Monthly Archives: February 2015

Court Holds that State Worker Classification Law Is Pre-Empted by Federal Law

Mack, S.By Sean Mack, Esq.

On February 5, 2015, a federal judge in Massachusetts dismissed two lawsuits against JB Hunt and FedEx, which had alleged that those carriers violated a Massachusetts labor law by classifying their drivers as independent contractors rather than as employees.  The Federal judge concluded that the Massachusetts law was preempted by the Federal Aviation Administration Authorization Act and therefore could not be enforced.  The FAAA expressly provides that federal statutes will preempt or supersede state laws if they could affect “prices, routes and services” of motor carriers and interstate freight movement.

Drivers have previously had success challenging their classification as independent contractors instead of employees in various state and federal courts in obtaining rulings that they were improperly classified as independent contractors.    For example, the Ninth Circuit Court of Appeals, which covers California and other Western States, has twice overturned rulings by lower courts that had concluded that drivers were independent contractors, not employees.  A federal court in Indian also ruled against FedEx in a class action concluding that it had misclassified its workers in various states.

Following those rulings, several states have enacted legislation creating a presumption that drivers are employees, not independent contractors.  New Jersey currently has bills pending in the legislature that would create a presumption that drivers of motor carriers are employees.  In 2013, the NJ Assembly passed the Truck Operator Independent Contractor Act  (A1578) that would establish a presumption that port and parcel delivery truck drivers are employees unless companies can prove otherwise.  The NJ Senate labor committee has cleared similar legislation (S1450), but the law has not yet been adopted in NJ.

The ruling in Massachusetts most likely will be appealed, but if upheld, is significant as it would provide precedent to invalidate similar worker classification laws in other states, and may dissuade states like NJ from  adopting a classification law that will be subject to preemption.

Update on Mandatory Paid Sick Leave in New Jersey

By Eleanor Lipsky, Esq.

Paid sick leave has traditionally been a benefit employers could voluntarily select to provide, and often only for certain employees.  However, employers should be aware that an increasing number of states and cities have begun mandating that employers provide paid sick leave to some extent.   Further, in the recent State of the Union address, the Obama Administration made it clear that it is taking steps to provide nation-wide access to paid sick leave by calling on Congress, the States, and cities to pass more of such legislation.

In 2014, the New Jersey State Assembly introduced and amended a bill entitling all employees, including part-time employees, to receive paid sick leave.   Under the bill, businesses with 10 or more employees would be required to let workers earn up to 72 hours of paid time off that they could use either when they are sick or to take care of sick relatives.  Businesses with less than 10 employees would be required to allow 40 hours of sick leave.  Under the bill, for every 30 hours worked, the employee would accrue one hour of earned sick leave, though the amount accrued does not have to carry forward from one year to the next.  While the bill is considered a pro-worker and pro-health policy measure, critics have noted that the bill does not yet address issues employers might have with seasonal employees, along with the increased cost to employers.  However, others argue business owners have an incentive to keep employees happy and healthy.

This state bill was introduced in light of a trend among some New Jersey communities that have already adopted similar sick paid leave rules locally.  So far, Jersey City, Newark, Passaic, East Orange, Paterson, Irvington, Trenton, and Montclair have all approved their own paid sick leave laws in 2014.  Many of these recent municipal ordinances became effective on January 1, 2015.  Notably, the state bill would not preempt some of these more generous municipal laws.



FAA Issues Proposed Regulations on the Commercial Use of Drones

By James Boyan, Esq.

On February 15, 2015, the Department of Transportation – Federal Aviation Administration (“FAA”) proposed a set of regulations that would allow drones to be used for commercial purposes.  The proposal would allow businesses to use small unmanned aircraft systems (i.e., drones) that weigh less than 55 pounds during daylight hours (i.e., official sunrise to official sunset, local time).

Under the proposed rules, the person actually flying the drone would be known as an “operator.”  To be certified as an operator, an individual would have to be at least 17 years old and pass an “initial aeronautical knowledge test” at an FAA-approved testing center.  The fee for obtaining an operator’s certificate will be approximately $200.  To maintain the certification, an operator will have to pass the FAA’s knowledge test every 24 months.  However, a drone operator would not be required to obtain any further certifications such as a pilot’s license.

The proposed regulations will require operators to maintain a “visual line of sight” of the drone at all times.  The rules would allow, but not require, and operator to work with a visual observer who would maintain constant visual contact with the aircraft.  However, the operator would still need to be able to see the drone at all time with unaided vision (except for corrective lenses).  A first-person view camera will not satisfy the line of sight requirement in the proposed regulations but a camera could be used as long as the sight requirement is otherwise satisfied.

