Employees or Contractors?

Employees or Contractors?

Copyright 2004, Traffic World, Inc.

The differences distinguishing independent contractors from employees came under scrutiny in California when a Los Angeles Superior Court found that FedEx Ground misclassified workers as employees rather than independents.

That decision stirred a beehive of interest even though the company, independent attorneys specializing in transport law and one Wall Street analyst belittled any repercussions and said the decision sets no precedent.

On its face, the case appears to affect less than half of 1 percent of all FedEx Ground''s 16,600 workers, although lawyers for the California workers who filed the suit claim the class action suit could affect many more.

Lynn Rossman Faris, an attorney representing the FedEx Ground drivers, called the Superior Court''s decision a "landmark" case that "finally rights a longstanding wrong." While acknowledging the decision applies only to California single-route pickup and delivery drivers, Faris said the case will have ramifications where other class-action suits are "either pending or contemplated."

Faris charged that FedEx Ground, founded 19 years ago as Pittsburgh-based Roadway Package Service and later sold to FedEx for $2.4 billion as part of the Caliber System acquisition, systematically misclassifies its drivers as independent contractors when they are really employees.

Attorneys for the drivers argue FedEx Ground violated California law by failing and refusing to reimburse drivers for tens of thousands of dollars in work-related expenses. Those expenses included the cost of trucks, fuel, maintenance, scanners, uniforms, liability and workers compensation-like insurance, among other expenditures.

To be entitled to such reimbursement, drivers Anthony Estrada and Jeffrey Morgan were required by the court to prove they were employees under California law rather than independent contractors, as the company claimed.

The issue is ultra-sensitive at FedEx, which has built ground delivery into its $24 billion empire partly through the independent contractor business model.

FedEx believes the case affects only about 80 workers. Attorneys for the workers say up to 6,000 single-route drivers could be affected. FedEx Express always has classified its nonunion workers as employees, although FedEx Ground declares its workers independent contractors.

"This decision should serve as a warning to other major employers who use sham independent contractor arrangements for their own financial benefit, calling them independent contractors but treating them as employees to avoid paying their costs of doing business," Faris said.

David Westrick of FedEx Ground said the impact of the case was limited to California and said FedEx would defend itself "vigorously." The next phase in the Superior Court case will determine whether FedEx Ground owes those California drivers any restitution.

"Any case like this is something to be concerned about," Westrick said. "We''re disappointed but we certainly stand behind the independent contractor model. We will vigorously defend it. Throughout our history we''ve had many agencies and courts uphold that concept. We''re determined that in this case that will be the end result."

Independent attorneys specializing in truck labor issues sided with FedEx''s reading and said the case would have a limited impact on the industry.

"It''s probably a fairly narrow holding," said Greg Feary, a partner with Scopelitis, Garvin, Light & Hanson, Indianapolis. He noted the ruling, which has not been published, also concludes that most FedEx Ground workers, including multiple-route P&D drivers, are independent contractors. "I don''t think it applies to all California-based FedEx single work area P&D drivers," Feary said. "It''s narrow, even to FedEx. The question is how far beyond FedEx could this decision reach? These facts are not typical to the trucking industry as a whole."

Bear, Stearns trucking analyst Ed Wolfe said there would be "no material impact" to the parent company. "The civil suit involves 80 total single-route drivers in California out of (FedEx) Ground''s 16,200 owner-operators," Wolfe said in a note to investors. "We believe restitution payments for benefits and expenses, if they were to occur, would be immaterial to consolidated financials. We believe contracts with these 80 owner-operators would be reconfigured to mitigate any ongoing cost impact."

Independent attorneys wonder how making contractors pay for their own expenses would make them look like employees, in the court''s eyes. Usually, that is one of the "20 questions" that courts consider when deciding whether workers are employees or contractors.

"Making independent contractors pay their own expenses is usually a key to determining employee-independent contractor status," Feary said.