In a unanimous, precedential opinion, New Jersey Staffing Alliance v. Fais, the U.S. Court of Appeals for the Third Circuit on July 24 affirmed the New Jersey district court's decision refusing to halt New Jersey's Temporary Workers' Bill of Rights.
Despite the arguments of the plaintiff industry groups, the appellate court held that the act does not violate the dormant commerce clause of the U.S. Constitution, is not impermissibly vague and is not an unreasonable exercise of state police power.
With this ruling, the act lives another day — so New Jersey staffing agencies and their clients should take immediate steps to ensure compliance.
Overview of the Temporary Workers' Bill of Rights
The act, signed by Gov. Phil Murphy on Feb. 6, 2023, imposes a variety of protections for New Jersey's 127,000 temporary workers, but its onerous and expensive burdens on staffing firms and their third-party clients faced strong opposition from trade groups who feared that the act could decimate the industry. The most noteworthy — and controversial — provision of the act mandates temporary workers receive the same average rate of pay and benefits as permanent employees.
Advocates of the act, which was narrowly passed by the state Legislature and overcame a conditional veto by the governor, have argued that this provision protects New Jersey's most vulnerable laborers. Industry groups, on the other hand, insist the wage and benefits requirement will not only prove logistically impossible, but will cause a mass exodus of business for staffing firms, bringing a halt to the temporary staffing industry in New Jersey.[1]
Industry Groups' Challenge of the Act's Constitutionality and Legal Merit
The plaintiffs, the New Jersey Staffing Alliance, the American Staffing Association and the New Jersey Business & Industry Association — three industry groups whose members include those regulated by the act — brought an action challenging the act's constitutionality, seeking a temporary restraining order and preliminary injunction and, ultimately, a permanent injunction precluding the act's enforcement.[2]
In a July 2023 opinion, the U.S. District Court for the District of New Jersey denied the plaintiffs' motion for a restraining order and preliminary injunction. On July 24, 2024, the Third Circuit affirmed the district court's decision.
Although the plaintiffs argued that the act violated the U.S. and New Jersey Constitutions and state and federal civil rights statutes, the district court determined that the state law claims were barred by sovereign immunity. This holding left only those claims asserting violations of the U.S. Constitution including, in particular, (1) the so-called dormant commerce clause; (2) the due process clause; (3) the equal protection clause; and (4) the privileges and immunities clause.
The dormant commerce clause prohibits enforcement of state laws and regulatory measures that are designed to benefit in-state economic interests by burdening out-of-state competitors. It is, in effect, an antidiscrimination law meant to prevent states from imposing tariffs or customs on out- of-state businesses.
The plaintiffs argued that the act violated the dormant commerce clause because its wage requirements are actually price-setting measures that operate like a tariff on labor sent out of the state.
The Third Circuit disagreed, finding instead that the act's wage restrictions are uniform for all firms doing business in New Jersey and that in-state firms were not given an economic advantage over out-of-state firms. The court reasoned that
labor costs will vary depending on the average wage that each individual customer — regardless of location — pays its permanent employees for similar work … So if the average wage of a Pennsylvania client is lower than the average wage of a New Jersey client, staffing firms may reduce their prices accordingly.
In fact, the court determined that the act
imposes a less onerous burden on out of-state customers because they can simply hire out-of- state staffing firms that are not subject to the Act. In contrast, New Jersey customers cannot avoid the Act by utilizing out-of-state firms because the act applies to any staffing firm that does business in New Jersey.
As such, the act does not economically favor in-state firms or customers over their out-of-state counterparts.
The court was likewise unpersuaded by the plaintiffs' argument that the act has an improper extraterritorial effect, i.e., that it impermissibly affects out-of-state businesses and consumers. The plaintiffs argued that out-of-state customers will become subject to the act when hiring New Jersey firms because the act imposes joint and several liability on staffing firms as well as their clients.
The court held that while it is true that the act may have an extraterritorial reach, this does not violate the dormant commerce clause as the clause does not prohibit state laws with an extraterritorial effect absent protectionist intent or effect. Put simply, the court held the act "applies equally to in-state and out-of-state staffing firms and customers."
The court also rejected the plaintiffs' argument that Section 7(b) of the act is vague and as such, void under the well-settled principle that "'Civil statutes that regulate economic activities' must give businesses 'fair notice' of the law's requirements."
Section 7(b) is the provision that mandates temporary workers and permanent employees be paid equal pay and benefits for "performing the same or substantially similar work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions."[3] The plaintiffs argued that the term "benefits" and the phrase "same or substantially similar work" are impermissibly vague, and thus could not be enforced fairly.
Unconvinced, the court noted that the language of the act is akin to that of the federal Equal Pay Act, which prohibits sex-based pay discrimination for employees performing "equal work on jobs the performance of which requires equal skill, effort, and responsibility, and which are performed under similar working conditions."[4] While reasonable people may disagree over what constitutes "equal skill, effort, and responsibility," the court held such language provided sufficient guideposts.
The court also found the term "benefits" is not elusive and that business people of ordinary intelligence understand what the word means, as was evidenced by the plaintiffs' reference in their brief to programs like 401(k)s and employer-sponsored healthcare. Under well-settled precedent, the court stated, "the presence of 'some ambiguities' does not prevent enforcement of an economic regulation; rather, it is void for vagueness only if it is 'so vague as to be no rule or standard at all.'" Here, that standard was not met.
