In a press release on Thursday, June 16, 2016, global delivery giant FedEx announced that it would pay delivery drivers working in 20 different states a total of $240 million over employee misclassification allegations.
FedEx Wraps Up Driver Wage & Hour Litigation
Around 12,000 FedEx drivers filed suit against the company, claiming they had been incorrectly classified as independent contractors. In their lawsuits, drivers argued that, since the company required them to use branded vehicles and wear FedEx uniforms, they should be considered employees under state and federal law, Reuters reports.
Before 2011, the company contracted directly with drivers, classifying them as independent contractors and thus avoiding payroll taxes and healthcare benefits, along with minimum wage and overtime pay requirements. Per an analysis by the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), FedEx may have cut labor costs up to 40% by classifying drivers as independent contractors, rather than employees. The arrangement allowed the company (and currently allows other companies) to avoid paying into Social Security and unemployment insurance, while excluding drivers from company healthcare and pension plans.
Today, FedEx contracts with various companies that employ their own drivers, rather than hiring individual drivers directly, according to Reuters.
For FedEx, this most recent settlement is a matter of cleaning up unfinished business. Between 2014 and 2015, a series of influential court decisions essentially put an end to the company’s former payroll practices:
- In August 2014, a federal appeals court with jurisdiction over Alaska, Arizona, California, Hawai’i, Idaho, Montana, Nevada, Oregon, Washington, Guam and the Northern Mariana Islands ruled that a class of 2,300 FedEx Ground and Home Delivery drivers had been misclassified as independent contractors. The court’s decision, which utilized a “right-to-control” test, overturned an earlier finding in favor of FedEx.
- In October 2014, the Supreme Court of Kansas came to a similar conclusion, ruling that the company’s drivers were employees.
- In July 2015, the Seventh Circuit Court of Appeals, based in Chicago, adopted the Kansas decision in its own case, finding that FedEx drivers were decidedly not independent contractors.
In each of these cases, federal judges came to an identical conclusion: “FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.” The overarching lesson? It’s not about what an employee is called in their contract. It’s about what they actually do, and how much control an employer exerts over their work.
Employees “In Independent Contractor’s Clothing”
The courts based their decisions on an “independent contractor agreement” drafted by FedEx itself, which the company used to contract with all of its Ground Division drivers. In its influential ruling, the Kansas Supreme Court characterized this document as:
a “brilliantly drafted contract creating the constraints of an employment relationship with [drivers] in the guise of an independent contractor model – because FedEx not only has the right to control, but has close to absolute control over [drivers] based upon interpretation and obfuscation.”
After the company’s courtroom losses began piling up, FedEx shifted gears, choosing to settle lawsuits, rather than fight them. In June 2015, the company chose to settle a class action joined by more than 2,000 Ground and Home Delivery drivers for $228 million.
No Admission Of Wrongdoing
FedEx has now decided to sweep away the remaining claims against it, reaching the $240 million settlement just announced. While drivers had initially filed their class actions in 20 states, the cases were transferred to the US District Court for the Northern District of Indiana for coordinated litigation in 2005.
FedEx’s settlement, which is slated to pay some drivers tens of thousands of dollars in compensation, isn’t an admission of guilt. Settlements of this nature, especially those agreed to by major corporations, rarely include any acceptance of responsibility or wrongdoing.
The company’s week, however, was not without a balancing victory. On Friday, June 17, a federal prosecutor decided to axe a government lawsuit alleging FedEx had conspired with online pharmaceutical retailers to deliver unprescribed drugs to consumers. In 2013, UPS settled a similar case, according to the Wall Street Journal.
So What Is An Independent Contractor Really?
To paint with a broad brush, independent contractors are allowed the latitude to control their own work, while employees have to play by a company’s rules. Since the Supreme Court has never outlined a specific test to distinguish between employees and independent contractors, the Department of Labor has settled on six factors to use as a guide:
- how integral a worker’s performance is to the employer’s business
- how much a worker stands to win or lose, profit or loss, in performing their duties
- how much a worker has invested in facilities and equipment
- how much initiative a worker must take to compete against other workers in the open market
- how permanent the employment relationship is
- how much control an employer exerts over a worker
In most of these considerations, common sense can be your guide. Are you truly independent? Do you market your services to more than one employee, manage your own accounts and hone your skills to win new clients? If so, you may be an independent contractor. Employees, on the other hand, sell their labor to one “customer,” their employer, but don’t go out to drum up more work.
How Many Misclassified Employees Are There?
There’s no satisfactory way to answer that question. Employers, of course, aren’t particularly forthcoming with information of this sort, since misclassifying employees as independent contractors is illegal. Government regulators, for that matter, don’t have the resources to comprehensively study the extent of misclassification.
That being said, we do have several solid estimates from major research organizations, along with the Department of Labor (DOL). Here are the results.
- In 2000, the DOL commissioned a study – known as the “Planmatics” study – which looked into employers that had been audited by state labor regulators. After extrapolating from their analysis, researchers estimated that between 10% and 30% of employers misclassified workers as independent contractors.
One thing to note? Workers who complain of being misclassified are rarely making it up, or confused about the relevant regulations. Planmatics found that 95% of workers who filed complaints were eventually reclassified as true employees after state review.
- In 2009, a Government Accountability Office report estimated that 15% of employers had misclassified around 3.4 million workers in 1984.
Most recently, the National Employment Law Project published a list of 18 state audits, emphasizing the proportion of audited employers who had been found to have misclassified workers:
- Washington – 62%
- Wisconsin – 44%
- Connecticut – 42%
- New Jersey – 38% – 42%
- Colorado – 33.9%
- Michigan – 30%
- California – 29%
- Virginia – 27% – 30%
- Maryland – 20% – 30%
- Illinois – 19.5%
- Tennessee – 17%
- Indiana – 16.8%
- Minnesota – 14% – 15%
- Maine – 12% – 14%
- Nevada – 10%
- New York – 10% – 15%
- Vermont – 10% – 14%
- Pennsylvania – 9%
Obviously, the estimates range a great deal, from 1 out of every 1.6 workers in Washington to 1 out of every 11 workers in Pennsylvania. The point, though, should be clear. Misclassification is shockingly common and, in some states, a matter of course.
A Growing Problem
Most organizations with an eye on this issue agree that employee misclassification is becoming more, not less, common.
The Recession forced many employees toward more flexible work arrangements, but observers are certain that many companies have exploited this shift in working relationships for their own profit.
Between 2000 and 2007, the number of misclassified workers discovered by state auditors grew from around 106,000 to more than 150,000, according to the National Employment Law Project. Those numbers are certainly on the low-end, since states usually audit less than 2% of employers per year. But the trend can’t be ignored. Employee misclassification is increasing, stealing millions of dollars from workers, to say nothing of the practice’s effect on unemployment insurance, workers’ compensation and Social Security.