relief in Case Challenging California’s AB 5

In a 24-page decision that went much as I expected, a Federal district judge in the Central District of California concluded that California Assembly Bill 5 2019 (AB 5) was rationally-related to a legitimate state interest, did not deprive gig economy workers of the right to pursue their chosen occupation, and did not unconstitutionally impair Gig employers’ contracts with workers. The core of the challenge sounds in equal protection, and the court found plaintiffs Lydia Olson, Miguel Perez, Postmates, and Uber unlikely to prevail on its merits. With respect to the request for injunctive relief:

 When “an injunction is requested which will adversely affect a public interest . . . the court may in the public interest withhold relief until a final determination of the rights of the parties, though the postponement may be burdensome to the plaintiff.” . . . Considering the potential impact to the State’s ability to ensure proper calculation of low income workers’ wages and benefits, protect compliant businesses from unfair competition, and collect tax revenue from employers to administer public benefits programs, the State’s interest in applying AB 5 to Company Plaintiffs and potentially hundreds of thousands of California workers outweighs Plaintiffs’ fear of being made to abide by the law.

Accordingly, injunctive relief was denied. “For the reasons stated below, the Court does not find likelihood of success on the merits or that sufficiently serious questions have been raised as to the merits of these claims.” (This case is not directly related to the “trucker preemption” matter under the FAAAA concerning which I’ve written in these pages).

The decision is complex and well worth reading in its entirety. One section of interest:

 . . . evidence submitted by Plaintiffs indicates that according to academic studies, “a majority of workers do not value scheduling flexibility” and only a “substantial share”—by inference, less than a majority—“are willing to give up a large share of their earnings to avoid employer discretion in setting hours.” McCrary Decl. at ¶ 26. This statement by Plaintiffs’ expert indicates that of the 395,000 or more drivers for Uber and/or Postmates, a majority may favor—or at least be neutral to—the application of AB 5 to their worker classification. To be sure, Olson, Perez, and individual amici attest that being classified as employees would be financially devastating and upend their schedules and expectations. See, e.g., Perez Decl. ¶¶ 8, 18–20; Olson Decl. at ¶¶ 10, 12; see also Br. of Amici Curiae U.S. Chamber of Commerce, Engine Advocacy, and TechNet at 10 (citing U.S. Dep’t of Labor, Contingent and Alternative Employment Relationships, Bureau of Labor Statistics, (May 2017) (79 percent of independent contractors prefer their work arrangement). The Court does not doubt the sincerity of these individuals’ views, but it cannot second guess the Legislature’s choice to enact a law that seeks to uplift the conditions of the majority of non-exempt low income workers rather than preserve the status quo for the smaller subset of workers who enjoy independent contractor status. (emphasis supplied)

My translation? Even if a minority of the population has sincere reasons for not wanting to be protected by the rules of the road it does not follow that the state must eliminate the rules of the road. (I have recently written about this idea in these pages). Or put somewhat differently, the state (a.k.a. the democratic polity) is entitled to exercise legitimate police power to protect its citizens. While the 14^th amendment places limits on the exercise of legislative power, those limits are very sharply circumscribed—as challengers of workers’ compensation laws know only too well. This was a principle that became well-established during the era of enactment of workers’ compensation statutes; it is one of the central theses of  New York Central R. Co. v. White, 243 U.S. 188 (1917).

It was also interesting to see Chamber of Commerce types have to grapple with a proposition that has bedeviled claimants challenging workers’ compensation laws: “The burden is on plaintiffs to negate ‘every conceivable basis’ which might have supported the distinction between exempt and non-exempt entities.” I have written in these pages about how difficult it is to overcome this standard.

Lydia Olson, et al.—which is ultimately about the state’s power to impose the ABC employment test on classes of putative employers—now moves on to the merits phase. As I have said in these pages, I don’t see how plaintiffs can prevail under existing law. But it appears likely that they have advanced and structured the case for review by the current U.S. Supreme Court. And we have some recent history of the ad hoc flexibility that body has afforded the 14^th amendment in key moments, so this is not an irrational strategy.

