Last week FedEx announced that it had reached a joint settlement of independent contractor class action lawsuits across 20 states. The $240 million settlement was with its Ground Division drivers, and is still pending court approval. This settlement follows a $226 million dollar settlement announced last year, in the California class action against it. Both settlements resolve claims that it misclassified its Ground and Home Delivery drivers as independent contractors, with the drivers alleging they were employees under applicable laws.
So with this combined $466 million that FedEx has paid in settlements of worker misclassification lawsuits, what’s the lesson for companies that use independent contractors? Should companies stop engaging independent contractors entirely?
The short answer is an emphatic “no”.
If you improperly vet, document, structure, and manage your working relationship with ICs you are exposing the organization to risk of fines, penalties, lawsuits, and reclassification. These negative outcomes could easily be avoided by implementing an IC compliance and engagement program.
Classifying workers as independent contractors is a perfectly legal and acceptable form of worker classification, so long as you do it correctly. An Independent Contractor Compliance and Engagement expert, like TalentWave, can build a comprehensive IC engagement program which enables your organization to gain business flexibility in uncertain times, and attract and retain talent (including independent contractors), all while mitigating the risks and streamlining the process.
Background on the FedEx Case
The legal trouble for FedEx first began in 2005, when FedEx drivers filed the first of many misclassification lawsuits against the company. The Ninth Circuit Court of Appeals in San Francisco handed down a blockbuster decision on August 27, 2014, concluding that FedEx had misclassified its Home Delivery and Ground Division drivers as independent contractors. That decision was quickly followed by a similar decision from the Supreme Court of Kansas, and the Kansas decision was then adopted in July 2015 by the Seventh Circuit Court of Appeals in Chicago. All three of those decisions reached the same conclusion: FedEx had in fact established an employment relationship with its delivery drivers, despite classifying and treating the workers as independent contractors.
The courts largely based their decisions on the FedEx independent contractor agreement, which FedEx had drafted itself and used across all its Ground Division drivers. The Kansas Supreme Court wrote a scathing critique of the contract, stating that FedEx’s independent contractor agreement was 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.’”
Following those three decisions, FedEx changed legal course and decided to stop fighting and pay up, resulting in these settlements totaling $466 million. The lawsuits outside of California were combined into a single case in Indiana, and involved 12,000 drivers from 20 states.
What is the Lesson for Businesses That Engage Independent Contractors?
These monumental FedEx Ground settlements offer some stark reminders to businesses that use independent contractors. First and foremost, it demonstrates the legal principle that contract law does not supersede employment law. Just because the contracts stated an IC relationship, and both FedEx and the drivers signed it, did not make it so. The best protection for companies using independent contractors is to structure, document, and manage the independent contractor relationship in a manner that is consistent with the laws in the states in which the business operates.
While the laws surrounding independent contractor classification vary significantly across states, most have a common element: direction and control. Specifically, the less direction and control over the workers in question, the better protection the organization has against a misclassified independent contractor.
There is good news for businesses that want to engage independent contractors and mitigate the risks of doing it incorrectly. TalentWave’s IC Compliance and Engagement solutions offer enterprise clients a turn-key solution that dramatically reduces the risk of a misclassified worker, while increasing efficiency and flexibility, and driving down costs.