On July 3, FedEx Ground drivers won summary judgment in their misclassification lawsuit brought against the global courier company under the Massachusetts Independent Contractor Act. No. 11-11094 (D. Mass. 7/3/13). Judge Richard G. Stearns of the U.S. District Court for the District of Massachusetts rejected all of FedEx Ground’s defenses, each of which had been previously rejected by other judges: that the Massachusetts Independent Contractor Act was “preempted” by the federal Airline Deregulation Act; that the drivers failed to exhaust their administrative remedies; and that FedEx satisfied all three prongs of the Massachusetts Independent Contractor Act. That law is one of a number of so-called “ABC” laws governing ICs where employee status is presumed unless the business can prove that it satisfies all three prongs of the state’s law.
Massachusetts’ ABC law for ICs has a very broad “B” prong, where the business must prove that the services performed by the worker are “outside the usual course of business of the employer.” FedEx Ground argued that it is in the “logistics” industry, not the pick-up and delivery business. The court, however, concluded that, under Massachusetts law, a service falls within an employer’s usual course of business if the company “defines its business as including the service.” Here, the court found, FedEx held itself out to the public as providing package pick-up and delivery services, as noted on its own website and in annual reports filed with the state government. The court also found that the pick-up and delivery services performed by the drivers fell within FedEx’s usual course of business because “without the services of the [drivers], [FedEx] would cease to operate.”
Because FedEx could not satisfy the “B” prong of the Massachusetts ABC law, the court did not bother to examine if it could satisfy either of the other two prongs.
FedEx Ground has won some of its IC misclassification cases, and lost some, many of which have been the subject of our prior blog posts. But the result in this case was predictable: Massachusetts has the least hospitable law for independent contractor (IC) status among the 50 states. Thus, it was not surprising that the federal court, applying the Massachusetts statute, found that the drivers had been misclassified as ICs, instead of being treated as employees.
Other states with ABC laws governing ICs typically have a “B” prong that affords the business the opportunity to satisfy that middle prong by showing one of two alternatives: that the services performed are either outside the usual course of the business for which the service is performed or are performed outside of all the places of business of the enterprise for which the service is performed.
As noted above, the other two prongs of the Massachusetts Independent Contractor Act were not addressed by the federal court in Massachusetts. Prong “A” requires the business to establish that the worker is free from control and direction in connection with the performance of the service, both under his contract and in fact. Prong “C” requires the individual be customarily engaged in an independently established trade, occupation, profession or business. FedEx Ground may have been able to establish those two prongs, but its predictable failure to satisfy Massachusetts’ prong “B” has exposed it to misclassification liability under that law.
Liability under the Massachusetts Independent Contractor Act is also one of the most brutal in the nation. Employees may bring claims directly under that law and any employees found to be misclassified are entitled to an award of “treble [triple] damages” for any lost wages and other benefits, and shall also be entitled to payment of their reasonable attorneys’ fees.
This case highlights the need for nationwide businesses to pay greater attention to state IC laws and take steps to minimize or avoid IC misclassification liability arising from state IC laws. Most commentators seem to focus only on the “economic realities” test under the federal wage and hour law or the IRS’s common law test (referred to sometimes as the “20-factor” test, although the IRS has now abandoned that test). Differences between varying state’s IC laws require a sophisticated multi-factor analysis and an intimate familiarity with virtually all 50 states’ IC laws. Use of IC Diagnostics™, including the 48 Factors-Plus™ analysis and the IC Compliance Scale™, are useful in achieving broad state-by-state compliance. Those diagnostic tools are described in a White Paper entitled “Independent Contractor Misclassification Update 2012 – How Companies Can Minimize the Risks.”
Workers who are bona fide ICs should typically satisfy the “A” and “C” prongs, thereby focusing attention on the malleable “B” prong for achieving IC status in a state that uses an ABC test. Many companies, though, unwittingly believe they can satisfy Prong “A” only to be found by a state regulatory agency or court to have exercised, or retained the right to exercise, direction and control over the performance of the workers’ services. Businesses that are savvy and wish to eliminate or minimize their exposure to misclassification liability have used a form of IC Diagnostics™ not only to evaluate their state of compliance but to re-structure, re-document, and re-implement their IC relationships in a manner that enhances their level of IC compliance.