Michael C. Duff

ABC Employee Test for App-Based Companies in PA?: More Reaction to Regulatory Arbitrage

A recently-offered Pennsylvania bill doubling-down on the ABC employee-status test for app-based companies like Uber and Lyft has created in me the strong impression that one school of national opinion seems to be coalescing around a presumption that the Gig economy writ large is not benign but a form of regulatory arbitrage (to borrow a term from the Gig-economy “friendly” Harris-Krueger/Hamilton Project Report). As in New York, the proposed Pennsylvania legislation requires alleged employers to affirmatively disprove the employee status of their workers. But unlike the New York bill (or California’s AB-5), the Pennsylvania bill, House Bill 2215 of 2020, introduced about three weeks ago, targets app-based enterprises like Uber and Lyft.

Under the “Application-Based Company Worker Misclassification Act,”

A person providing labor or services for remuneration to an application-based company shall be considered an employee rather than an independent contractor unless the application-based company demonstrates that all of the following conditions are satisfied:

(1) The person is free from the control and direction of the application-based company in connection with the performance of the work, both under the contract for the performance of the work and in fact.

(2) The person performs work that is outside the usual course of the application-based company's business.

(3) The person is customarily engaged in an independently established trade, occupation or business of the same nature as that involved in the work performed..

Moreover, the Act would impose a variety of civil and criminal penalties for misclassification, though good-faith defenses are available. In short, the Pennsylvania bill is the polar opposite of the Handy, Inc. bills about which I’ve written in these pages, both in substance and in spirit.

Obviously, it is unclear whether the Pennsylvania bill will become law. But what interests me is the sharp and focused tone of the proposed legislation. It is not merely abstractly altering the legal test for employment but additionally contemplates deliberate gaming of the system. Intentional violations of the Act would be misdemeanors; non-intentional violations would be summary offenses. It would be a specific violation of the Act for an app-based company to fail to properly classify an individual as an employee for purposes of the Pennsylvania Workers’ Compensation Act (or to fail to provide workers’ compensation coverage).

My hunch is that organized labor was involved in drafting and sponsoring the bill. Complete acquiescence to the Gig economy in the end would yield fewer “employees.” Because only “employees” have the right to collectively bargain, or to protest adverse working conditions, dissolution of employee-status necessarily means dissolution of union representation. Recently, the Trump National Labor Relations Board determined in an administrative memo (the conclusion has not been tested in the courts) that certain Uber drivers were independent contractors rather than employees. In the recent past, the NLRB, an extremely “political” agency at its apex, has continued to utilize the common law, under the Section 220 of the Restatement Second of Agency test, when analyzing employee status (it is bound to do so because the common law definition is the default under federal statutes). Under the NLRA workers of Gig-type employers have, in recent years, been found employees: in two informal NLRB adjudications/internal memoranda Download Handy Advice Memo, Download Postmates Advice memo, and in one formal NLRB adjudication. The NLRB has rejected the argument that intentional misclassification of workers, without more, violates the National Labor Relations Act. But “employees” acting in concert in protest over working conditions remain protected against employer retaliation. Gig employers taking adverse action against concerted worker protest on the theory that those employees are unprotected as non-employees under state law do so at their peril. Still, the NLRB’s Uber Memo is signaling its proclivity to withdraw federal law protection from Gig workers. Evisceration of employee status at the state level could provide cover for an NLRB “vanishing employee” agenda. Unions would obviously fight such developments on multiple levels. Collective employee protest against employee misclassification under state law could feed into the strategy, but a shrinking base of “employees” would not help organized labor’s cause.  

Emerging ABC-type laws (in New York and California, in particular), which at first blush seem most closely connected to employment law (including workers’ compensation law), raise other complicated labor law issues. Some provisions would, in addition to modifying employee-status law, confer collective bargaining rights on Gig workers--an idea that some in the European Union have been championing. Assuming Gig workers are employees, these provisions could be preempted under Machinists’ labor law field preemption. On the other hand, if Gig workers are not employees, but are independent contractors, conferral by states of collective bargaining rights on them is fraught with antitrust complexity (though states—as opposed to cities like Seattle—enjoy broad antitrust immunity). Organized labor involvement in “local” laws (including what I am speculating is its involvement in the Pennsylvania bill) is evidence that the legal battles playing out extend well beyond the domain of workers’ compensation. It will take effort for workers’ compensation specialists to discern the sometimes hazy lines of conflict bubbling up in their neighborhood.

