Independent Contractor Misclassification Ruling in Favor of FedEx Ground Confirms Critical Role of IC Agreements and Policies and Procedures in Class Action Litigation

Last month, the federal district court judge assigned to handle dozens of state law class action claims brought around the country against FedEx Ground by its drivers, who have claimed they are “employees” misclassified as independent contractors (ICs), issued a comprehensive ruling covering 42 of the of the remaining lawsuits.  These  lawsuits, which had been consolidated in the U.S. District Court for the Northern District of Indiana, alleged violations of an array of labor, benefits, and other state laws. 

Judge Rules that the Drivers are ICs Under Most State Laws

Judge Robert L. Miller Jr. had previously ruled on the classification of FedEx Ground drivers in two states:  in his most recent decision involving Kansas law, Judge Miller found the drivers to be ICs; whereas in an earlier decision involving Illinois law, he found the drivers to be employees, noting the differences in the various state law definitions of what constitutes an IC.  Now, in a 182-page decision covering over 42 lawsuits involving laws in 27 states, Judge Miller found that the drivers were properly classified as ICs in lawsuits covering 23 states, that they were employees and thus improperly classified as ICs under state laws in only three states, and that their status was moot in a lawsuit filed in another state.  The judge also remanded back to their original courts a few of the lawsuits and reserved for later decision a small number of unresolved claims. 

In issuing his comprehensive ruling, Judge Miller followed the analysis he detailed in his decision in August of this year involving Kansas law, which was analyzed in a prior blog post on this site.  The federal court judge concluded in his decision last month that, just as the drivers were ICs under the common law of Kansas, they are also ICs under the law of 23 of the remaining 27 states.

The court made clear that the most important factor for determining whether an individual is an employee or IC in Kansas and the other 23 states in which he ruled in favor of FedEx is “the right to control the methods and means of the drivers’ work.”  The court distinguished this type of control from a company’s control over the results to be produced, which the court noted does not indicate employee status.

The court then repeated its conclusion in the Kansas case, finding it equally applicable in the lawsuits in 23 of the remaining states:

“Upon review of the evidence in the light most favorable to the
plaintiffs, the only reasonable inference is that FedEx hasn’t retained
the right to direct the manner in which drivers perform their work.
FedEx supervises the drivers’ work and offers numerous suggestions
and best practices for performance of assigned tasks, but the
evidence doesn’t suggest that FedEx has the authority under the
Operating Agreement to require compliance with its suggestions.
Further, other factors strongly weigh in favor of independent
contractor status; in particular, the parties intended to create an
independent contractor arrangement, the drivers have the ability to
hire helpers and replacement drivers, they are responsible for acquiring
a vehicle and can use the vehicle for other commercial purposes, they
can sell their routes to other qualified drivers, and FedEx doesn’t have
the right to terminate contracts at-will. Although some facts weigh in
favor of employee status, after considering all the relevant factors, the
court finds that the plaintiffs are independent contractors as a matter
of [Kansas] law.”  (Emphasis added)

The Plaintiffs’ Misplaced Reliance on the FedEx IC Agreement and Its Policies and Procedures

The procedural posture of this case posed special evidentiary issues, which eventually resulted in the many unfavorable rulings for the plaintiff-drivers.  As the court noted, this was a multi-district litigation (MDL) consisting of class actions, which limited the scope of the evidence that the court could consider in deciding the drivers’ classification status.  In seeking MDL status instead of trying each class action in each state, Plaintiffs’ counsel chose to rely solely upon two sets of documents:  (a) the nationwide FedEx Ground Operating Agreement that classified the drivers as ICs and set forth the written relationship between the parties, and (b) the company’s nationwide policies and procedures governing its Ground Division drivers.  This evidentiary standard was chosen by plaintiffs’ counsel in order to qualify for class action status and to satisfy the requirements for MDL consolidation, which streamlined the lawsuits so they did not have to be separately litigated. 

As a result, the federal court noted that it could not consider particularized (so-called “anecdotal”) evidence of the degree of control allegedly exercised by FedEx Ground over the manner and means of the drivers’ performance of their services.  In effect, the drivers argued that the two sets of documents alone, the IC agreements and the policies and procedures, demonstrated by a preponderance of the evidence that FedEx Ground exercised control over the way in which the drivers performed their work, thereby rendering them employees and not ICs. 