The proposed regulations contain the following restrictions on the commercial use of drones:

  • The operator must discontinue flight when continuing to fly would pose a hazard to other aircraft, people or property;
  • A drone may not fly over people, except those directly involved with the flight;
  • Drone flights should be limited to 500 feet in altitude and no faster than 100 mph;
  • Operators must keep their drones out of airport flight paths and restricted airspace and obey any FAA temporary flight restrictions; and
  • Operators are not permitted to drop any objects from their drones.

The FAA’s proposed regulations will also require operators to:

  • Conduct a pre-flight inspection of the drone prior to each operation;
  • Report any accidents that result in injury or property damage to the FAA; and
  • Ensure that all drones have appropriate aircraft markings.

The FAA is also considering a separate set of rules for “micro-drones” (i.e., drones that weigh less than four pounds). Under those rules, operators would not have to pass any kind of test. Instead, they would only have to submit a written statement to the FAA certifying that they are familiar with basic aviation safety measures.

Businesses that currently use drones or plan to do so in the future should closely monitor the FAA’s proposed regulations.

Fees on Fees for Corporate Indemnification: Who pays the bill when you have to sue your company to defend you?

As it appeared in the New Jersey Law Journal.

Schwartz, A.By Adam Schwartz, Esq.

So you are an officer or director of a company and you have been sued for some action (or inaction) you took in your corporate capacity. Does the company defend and indemnify you? In most instances, unless you are being sued for fraud, the company’s bylaws, and in some instances even New Jersey statutes, require the company to provide defense and indemnification. But what happens if the company refuses?

Under New Jersey’s corporate indemnification statute, you can sue to obtain the defense and indemnification to which you are entitled, but at what cost? Will you spend more suing the company than paying for your own defense in the underlying matter? Unless you can recover the attorney fees you incur in suing the company (often referred to as “fees on fees”), you will not be made whole. Moreover, if the company is not compelled to pay your legal fees, it creates an incentive to deny coverage in the first instance. Maybe you won’t bother suing. Maybe you won’t realize you can challenge the company’s decision to deny coverage.

There are no reported New Jersey cases addressing “fees on fees” in the corporate indemnification context. However, a New Jersey court will inevitably face this issue. How will it be resolved? On issues of first impression, New Jersey courts often look to other jurisdictions for guidance, such as Delaware and New York, which have similar corporate indemnification statutes. However, those states have reached opposite conclusions—Delaware allows an officer to recover “fees on fees” while New York does not. Thus, New Jersey courts facing this issue will likely follow the state—Delaware or New York—with the most persuasive reasoning.

As an initial matter, all three states follow what is called the “American Rule,” which provides that each litigant must bear his own legal costs unless a statute, court rule or contract specifically provides that a successful plaintiff can recover attorney fees. See Porreca v. City of Mellville, 419 N.J. Super. 212, 224 (App. Div. 2010); see also Goodrich v. E.F. Hutton Group, 681 A.2d 1039, 1043 (Del. Sup. Ct. 1996); Baker v. Health Management Systems, 98 N.Y. 2d 80, 88 (2002). Thus, the ability to recover “fees on fees” will be determined by corporate indemnification statutes and/or the company’s bylaws. As bylaws frequently provide for coverage “to the fullest extent” allowed under the law, the corporate statutes will be the focal point for any analysis.

The applicable Delaware Statute, 8 Del. C. 145(a), provides as follows:

A corporation shall have the power to indemnify any person who was or is a party or is threatened to be made a party to any … suit or proceeding … by reason of the fact that the person is or was a director, officer, employee or agent of the corporation … against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonablyincurred by the person in connection with such action, suit or proceeding.

In Stifel Fin. Corp. v. Cochran, 809 AD.2d 555 (Del. Sup. Ct. 2003), the Delaware Supreme Court noted that § 145(a) permits indemnification “in any action,” may extend to the indemnification action itself. It further noted that § 145(a) is remedial in nature and “should be broadly interpreted to further the goals it was enacted to achieve.” Those goals include (i) assisting corporate officials resist what they consider to be unjustified suits, and (ii) encouraging “capable men to serve as corporate directors, secure in the knowledge that expenses incurred by them in upholding their honesty and integrity as directors will be borne by the corporation they serve.”

