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Courts, NLRB deliver blow to FedEx independent contractor model

October 7th, 2014  |  Joy Waltemath

In the past six weeks, FedEx’s independent contractor model has suffered a triple blow. First, in a late August decision that the concurring judge said “substantially unravels FedEx’s business model,” the Ninth Circuit ruled in two companion decisions that FedEx delivery drivers are employees, not independent contractors, as a matter of California and Oregon law.

Next, at the end of September, a divided NLRB held that, although D.C. Circuit decisions required it to reexamine its approach in independent contractor cases, it would decline adopt the appeals court’s interpretation of Sec. 2(3) of the NLRA and accordingly found that FedEx Home Delivery drivers were employees entitled to coverage under Sec. 2(3).

Finally, the first week of October, the Kansas Supreme Court determined that FedEx delivery drivers who drive on a full-time basis were employees as a matter of law under the Kansas Wage Payment Act and not independent contractors.  This most recent case covers drivers in Kansas and is part of the same multidistrict litigation as the California and Oregon cases decided by the Ninth Circuit just over a month earlier.

How did we get here? When a wave of lawsuits challenged FedEx’s independent contractor model (with cases filed in 40 states), the Judicial Panel on Multidistrict Litigation consolidated the cases for multidistrict litigation proceedings in a federal district court in Indiana. The MDL court held that nearly all of the plaintiffs were independent contractors as a matter of law in those states where their status was guided by common law agency principles. That holding applied to the California and Oregon full-time delivery drivers in the Ninth Circuit companion cases.

When the Judicial Panel on Multidistrict Litigation consolidated the class actions, it designated the Kansas class action as the lead case. The district court determined that the Kansas class plaintiffs were independent contractors under the KWPA and granted summary judgment in favor of FedEx. On appeal, the Seventh Circuit concluded that Kansas law did not clearly indicate how it should decide a close case like this one and accordingly certified to the Kansas Supreme Court whether the drivers were employees of FedEx as a matter of law under the Kansas act.

Ninth Circuit right to control test. FedEx drivers were identified as independent contractors under the company’s operating agreement (OA) that governed the parties’ relationship. While the OAs were fairly clear, the Ninth Circuit found that to the extent they were ambiguous, extrinsic evidence supported a finding that FedEx exercised substantial enough control over the drivers to suggest they were not “independent contractors.”  The court considered the following:

  • FedEx’s extensive and detailed grooming and appearance standards, “from their hats down to their shoes and socks.”
  • FedEx’s equally meticulous vehicle specifications, including being painted a specific shade of white, marked with the FedEx logo, conforming to specific dimensions.
  • Drivers’ work hours are adjusted by FedEx managers so that they work 9.5 to 11 hours daily; they cannot leave their terminals in the morning until all their packages are available and must report back to the terminals before a specified time.
  • FedEx determines what packages to deliver and when. Each driver is assigned a specific service area that only can be altered at FedEx’s sole discretion.
  • FedEx’s right to control the workers’ “entrepreneurial opportunities”; drivers’ ability to operate more than one vehicle or route was contingent on FedEx’s approval. To hire additional help, drivers had to be “in good standing” and replacement drivers had to be “acceptable” to FedEx.

What did they think? California also takes into consideration the parties’ beliefs as to the nature of their relationship, and the OA said the drivers were independent contractors and disclaimed any authority to direct drivers as to the manner or means of their work. But other contract provisions, plus other policies and procedures, allowed FedEx to exert considerable control over the drivers’ day-to-day work. Neither FedEx’s belief nor the drivers’ own perceptions provided the final answer. Simply calling the drivers independent contractors didn’t make it so.

Plus, the drivers’ work was “wholly integrated” into the company’s operations. “The drivers look like FedEx employees, act like FedEx employees, are paid like FedEx employees,” the Ninth Circuit noted. And picking up and delivering packages is not just part of FedEx’s regular business, it is “essential to FedEx’s core business.”

Kansas Supreme Court. As the Seventh Circuit discovered, the Kansas Supreme Court had not specifically identified a test to definitively determine employment status under the KWPA. But Kansas courts have long emphasized the right to control test, and the primary distinction between it and the economic reality test used under the FLSA to determine employee-independent contractor status is that under the economic reality test, the right to control is not considered the single most important factor. The Kansas court ultimately determined that the 20-factor test is a tool to be used in Kansas to determine whether an employer/employee relationship exists under the KWPA, and this test includes economic reality considerations, while maintaining the primary focus on an employer’s right to control.

Although the district court primarily focused on the statements in the drivers’ operating agreement, saying the actual control that FedEx exercised over the drivers was not the question, the Kansas Supreme Court found that how FedEx implemented the operating agreement was a compelling factor in determining the company’s right to control its drivers. Viewing the factors as a whole, the Kansas high court concluded that FedEx had established an employment relationship with its delivery drivers but had dressed the relationship in independent contractor clothing.

NLRB. The issue in the NLRB decision was whether drivers operating out of a FedEx Home Delivery terminal in Connecticut were employees covered under Sec. 2(3) or, instead, were independent contractors, excluded from coverage. Although the Board had taken the position that the drivers were statutory employees, the D.C. Circuit subsequently held that drivers performing the same job at two FedEx facilities in Massachusetts were independent contractors. Acknowledging that this decision raised important questions about the Board’s approach in independent contractor cases, the Board decided to reexamine its approach.

Common law agency tests. The D.C. Circuit had found the common-law agency test was the appropriate legal standard, but over the course of recent decisions, the standard had changed its focus from the employer’s right to control to the “significant entrepreneurial opportunity for gain or loss.” Acknowledging that all common law considerations were relevant, the appeals court concluded that an important way to evaluate those factors was whether the position presented the opportunities and risks inherent in entrepreneurialism.

But the Board was not convinced. It had never held that entrepreneurial opportunity, in and of itself, was sufficient to establish independent contractor status, it said. In fact, “if a company offers its workers entrepreneurial opportunities that they cannot realistically take, then that does not add any weight to the company’s claim that the workers are independent contractors.” Thus, the Board rejected the D.C. Circuit’s view that it treated entrepreneurial opportunity as the decisive factor. While actual entrepreneurial opportunity for gain or loss remains relevant, it was just one aspect of a factor that asks whether the evidence tends to show that the worker is, in fact, rendering services as part of an independent business, said the Board, finding again that the FedEx Home Delivery drivers were employees under Sec. 2(3).

The Ninth Circuit decisions are Alexander v FedEx Ground Package System, Inc dba FedEx Home Delivery and Slayman v FedEx Ground Package System, Inc dba FedEx Home Delivery, Inc.  The decision of the NLRB is FedEx Home Delivery, a division of FedEx Ground Package Systems, Inc., and the Kansas Supreme Court decision is Craig v FedEx Ground Package System, Inc.

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