Finally, the Third Circuit rejected the plaintiffs' argument that the act is an unlawful exercise of state police power. A state's exercise of police power is subject to rational basis review. Put simply, because New Jersey has a legitimate interest in protecting temporary workers, and the act is rationally related to that interest, it did not abuse its police powers.
Ironically, the district court did find that the plaintiffs and their members would be "irreparably harmed" by the act because they have "adequately shown that their members are likely to face economic losses that could threaten the existence of the members' businesses and because those losses are likely unrecoverable from Defendants because of their sovereign and qualified immunities." The Third Circuit too explicitly noted that "the legislative winners here are New Jersey's temporary workers, and the losers are New Jersey staffing firms."
Like the New Jersey Legislature, however, the court may be underestimating the negative unintended consequences of the act on temporary workers. Temporary workers play a vital role in the workforce. Among other benefits, temporary workers and staffing firms allow companies to maintain productivity during temporary staffing gaps, such as when permanent employees are on medical or family leave; reduce workplace burnout by assisting in temporary work overflow; and increase efficiencies in the hiring process by providing access to qualified prescreened candidates.
If — or when — out-of-state businesses stop using New Jersey staffing firms as a result of the act, this will undeniably cause a ripple effect that reduces demand for the very workers the law was enacted to protect. For those that must continue to use New Jersey staffing firms, the efficiencies attained may be a thing of the past, causing businesses to cut costs where they may otherwise have not, including staffing in general.
What Comes Next
Perhaps seeing the writing on the wall, a month prior to the Third Circuit's decision, the industry groups asserted a partial preliminary injunction based on a new claim that the act conflicts with the federal Employee Retirement Income Security Act, which preempts state laws that relate to employee benefit plans, and therefore they were entitled to a preliminary injunction.
While both courts have already found the plaintiffs would suffer irreparable harm from compliance with the act, the industry groups must likewise show that they are likely to succeed on the merits of their ERISA-preemption claim. In their motion, the plaintiffs relied upon Staffing Services. Association of Illinois v. Flanagan, case law decided in March by the U.S. District Court for the Northern District of Illinois.[5]
In Flanagan, temporary staffing firms challenged an Illinois law enacted to provide certain temporary employees the same wages and equivalent benefits as the lowest-paid comparable permanent employee. In a first-of-its-kind decision, the court in Flanagan relied upon U.S. Supreme Court case law to find ERISA preemption a viable basis for challenging equal-benefits laws and granted the plaintiffs' request for a preliminary injunction temporarily enjoining enforcement of the equivalent-benefits provision.
Unfortunately for the New Jersey industry groups, the district court denied this new claim, though for different reasons.
While ERISA preemption may give the industry groups viable arguments in the end, over a year has passed since the act was signed and this case was initially filed. Based largely upon the lengthy delay, on Aug. 30, the district court denied the industry groups' request for a partial preliminary injunction to prevent continued enforcement of the equal benefits provision of the act. While generally ignoring the merits of the ERISA preemption argument, the court noted that delays such as this weigh against the already high burden of proof for the issuance of a preliminary injunction.
Interestingly, the court qualified its prior holding that enforcement of the act could cause irreparable harm. In doing so, the court now defined the parties' status quo as the period of time since the act went into effect, noting the public's reliance on the act while the plaintiffs delayed amendment of their complaint.
In denying the industry groups' motion, the court also addressed the plaintiffs' argument that they would likely succeed on the merits of their ERISA claim based upon the Flanagan decision. The court stated the plaintiffs "have the potential to ultimately succeed on the merits," but failed to show a likelihood of success on the merits because their motion was only supported by conclusory statements concerning the burden of compliance.
To demonstrate a likelihood of success on the merits, the plaintiffs were required to provide "details as to exactly what burden, and to what extent, the equal benefits provision imposes," such as how many staffing agencies had established ERISA plans, how much time staffing agencies and third parties "had expended to make an analysis with respect to the provision at issue and to calculate the cost of benefits," and "how many or what percentage of staffing agencies had a self-funded benefits plan."
As noted by the court in exploring these issues, the plaintiffs may ultimately be successful in demonstrating that ERISA preempts the act's equal benefits provision. Until then, though, staffing firms and their third-party clients should review their processes to ensure full compliance. Stay tuned, as this saga seems far from over!
References
[1] For a full breakdown of the act's requirements, see Prepare Now To Comply With NJ Temp Worker Law: https://www.law360.com/articles/1594204/prepare-now-to-comply-with-nj-temp-worker-law.
[2] New Jersey Staffing Alliance et al. v. Cari Fais et al., No. 23-2419, 2024 U.S. App. LEXIS 18168 (3d Cir. July 24, 2024).
[3] N.J. Stat. Ann. § 34:8D-7(b).
[4] 29 U.S.C. § 206(d)(1).
[5] Staffing Servs. Ass'n of Illinois et al. v. Flanagan, No. 23 C 16208 (N.D. Ill. Mar. 11, 2024).
Reprinted with permission of Law360.