Michael C. Duff

ABC Employee Test for Workers’ Compensation in NY?: The Lottery Class Resists

I think about the question of employee status, under workers’ compensation statutes and elsewhere, as in part a contest between the actual working class (and its advocates), and a class of purported “exceptionals” who hyper-focus and insist upon preserving their “liberty” to “hit” the lottery by becoming part of the one percent. Why would someone opt for a world bereft of law and without limits? Well, you might get lucky. You might not be the one to suffer a workplace injury (among other things). And so, even though as a matter of pure probability you will almost certainly never become part of the one percent utterly without need of the social contract, you identify with them: those who must be motivated by noblesse oblige and are rightfully—you contend—beyond the law. You argue that you have no need of nanny-state protections like “employee status.” Now I am not for demonizing your irrational exuberance, but neither am I for subsidizing it. Hence my resistance to a world without employees and full of lots (and lots) of underinsured, “independent” contractors.

A bill currently sits in the New York Senate, Senate Bill S6699A sponsored by Robert Jackson of the 31st Senate District. The bill reads in relevant part (that is, as it relates to workers’ compensation),

4. Subdivision 6 of section 201 of the workers' compensation law is amended by adding a new paragraph E to read as follows:

                        1. (A) The term “employment” includes, unless specifically excluded by a provision of this subdivision, any service by a person providing labor or services for remuneration unless the hiring entity demonstrates that all of the following conditions are satisfied:

                (i) the person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact; and

                (ii) the person performs work that is outside the usual course of the hiring entity's business; and   

                (iii) the person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

            (B) For the purposes of this section, any person providing labor or services for remuneration pursuant to subparagraph (A) of this paragraph shall be considered an employee rather than an independent contractor. 

5. This act shall take effect immediately.

This is essentially the ABC test/California’s AB-5, and represents the continuation of a struggle unlikely to abate soon. One of the public comments on the bill, located on the NY Senate’s website, argues that the proposed law is likely to harm the very people that it seeks to help. The commenter contends that the bill alarms “freelancers and self-employed people” who are not exploited but are “happy, productive people who have chosen freelance for a reason.” Artists, writers, and digital developers are cited as examples. Forcing enterprises to provide them with workers’ compensation coverage will purportedly interfere with their happiness (presumably by compelling the enterprises to stop using their services).

The commenter in my view precisely states the issue, but may misapprehend the analysis of the overall situation. If you think that most of the economy is, or will soon be, comprised mainly of, artists, writers, digital developers, and other such generally happy and productive people, then the actions of the California Assembly, and now potentially the New York legislature, seem incomprehensible. Why pass laws that would damage the economic fortunes of most workers (by forcing companies to go out of business rather than succumb to regulation)? Yet what would help most workers? This bill? Or the current state of affairs allowing enterprises to so easily categorize their workers as independent contractors? Is the greater evil that certain enterprises could be forced to prove that the economic reality of the working conditions they supply do not amount to an employment relationship; or is it that many workers who should be classified as employees are not because of artful manipulations of the current legal system? Maybe legislatures, particularly in very large states, are becoming suspicious that most workers are not participating in some golden-age, creative-class adventure; and that the ever-encroaching Gig economy has little to do with a new economy, and everything to do with the very old game of regulatory evasion. 

Here is a factual portrait of our economy: according to a recent Brookings study, more than 53 million people—44% of all workers aged 18-64—are low-wage workers and earn median hourly wages of $10.22 and median annual earnings of $17,950. Please don’t try to persuade me that these workers are philosophically in favor of low-paying, precarious, but “flexible” work. Pundits can call it what they want. I call it unacceptable. And this explosion of staggering inequality has occurred during the Gig economy. Legislators are entitled (indeed have the duty) not to be willfully blind to the obvious. So, yes, a golden age of flexible, creative work may be just on the horizon, and laws making it harder to “de-employee” society may turn out to be mechanisms frustrating the development of such an Age of Pericles. Or current law facilitating bad actors’ bad actions in obliterating the employment relation to avoid as much regulation as possible may be the veritable “man behind the curtain.”  

There is no denying that the lottery class prefers an employee-less world that preserves the maximal liberty of those for whom members of the class de facto work to “produce” according to whim—jeux sans frontiers. The question I have for this class is whether it collectively imagines that others will abandon the rule of law to preserve its “right” to try to hit the lottery. The lottery class should not be surprised if the slumbering giant of our democracy chooses instead to deploy the “disruption” of the rule of law.

Michael C. Duff