FedEx Hit with Avalanche of Independent Contractor Misclassification Rulings

In the past week, the Supreme Court of Kansas and the National Labor Relations Board have issued lengthy, comprehensive opinions finding that FedEx misclassified its Home Delivery and Ground Division drivers as independent contractors as a matter of law. Those two decisions, which dealt with drivers in Kansas and Connecticut, come only a month after the U.S. Court of Appeals for the Ninth Circuit reached the same conclusion under California and Oregon law. All three decisions essentially conclude what the Kansas court found: “FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.”

The Supreme Court of Kansas Decision

All three decisions are significant setbacks for FedEx. But the decision of the Supreme Court of Kansas may well be the most damaging. It was issued in response to a request by the U.S. Court of Appeals for the Seventh Circuit, which is considering appeals in dozens of state law class actions that had been consolidated and heard by a single district court judge, who had ruled in favor of FedEx in 42 lawsuits covering drivers in 27 states. The Seventh Circuit chose to first consider the class action arising under the Kansas wage payment law, but turned to the Kansas Supreme Court for guidance when it found that the law of Kansas was not crystal clear. This decision issued by the state court last Friday, October 3, 2014, may well be relied upon by the Seventh Circuit in deciding some or all of the other FedEx cases on appeal.

The Kansas Supreme Court noted in its opinion in Craig v. FedEx Ground Package System, that the test under Kansas law as to whether an individual is an employee or independent contractor is the so-called common law “right to control test,” which it defined as “whether the employer has the right of control and supervision over the work of the alleged employee, and the right to direct the manner in which the work is to be performed, as well as the result which is to be accomplished.” The Court noted that this test differs somewhat from the “economic realities” test under the federal wage and hour law. Under the federal test, the determination of an individual’s status focuses more on whether, as a matter of economic reality, a worker is dependent on a given employer. Because the “right to control” test is generally regarded as more favorable to a finding of independent contractor status, the Court’s decision that FedEx misclassified its drivers leads to the conclusion that the company is even less likely to prevail in those states that use the “economic realities” test.

In reaching its decision, the Kansas Supreme Court set forth 20 factors that Kansas considers when making a determination of independent contractor status. (This is not the same 20-factor test as used by the IRS, but is similar.) The Court then examined all 20 factors in depth. Among the factors that the Court concluded were those favoring employee status were the following:

  • FedEx issued instructions and required compliance therewith.
  • The services of the drivers were an integral part of FedEx’s business.
  • There was a continuing relationship between the drivers and FedEx.
  • FedEx requires written reports about deliveries.
  • The drivers’ ability to earn a profit is constrained by FedEx’s controls.
  • As a matter of reality and practicality, drivers cannot work for more than one company at a time.
  • The drivers’ services are not regularly made available to the public.
  • The drivers may unilaterally terminate their relationship with FedEx at any time without financial repercussion.

In its decision, the Kansas Supreme Court noted that this is a “close case” and, indeed, it found that at least five or six of the 20 factors favored independent contractor status (and the remaining factors were neutral). But, the significance of those factors, according to the Court, were undermined by “FedEx’s control and micromanaging” of the drivers.

The Kansas Court concluded its decision with a body blow to FedEx. The Seventh Circuit not only asked the Supreme Court of Kansas if single-route drivers were employees under the Kansas wage payment law, but also whether drivers who “acquire more than one service area from FedEx” are also employees. This question is potentially critical for FedEx because, in or about 2010, it initiated a new business model intended to comply with independent contractor laws. That business model, described in my August 12, 2010 blog post, gave 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, (b) become an employee driver of an approved FedEx Ground ISP (that is, become a driver for 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 independent contractor agreement, which would not be renewed. The Kansas Supreme Court concluded that “the employer/employee relationship between FedEx and a full-time delivery driver . . . is not terminated or altered when the driver acquires an additional route for which he or she is not the driver.”

The NLRB Decision

The decision by the NLRB in FedEx Home Delivery, an Operating Division of FedEx Ground Package Systems was issued September 30, 2014. It addresses the independent contractor status of FedEx Home Delivery drivers in Connecticut, who are being petitioned to be represented by a Teamsters Union.

