3P Delivery, Inc. provides delivery services for major retailers. It has historically classified its drivers as independent contractors and not employees. 3P Delivery was sued in 2008 by two drivers in Oregon and two drivers in Washington for misclassification, claiming that “3P engages in a fraud designed to make its Drivers appear to be running independent businesses, when in reality its Drivers are 3P employees.”
Both lawsuits sought damages including reimbursement of the drivers’ expenses for operating their vehicles (such as the cost of leasing or purchasing the drivers’ trucks, fuel and cargo expenses, and insurance); denial of overtime and other wage payments, paid holiday pay, and other employee benefits; and penalty wages for failure to pay wages in a timely manner.
Among the allegations made were that 3P:
- requires drivers to fill out applications;
- furnishes drivers with pallet jacks, hand trucks and straps;
- pays drivers by a method chosen by 3P (either a fixed weekly amount or commission);
- requires drivers to adhere to 3P standards as set forth in a “Contract Driver Guide Book”;
- advertizes that it maintains its own fleet of clean vehicles;
- controls the workload of drivers;
- does not permit substitute drivers;
- instructs drivers how to load, transport, and unload shipments;
- retains the right to terminate the drivers at will;
- prohibits drivers from using their vehicles to offer delivery services for other companies;
- requires the drivers to submit a daily log of deliveries; and
- evaluates the performance of the drivers.
In connection with the “fraud” claims, the Complaint alleged that 3P required its drivers to sign a contract with 3P Delivery, required the drivers to secure business licenses, created business cards for each driver, and directed (and assisted) drivers in becoming either a Limited Liability Corporation (LLC) or a regular corporation.
After the courts permitted the two lawsuits to proceed as class actions, the parties engaged in substantial pretrial discovery that yielded disclosure by 3P Delivery of over 160,000 pages of documents. Following court-ordered mediation, the parties agreed to settle both cases for $2.25 million: $1.125 million for the Oregon case and $1.125 million for the Washington case.
1. The real costs: The cost of defending and settling class action cases of this nature is often equal to or greater than the damages to be awarded each member of the class. Here, in addition to the $2.25 million in settlement funds allocated to settlement, the class action lawyers are seeking at least $1.2 million in the Oregon case and $1.0 million in the Washington case in plaintiff’s legal fees for hours they expended. In addition, 3P Delivery likely expended a greater amount in paying defendant’s own legal fees to its lawyers. Thus, when the final “bill” is tallied for the lawsuit, 3P Delivery may have had to pay well in excess of $7 million as a result of misclassifying its drivers as independent contractors.
In addition, companies that settle claims of this nature with class action lawyers usually have to “settle up” with the IRS and state revenue departments as well as state unemployment and workers compensation agencies. The cost of satisfying those government obligations, which can include penalties and fines, can often be larger than the overall cost of a class action.
2. There are ways to minimize or eliminate independent contractor misclassification; neither disguising nor ignoring it appear to be sound alternatives. There is no federal law and only a few state laws that prohibit trucking and delivery companies from classifying its drivers as independent contractors. The 3P Delivery case is an example of how a company can become a casualty of failing to structure its relationship with its drivers in a bona fide manner that complies with applicable employment, tax, benefits, and independent contractor laws.
Misclassification typically starts with structuring a business without being aware of the sizeable legal risks of operating a business in a way that fails to comply with labor, tax, and employee benefits laws applicable to independent contractors and employees. When a business finally becomes aware of the risks, there are three alternatives: (1) do nothing, as most businesses seem to continue to do; (2) disguise the misclassification and try to make it appear to be legitimate without changing the underlying indicia of misclassification, such as what 3P Delivery allegedly did (requiring its drivers to incorporate as LLCs or regular corporations); or (3) enhancing compliance with federal and state independent contractor laws in a bona fide manner , after undergoing an “IC Diagnostics”TM process.
As noted in articles and other posts by the publisher of this blog, if the latter alternative is chosen, there are at least three steps companies can take to enhance their compliance with independent contractor laws and minimize or eliminate exposure to future misclassification liability. While taking steps to enhance compliance now will not eliminate past misclassification liability, those companies that take bona fide compliance steps are far less likely to become future targets of class action lawyers and government regulators than companies that choose to do nothing or disguise their misclassification.
Written by Richard Reibstein.