What FedEx’s Misclassification Suit Teaches Us All

June 21, 2016

Last week, FedEx announced that it had reached a $240 million settlement in its class action suit across 20 states for misclassifying workers as independent contractor upon court approval. This, on top of a $226 million in California for the same problem, means that the package delivery service will end up paying $466 million for its failure to properly classify workers.

FedEx is not the only company who has this problem. Over the last several years, many companies have had problems properly classifying workers, and as a result, a lot of money has been lost in making it right.

To help, I have examined the FedEx case, as well as the laws on this topic and other companies who have found themselves on the wrong side of a classification lawsuit.

  • Why is it so hard?
  • What should you be doing?
  • Is your classification system accurately reflecting the status of your workers and contractors?

These are questions that you need to answer in order to make sure that you are compliant before you find yourself in trouble too.

The FedEx Story

This is not a new story. In fact, we covered it in a podcast a while ago. However, that just goes to show you how difficult these cases can be.

FedEx has been fighting its IC claims with its Ground Divisions drivers for years. It all starts with a contract that the company wrote itself – and which has not been used for years at this point.

Up until 2011, FedEx was hiring independent contractors to make its runs. Since all of this has come to light, they have switched to using a third party contractor to employ its drivers.

Before making this switch, though, the company was hiring what it called independent contractors using a contract that it had drafted itself.

Under the contract, the company gained a lot of benefits because they were using independent contractors. For example, they saved on taxes, fringe benefits, overtime, healthcare costs, and salaries. However, they still gained a lot of rights that generally only an employer would receive.

For example, these alleged independent contractors were still required to use FedEx’s trucks, uniforms, and scanners.

Because of the potential conflict with this system, in 2006, a driver brought a suit against the company alleging that the drivers were being misclassified. Since then, the suits have grown.

Outside of the California suit, this one effects drivers in 20 different states, and it equals about 12,000 drivers, with some set to get several thousand dollars in payment in lost overtime, salary, and other fees.

Of course, as is almost always the case in settlements, FedEx does not admit guilt in this matter. However, if the case were to go through the entire legal process, it is likely that it would take years to conclude.

The State of Misclassification Over the Last Several Years

As I mentioned earlier, FedEx is far from being the only company to have to deal with a misclassification suit over the last several years.

Just at look at some of these stats from the IRS:

  • In 2012, there were an estimated 368,685 misclassified workers in Illinois alone. The following states had similar numbers: Massachusetts (125,725 to 248,206); New York (704,785); Ohio (54,000 to 459,000); and Pennsylvania (580,000).
  • All major industries has some level of problems with misclassification.
  • It is estimated that, in 2006, the federal government lost around $2.72 billion because of misclassification.

With all this, you can see why this is such a highly important and often litigated subject. Here are some of the big misclassification suits that have occurred over the last couple of decades.

Lyft and Uber

I have talked a little bit about the problems Lyft and Uber have faced in this area before. Both have had problems with how much control they have over their drivers and the fact that they call the drivers independent contractors.

Lyft settled its misclassification suit for $12.5 million earlier this year. Uber is still in the process of litigating some of its claims.

This is not surprising as problems such as this have been plaguing the gig sharing economy since its emergence.

Lowe’s

Lowe’s settled its own misclassification lawsuit last year when it reached a $10 million settlement with its workers.

The case claimed that while the home improvement giant claimed these workers as independent contractors, the company still retained control of the workers as if they were employees.

Microsoft

Proving that this is not an newly emerging trend, in 2000, Microsoft faced their own $97 million suit. In this suit, temporary workers classified as independent contractors were not allowed to participate in employee benefits programs, specifically the company employee stock purchase plan.

Google

Even Google is not above such suits. A couple of years ago, it was sued by freelance workers who claimed to be employees entitled to overtime when the search engine giant made the workers offers contingent on registering through freelance software eLance (aka o-desk).

Bimbo Bakeries

In another case of truck driver misclassification, Bimbo Bakeries settled for $950,000 when it was sued for misclassifying drivers as independent contractors.

The Law and Its Meaning

Now that you have seen that this really is a huge problem in the workforce, you might start to worry about whether any of this has or could effect you. In order to address this concern, it is important to take a look at the ruling law in the land on this subject.

Employee classification is ruled largely at the federal level with the Fair Labors Standard Act (FLSA). However, states do have some level of control too.

Basically, what it all comes down to is how much control you have over a worker.