Judge Miller disagreed with the plaintiff-drivers in the overwhelming number of cases, each of which he analyzed under the law governing employee versus IC status for each state in question.  Noting that the plaintiffs’ counsel erroneously claimed that he was refusing to consider “anecdotal” evidence that showed that FedEx Ground exercised control over how the drivers performed their jobs, Judge Miller made it clear that he had forewarned plaintiffs’ counsel that by seeking to proceed with their consolidated MDL case they would not be able to introduce individualized or particularized proof of control outside of the IC agreement and the nationwide policies and procedures. 

California Law Not Controlling

The plaintiff-drivers had also asked the federal court to give controlling effect to the decision in Estrada v. FedEx Ground, where the California courts had held that the drivers in that state were employees and not ICs.  The federal court concluded, however, that “the facts before the Estrada court and those before this court are dissimilar insofar as the facts available to this court don’t go beyond the Operating Agreement and generally applicable Policies and Procedures.”  

Four Takeaways

The federal court’s decision provides four main takeaways for companies that use ICs and for attorneys handling cases of this nature:

  • First, FedEx Ground’s operating agreements provided the plaintiffs-drivers with sufficient evidence to win class action status for their state and federal court lawsuits.  As the district court judge initially found, the operating (IC) agreements provided enough evidence that FedEx Ground exercised control over the manner and means of how the drivers performed their services to justify certifying the cases as class actions and consolidating them in a multi-district case before a single federal court judge.  By their very nature, therefore, IC agreements and policies and procedures that are not drafted in a state-of-the-art manner can cause companies that use ICs to face class action litigation they may be able to otherwise avoid.
  • Second, plaintiff’s counsel took a gamble by proceeding in a manner relying solely upon the operating agreement and policies and procedures to prove IC status.  While this decision undoubtedly reduced considerably the amount of time and effort needed to ready this case for decision by the federal court, using 20-20 hindsight that decision backfired on plaintiffs because such evidence was not alone enough to prevail in the case. Had the plaintiffs sought to litigate each case separately and allowed themselves the opportunity to introduce “anecdotal” evidence  of alleged control over their day-to-day affairs, the result in some or all of the cases may well have differed, as was the case in the Estrada case in California.
  • Third, while the court’s decision does not prevent FedEx Ground drivers in future misclassification lawsuits from relying upon “anecdotal” evidence of real-life control that they have been allegedly subjected to, as a practical matter FedEx Ground has now revised its operating agreements in many states and restructured its relationship with its IC drivers in a more legally defensible manner.  See our prior blog post.
  • Fourth, instead of waging battle for years against its IC-drivers and many state attorney generals, to whom FedEx has paid many millions of dollars in settlement of labor law and tax claims, Fed Ex Ground could have earlier sought to enhance its compliance with federal and state labor, benefits, tax, and other laws affecting ICs by redrafting its IC agreements in a state-of-the-art manner and restructuring the manner in which it uses its IC-drivers so as to avoid or minimize legal challenges.  Notably, it has now sought to do that to a large extent (as noted in the third bullet point).  Whether such changes will ultimately prevail on a going-forward basis remains to be seen, but proactive IC compliance enhancement would have avoided many of the past legal challenges to its classification of its Ground Division drivers and saved FedEx hundreds of millions of dollars in legal fees and liability in past and pending lawsuits and administrative proceedings.  This case demostrates the costs faced by companies, even those that ultimately prevail in large measure, that do not update and create state-of-the-art IC agreements, policies, and procedures and fail to engage in bona fide restructuring of their IC arrangements in a manner that will enhance their IC compliance.

Your comments are invited.

Richard Reibstein
Attorney at Law
Pepper Hamilton LLP
The New York Times Building
620 Eighth Avenue, 37th Floor
New York, New York 10018
T: 212.808.2722
F: 866.454.5857
E: reibsteinr@pepperlaw.com
www.pepperlaw.com

This entry was posted in IC Compliance and tagged , , . Bookmark the permalink.