Yesterday, as anticipated, the U.S. Court of Appeals for the Seventh Circuit adopted the decision of the Kansas Supreme Court that FedEx Ground drivers, as a matter of law, were employees and not independent contractors under the Kansas Wage Payment Act (KWPA). The Seventh Circuit had “certified” two questions to the Kansas Supreme Court: (1) are the plaintiff drivers employees of FedEx as a matter of law under the KWPA; and (2) is the answer to the preceding question different for plaintiff drivers who have more than one service area? As we noted in our blog post of October 6, 2014, the Kansas Supreme Court answer the first question “yes” – the drivers are employees and not independent contractors – and the second question “no” – the answer is the same for drivers that have more than one service area (even though they have to employ other drivers to handle their second or third route).

FedEx argued to the Seventh Circuit that the federal appellate court should not follow the Kansas Supreme Court’s answers to the certified questions. The Seventh Circuit rejected FedEx’s arguments, noting that “Certification would be a pointless exercise unless the state court’s answers are regarded as an authoritative and binding statement of state law.” Therefore, the Seventh Circuit concluded that “the state answers are binding.”  Craig v. FedEx Ground Package System, No. 10-3115 (7th Cir. July 8, 2015).

The Seventh Circuit now joins the Ninth Circuit in ruling against FedEx Ground on this issue, which has occupied the federal and state courts for years. In August 2014, the Ninth Circuit made the same finding in two cases against FedEx under California and Oregon law, as discussed in our blog post of August 29, 2014. As a result of the decisions by the Ninth Circuit, FedEx recently settled the California case for a reported $228 million.

Analysis

While the decision of the Supreme Court of Kansas, as now adopted by the Seventh Circuit, applies to far fewer drivers than does the Ninth Circuit decisions, it may well be even more damaging to FedEx than the Ninth Circuit rulings, at least from a purely legal standpoint. The Kansas Supreme Court had noted in its opinion that the test under Kansas law as to whether an individual is an employee or independent contractor is the so-called common law “right to control test,” which it defined as “whether the employer has the right of control and supervision over the work of the alleged employee, and the right to direct the manner in which the work is to be performed, as well as the result which is to be accomplished.” The Court noted that this test differs somewhat from the “economic realities” test under the federal wage and hour law. Under the federal test, the determination of an individual’s status focuses more on whether, as a matter of economic reality, a worker is dependent on a given employer. Because the “right to control” test is generally regarded as more favorable to a finding of independent contractor status, the decision by the Kansas Supreme Court as adopted by the Seventh Circuit suggests that the company is even less likely to prevail in those states that borrow or use a variation of the federal “economic realities” test.

In reaching its decision, the Kansas Supreme Court had set forth 20 factors that Kansas considers when making a determination of independent contractor status. (This is not the same 20-factor test as used by the IRS, but is similar.) The Court then examined all 20 factors in depth. Among the factors that the Court regarded as favoring employee status were the following:

  • FedEx issued instructions and required compliance therewith.
  • The services of the drivers were an integral part of FedEx’s business.
  • There was a continuing relationship between the drivers and FedEx.
  • FedEx requires written reports about deliveries.
  • The drivers’ ability to earn a profit is constrained by FedEx’s controls.
  • As a matter of reality and practicality, drivers cannot work for more than one company at a time.
  • The drivers’ services are not regularly made available to the public.
  • The drivers may unilaterally terminate their relationship with FedEx at any time without financial repercussion.

The Kansas Supreme Court had noted that at least five or six of the 20 factors favored independent contractor status. But, according to the Court, the significance of those factors was undermined by “FedEx’s control and micromanaging” of the drivers.

The most damaging part of the decision by the Kansas Supreme Court was its holding that not only were single-route drivers found to be employees under the Kansas Wage Payment Act, but so too were drivers who “acquire more than one service area from FedEx.” This holding is potentially devastating for FedEx because, in or about 2010, it initiated a new business model intended to comply with independent contractor laws. That business model, described in our August 12, 2010 blog post, gave its single-route drivers three options for continuing to work with FedEx on a going-forward basis: (a) become a multi-route Independent Service Provider (ISP) by incorporating as a business, (b) become an employee driver of an approved FedEx Ground ISP (that is, become a driver for another driver that has set up a business as an ISP); or (c) terminate his or her relationship with FedEx Ground at the expiration of its current independent contractor agreement, which would not be renewed. The Kansas Supreme Court concluded that “the employer / employee relationship between FedEx and a full-time delivery driver . . . is not terminated or altered when the driver acquires an additional route for which he or she is not the driver.”

FedEx reportedly stated in response to the Kansas and Seventh Circuit decisions that the business model that is the subject of those decisions “no longer is in use” and that it only contracts with incorporated businesses that treat their drivers as their employees.  Yet, that view may well be at odds with the conclusion by the Kansas Supreme Court and the Seventh Circuit that their decisions apply to “drivers who have more than one service area.”

Takeaways

The Kansas, Seventh Circuit, and Ninth Circuit decisions relied principally on the FedEx independent contractor agreement, which FedEx drafted and used with all its Ground Division drivers. The Kansas Supreme Court was not particularly soothing in its critique of the contract, noting that it agreed with a California appellate court that FedEx’s independent contractor agreement is a “‘brilliantly drafted contract creating the constraints of an employment relationship with [the drivers] in the guise of an independent contractor model—because FedEx not only has the right to control, but has close to absolute actual control over [the drivers] based upon interpretation and obfuscation.’”

These decisions remind businesses that use independent contractors that the form of their agreements is little protection if either (a) the document gives a right to independent contractors with one hand, and then takes it away with the other; or (b) the contract does not accurately represent the parties’ practice. These decisions confirm that the best protection for businesses using independent contractors is to structure, document, and implement the independent contractor relationship in a manner that is consistent with the laws in the states in which the business operates. The law in California, Oregon, Kansas, and most other states all vary considerably, yet have a common thread: the less direction and control over the individuals in question, the better.

Many businesses that seek to reduce direction and control, yet maintain an independent contractor model, have resorted to the use of IC Diagnostics™, a proprietary process that examines whether a group of workers would pass the applicable tests for independent contractor status under governing state and federal laws.  IC Diagnostics™ then offers a number of practical, alternative solutions to enhance compliance with those laws. For existing businesses, those alternatives include restructuring, reclassification, or redistribution, as more fully described in our White Paper.

For those businesses that can, consistent with applicable laws, retain their independent contractor relationships without undue exposure to misclassification liability, IC Diagnostics™affords them a way to restructure, re-document, and re-implement those relationships in a manner that enhances independent contractor compliance and minimizes misclassification exposure. Not every business can restructure in a manner that complies with applicable laws, but most can. By doing so, those companies can maximize the likelihood that they will be able to avoid the types of misclassification liability that FedEx Ground is now facing.