Are they setting their own hours, using their own tools, working under their own company name (or the name of a third party company)?

If so, then there is a better chance that they will be considered independent contractors.

However, if you make them come in to your workspace, wear your uniforms, use your tools and systems, etc. Then it will be a lot harder to get away with saying they are not one of your employees.

Courts may differ in how they determine whether to rule a worker an employee or an independent contractor. However, there are a few tests that states use to help aid in this decision making process.

For example, a court may chose to use the ABC Test. In fact, more than half of the states use this test, so while it is not a sure thing, knowing the ABC Test is a good place to start.

Basically, it is assumed that a worker is an employee unless all of the following criteria is meet:

  1. They are free from the company’s control as long as they meet the requirements of the contract.
  2. The work is not the normal work performed by the company or is performed fully outside of normal business operations (meaning away from the workplace, outside of normal business hours, etc.)
  3. The worker normally does these services as an independent contractor or freelancer.

Why It Is So Hard

Of course, part of the reason that so many employers mess up on misclassfying workers is that they do it intentionally. If you don’t get caught, then you have all of the above mentioned benefits – plus more – of getting work done without having to pay benefits and overtime to workers.

However, for the most part, employers do not make these mistakes on purpose. Instead, they find themselves unexpectedly facing a lawsuit they didn’t even know was a concern.

That is because the law in this area can be difficult to understand and follow. For that reason, it is very important that you make sure you are following all aspects of the law. If you cannot understand it on your own, make sure you talk to a qualified legal professional specializing in employment law.

What You Need to Be Doing

I hope that all of this has taught you a few valuable lessons.

  1. You need to understand the law on this topic, and if you don’t, you need to talk to someone who does.
  2. You need to evaluate your classification system and make sure that you are properly classifying workers. If you are, great work. Take steps to ensure you continue this progress. If you are not, do something to fix it in the future and take steps to correct the problems it has caused in the past, up to and including getting ready for any potential litigation.
  3. Continue to review and monitor employee roles and classifications as new employees are added on and as other roles change and grow.

Final Statements

Misclassification is a bid deal both in terms of how much it can cost and how hard it can be to follow. However, with a little bit of preparation, examination, and help, you can feel a lot more confident in your program.

Once you have taken the time to make sure you understand the law, you should take some time to examine the people working for and with you.

Are the people you are claiming as independent contractors really independent contractors? Or do they actually fall under the description of an employee?

This is not an area that you want to be noncompliant in, so make sure you are doing it right. Of course, if you are not sure, then you should check with an employment lawyer to make sure you are in the lines of the law.

Similarly, if you find that you haven’t been following the law and find yourself being sued, then you should also contact that employment lawyer.

Ashley Shaw

By

Ashley Shaw is an experienced Legal Writer with years of experience. After receiving her JD, she worked for years in a corporate environment writing on business and employment law topics

Get Business Legal Updates

Please provide your full name.
Please provide a valid email address.
We respect your privacy, and we will never share your information. Unsubscribe at any time.

Related Publications

Covered in this episode of Legally Sound Smart Business are some typical business mistakes blunders small businesses often make and how to avoid them. Blunder #1: Copying and pasting agreements It may sound like a good idea at the time, but this blunder comes with hidden pitfalls. Having an attorney draft terms that are specific…

June 16, 2021

Employee misclassification is a common business blunder – even for large businesses (like Google & FedEx). With states like California passing laws that change employee classification in certain industries, it can be hard to keep up. You can read more on our blog or contact our legal team to make sure that your employees are…

June 16, 2021

Anyone who’s been paying attention to state and federal politics this 2016 election cycle knows that wage and hour laws have been a big topic in the news.  Much of this focus has been on raising the minimum wage at both federal and state levels, and there’s been a lot of discussion over clarifying the…

May 19, 2016

Anything that shifts risk away from a small business appeals to the business owner, and three employment practices seem to do just that: on-call employment, flexible shift changes and part-time employment. But these practices shift economic risk toward employees who are also consumers, so are these moves a good idea or not? Tomatoes and sweet…

July 31, 2014

It’s one of the most common areas in which business owners make a mistake when they hire a new worker. Must I classify this worker as an employee? Or could I classify their services as a position of an independent contractor? Each has significant consequential differences. If an employee, besides wages and tax withholdings, you…

November 8, 2013
Legally Sound Smart Business cover art

Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
Apple Podcast badge
Google Podcast badge
Spotify Podcast badge

Latest Episodes

July 14, 2021

Through a five-round championship bout, Matt travels to Texas from California to determine which state is better for business. Will it be a knockout with a clear winner or will it go to the scorecards?

