A Washington-based intermodal carrier settled its lawsuit against New Jersey’s labor department over a long-running dispute on driver classification.
The lawsuit was part of the ongoing fallout from the use of the ABC test, the stringent and increasingly common standard that motor carriers must consider when determining whether drivers are employees or independent contractors.
East Wenatchee-based Eagle Systems, which does business in 24 operations along the East Coast and Midwest and has just under 400 power units according to the U.S. Department of Transportation, will pay New Jersey’s Department of Labor and Workforce Development $1.25 million in back disability and unemployment insurance claims, the department said in a press release. Eagle Systems also agreed to future audits from the labor department.
The claims stem from an audit of Eagle Systems that alleged the company did not properly classify drivers as employees, thereby not paying state unemployment benefits.
The settlement does not mean Eagle Systems intended to misclassify drivers and to avoid paying state taxes, said Chief Executive Officer Dave Hensal. The settlement was solely done for “business reasons and the benefit of our owner-operators, customers and shareholders.”
In 2010, a driver for Eagle Systems applied for New Jersey unemployment benefits. The Department of Labor and Workforce Development twice denied benefits because the driver supplied his own truck, chose his hours and loads, and was responsible for all direct business expenses from operating the truck.
The claim, though, triggered a state audit of Eagle’s drivers for the period between 2006 and 2013. The audit first determined Eagle Systems owed over $2 million for not paying unemployment taxes to the state.
After an administrative law judge refused to overturn the Department of Labor and Workforce Development’s initial finding, Eagle Systems filed a federal class action lawsuit in 2018 seeking to block the department from enforcing the rules that require it to use the ABC test in determining worker classification.
New Jersey allows carriers to classify drivers as independent contractors without the ABC test if the employer is exempt under the Federal Unemployment Tax Act (FUTA).
Getting a FUTA exemption was allowed under the Internal Revenue Service’s 20-factor test, as well as through a determination or ruling letter or an IRS audit.
As of Seputember 2018, New Jersey eliminated the 20-factor test as a FUTA exemption after the IRS invalidated the test. But Eagle Systems alleges the auditor refused to consider the 20-factor test in determining exemption, even though it was permitted at the time.
Absent the FUTA exemption, the auditor applied the ABC test, which looks at the driver’s independence from the employer, the location and nature of the work, and whether the driver is regularly engaged in an independently established trade.
The audit determined that Eagle failed the “B” portion of the test, which says a worker is an independent contractor if the service they provide is “outside the usual course of business for which such service is performed or that such service is performed outside of all of the places of business of the enterprise for which such service is performed.”
The auditor’s report found that Eagle Systems’ owner-operators are “an integral part of Eagle’s operation,” thereby failing to meet the B prong.
Eagle Systems argued that the Federal Aviation Administration Authorization Act (FAAAA) preempts any state rule “related to a price, route or service,” according to the lawsuit. The department’s rules to determine independent contractor status “will always result in owner-operators being found to be employees and not independent contractors, under any circumstance” and that “clearly affects prices, routes or service in interstate commerce.”
Eagle also alleged the auditor miscalculated the unemployment tax liability by including pass-through costs such as tolls along with direct wages paid to the driver.
Robert Asaro-Angelo of the Department of Labor and Workforce Development argued in a motion to dismiss the complaint that the FAAAA’s sole aim is to block state laws that “significantly impact” the trucking market. New Jersey’s unemployment compensation laws “do not require Eagle Systems to choose one business model over another. Rather, the laws simply require Eagle Systems to properly classify its workers.”
In addition, the Social Security Act and FUTA gave states “broad freedom” in setting up unemployment compensation laws, the labor department said.
Eagle Systems, which runs about 60 power units in New Jersey, will comply with the state’s classification regime. But Hensal said his company will have to reevaluate how it wants to do business in the state.
The regulatory climate is “forcing motor carriers to make some significant changes in a business model that has lasted for fifty years,” he said.