Virtually by definition, many transportation workers, and many employees of airlines and railroads in particular, regularly travel and work in many states. For the most part, that does not impede their work or their employers’ businesses, but what if one state’s laws (read California’s) are unusually burdensome?

That issue arose in a pair of class action cases filed in California district courts in which the plaintiffs, airline employees who frequently traveled out of state, complained that their wage statements did not comply with the dictates of California Labor Code § 226. Both district courts granted summary judgment in favor of the defendant airline. When the cases reached the U.S. Court of Appeals for the Ninth Circuit, it certified the question of whether Labor Code § 226 applied to these employees under state law. In June of last year, the California Supreme Court answered that question and held that employees who perform duties across the country – pilots, flight attendants and other interstate transport workers – are entitled to California-compliant wage statements (under Labor Code § 226) so long as California serves as their base of work operations. Ward v. United Airlines, Inc. 466 P.3d 309, 325 (Cal. 2020).

With that question answered, the Ninth Circuit addressed, and largely rejected, a series of arguments by the employer that the application of § 226 would violate federal law and the federal Constitution. Ward v. United Airlines, Inc. Case No. 16-16415 (9th Cir., Feb. 2, 2021).

Dormant Commerce Clause

For most of us, the application of the dormant commerce clause is only a distant law school memory. Here, however, the employer first asserted that the dormant commerce clause precluded application of Labor Code § 226 because (1) the California Supreme Court’s Ward test results in discrimination against interstate commerce, (2) the Ward test results in direct regulation of interstate commerce wholly outside California’s borders, i.e., the extraterritoriality principle, and (3) the Ward test’s application would impose a burden on interstate commerce clearly excessive in relation to the putative local benefits, i.e., the Pike balancing test. See Pike v. Bruce Church, Inc., 397 U.S. 137, 142 (1970).

The panel flatly rejected the employer’s argument that the first prohibited category was at issue, because the Ward test imposed burdens on private employers regardless of whether they are based inside or outside California and thus was nondiscriminatory on its face. The second category was also inapplicable because the Ninth Circuit had previously held that the extraterritoriality principle only applies “when state statutes have the practical effect of dictating the price of goods sold out[]of[]state or tying the price[s] of in-state products to out-of-state prices.” See Association des Eleveurs de Canards et d’Oies du Quebec v. Harris, 729 F.3d 937, 948 (9th Cir. 2013). Thus, the employer’s attempt to characterize § 226 as a statute worthy of invalidation under the extraterritoriality principle was improper because § 226 does not regulate the price of goods.

Next, the Court addressed the contention that the burden imposed by § 226 on the employer was clearly excessive in relation to the putative local benefits. The employer specifically argued that compliance with the Ward test would “require it to track every employee’s hours on a pay-period-by-pay-period basis to determine whether each employee spent more than 50% of his or her time working in another state and thus was exempt from § 226’s coverage.” Because this would result in increased cost to the employer, the burden on interstate commerce would be too substantial to withstand the dormant commerce clause challenge. The Ninth Circuit offered two points in rebuttal: (1) increased costs alone, without a proffer of magnitude, do not suffice to establish a substantial burden on interstate commerce; and (2) the employer could easily comply with § 226 by issuing § 226-compliant wage statements to all pilots who call California their home base, which would result, at worst, in overcompliance. It then reasoned that because the employer failed to offer any evidence of magnitude of cost, any purported burden was not substantial.

The Court also dismissed the employer’s argument that the Ward test’s application would subject it to a “patchwork of inconsistent regulations,” reasoning that this was not an area of regulation requiring national uniformity. It concluded, then, that requiring compliance with § 226 would neither impair the free flow of commerce across state borders nor disrupt operation of interstate transportation. In light of these findings, the Ninth Circuit held that the Ward test did not impose a significant burden on interstate commerce clearly excessive in relation to the putative local benefits – and in fact, did not even address the second part of the balancing test. Strike one.

The Airline Deregulation Act of 1978

The employer next argued that § 226 was preempted by the Airline Deregulation Act of 1978 (ADA), which prohibits states from regulating the price, route or service of an air carrier that provides air transportation. It argued that this Act preempted § 226 because compliance with the statute would affect the employer’s prices, routes and services by increasing costs and influencing its decisions about flight. The Ninth Circuit rejected this contention, however, on the grounds that the asserted effect on prices, routes or services was too “tenuous, remote[] or peripheral” to warrant federal preemption under the Act. And even assuming that the employer could invoke the ADA’s preemptive effect, the Circuit explained that the challenge would still fail because the employer presented no evidence that these increased costs would have a “significant impact” on its prices, routes or services, echoing the panel’s earlier justification for rejecting the employer’s dormant commerce clause argument. Strike two.

Railway Labor Act

In a final attempt to invalidate the Ward test’s application to the putative class, the employer asserted Railway Labor Act (RLA) preemption. The RLA establishes a mandatory, detailed dispute resolution process for resolving labor disputes arising in the rail and airline industries.

The employer asserted that the RLA applied because both the pilots and flight attendants were covered by collective bargaining agreements (CBAs) that contained provisions concerning the manner in which their pay is determined – thereby constituting a dispute over terms in the CBA. The panel rejected this argument after applying the two-step test courts use to determine whether the RLA preempts a state law claim. The first step determines whether the claim is “grounded” in a CBA by asking whether the claim “seeks purely to vindicate a right or duty created by the CBA itself.” The second step asks whether adjudicating the state law claim requires interpretation of a CBA. The panel answered the first step in the negative because claims under § 226 are not grounded in the CBA – these claims instead seek to vindicate rights created by California law. The second step similarly was not satisfied because resolving whether the employer violated the wage statement law did not require interpretation of any terms in the CBA; it would only require analyzing the wage statements themselves. Strike three.

Although upholding § 226’s application in this case, the panel left open the possibility for successful constitutional challenge in cases where an employer produces evidence that complying with § 226 would impose substantial costs on its business. This part of the opinion also suggests that other aspects of the California Labor Code, such as those relating to hours or breaks, might similarly run afoul of federal law.

The Bottom Line

Transportation companies with employees based in California will be bound by § 226’s wage statement requirements unless they can maintain the difficult burden of proving that compliance will impose substantial costs.