FedEx gives up: agrees to $228 million independent contractor settlement

An icon of American business has run afoul of state and federal laws for misclassifying employees as independent contractors. During years of litigation over its use of independent contractors to pick up and deliver packages, FedEx suffered more blows than victories. Having changed its business model once more, FedEx settled the last remaining big lawsuit. Last month, a federal judge finalized a settlement that will cost FedEx a staggering $228 million, not counting attorney’s fees, to be paid to drivers for claims related to unpaid wages, expense reimbursement, and family leave.

In the beginning, outsourcing package pickup and delivery services seemed like a great way for FedEx to save money and increase flexibility – contract with independent contractors to provide the services. Drivers would be responsible for choosing their routes and be required only to meet performance standards specified by contract. Due to the FedEx technology platform, the entire service would appear seamless to the typical customer.

And everyone would win, right? Customers, who wouldn’t know the difference, would get their packages on time and enjoy the convenience of tracking delivery status through FedEx’s website. Contractors would gain an entrepreneurial opportunity to build a successful business, bid on routes, and hire their own employees to help them fulfill their contracts. And FedEx would be relieved of the payroll expense for thousands of employees and the attendant expenses of payroll taxes, employee benefits, and workers comp insurance.

What had seemed like a win-win formula, however, landed FedEx in hot water with federal and state agencies and in contractor lawsuits in 40 states. The final blow was the Ninth Circuit Court of Appeals ruling that FedEx’s drivers were employees, NOT independent contractors, under state law. The cost to FedEx? Nearly a quarter of a billion dollars.

Why did this happen, and could it happen to you?

The first test of whether a worker is an independent contractor is whether or not the company has the right to control how the contractor does his or her job, and, according to the Ninth Circuit, FedEx failed this test. FedEx had required its independent contractors to wear FedEx uniforms - the company dictated the shoes and socks they could wear, and they even had to observe FedEx’s grooming and appearance standards. Drivers were only permitted to drive FedEx-approved vehicles, paint them a specific shade of white, install shelving with approved dimensions, mark the vehicles with the FedEx logo, and keep them clean and free of damage. And FedEx told the drivers what packages to deliver, set delivery times, and required drivers to use an electronic scanner to send data about each pickup and delivery to FedEx.

In my law practice I routinely see companies that are attracted to the same benefits that FedEx saw – entrepreneurial flexibility and cost savings. But this business model is fraught with danger in today’s environment. Very few companies fully grasp the concept that classifying a worker as an independent contractor or employee is not as simple as checking a box to indicate their selection. State and federal laws defining “employee” and “independent contractor” have been on the books for decades. What’s different today is that government auditors have dramatically stepped up their activities in recent years.

The right to control how a worker does his or her job is only the first test an independent contractor must pass to ensure proper classification. In future posts, I’ll discuss some of the other tests.