June 16, 2021

Covered in this episode of Legally Sound Smart Business are some typical business mistakes blunders small businesses often make and how to avoid them. Blunder #1: Copying and pasting agreements It may sound like a good idea at the time, but this blunder comes with hidden pitfalls. Having an attorney draft terms that are specific…

February 4, 2021

How you terminate an employee can make the difference between a graceful transition to avoidable negative outcomes like a dramatic exit or even a lawsuit. We gathered a panel of experts and asked them – is there a “right way” to fire an employee? We would like to thank our guests for this episode: Amr…

December 2, 2020

The COVID-19 pandemic has turned nearly every aspect of life on its head, and that certainly holds true for the business world. In this episode, Matt and Nasir explain how the early days of the pandemic felt like the Wild West and how the shifting legal playing field left a lot open to interpretation and…

November 16, 2020

After plenty of ups and downs, our buyer has finally closed on the purchase of their business. While we’re marking this down in the ‘wins’ column, it never hurts to review the game tape. In this final episode, our hosts, Matt Staub and Nasir Pasha, return to the deal almost a year later to reflect…

September 15, 2020

The ink is drying on the signature line and things are looking great for our buyer. After so much hard work, the finish line is in sight and the cheering within ear shot.   Though the landlord is still serving friction, things seem safe to move forward and for now, our buyer will be keeping…

July 31, 2020

Though things are coming along well, the journey would not be interesting if it was purely smooth sailing. After our buyer opens escrow, they are forced to push the closing date back when suddenly a letter from an attorney was received claiming the business, we are buying has a trade mark on the name!  Now…

June 12, 2020

With frustration at an all-time high and professionalism at an all-time low, our friend the Buyer has “had it” with the Seller and quite frankly their lack of knowledge. At present our Buyer is rightfully concerned that the latest misstep from our loose-lipped Seller will threaten not only the entire operation of the businesses but…

May 11, 2020

As we go deeper into the buying process, we start to uncover more challenges from our seller and encounter some of the wrenches they are tossing our way. When we last left off in episode three our team was knee deep in due diligence for our buyer, had already penned and signed the Letter of…

April 4, 2020

One word–interloper! When a new mysterious broker enters the transaction and starts to kick up dust, Nasir and Matt take the reins. The seller signed off on the letter of intent (see episode 2), yet this “business broker” serves only friction and challenges by refusing to send financials, whilst demanding more of a firm commitment…

April 4, 2020

Just as most stories and deals start out, everyone is optimistic, idealistic and full of hope for clear skies. It’s a perfect outlook with a perfect setup for the ups and downs yet to come. Peek further behind the curtain and into the first steps of buying a business: the letter of intent. After the…

April 4, 2020

When a savvy buyer hears opportunity knocking to purchase a prime positioned business, she decides not to go it alone and taps in the professionals to help navigate what could potentially be a fruitful acquisition. “Behind the Buy” is a truly rare and exclusive peak into the actual process, dangers, pitfalls and achievements, that can…

August 7, 2019

GrubHub is subject to two “matters of controversy” that have likely become common knowledge to business owners: “fake” orders and unfriendly microsites.

May 28, 2019

In this podcast episode, Matt and Nasir breakdown the legal issues of the subscription industry’s business on the internet. Resources A good 50-state survey for data breach notifications as of July 2018. California Auto-Renewal Law (July 2018) Privacy Policies Law by State Why Users of Ashley Madison May Not Sue for Data Breach [e210] Ultimate…

March 12, 2019

In recording this episode’s topic on the business buying process, Matt’s metaphor, in comparing the process to getting married probably went too far, but they do resemble one another. Listen to the episode for legal advice on buying a business.

