141 drivers classified as independent contractors by FedEx
Ground will receive $5.8 million in settlement of their
misclassification lawsuit brought under federal and Maine wage
and hour laws. The amount includes their class counsels'
legal fees of $1.9 million. Scovil v. FedEx Ground
Package System, Inc., d/b/a FedEx Home Delivery, Case No.
1:10-cv-00515-DBH (D. Maine, March 14, 2014).
The federal court lawsuit in Maine alleged that the FedEx Ground
improperly denied the drivers' overtime pay for hours worked
over 40 in a workweek, improperly made deductions from the
drivers' pay, and improperly required the drivers to pay for
their own expenses. There were seven named plaintiffs, but
only two of the seven signed the settlement agreement, arguing that
the amount being paid by FedEx Ground should have been even more
The federal court judge noted that if the drivers' case was
tried, damages could have topped $10,000,000, with the potential
for double damages under state and federal wage laws. The
court nonetheless found that the proposed settlement of $5.8
million was fair, reasonable, and adequate.
In approving the settlement last week, the court acknowledged
that "the proposed settlement . . . is clearly a compromise
that discounts to some degree . . . the drivers' total
claims" but is a "fair trade-off for the uncertainties of
trial and appeal and a prolonged delay in receiving any money. In
that regard, the court noted that FedEx Ground has won some
independent contractor misclassification cases and lost
others. The court also found that the amount (one-third of
the $5.8 million settlement) sought by the lawyers for the class
for counsels' legal fees, costs, and expenses was
Analysis and Takeaways
FedEx Ground and its drivers have been at the center of the
independent contractor misclassification issue for many years.
FedEx has lost in such states as California,
Illinois, and Massachusetts; won under the state
law of Kansas and the federal National Labor Relations Act;
won before the IRS (which reportedly concluded
that the drivers were independent contractors but that FedEx was
entitled to the benefit of safe harbor relief under Section 530 of
the Revenue Act of 1978), and settled cases with
state Attorneys General, including those in Montana and
Massachusetts. Dozens of cases brought by class action
lawyers and other states' Attorneys General remain pending,
including a case reportedly going to trial in Missouri.
In addition to the cost of the settlements as well as the
judgments rendered against FedEx Ground, the company has incurred
very considerable legal fees for its own lawyers defending these
legal proceedings around the country. Few businesses can
afford to defend themselves against a rash of lawsuits or afford to
pay multi-million dollar judgments and settlements.
How can a business, which makes use of independent contractors,
avoid or minimize independent contractor misclassification
liability? As noted in our
White Paper, there are alternatives that businesses can take to
avoid or minimize such misclassification liability, including
restructuring, re-documenting, and re-implementing their business
models; voluntary or government-sponsored reclassification; or
redistribution of independent contractor through the use of a
workforce management or staffing firm.
Most businesses built on an independent contractor model or that
use a substantial number of 1099ers prefer to maintain their
business model by opting for the first alternative: restructuring
their independent contractor relationships to enhance compliance
with applicable state and federal labor, tax, and employee benefit
laws. This alternative can be accomplished through the use of
IC DiagnosticsTM, a process
developed, refined, and improved over a period of over four years,
using proprietary diagnostic tools to assess the level of
compliance and guide the restructuring, re-documentation, and
re-implementation to minimize exposure to liability under various
federal and state laws.
The same proprietary tools used to enhance independent
contractor compliance are also key tools used in defending
administrative and court challenges to a company's worker
classifications. The cost of defense, however, typically far
outweighs the cost of avoiding lawsuits in the first place.
While businesses that operate with an enhanced level of independent
contractor compliance cannot completely avoid scrutiny by
governmental regulators and plaintiffs' class action counsel,
it is a given that the higher the level of compliance, the less
likelihood that the business be subject to legal challenges at
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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On July 15, 2015, the Wage and Hour Division (WHD) of the Department of Labor declared the misclassification of employees as independent contractors to be "one of the most serious problems" at workplaces in the United States.
The new penalties apply to returns and statements required after December 31, 2015. This means the new penalties will apply to the 2015 Forms W-2, 1099-R, 1099-MISC, 1094-B, 1095-B, 1094-C and 1095-C that are due in early 2016.