Earthquake in the Independent Contractor Misclassification Field: Changed Landscape Following Serious Legal Blow to FedEx Ground by Federal Appellate Court

by Pepper Hamilton LLP
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FedEx Ground has been at the epicenter of the crackdown on IC misclassification by government regulators, state legislators, and plaintiffs’ class action lawyers since 2007, when a California appellate court found single-route FedEx Ground delivery drivers to have been misclassified as independent contractors (ICs) instead of employees.[1] But in 2009[2] and 2010[3], FedEx Ground won significant court decisions involving the IC status of its Ground Division drivers, including a December 2010 decision by a federal district court judge presiding over dozens of IC misclassification cases in a “multi-district litigation.” That decision, issued over 3-1/2 years ago, had granted summary judgment in favor of FedEx Ground in 42 IC misclassification lawsuits brought by drivers in 27 states, including California and Oregon.

On August 27, 2014, however, the IC misclassification landscape for FedEx Ground dramatically reverted to its 2007 state.  Only two days ago, two decisions were issued by the United States Court of Appeals for the Ninth Circuit. That highly regarded federal appellate court reversed the December 2010 decision by the federal district court judge in the multi-district litigation where 42 cases were decided in FedEx Ground’s favor.

The impact of these new Ninth Circuit decisions is likely to reinvigorate the crackdown against companies using an IC business model that is not structured, documented, or implemented in a manner that demonstrates compliance with state or federal IC laws. As noted below, those companies that have enhanced their IC compliance consistent with the thrust of the Ninth Circuit decisions and applicable state and federal laws will have a far lesser risk for IC misclassification liability than those companies that use ICs but knowingly or unwittingly fail to do so in a compliant manner.

The Game-Changing Decisions by the Ninth Circuit

The two Ninth Circuit decisions covered lawsuits filed by FedEx Ground drivers in California and Oregon under the laws of those states.  Both of those cases had been decided in FedEx Ground’s favor by the federal court judge in the multi-district litigation.

The California case, Alexander v. FedEx Ground Package System, Inc., No. 12-17458 and 12-17509, is a class action involving approximately 2,300 individuals who provided delivery services to FedEx Ground on a full-time basis in California between 2000 and 2007. Those drivers sought unpaid wages and reimbursement of unpaid driving expenses.

The Oregon case is Slayman v. FedEx Ground Package System, Inc., No. 12-35525 and 12-35559.  It is a smaller class action involving approximately 360 individuals who were full-time delivery drivers for FedEx Ground in Oregon from 1999-2009.  Those drivers in Oregon sought similar types of state law damages as did the drivers in California.

The Court first examined the FedEx Ground contract (called the Operating Agreement) that the company entered into with each of the drivers, as well as its written policies and procedures.  It concluded that by virtue of the FedEx standard agreement and its policies and procedures, the drivers were employees and not independent contractors under both California and Oregon law.  Specifically, in the California case, the Court found that:

  • FedEx has the right to and actually controls the appearance of its drivers, including their clothing, from their hats down to their shoes and socks, as well as their hair and hygiene. Managers may prevent the drivers from working if they are not properly groomed and dressed.
  • FedEx can and does control its drivers’ vehicles, including the color of the paint that their vehicles must be and the requirement that they display the distinctive FedEx logo.  FedEx also requires that the vehicles be “clean and presentable [and] free of body damage and extraneous markings” – requirements that “go well beyond those imposed by federal regulations.” In addition, FedEx dictates the vehicles’ dimensions, including the dimensions of their “package shelves” and the materials from which the shelves are made. Managers may prevent drivers from working if their vehicles do not meet specifications.
  • FedEx can and does control the times its drivers can work, even though the Operating Agreement specifies that FedEx has no right to set specific working hours; “it is clear from the [Operating Agreement] that FedEx has a great deal of control over drivers’ hours, structuring their workloads so that they have to work 9.5 to 11 hours every working day.  Further, FedEx managers have the right to adjust drivers’ workloads to ensure that they never have more or less work than can be done in 9.5 to 11 hours. In addition, drivers are not supposed to leave their terminals in the morning until all of their packages are available, and they must return to the terminals no later than a specified time. If drivers want their vehicles loaded, they must leave them at the terminal overnight. In the Court’s view, “[t]he combined effect of these requirements is substantially to define and constrain the hours that FedEx’s drivers can work.”
  • FedEx can and does control aspects of how and when drivers deliver their packages. It assigns each driver a specific service area, which it “may, in its sole discretion, reconfigure.” It tells drivers what packages they must deliver and when by negotiating the delivery window for packages directly with its customers.”
  • FedEx requires drivers toconduct all business activities with . . . proper decorum at all times” and comply with “standards of service,” including requirements to “[f]oster the professional image and good reputation of FedEx”.

In response to FedEx’s argument that it lacks control over some parts of its drivers’ jobs, the Court concluded that such lack of control over certain parts of the drivers’ roles is not sufficient to “counteract the extensive control it does exercise.”

While FedEx pointed out that the FedEx Operating Agreement permits a driver to delegate to other drivers, take on additional routes, or sell his route to a third party, the Court noted that FedEx may refuse to let a driver take on additional routes or sell his route to a third party, and FedEx’s senior managers have the authority to reject proposed replacement drivers based on failure to meet FedEx standards such as grooming requirements.

Are these two decisions by the Ninth Circuit final? Yes and no.  The decisions were made by a panel of three federal appellate judges.  FedEx has the right to seek review by all of the judges in the Ninth Circuit, but that is discretionary by the Court.  FedEx may also seek review by the U.S. Supreme Court, although it is unlikely that that Court will agree to hear the case inasmuch as the Supreme Court accepts very few employment cases each year to review. 

The Significance of the Ninth Circuit Decisions for Other Companies Using ICs

FedEx Ground lost these two decisions because of a misplaced reliance on an IC agreement and its policies and procedures that were good, but by no means good enough.  A quick review of the language in the Operating Agreement and the policies and procedures would give one the impression that FedEx knew what to write and how to write it, but close scrutiny by a court found one fallacy after another – sufficient in degree to lead the court to rule against FedEx. By their very nature, therefore, IC agreements and policies and procedures that are not drafted in a state-of-the-art manner, free from language that can be used against the company, can cause businesses that use ICs to face class action litigation or regulatory audits or enforcement proceedings they may be able to otherwise avoid.

Instead of waging battle for years against its IC-drivers as well as 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. The first step is restructuring the relationship with the ICs in a manner that still serves the corporate objectives.  The second step is redrafting IC agreements in a state-of-the-art manner.  The third step is re-implementing the relationship in a manner consistent with the IC structure and agreement – and not at cross-purposes.  This is one of the fallacies noted by the Ninth Circuit when it relied not only on the inartfully drafted IC agreement but also policies and procedures that apply to all ICs and undermine the independent nature of the independent contractor relationship.

Some businesses have chosen to use IC Diagnostics™ to enhance their level of IC compliance and determine whether a group of workers not being treated as employees would pass the applicable tests for IC status under governing state and federal law.  That proprietary process also offers a number of practical, alternative solutions to enhance compliance with those laws.

[1] Estrada v. FedEx Ground Package System, Inc., 64 Cal. Rptr. 3d 327 (Ct. App. 2007).

[2] FedEx Home Delivery v. National Labor Relations Board, 563 F.3d 492 (D.C. Cir. 2009).

[3] FedEx Ground Package System, Inc. Employment Practices Litigation, No. 3:05-MD-527-RM (MDL 1700) (Dec. 13, 2010).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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