Trucking company PDX argues against New Jersey’s unemployment tax

A New Jersey trucking company recently argued in a federal appeals court that the state’s independent contractor statute should be void after an audit determined it owes nearly $2 million in unpaid unemployment contributions for truckers the state considers employees.

In April, attorneys for PDX North America presented oral arguments to the U.S. Third Circuit Court of Appeals for a lawsuit it filed against New Jersey Department of Labor and Workforce Development Commissioner Robert Asaro-Angelo. The case centers on the Commercial Truck Drivers Exemption within the New Jersey Independent Contractor Statute.

From 2006 to 2015, the commissioner audited PDX three times regarding its unemployment compensation obligations. Asaro-Angelo found that PDX owes $1.83 million in contributions to the unemployment compensation fund, interest on those unpaid contributions and financial penalties.

Essentially, the state determined the truckers hired as independent contractors were actually employees.

New Jersey’s Independent Contractor Statute uses a three-prong ABC test to determine if someone is an independent contractor:

• Individual has been and will continue to be free from control or direction over the performance of the services provided, both under his contract of service and in fact.
• Service the individual performs must be either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed.
• Individual customarily engages in an independently established trade, occupation, profession or business.

However, an exemption to that statute applies to motor carriers that satisfy the following criteria:

• Vehicle used must weigh 18,000 pounds or more.
• Vehicle must have a license for commercial use.
• Operator of the vehicle must either own their equipment, or lease or finance the purchase of the equipment through an entity which does not own or control directly or indirectly the entity performing the services.
• Vehicle use must be for the highway movement of motor freight.
• Operator compensation must derive by receiving a percentage of the gross revenue from the transportation move or by a schedule of payment based on the distance and weight of the transportation move.

Since PDX drivers’ trucks do not weight more than 18,000 pounds, the exemption does not apply. Consequently, its drivers are employees by New Jersey state law.

In its original complaint, PDX argues that New Jersey’s Independent Contractor Statute and trucker exemptions violate F4A. According to the complaint, Congress enacted F4A to ensure that transportation rates, routes and service reflect “maximum reliance on competitive market forces” to stimulate “efficiency, innovation, and low prices” as well as variety and quality.

PDX claims state laws adversely affect its prices, routes and/or services. Since federal law supersedes state law, the statue should be voided. In July 2019, a federal district court in New Jersey dismissed the case.

The court agreed with the commissioner that the federal court should exercise jurisdiction in the matter under what is known as the Younger abstention doctrine.

The Younger abstention doctrine states that federal courts should abstain from exercising jurisdiction in cases that may interfere with certain pending state litigation when “the state’s interests in the proceeding are so important that exercise of the federal judicial power would disregard the comity between the states and the national government.”

To qualify, the state proceedings must be “quasi-criminal” in nature. In this case, the administrative proceedings to recover unemployment compensation payments are in question. The district court found that certificates filed by the commissioner has the same force and effect of court judgments.

Furthermore, the commissioner can issue punitive sanctions to recover payments.

Essentially, the administrative provisions to recover unpaid unemployment compensation contributions are closely related to criminal statutes.

With the question of “quasi-criminal” answered. The state must also satisfy three other factors to qualify for the Young abstention doctrine:

• There is an ongoing state proceeding that is judicial in nature.
• The state proceeding implicates important state interests.
• The state proceeding offers an adequate opportunity for the federal plaintiff to litigate federal constitutional challenges.

First, the court found that administrative proceedings have been routinely deemed judicial in nature in other cases. Second, the timely and prompt collection of unemployment compensation payments is an important state interest. Lastly, PDX has the right to appeal an unfavorable decision by the commissioner. During such an appeal in a state appellate court, federal constitutional claims may be brought forward.

With all factors of the Young abstention doctrine satisfied, the federal district court dismissed PDX’s complaint, directing the trucking company to present federal claims in the state proceedings. PDX appealed.

During oral arguments before the appellate court, PDX argued that penalties from the audit are civil in nature, not quasi-criminal. Therefore, the Young abstention doctrine does not apply.

In addition to reiterating what the district court decided, the commissioner also argued that the Tax Injunction Act does not give the court jurisdiction to hear the case. The Tax Injunction Act prohibits lawsuits that attempt to restrain the assessment or collection of any tax. Rhode Island attempted to invoke the Tax Injunction Act in the American Trucking Associations’ toll lawsuit.

As of publication, the appellate court has not published an opinion on the case.