December 3, 2018

Nasir and Matt return to discuss the different options available to companies looking to raise funds through general solicitation and crowdfunding. They discuss the rules associated with the various offerings under SEC regulations and state laws, as well as more informal arrangements. The two also discuss the intriguing story about a couple who raised over…

July 24, 2018

Flight Sim Labs, a software add-on creator for flight simulators, stepped into a PR disaster and possibly some substantial legal issues when it allegedly included a Trojan horse of sorts as malware to combat pirating of its $100 Airbus A320 software. The hidden test.exe file triggered anti-virus software for good reason as it was actually…

April 17, 2018

Attorneys Matt Staub and Nasir Pasha examine Mark Zuckerberg’s congressional hearings about the state of Facebook. The two also discuss Cambridge Analytica and the series of events that led to the congressional hearings, the former and current versions of Facebook’s Terms of Service, and how businesses should be handling data privacy. Full Podcast Transcript NASIR:…

March 10, 2018

The Trump presidency has led to a major increase in ICE immigration enforcement. It’s critical for business owners to both comply with and know their rights when it comes to an ICE audit or raid. Nasir, Matt, and Pasha Law attorney Karen McConville discuss how businesses can prepare for potential ICE action and how to…

February 5, 2018

New years always bring new laws. Effective January 1, 2018, California has made general contractors jointly liable for the unpaid wages, fringe benefits, and other benefit payments of a subcontractor. Nasir and Matt discuss who the new law applies to and how this affects all tiers in the general contractor-subcontractor relationship. Click here to learn…

January 2, 2018

With a seemingly endless amount of new mattress options becoming available, it is unsurprising that the market has become increasingly aggressive. As companies invest in more innovative solutions to get in front of customers, review sites, blogs and YouTube videos have moved to the forefront of how customers are deciding on their mattresses and how…

December 7, 2017

In recent months explosive amounts of high profile allegations of sexual harassment, assault, and varying acts of inappropriate behavior have transcended every sector of our professional world. With a deluge from Hollywood and politics, and the private workforce, accusations have inundated our feeds and mass media. This harassment watershed has not only been felt within…

November 16, 2017

If you are not familiar with the EB-5 program started in 1990 to give green cards to certain qualified investors in the United States, then you may not have been alone a few years ago. Currently, the EB-5 program has since exploded since its inception and now hits its quotas consistently each year. The program…

October 10, 2017

Government requests come in multiple forms. They can come in as requests for client information or even in the form of investigating your company or your employees. Requests for Client Information General Rule to Follow Without understanding the nuances of criminal and constitutional law and having to cite Supreme Court cases, any government requests for…

August 24, 2017

Nasir and Matt suit up to talk about everything pertaining to employee dress codes. They discuss the Federal laws that govern many rules for employers, as well as state specific nuances in California and other states. The two also emphasize the difficulty in identifyingreligious expression in dress and appearance, how gender-related dress codes have evolved…

June 28, 2017

Nasir and Matt discuss the life cycle of a negative online review. They talk about how businesses should properly respond, how to determine if the review is defamatory, the options available to seek removal of the review, how to identify anonymous reviewers, whether businesses can require clients to agree not to write negative reviews, and…

June 7, 2017

On this episode of the Ultimate Legal Breakdown, Nasir and Mattbreak down social media marketing withguests Tyler Sickmeyer and Kyle Weberof Fidelitas Development. They first discuss contests and promotionsand talk about where social media promotions can go wrong,when businesses are actually running an illegal lottery, and the importance of a soundterms and conditions. Next, they…

April 3, 2017

On this episode of the Ultimate Legal Breakdown, Nasir and Matt go in depth with the subscription box business. They discuss where subscription box companies have gone wrong(4:30), the importance of a specifically tailored terms and conditions(6:30), how to structure return policies (11:45), product liability concerns (14:45),the offensive and defensive side of intellectual property (19:00),…

February 1, 2017

Nasir and Matt discuss the suit against Apple that resultedfrom a car crashed caused by the use of FaceTime while driving. They also discuss howforeseeable use of apps can increase liability for companies. Full Podcast Transcript NASIR: Hi and welcome to Legally Sound Smart Business! I’m Nasir Pasha. MATT: And I’m Matt Staub. Two attorneys…

January 5, 2017

The guys kick in the new year by first discussing Cinnabon’s portrayal of Carrie Fisher as Princess Leia soon after her death, as well as other gaffes involving Prince and David Bowie. They alsotalk about right of publicity claims companies could be held liable for based on using someone’s name or likeness for commercial gain.

December 22, 2016

Nasir and Matt discuss the recent incidentat a Victoria’s Secret store where the store manager kicked out all black women after one black woman was caught shoplifting. They then each present dueling steps businesses should take when employees are accused of harassment.

December 8, 2016

Nasir and Matt return to talk about the different types of clients that may have outstanding invoices and how businesses can convert unpaid bills to getting paid.

