Independent Contractor Classification of Workers Costs FedEx $228M

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FedEx Corp. agreed to settle a suit regarding the employment classification of FedEx ground workers, a decision that will cost the American global courier both millions of dollars. The settlement of $228 million is subject to approval in the US District Court for the Northern District of California, where the matter is currently pending.

Millions for Missclassification

The settlement comes in the wake of a 2014 Ninth Circuit ruling that FedEx, which is headquarted in Memphis, Tennessee, misclassified drivers as independent contractors. FedEx has at all times maintained it did not misclassify the ground workers, and that independent contractor status has long been a key component of the FedEx business model. Some 2,300 ground FedEx Ground drivers filed a class action over the pay of independent contractor status.

Had FedEx classified these ground workers as employees, it would have triggered numerous of federal and state tax withholding, fringe benefit, federal and state anti-discrimination, health care, pension, worker’s compensation and unemployment insurance obligations. Simply labeling workers “independent contractor” is not enough. The status determination comes down to the amount of control an employer exerts over the worker.

In a major blow to FedEx, the Ninth Circuit Court of Appeals said that FedEx controlled its employees, and that the label of independent contractor was just that: a label only. FedEx has defended its so-called independent contractor business model for years, due to the enormous financial benefit of such a contract arrangement. For years, FedEx has been able to shift the following costs to its drivers:

Drivers also did not receive pay for rest periods, overtime compensation, missed meals, or other similar benefits workers classified as employees typically receive.

Right to Control

When the Ninth Circuit left open the question of how much FedEx should pay, the settlement decision enabled both parties the avoidance of another trial focused on damages. Attorney Beth Ross of Leonard Carder LLP represents the class, and 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.”

FedEx's operating agreement governed its relationship with the drivers. The Background Statement of the Operating Agreement provided:

"This Agreement will set forth the mutual business objectives of the two parties . . . but the manner and means of reaching these results are within the discretion of the driver, and no officer or employee of FedEx shall have the authority to impose any term or condition upon the driver . . . contrary to this understanding."

Another provision of the OA titled "Discretion of Contractor to Determine Method and Means of Meeting Business Objectives" discussed that no officer or employee of FedEx had any discretion to determine the manner in which the drivers completed work. However, after an extensive discussion of:

  • FedEx Job Requirements.
  • FedEx Equipment and Appearance Requirements, and
  • California's Right-to-Control Test

The Ninth Circuit determined, "The existence of the right to control and supervision establishes the existence of an agency relationship . . . It is not essential that the right to control be exercised or that there be actual supervision of the work of the agent." Thus, even though FedEx left some minor decisions up to its ground workers, it was maintaining all necessary control of the manner in which delivery drivers performed their work.

The $228 million settlement, one of the largest this year in employment law, is a major call to employers to check the level of control being exerted over employees. Misclassifications, beware.

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