In light of those objectives, the Stifel court held that “without an award of attorneys’ fees for the indemnification suit itself, indemnification would be incomplete.” Thus, it concluded that, while § 145(a) does not expressly state that “fees on fees” are recoverable, the language provides that “fees on fees” are “permissible” and therefore “authorized”—although not required. As the company’s bylaws provided for indemnification to the fullest extent of the law, and “fees on fees” are permissible under the law, the officer was reimbursed for the fees he incurred in seeking indemnification. Moreover, the Stifel court observed that allowing “fees on fees” under these circumstances would prevent a company with “deep pockets” from wearing down a former director, “with a valid claim to indemnification, through expensive litigation.”

In essence, Stifel subordinated the American Rule and looked to the purposes behind § 145(a) to determine that “fees on fees” supported the statute’s remedial purpose. It did not believe corporations would be unduly punished by this result because they can tailor their bylaws to exclude “fees on fees” if so desired.

On the other hand, New York’s highest court has held that New York’s corporate indemnification statute does not permit “fees on fees.” Baker, 98 N.Y.2d at 88. The corporate indemnification statute in New York, McKinney’s Business Corporation Law § 722, provides that:

A corporation may indemnify any person made, or threatened to be made, a party to an action or proceeding … by reason of the fact that he … was a director or officer of the corporation … against judgments, fines, amounts paid in settlement and reasonable expenses, including attorneys’ fees actually and necessarily incurred as a result of such action or proceeding, or any appeal therein.

In Baker, a corporate officer who successfully obtained indemnification argued that he was entitled to “fees on fees” because the attorney fees he incurred by suing to obtain indemnification were “necessarily incurred as a result” of his being sued in his corporate capacity for securities fraud. The Baker court rejected the officer’s argument, holding that the fees he incurred in the indemnification lawsuit were caused by the company’s refusal to indemnify; they were not incurred as a result of the officer being sued in the underlying securities fraud action.

The Baker court then examined the legislative history of §722 and discerned no evidence suggesting an intention to allow “fees on fees.” It further held that even if the officer’s argument had merit, it would be preempted by the American Rule. In essence, the Baker court held that, since “fees on fees” were not expressly authorized in §722, they are not available. It did not believe its holding would unduly punish corporate officers because they “remain free to provide indemnification of fees on fees in bylaws, employment contracts or through insurance.”

New Jersey’s corporate indemnification statute provides that: “Any corporation … shall have the power to indemnify a corporate agent against his expenses and liabilities in connection with any proceeding involving the corporate agent.” N.J.S.A. 14A:3-5(2). As with the Delaware and New York statutes, it is silent on the issue of fees on fees. The reasoning of Delaware and New York, provide credible arguments for and against “fees on fees.” However, New Jersey is more likely to follow the logic of Stifel.

The New Jersey Supreme Court has noted that Delaware’s corporate indemnification statute is similar to and in fact, constitutes “the very genesis of New Jersey’s Indemnification Statute.” Vergopia v. Shaker, 191 N.J. 217, 220, fn. 1 (2007). Thus, it will likely look to Delaware courts for guidance as it has previously done for corporate law issues. Moreover, New Jersey courts have recognized the remedial nature of the corporate indemnification statute and the goals it seeks to achieve—goals identical to those identified in Stifel. SeeCohn v. Southbridge Park, 369 N.J. Super. 156, 160 (App. Div. 2004) (noting that the statute (i) helps corporate officials resist what they consider to be unjustified suits and claims, and (ii) encouragescapablemen to serve as corporate directors.)

Moreover, one of the primary differences between New York and Delaware is who the courts believe are responsible for protecting themselves against an unfavorable result. Delaware believes that it is incumbent upon the company to amend its bylaws to exclude “fees on fees”; while New York places that burden for ensuring the availability of “fees on fees” on the individual officer.

Faced with this dichotomy, New Jersey will likely place the burden on the company to exclude coverage. In other instances, New Jersey courts have looked to the relative bargaining power of the respective parties to determine the viability of a claim. SeeMohammed v. Count Bank of Rehoboth Beach, Delaware, 189 N.J. 1, 15 (2006) (contracts of adhesion); see also Alloway v. General Marine Industries, 149 N.J. 620, 628 (1997) (whether tort or contract principles apply to transaction). In this instance, the relative bargaining power clearly rests with the company, which has already approved the bylaws and has deeper pockets that the individual.

Thus, notwithstanding New Jersey’s adherence to the American Rule, a New Jersey court will likely find that “fees on fees” are permitted under N.J.S.A. 14A:3-5(2).•

Reprinted with permission from the February 9, 2015 issue of The New Jersey Law Journal. © 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.