November 10, 2016

After a long break, Nasir and Matt are back to discuss a Milwaukee frozen custard stand that is now revising it’s English only policy for employees. The guys also discuss how similar policies could be grounds for discrimination and what employers can do to revise their policies.

October 6, 2016

The guys discuss the new California law that allows actors to request the removal of their date of birth and birthdays on their IMDB page and why they think the law won’t last. They also discuss how age discrimination claims arise for business owner.

September 29, 2016

Nasir and Matt discuss the racial discrimination claims surroundingAirbnb and how it’s handled the situation. They also discuss some practical tips for businesses experiencing similar issues.

September 8, 2016

Nasir and Matt discuss whyAmazon seller accounts are getting suspended and banned without notice and how business owners can rectify this situation through a Corrective Action Plan.

August 25, 2016

Nasir and Matt talk about the accusations surroundingfashion giant Zararipping off the designs of independent artists like Tuesday Bassen and howsmaller companies can battle the industry giants.

August 18, 2016

Nasir and Matt discuss Brave Software’s ad replacing technology that has caught the eye of almost every national newspaper and has a potential copyright infringement claim looming. They also welcome digital marketing expert Matt Michaelree to speak on the specifics of what Brave is attempting to do and whether it has the answers moving forward.

July 28, 2016

Nasir and Matt discuss the sexual harassment lawsuit filed by Gretchen Carlson against Fox CEO Roger Ailes. They also talk aboutthe importance of sexual harassment training and properly handling such allegations in the office.

July 15, 2016

Nasir and Matt talk about the changes at Starbucks that have led to many disgruntled employees and customers.

June 23, 2016

Nasir and Matt discuss the criminal charges facing FedExinvolving the alleged transportation of illegal drugs. They also talk about how business owners should address working with customers that may be breaking the law.

June 15, 2016

The guys return after a long break to discuss why Yahoo is auctioning off over 3,000 patents and how this decision will affect the longevity of the company.

May 25, 2016

Nasir and Matt discuss the increase in the salary thresholdfor exempt employees and how employerscan try to avoid paying overtime as a result.

May 18, 2016

Nasir and Matt discuss the Baltimore law that makes it very difficult to operate food trucks in the city. They also discuss all the legal restrictions tohaving a food truck.

May 11, 2016

Matt listens to Nasir recap the developing battle in his hometown of Vandalia, Ohio over whether a Dunkin Donuts can move into a location in close proximity to a local favorite donut shop. They then discusswhether the issue is more legal or personal.

May 9, 2016

The guys kick off the week by discussing a Nevada employee who is claiming she was fired for not supporting the Scientology beliefs of her employer.

April 27, 2016

The guys discuss the massive floods in Houston,how employers responded, and why one meteorologist became a local hero. They also discuss the steps businesses should take in preparing for storms outside the workplace.

April 20, 2016

The guys discuss the boycott of Amazon over the products of an unnamed presidential candidate. They also talkabout how a business should handle a boycott and whether it’s possible to exit one unscathed.

April 13, 2016

Click here to read HubSpot’s response on this topic. Nasir and Matt discuss the trend in startups to compensate programmers and other early employees with stock options and how the company culture at HubSpot isn’t what it seems.

April 6, 2016

Nasir and Matt discuss various lawsuits against social media platforms in which users are accused of artificially inflating their social currency.

We represent businesses.
That’s all we do.

Oh, and we love it.

We love our work. We love reviewing that lease for your new location. We thrive on closing that acquisition that nearly fell through. We’re fulfilled when we structure a business to grow, raise capital, and be legally protected.

We focus on developing close relationships with our clients by being like business partners. A partner who provides essential, personalized, proactive legal support.

We do all of this without utilizing the traditional billable hour model. You pay for the value we bring, not the time spent on calls, emails, and meetings.

Our team is made up of attorneys and staff that share these values and we are retained by clients who want the same.

Pasha Law PC operates in the states of California, Illinois, New York, and Texas.

Meet Our Team

Fractional General Counsel Services

Pasha Law Select offers the expertise of a high-end general counsel legal team for every aspect of your business at a fixed monthly rate. Pasha Law Select is deliberately designed to allow our legal team to be proactive, to anticipate, and to be comprehensive in serving our clients. To be great lawyers, we need to know our clients. We can’t know our clients unless we represent a select number of clients in the long-term. This is Pasha Law Select.

Learn More