Package delivery's 'seismic' situation

By Robert W. Wood

FedEx has settled a long-running worker status dispute with over 2,000 FedEx Ground
drivers in California. Once it is approved by the 9th U.S. Circuit Court of Appeals,
the settlement of this class action will create a $228 million fund to resolve the
claims of FedEx Ground and FedEx Home Delivery pickup and delivery drivers. Some claims
date back to 2000 and continue through 2007.

The settlement comes in the wake of the 9th Circuit ruling in 2014 that FedEx misclassified
drivers as independent contractors when they were really employees. See Alexander v. FedEx Ground Package System Inc., 2014 DJDAR 11877 (Aug. 27, 2014). A key component of how FedEx does business was
upended by the 9th Circuit when it ruled that 2,300 FedEx Ground drivers were misclassified.
For years, FedEx called them - and paid them - as independent contractors.

Employees trigger a litany of federal and state tax withholding, fringe benefit, anti-discrimination,
health care, pension, worker's compensation and unemployment insurance obligations.
You avoid these entanglements by hiring independent contractors, but only if the arrangement
is legitimate and passes legal muster. Thus, the non-employee status is subject to
review.

Plainly, labels aren't enough. A variety of federal and state agencies can attack
mislabeled workers. The issue can also arise in private litigation, including in class
actions brought by the workers themselves. Disputes are common, and independent contractor
vs. employee cases have factual and legal nuances galore. Was the FedEx case about
a little overtime?

Hardly. FedEx avoided health care, workers compensation, paid sick leave and vacation,
retirement and more. FedEx made drivers pay for their uniquely FedEx branded trucks,
uniforms and scanners. Plus, fuel, insurance, tires, oil changes, maintenance and
even workers compensation coverage.

Add in missed meal and rest period pay, overtime compensation and penalties. Some
"independent contractors" even had to pay wages of employees FedEx Ground required
them to hire to cover for them if they were sick or needed a vacation, to help out
during the Christmas rush. The 9th Circuit said "We hold that plaintiffs are employees
as a matter of law under California's right-to-control test."

There will be continuing controversy about this case not only at FedEx but across
the package delivery and transportation industries. Many trucking companies use a
similar model, calling - and paying - their drivers as independent contractors. How
about taxis, Uber, Lyft and others? (Indeed, this week the California labor commissioner
said an Uber driver in San Francisco should be classified as an employee, though for
now the ruling is limited to that driver.) Some suits are challenging the line between
independent contractor and employee in those contexts, too.

In that emerging setting, some of the liabilities are to injured third parties. After
all, respondeat superior liability clearly applies to employers for the acts of their
employees. Outside of the employment relationship, the lines of liability are less
clear. And the liabilities to workers themselves for fringe benefits, overtime and
expenses can be even bigger.

FedEx Ground defended its independent contractor model fervently. Then, the 9th Circuit
ruling said that FedEx controlled the drivers and that they were "independent contractors"
in name only. It was a major blow to FedEx, which has fought about its independent
contractor model of operation for many years. And while other cases have chipped away
at pieces of the FedEx empire, this case was a decisive one.

The court's finding that these 2,300 drivers are covered by California's workplace
protection statutes could impact dozens of other FedEx cases across the country. The
financial benefit of the contract arrangement was big. For years, FedEx has been able
to shift on to its drivers the costs of such things as FedEx branded trucks, FedEx
branded uniforms, and FedEx scanners, fuel, maintenance, insurance and more.

But a key question was just how much it would cost FedEx to get out of the mess. The
9th Circuit left open the question of how much the drivers should receive. This settlement
avoids a retrial, but the cost to FedEx is big. Attorney Beth Ross of Leonard Carder
LLP representing the class said, "The $228 million settlement, one of the largest
employment law settlements in recent memory, sends a powerful message to employers
in California and elsewhere that the cost of Independent Contractor misclassification
can be financially punishing, if not catastrophic, to a business."

Private lawsuits can sometimes do more than government enforcement efforts. Indeed,
the amount of this one settlement is said to be comparable to what the U.S. Department
of Labor has collected in back wages annually through nationwide enforcement of wage
and hour law during at least the last seven years (2014: $250 million; 2013: $240
million; 2012: $275 million; 2011: $225 million; 2010 and 2009: $175 million). See
www.dol.gov/whd/statistics/.

The court's finding in Alexander that drivers in California are covered by California's workplace protection statutes
impacts one of FedEx Ground's largest workforces. It also could influence the outcome
in over two dozen cases nationwide in which FedEx Ground drivers are challenging the
legality of their independent contractor classification. In addition, many trucking
companies have been operating under a similar model in which they classify their drivers
as independent contractors.

The worker status issue can come up almost anywhere. The tax law, labor and employment
law, discrimination, pension and workers compensation laws are all clear that a contract
does not bind this issue. It's that important.

From drivers to salespeople, custodians to lawyers, couriers to facialists, mercenaries
to programmers, and newspaper carriers to scientists, there's no one-size-fits-all
solution. The Internal Revenue Service cares, and so do state tax and labor agencies,
workers compensation and unemployment insurance authorities and more. All of them
scrutinize the status of workers.

It even matters under Obamacare. Independent contractors are not covered, assuming
their status is legitimate. A central precept of the law is that one can tell the
difference between employees and independent contractors. The IRS is active in reclassification
efforts and more scrutiny is coming. The FedEx case is a good reminder that no matter
how you label someone, the substance of the work relationship will control. In that
sense, as attorney Beth Ross noted, the impact of the FedEx case is "seismic."

  <p/> 
  <b>Robert W. Wood </b><i>is a tax lawyer with a nationwide practice (www.WoodLLP.com). The author of more than 30 books including "Legal Guide to Independent Contractor
     Status" (www.TaxInstitute.com), he can be reached at <a style="color:#123f72;" href="Wood@WoodLLP.com">Wood@WoodLLP.com</a>. This discussion is not intended as legal advice, and cannot be relied upon for any
     purpose without the services of a qualified professional.</i> 
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