In re FedEx Ground Package System, Inc., (DC IN 12/13/2010)

In a multidistrict litigation (MDL) in which delivery drivers from 26 states sought determinations that they were employees of FedEx for purposes including reimbursement of business expenses and entitlement to overtime pay, a district court held that the majority of the drivers were independent contractors. The court engaged in a state-by-state analysis and concluded, that in most instances, the drivers weren't employees because FedEx didn't retain on a nationwide basis the right to either control the means by which the drivers perform their work or terminate the drivers at will.

RIA observation: As a result, FedEx won't have to withhold income taxes, withhold and pay Social Security and Medicare taxes, or pay unemployment tax on payments to the drivers. On the other hand, the drivers will be able to deduct expenses incurred in the performance of services on Schedule C without the limitations applicable to employees but will have to pay self-employment tax. Note that under the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, the OASDI tax rate under the SECA tax for 2011 is reduced two percentage points to 10.4% percent for self-employed individuals on self-employment income up to $106,800.

Procedure and case history. The district court noted as a preliminary matter the “procedural uniqueness” of this case, largely stemming from the fact that it was a MDL consisting of class actions with plaintiffs from 26 different states. The posture of the case also limited the scope of evidence available to the court in determining the drivers' generalized employment status, and the court's analysis was based mainly on the operating agreement and FedEx's policies and procedures. The court also stated that, given the nature of the case, it would have limited preclusive effect in subsequent proceedings involving personal injury or workers' compensation.

The district court had previously granted summary judgment in favor of FedEx in an earlier decision involving drivers from Kansas (the “Kansas decision”). Following the Kansas decision, the parties were ordered to file supplementary briefs for each of the outstanding class cases addressing why the outcome in each such case should be the same as, or different from, the Kansas decision.

The Kansas decision held that there was no “reasonable inference” that FedEx retained, on a class-wide basis, the right to control the means and methods of the drivers' work or terminate the drivers at will. In so holding, the court distinguished between retained control with respect to the results of the drivers' work and retained control as to how such work is performed. The court also found that FedEx afforded its drivers with certain entrepreneurial opportunities that were indicative of independent contractor status.

Judgment independent of the motion. In cases involving 11 of the states with pending summary judgment motions filed by the drivers, FedEx didn't file its own motions for summary judgment, arguing instead that a trial was required on the employment classification issue. However, in light of the Kansas decision, FedEx now requested that the district court enter judgment in its favor.

The district court found, under the new F.R.Civ.P. 56(f)(1) provision (effective Dec. 1, 2010) for “judgment independent of the motion,” that granting judgment in favor of FedEx: (i) was permissible so long as the drivers had notice that FedEx would seek such judgments and a reasonable opportunity to respond; and (ii) would best serve judicial economy.

Background. Under the common law rules, whether a worker is an independent contractor or employee generally is determined primarily by whether the enterprise he works for has the right to control and direct him regarding the job he is to do and how he is to do it. In certain instances, workers seek declarations that they are employees instead of independent contracts in order to vindicate statutorily created rights (such as overtime pay) or shift certain duties to the putative employer.

The tests used to evaluate whether a worker is an independent contractor or employee vary somewhat from state to state, but are generally comprised of a number of the following factors:

(1) The degree of control retained by the principal;

(2) whether the principal can discharge the individual;

(3) the opportunity of the individual for profit or loss;

(4) which party invests in work facilities used by the individual;

(5) whether the work is part of the principal's regular business;

(6) the permanency of the relationship;

(7) the relationship the parties believed they were creating;

(8) the provision of employee benefits;

(9) where the work is performed; and

(10) the method and regularity of payments.

In addition, certain states have other tests for determining employee status for purposes of, for example, a state law wage or worker's compensation statute. These statutes generally construe employee status more broadly than common law.

Facts. The drivers in the multistate action had entered into independent contractor agreements with FedEx to provide package delivery services, and FedEx was contractually bound to provide them with work. The drivers were responsible for acquiring their own delivery trucks and equipment, and they were permitted to hire assistants with FedEx's consent.

Generally, the drivers sought determinations that they were employees under various state laws and were accordingly entitled to reimbursement of business expenses, backpay for overtime, and other wages. Certain individual drivers and classes also alleged, among other things: fraud; breach of contract; employment discrimination; violations of a number of state laws; ERISA claims; and violations of several federal statutes, including the Fair Labor Standards Act (FLSA) and the Family Medical Leave Act (FMLA).

The drivers' argued primarily that, despite the contrary language in their agreements, FedEx exercised sufficient control over their work so as to support an employer-employee relationship. Specifically, they claimed that FedEx supervised their work, assigned them an amount of work to be completed within a certain timeframe, and could decline to renew or cancel for cause a driver's contract.

Conclusion. The district court analyzed the law of each state and the claims asserted by each class of drivers (and some individuals) and largely granted summary judgment or judgment independent of the motion, in whole or in part, in favor of FedEx that the drivers were independent contractors.

In many cases, the court found that all or many of the claims turned on the employment classification issue (or the drivers didn't assert otherwise), examined the operative employment classification test of the state, and concluded that the test was sufficiently similar to that in the Kansas decision so as to resolve those claims against the drivers.

The following distinctions were highlighted throughout the court's decision on the workers' employment classification:

·         The court based its decision on controls that were institutionally retained by FedEx, and not those which were exercised in various instances.

·         In evaluating the control retained by FedEx, the court focused on control over the manner in which the drivers performed their work. In contrast, the court said that the right to control what is ultimately to be accomplished (“results-based control”) doesn't necessarily indicate employee status.

·         The court emphasized the difference between employment classification for personal injury-type cases and others, such as this case. In personal injury cases, the term “employee” is often construed in a broader manner so as to justify holding the employer liable for the worker's injuries.

However, drivers from several states were granted partial summary judgment as to their employee status under state statutes, and their claims based on those statutes were accordingly entitled to proceed.

The court also remanded a number of the claims of individuals or certain classes that were not resolved by the employee classification issue. Remanded issues included FLSA and FMLA claims, various state law statutory claims, and employment discrimination based on age and disability. In addition, the employee status of one driver wasn't resolved because it wasn't clear whether he was a member of and thus bound by an adverse decision in respect to a separate class.

RIA Research References: For determining who is an employee, see FTC 2d/FIN ¶ H-4250; United States Tax Reporter ¶ 34,014.37; TaxDesk ¶ 535,001.