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 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.
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.
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).
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:
- They are free from the company’s control as long as they meet the requirements of the contract.
- 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.)
- 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.
- You need to understand the law on this topic, and if you don’t, you need to talk to someone who does.
- 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.
- Continue to review and monitor employee roles and classifications as new employees are added on and as other roles change and grow.
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.