PDX N., Inc. v. Comm'r N.J. Dep't of Labor & Workforce Dev.

• Decision Date: 22 October 2020
• Docket Number: Nos. 19-2968,19-2993,s. 19-2968
• Citation: 978 F.3d 871
• Parties: PDX NORTH, INC.; SLS Delivery Services, Inc. (Intervenor in District Court) v. COMMISSIONER NEW JERSEY DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENT PDX North, Inc., Appellant in No. 19-2968 SLS Delivery Services, Inc., Appellant in No. 19-2993
• Court: U.S. Court of Appeals — Third Circuit

978 F.3d 871

PDX NORTH, INC.;SLS Delivery Services, Inc. (Intervenor in District Court)

v. COMMISSIONER NEW JERSEY DEPARTMENT OF LABOR AND WORKFORCE DEVELOPMENTPDX North, Inc., Appellant in No. 19-2968SLS Delivery Services, Inc., Appellant in No. 19-2993

Nos. 19-2968

19-2993

United States Court of Appeals, Third Circuit.

Argued: April 15, 2020

Filed: October 22, 2020

Allison L. Hollows, Fox Rothschild, 101 Park Avenue, 17^th, Floor New York, NY 10178, Jack L. Kolpen, Corinne L. McCann Trainor [ARGUED], Ian D. Meklinsky, Fox Rothschild, 997 Lenox Drive, Princeton Pike Corporate Center, Building 3, Lawrenceville, NJ 08648, Counsel for Appellant in No. 19-2968

Vafa Sarmasti [ARGUED], 271 Route 46 West, Suite A205, Fairfield, NJ 07004, Counsel for Appellant in No. 19-2993

Emily M. Bisnauth, Esq. [ARGUED], Christopher W. Weber, Office of Attorney General of New Jersey, Department of Law & Public Safety, Division of Law, Richard J. Hughes Justice Complex, 25 Market Street, P.O. Box 112, Trenton, NJ 08625, Counsel for Appellee

Before: CHAGARES, SCIRICA, and ROTH, Circuit Judges

OPINION OF THE COURT

SCIRICA, Circuit Judge This case involves a dispute over the employment classification of delivery drivers, either as independent contractors or as employees. The precipitating event in this litigation is the State of New Jersey's assertion of non-payment of unemployment compensation taxes because of the employers' misclassification. To resolve a part of this dispute, we must apply the abstention doctrine of Younger v. Harris , 401 U.S. 37, 91 S.Ct. 746, 27 L.Ed.2d 669 (1971).

PDX North, Inc., a last-mile shipper, long classified its delivery drivers as independent contractors. After audits by the New Jersey Department of Labor and Workforce Development (the "Department"), PDX was told that its drivers were misclassified. Because they were employees, the Department asserted PDX owed unemployment compensation taxes. PDX challenged this determination before the New Jersey Office of Administrative Law (the "New Jersey OAL") on February 19, 2015.

On September 22, 2015, PDX filed this suit in federal court against the Department's Commissioner contending New Jersey's statutory scheme for classifying workers was preempted by the Federal Aviation Administration Authorization Act of 1994 (the "FAAAA") and was unconstitutional under the Interstate Commerce Clause.

On February 29, 2016, the New Jersey OAL action was stayed at PDX's request and with the consent of the Department. Since then, this stay has been renewed every six months and remains in effect.

Meanwhile, SLS Delivery Services, Inc., also a last-mile shipper, was audited by the Department. Because SLS classified its drivers as independent contractors, it moved to intervene in PDX's action against the Commissioner on December 1, 2017. Intervention was granted on July 27, 2018 and SLS filed a complaint alleging nearly identical claims to PDX. The Department's audit against SLS is still pending.

The Commissioner filed a motion for judgment on the pleadings in the federal action on October 7, 2018, contending the case was barred by the Younger abstention doctrine. The trial court agreed and dismissed the entire case. We hold that the trial court correctly dismissed PDX, but it erred in dismissing SLS. Accordingly, we will affirm in part, reverse in part, and remand this matter for further proceedings.¹

I.

PDX is a last-mile shipper of wholesale auto parts in New Jersey and other states along the Eastern Seaboard. Lastmile shippers, also known as same-day shippers, are companies providing domestic transportation of shipments within a 24-hour period, often on a same-day basis with geographic coverage generally limited to a single metropolitan area. Depending on the volume and timing of its customers' shipping needs, PDX hires "independent owner-operators" on an "as-needed" basis. PDX long classified these drivers as independent contractors.

In May 2012, after completing an audit of PDX for 2006 through 2009, the Department determined that PDX had misclassified its drivers, finding they were employees, not independent contractors. The Department reached the same conclusion in two subsequent audits examining 2010 through 2015. The parties do not provide the factual basis for this determination, nor do they provide the Department's reasoning.

