Class actions were brought against FedEx in both California and Oregon by FedEx drivers contending they had been misclassified as independent contractors. (Alexander, et al. v. FedEx Ground Package System, Inc. and Slayman, et al. v. FedEx Ground Package System, Inc., respectively.) The California class consisted of approximately 2,300 drivers, while the Oregon class consisted of approximately 363 drivers.
FedEx’s Operating Agreement with its drivers classified them as independent contractors. Despite this classification, the Operating Agreement, as well as FedEx’s policies, imposed rules on the drivers regarding their routes, the mode of pick-up and delivery of packages, safety, and appearance standards for both the driver and the vehicle.
The California action originally was commenced in state court but was removed to the federal Northern District court in San Francisco. The California plaintiff class alleged claims for employment expenses, unpaid wages, and benefits purportedly due them as employees based on their misclassification as independent contractors. The Oregon class action, which was commenced in federal court, alleged similar claims.
During the pendency of these two actions, similar cases were filed against FedEx in approximately 40 states around the country. These cases were consolidated in a multidistrict litigation proceeding venued in the Northern District of Indiana. Plaintiffs in the multidistrict litigation moved for partial summary judgment asserting they were employees as a matter of law. FedEx filed cross-motions for summary judgment arguing the drivers were classified properly as independent contractors. The court overseeing the multidistrict litigation denied nearly all of the plaintiffs’ motions and granted nearly all of FedEx’s motions, holding that plaintiffs were independent contractors as a matter of law in each state where the employment status is governed by common-law agency principles (such as California and Oregon). Following its ruling on the summary judgment motions, the multidistrict court remanded these cases back to the federal district courts from which they had originated to handle ancillary matters and for entry of final judgment. Upon entry of final judgment, the plaintiff classes appealed in both cases.
In both cases, the parties agreed that California and Oregon state law respectively controlled the question of whether the FedEx drivers were employees or independent contractors. With respect to the application of California law, the Ninth Circuit found that “[t]he principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired,” citing, S.G. Borello & Sons, Inc. v. Dept. of Ind. Relations (1989) 48 Cal.3d 341, 346. The court further found that under California law, “[t]he label placed by the parties on their relationship [in this case “independent contractor” by virtue of the FedEx Operating Agreement] is not dispositive, and subterfuges are not countenanced.” (Oregon state law utilized a similar “right-to-control” test for determining employment versus contractor status.) Because the Operating Agreement, as well as FedEx’s policies and procedures, unambiguously allowed FedEx to exercise a great deal of control over the manner in which its drivers did their job, the court ruled they properly were characterized under California law as employees, not independent contractors. The court came to the same conclusion in the Oregon case applying Oregon state law.
The Ninth Circuit’s decision in these cases should serve as a cautionary tale for both private and public sector employers. (California courts have found that the common law “right-to-control” test is as equally applicable in the public sector for distinguishing employees from independent contractors as it is in the private sector. See Metropolitan Water District v. Superior Court (Cargill) (2004) 32 Cal.4th 491.) The consequences for misclassifying employees as independent contractors can be staggering and can include such items as unpaid wages and expenses, the value of benefits not provided based on the misclassification, payroll tax penalties, and civil fines and penalties of up to $25,000 per violation pursuant to Labor Code section 226.8. Before classifying an individual performing services as an independent contractor, both private and public sector employers should carefully consider the facts and circumstances bearing on that classification to ensure proper compliance with the law.