What’s In a Name for Employees Labeled as Independent Contractors?

By Robert S. Nelson, Esq.
Nelson Law Group

If you ask the same question of 10 lawyers you'll probably hear 11 different opinions. Nowhere is that phenomenon more apparent than when trying to parse the difference between employees and independent contractors. Witness the recent ruling by the Ninth Circuit Court of Appeals holding that FedEx drivers are employees and not contractors, as FedEx had long considered them. The decision contradicts numerous other cases in which FedEx's drivers were held to be contractors. It also "unravels FedEx's business model" by granting drivers rights they would have as employees, including overtime, meal and rest breaks and reimbursement of business expenses.

1. The case

Alexander v. FedEx Ground Package System, Inc. first began in 2005, when it was filed as a putative class action on behalf of the approximately 2,300 people who worked for FedEx in California as delivery drivers during the applicable statute of limitations period (dating back to 2000). The drivers claimed that FedEx unlawfully characterized them as independent contractors when the realities of their jobs in fact made them employees. The distinction was critical, especially in California. If the drivers were truly contractors, FedEx could pay and treat them however it wanted, subject to whatever they agreed to in private contracts. But if the drivers were employees, notwithstanding their agreements with FedEx, they would potentially be entitled to both weekly and daily overtime, which goes into effect whenever employees work more than eight hours in a single day. FedEx expected its drivers to work at least 9.5 to 11 hours each day, hence its overtime liability alone would be significant.

Employee drivers would also be entitled to take duty-free, half-hour meal breaks after no more than five consecutive hours worked, and 10-minute rest breaks for every four hour block of time worked (or major fraction thereof). If FedEx could not prove that it permitted its drivers to take those breaks, it would have to pay them an extra hour's pay for every day they did not receive their required breaks. Also, if the drivers were employees, FedEx would be responsible for all expenses they incurred in carrying out their job duties. FedEx typically made drivers provide their own vehicles and pay for the gas and upkeep.

The stakes were high. If FedEx was wrong in how it characterized its drivers, it could end up owing many millions in unpaid wages, expenses, and other fees and penalties.

2. The issues

FedEx had detailed written agreements with its drivers telling them, ad nauseam, that they were independent contractors. Drivers could also hire their own teams to work multiple routes, thereby earning more than if they were only single-route employees. Other courts found this ability to profit determinative in repeatedly holding that FedEx's drivers were independent contractors. According to the company, more than 100 federal and state court rulings have upheld its classification of drivers as independent contractors.

Around the same time that Alexander was filed, similar wage-and-hour class actions were filed against FedEx in approximately 40 other states. Those cases were then consolidated, with Alexander, into mass multi-district litigation in federal district court in Indiana. The Indiana court routinely ruled that FedEx's drivers were contractors and therefore not entitled to employee benefits. It did the same in Alexander, purporting to apply California's common-law agency principles for employee/contractor evaluations. Alexander was appealed to the Ninth Circuit after the Indiana court granted summary judgment to FedEx on grounds that its drivers were contractors, as a matter of law.

In California, employee/independent contractor determinations are supposed to be made according to the common law "right-to-control" test, which looks primarily at how much control a business has over how its workers perform their jobs. Other "secondary" factors can also be relevant, including whether: (a) the parties have the right to terminate their relationships at-will; (b) workers are engaged in distinct businesses from the employers; (c) what the industry-standard is for the particular occupation; (d) who supplies the tools and instrumentalities for the work; (e) how long the parties business relationships last (the longer, the more likely it is employment); (f) how the workers are paid; and (g) what relationship the parties initially believed they were establishing. No single factor is dispositive, although right to control work should be most important. Likewise, as the Ninth Circuit noted, "[t]he label placed by parties on their relationships is not dispositive, and subterfuges are not countenanced."

2. The facts

Looking past the drivers' agreements to the realities of their jobs, the Ninth Circuit found that FedEx exerted an extraordinary amount of control such that the drivers should be considered employees. For example, FedEx dictated when its drivers reported for work; how long they worked each day; how and when they could deliver packages; how their trucks should be organized, with detailed specifications for the number, length and set-up of shelves inside the trucks; and even how the drivers looked "from their hats down to their shoes and socks." The court found the dress code requirements particularly compelling, and at odds with FedEx's excuses that it simply requires its drivers to perform end-tasks without dictating exactly how the tasks are performed. "[N]o reasonable jury could find that the "results" sought by FedEx includes detailed specifications as to the delivery driver's fashion choices and grooming."

FedEx trumpeted the unique "entrepreneurial opportunities" its drivers had to make more money by working more routes, something employees theoretically could not do. This argument swayed the Indiana multi-district court, which held that the drivers' ability to make more profit from their work trumped FedEx's control over how the work was performed. In doing so, the Indiana court followed an appellate ruling from the D.C. Circuit saying that profit opportunities were paramount in the employee/contractor analysis. But the Ninth Circuit concluded that opportunity to increase workload is hardly even relevant to the employee/contractor determination under California's right-to-control test, let alone determinative. Also, FedEx's drivers could not take on additional routes unless the company approved. Thus they did not truly have the freedom of real contractors.

The court "split the baby" on the secondary factors, finding some that favored calling the drivers employees, and other that favored contractor status. For example, the fact that there were some limitations on FedEx's right to terminate driver agreements hinted at a contractor relationship. But nothing could overcome the "powerful evidence of FedEx's right to control the manner in which drivers perform their work." This further highlights the paramount importance of employer control in employee/contractor evaluations under California's right-to-control test.

The Ninth Circuit remanded the Alexander case back to district court for entry of summary judgment that the FedEx drivers were employees. FedEx has vowed to seek en banc review.

3. The lessons

Regardless what happens in the future, several lessons (and questions) can immediately be taken from the Ninth Circuit's Alexander ruling:

· Close control by itself can be dispositive. Although cases typically note that no single factor is controlling in the employee/contractor analysis, Alexander strongly suggests that employer control may be, when it is sufficiently clear. Employers that closely control their workers likely will not avoid them being considered employees, regardless how they are labeled. Said the concurrence, quoting Abraham Lincoln: "Calling a dog's tail a leg does not make it a leg."

· Tell the truth, the whole truth, and nothing but the truth. The concurrence took the unusual step of calling out FedEx's lawyers for misleadingly quoting only partial excerpts of evidence. For example, FedEx cited a supposed "admission" from the plaintiffs that they were contractors. But when read in its entirety, the admission in fact said that the plaintiffs were never FedEx contractors. When dealing with lawyers, the court noted it would be wise to "verify before you trust."

· Perspective is everything. If nothing else, the Alexander ruling will likely frustrate FedEx and anyone else who had been relying on decisions from the Indiana multi-district litigation to gauge the legality of FedEx's contractor business model. While that court had consistently upheld the model, the Alexander ruling potentially blows it up, although the decision noted that FedEx altered the model in 2011, moving to drivers who had their own incorporated businesses. Still, the conflicting rulings illustrate the subjectivity of contractor/employee evaluations.

Robert S. Nelson is the founder of the Nelson Law Group, a San Francisco based law firm specializing in labor and employment matters. He can be reached at (415) 702-9869, or [email protected]