Under N.J. Stat. Ann. § 43:21-19(i)(6) (the "Independent Contractor Test"), New Jersey presumes workers are employees unless three statutory elements are met. Those elements generally require the business to show the worker is "free from [its] control or direction," the worker provides a service "outside the usual course of business," and the worker is "customarily engaged in an independently established trade." N.J. Stat. Ann. § 43:21-19(i)(6)(A)–(C). Some working relationships, however, are exempt from the Independent Contractor Test. One exemption, the Large Motor Carrier Exemption, may apply if, among other things, the drivers' vehicles weigh 18,000 pounds or more, the vehicles are used for the "highway movement of motor freight," and the driver receives "a percentage of the gross revenue generated." N.J. Stat. Ann. § 43:21-19(i)(7)(X) (the "Large Motor Carrier Exemption"). If the Large Motor Carrier Exemption applies, the elements of the Independent Contractor Test do not need to be satisfied for the worker to qualify as an independent contractor. Id.

Because the Department determined PDX had misclassified its drivers and did not qualify for the Large Motor Carrier Exemption, it concluded the drivers were employees for which PDX had not withheld unemployment compensation taxes. The Department assessed PDX for the amount owed, including principal, interest, and penalties, totaling $1,831,291.83 and filed administrative judgments for those assessments in 2015 and 2018.² As noted, PDX sought review of the assessment amounts before the New Jersey OAL on February 19, 2015 and that action is currently stayed by PDX's motion (and without objection by the Department or Commissioner).

As noted, after filing its challenges with the New Jersey OAL, PDX brought an action for declaratory and injunctive relief in federal court on September 22, 2015. PDX accepts, for purposes of this suit, that it can neither satisfy the elements of the Independent Contractor Test nor the requirements for the Large Motor Carrier Exemption. As a result, its drivers must be classified as employees. In addition to the state and federal tax burdens, PDX complains of the additional costs and obligations of employment. It asserts that classifying these drivers as employees would require additional administrative and human resources costs, the outlay of capital to buy and maintain a fleet of trucks, and a larger payroll to ensure it can always meet peak demand. If it must classify its drivers as employees, PDX alleges, "it will be driven out of business."

PDX contends the Independent Contractor Test and the Large Trucker Exemption are preempted by the FAAAA because they are "related to a price, route, or service" of an interstate motor carrier. 49 U.S.C. § 14501(c)(1). Moreover, PDX asserts these provisions violate the Interstate Commerce Clause, U.S. Const. art. I, § 8, cl. 3, because of the "undue burdens" they impose on its business. It requested the trial court to find the Independent Contractor Test and the Large Motor Carrier Exemption preempted by the FAAAA and unconstitutional under the Interstate Commerce Clause. It also requested the trial court to enjoin the enforcement of the administrative judgments and the performance of future audits.

In a motion to dismiss for failure to state a claim and for lack of jurisdiction under Rule 12(b) filed on October 30, 2015, the Commissioner contended PDX's case should be dismissed on three separate abstention grounds. The Commissioner did not raise the Younger abstention doctrine. The trial court determined none of the cited abstention grounds were applicable, explicitly noting it did not rule on Younger abstention because no party had briefed the issue.

The case was reassigned to another judge and proceeded to discovery. As noted, SLS moved to intervene in the action on December 1, 2017 because it operated under a similar business model and was being audited by the Department. Intervention was granted on July 27, 2018, PDX submitted an amended complaint, and SLS submitted a complaint containing nearly identical allegations to PDX's amended complaint. After responding to the complaints, the Commissioner filed a motion for judgment on the pleadings under Rule 12(c) on October 7, 2018, contending for the first time that Younger abstention required dismissal.

The trial court granted the Rule 12(c) motion on Younger abstention grounds, dismissing the case in its entirety. It reasoned the Younger abstention doctrine applied because the proceeding was quasi-criminal in nature as to both PDX and SLS. The trial court then considered the applicable Middlesex factors³ for both PDX and SLS and concluded each factor favored abstention. Importantly, the trial court held the Department's audit of SLS was an ongoing state judicial proceeding. In the alternative, the trial court noted SLS may have waived its argument that it was not subject to an ongoing state proceeding. The trial court also raised the Tax Injunction Act ("TIA"), sua sponte, and stated it had "significant doubts that the TIA would permit this action to go forward" because this was "an action to enjoin the collection of New Jersey unemployment compensation contributions." But the trial court never ruled on the application of the Tax Injunction Act.

PDX and SLS timely appealed, focusing on two main issues.⁴ First, they contend either Federal Rule of Civil Procedure 12 or judicial estoppel prevented the invocation of the Younger abstention doctrine. Second, they contend the trial court incorrectly applied Younger abstention.

II.⁵

First, we will consider whether Federal Rule of Civil Procedure...