FedEx Ground Prevails in Key Ruling Under “Common Law” Test for Independent Contractor Status

The federal court judge assigned to over 60 cases involving FedEx Ground drivers who claim they have been misclassified as independent contractors instead of employees has issued his second key ruling in the case.  In contrast to the judge’s conclusion in May that FedEx Ground drivers in Illinois were employees and not independent contractors under that state’s restrictive wage payment laws, on August 11 the judge reached a contrary conclusion under Kansas wage payment law, which uses the more prevalent “common law” test.

The 103-page decision under Kansas law was issued by Judge Robert L. Miller, Jr., the federal district court judge located in the Northern District of Indiana who has responsibility for many of the class actions filed against FedEx Ground.  Judge Miller’s decision is significant for at least two reasons.

First, it may be a harbinger of future decisions by the courts on the remaining claims that apply the “common law” test, including the nationwide ERISA claim for employee benefits once that case becomes ripe for court decision.  While the “common law” test for independent contractor status is similar in most states, there are some subtle (and sometimes not so subtle) differences in state court precedents that the courts will have to follow when applying each state’s laws.  Of course, the decision by Judge Miller is subject to appeal before the Seventh Circuit Court of Appeals in Chicago.

Second, this newest decision may change the manner in which plaintiff’s’ class action lawyers litigate independent contractor cases.  The issue before the court in cases governed by the “common law” test is whether the hiring party retains the right to control or actually exercises control over the manner and means used to perform the work.  Here, the class of Kansas drivers was certified on the basis of FedEx’s asserted right to control by virtue of the terms of the Operating Agreement that FedEx required each of its Ground Division drivers to sign.  The lawyers for the drivers told the court that they would not seek to introduce facts outside of the Operating Agreement and the written policies and procedures of FedEx generally applicable to its Ground Division drivers.  In issuing its August 11 decision, therefore, the court declined to consider any of the drivers’ evidence about FedEx Ground’s actual exercise of control based on documents other than those select written documents.

The judge also declined to consider evidence that the IRS had found FedEx Ground’s drivers to be employees and not independent contractors under the “common law” test.   Last fall, however, the IRS concluded that FedEx was nonetheless protected from hundreds of millions of dollars in tax liability under the “safe harbor” provisions of the tax law.

Unless reversed on appeal, this decision may free FedEx from the potential of significant financial liability that it has been facing in many of the more than 60 cases that have been pending before Judge Miller in Indiana.

This decision under the Kansas “common law” may temper some of the recent enforcement initiatives by state regulators and attorneys general who have for years portrayed FedEx Ground as a company that repeatedly fails to comply with state workplace laws.  FedEx can now argue forcefully that it has not been depriving workers of pay or workplace protections after all, at least not in those states that use the “common law” test for determining independent contractor status.

Finally, it is likely that FedEx will use this favorable decision to further refine its independent contractor model for its Ground Division drivers.  Already, FedEx has implemented in a number of states a new Independent Service Provider (ISP) model whereby its Ground and Home Delivery drivers must incorporate and own three or more service areas if they wish to continue to work with FedEx.  The impending ISP model is currently being challenged in a new class action case filed in Massachusetts against FedEx; unless it is stricken down in that state or others, it appears that FedEx may ultimately withstand a great deal of the enormous legal exposure it faced from the numerous court cases and enforcement actions brought against it for using an independent contractor model for its Ground Division drivers.

 

Written by Richard Reibstein.

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