On July 15, 2010, the Massachusetts Attorney General’s Office announced that it had reached an agreement with FedEx Ground to settle a citation that the company was misclassifying its drivers as independent contractors (ICs) instead of properly classifying them as employees.  FedEx agreed to pay $3 million to settle the charges against it, including claims that it violated the Massachusetts Independent Contractor Law and improperly failed to pay the state payroll taxes and workers’ compensation and unemployment assistance premiums by treating its Ground Division drivers as ICs.  FedEx denied any liability in settling the case.

On the same day, FedEx Ground reportedly launched a new business model in Massachusetts for its ground and home delivery drivers. The new business model gives its single-route drivers three options for continuing to work with FedEx on a going-forward basis: (a) become a multi-route Independent Service Provider (ISP) by incorporating as a business, purchasing from FedEx Ground three or more work areas in the same geographic area and entering into an agreement with FedEx on an approved ISP arrangement for the work areas; (b) become an employee driver of an approved FedEx Ground ISP (that is, become a driver for a another driver that has set up a business as an ISP); or (c) terminate his or her relationship with FedEx Ground at the expiration of its current Operating Agreement, which will not be renewed, leading to loss of “employment” with FedEx Ground.

These options were described in a new class action lawsuit just filed in Massachusetts on August 4, 2010 by two FedEx Ground drivers that are seeking an injunction to prohibit the implementation of the new ISP program. The lawsuit claims that FedEx Ground’s new ISP business model in that state was created in retaliation for the actions by drivers and others on their behalf exercising legal rights under the Massachusetts Independent Contractor Law.

The new business model by FedEx Ground in Massachusetts comes on the heels of the announcement of a new business model by that company for its ground and home delivery drivers in most other states. According to a Wall Street Journal article on May 21, 2010, FedEx notified its IC drivers nationwide that they must soon become incorporated under state law instead of being organized as sole proprietorships, partnerships, or other unincorporated entities, and treat that they must treat their personnel (presumably including themselves) as employees. Drivers were given 180 days to comply. Challenges to that business model change are likely – either in the form of class action retaliation lawsuits by drivers, like the one just filed in Massachusetts, or by state or federal tax or workforce agencies, which may regard this new “corporate” business model as an effort to circumvent employment tax and workplace protection laws.

Written by Richard Reibstein.