The key issue in the case involves the entrepreneurial opportunities for drivers to earn a profit by having the right to operate two or more FedEx routes. The majority opinion of the Board held that entrepreneurial opportunity is one of many factors to be considered in determining independent contractor status. In contrast, a dissenting Board member viewed this factor as one warranting the same special emphasis that was given to this factor by the U.S. Court of Appeals for the District of Columbia in its 2009 decision dealing with FedEx Home Delivery drivers in Massachusetts. In that case, the D.C. Circuit concluded that the Massachusetts drivers were independent contractors and, therefore, not capable of being unionized by a union.

The majority opinion of the Board expressly noted that it “decline[s] to adopt the District of Columbia Circuit’s recent holding, insofar as it treats entrepreneurial opportunity . . . as an ‘animating principle’ of the inquiry.” Further, the Board majority states, it should give weight to “actual, not merely theoretical, entrepreneurial opportunity” and should evaluate any constraints placed on drivers who wish to pursue this opportunity. What exactly does this all mean?

In reaching its decision, the Board majority said it would not be taking into account the fact that six drivers had operated multiple routes that offered them the opportunity to earn a profit by hiring other drivers to operate one or more routes besides the one that they handled themselves. Why? Because the Teamsters local who sought to represent the drivers excluded all multiple route drivers from the unit of drivers it sought to represent. As the Board majority states, “Evidence that goes only to employees who are outside of the petitioned-for unit is unlikely to have probative effect.” In effect, the Board majority has, according to the dissenting Board member, “determined that little weight be assigned to the entrepreneurial opportunity factor.”

As former NLRB member Ronald Meisburg has suggested, this decision by the NLRB could lead to another show-down between the NLRB and the one federal court of appeals with nationwide jurisdiction to review NLRB decisions.

The Ninth Circuit’s Decision

In my August 29, 2014 blog post, I discussed the Ninth Circuit’s decisions issued two days earlier, which held that FedEx’s standard independent contractor agreement and its nationwide policies and procedures established that single-route FedEx drivers in California and Oregon were employees and not independent contractors. We noted that despite the fact that FedEx lacks control over some parts of its drivers’ jobs, the Court concluded that such lack of control is not sufficient to “counteract the extensive control [FedEx] does exercise.”

Analysis and Takeaways

Both the Kansas and Ninth Circuit decisions relied on the independent contractor agreement, which FedEx drafted and used with all its Ground Division drivers, as the principal evidence finding misclassification. The Kansas Supreme Court was not particularly soothing in its critique of the contract, noting that it agreed with a California appellate court that FedEx’s independent contractor agreement is a “‘brilliantly drafted contract creating the constraints of an employment relationship with [the drivers] in the guise of an independent contractor model—because FedEx not only has the right to control, but has close to absolute actual control over [the drivers] based upon interpretation and obfuscation.'”

These decisions remind businesses that use independent contractors that the form of their agreements is little protection if either (a) the document gives a right to independent contractors with one hand, and then takes it away with the other; or (b) the contract does not accurately represent the parties’ practice. These decisions confirm that the best protection for businesses using independent contractors is to structure, document, and implement the independent contractor relationship in a manner that is consistent with the laws in the states in which the business operates. The law in California, Oregon, Kansas, and most other states all vary considerably, yet have a common thread: the less direction and control over the individuals in question, the better.

That is one of the hallmarks of IC Diagnostics™, a proprietary process that examines whether a group of workers would pass the applicable tests for independent contractor (IC) status under governing state and federal laws, and then offers a number of practical, alternative solutions to enhance compliance with those laws. For existing businesses, those alternatives include restructuring, reclassification, or redistribution, as more fully described in my White Paper.

For those businesses that can, consistent with applicable laws, retain their independent contractor relationships without undue exposure to misclassification liability, IC Diagnostics™ affords them a way to restructure, re-document, and re-implement those relationships in a manner that enhances IC compliance and minimizes misclassification exposure. Not every business can restructure in a manner that complies with applicable laws, but most can – and should, not only to avoid the types of misclassification liability that FedEx Ground is now facing after these recent court decisions, but also to avoid the prospects of unionization if they wish to remain union-free.

Written by Richard Reibstein.

This entry was posted in IC Compliance. Bookmark the permalink.