FedEx’s costs due to IC misclassification are approaching $500 million over the past year as a result of its inability to draft in a valid manner its IC agreement and internal policies governing Ground Division drivers. Last Friday, an Oregon federal judge approved a $15.4 million class action settlement between FedEx and around 400 Ground Division drivers who were found as a matter of law to have been improperly classified as ICs. The settlement comes a little more than two years after the Ninth Circuit issued its blockbuster decision finding that the drivers had been misclassified as ICs by FedEx as a matter of law based on the very documents FedEx had drafted.

How could a Fortune 100 company with top in-house and outside counsel create such enormous exposure for itself? And how can companies both large and small avoid the types of mistakes made by FedEx? To answer those questions, one needs to look first at the background of FedEx’s IC misclassification experience.

The background of the FedEx IC misclassification saga

As most readers of this legal blog know, FedEx Ground has been at the epicenter of the crackdown on IC misclassification by government regulators, state legislators, and plaintiffs’ class action lawyers since 2007. That is when a California appellate court found single-route FedEx Ground delivery drivers to have been misclassified as independent contractors instead of employees. But in 2009 and 2010, FedEx Ground won significant court decisions involving the IC status of its Ground Division drivers, including a December 2010 decision by a federal district court judge presiding over dozens of IC misclassification cases in a “multi-district litigation.” That decision, issued nearly six years ago, had granted summary judgment in favor of FedEx Ground in 42 IC misclassification lawsuits brought by drivers in 27 states, including California and Oregon.

In August 2014, however, the IC misclassification landscape for FedEx Ground reverted to its 2007 state. At that time, two decisions were issued by the United States Court of Appeals for the Ninth Circuit. That highly regarded federal appellate court reversed the December 2010 decision by the federal district court judge in the multi-district litigation where 42 cases had been decided in FedEx Ground’s favor.

The two Ninth Circuit decisions covered lawsuits filed by FedEx Ground drivers in California and Oregon under the laws of those states. Both of those cases had been decided in FedEx Ground’s favor by the federal court judge in the multi-district litigation.

The California case, Alexander v. FedEx Ground Package System, Inc., No. 12-17458 and 12-17509, was a class action involving approximately 2,300 individuals who provided delivery services to FedEx Ground on a full-time basis in California. The Oregon case, Slayman v. FedEx Ground Package System, Inc., No. 12-35525 and 12-35559, was a smaller class action involving approximately 400 individuals who were full-time delivery drivers for FedEx Ground in Oregon.

The Court first examined the FedEx Ground contract (called the Operating Agreement) that the company entered into with each of the drivers, as well as its written policies and procedures. It concluded that by virtue of the FedEx standard agreement and its policies and procedures, the drivers were employees and not independent contractors under both California and Oregon law. Specifically, in the California case, the Court found that, by virtue of language in the Operating Agreement and its policies and procedures:

  • FedEx reserved the right to control and by its policies controlled the appearance of its drivers, including their clothing, from their hats down to their shoes and socks, as well as their hair and hygiene. Managers had the right to prevent the drivers from working if they were not properly groomed and dressed.
  • FedEx reserved the right to control its drivers’ vehicles, including the color of the paint that their vehicles must be and the requirement that they display the distinctive FedEx logo. FedEx also required that the vehicles be “clean and presentable [and] free of body damage and extraneous markings” – requirements that “go well beyond those imposed by federal regulations.” In addition, FedEx dictated the vehicles’ dimensions, including the dimensions of their “package shelves” and the materials from which the shelves are made. Managers also had the right to prevent drivers from working if their vehicles did not meet specifications.
  • FedEx can and does control the times its drivers can work, even though the Operating Agreement specifies that FedEx has no right to set specific working hours. The court held that it was clear from the Operating Agreement that FedEx has a great deal of control over drivers’ hours, structuring their workloads so that they have to work 9.5 to 11 hours every working day. Further, FedEx managers had the right to adjust drivers’ workloads to ensure that they never had more or less work than can be done in 9.5 to 11 hours. In addition, drivers were not supposed to leave their terminals in the morning until all of their packages are available, and they had to return to the terminals no later than a specified time. If drivers wanted their vehicles loaded, they had to leave them at the terminal overnight. In the Court’s view, “[t]he combined effect of these requirements is substantially to define and constrain the hours that FedEx’s drivers can work.”
  • FedEx can and does control aspects of how and when drivers deliver their packages. It assigned each driver a specific service area, which it “may, in its sole discretion, reconfigure.” It told drivers what packages they must deliver and when by negotiating the delivery window for packages directly with its customers.”
  • FedEx required drivers toconduct all business activities with . . . proper decorum at all times” and comply with “standards of service,” including requirements to “[f]oster the professional image and good reputation of FedEx”.

In response to FedEx’s argument that it lacked control over some parts of its drivers’ jobs, the Court concluded that such lack of control over certain parts of the drivers’ roles is not sufficient to “counteract the extensive control it does exercise.”

While FedEx pointed out that the FedEx Operating Agreement permitted a driver to delegate to other drivers, take on additional routes, or sell his route to a third party, the Court noted that FedEx had the right to refuse to let a driver take on additional routes or sell his route to a third party, and FedEx’s senior managers have the authority to reject proposed replacement drivers based on failure to meet FedEx standards such as grooming requirements.

As a result of the Ninth Circuit decision, in June 2015 FedEx settled the California case for $228 million.

Meanwhile, in July 2015, FedEx lost yet another major battle, this time before the U.S. Court of Appeals for the Seventh Circuit. That Midwest circuit adopted the decision of the Kansas Supreme Court, which (like the Ninth Circuit) held that FedEx Ground drivers, as a matter of law, were employees and not independent contractors under the Kansas wage payment law.

Both the Seventh and Ninth Circuit decisions relied on the independent contractor agreement, which FedEx itself drafted and used with all its Ground Division drivers, as the principal evidence finding misclassification. The Kansas Supreme Court decision, which was effectively adopted by the Seventh Circuit, was highly critical of the drafting 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.’”

With two major federal appellate courts now disfavoring FedEx, the company chose in June 2016 to settle most of the other IC misclassification cases. The cost: $240 million to settle 20 of the remaining class action lawsuits, excluding the Oregon case.

Last Friday, as noted above, FedEx settled the Oregon case for $15.4 million. When this amount is added to the other settlements in the past two calendar years, the total cost to FedEx in those years alone is now approaching $500 million.

How could a company as sophisticated as FedEx let this happen?

Reading the wording of the FedEx Operating Agreement and its policies and procedures, one gets the impression that FedEx knew what it was supposed to write but could not help itself in “over-lawyering” the agreement. When those documents were closely examined by the appellate courts, which had been educated in the nuances of IC misclassification law by knowledgeable plaintiffs’ class action lawyers, they found one IC compliance deficit after another buried well within the agreement and policies – sufficient in degree to lead the courts to rule against FedEx.

The FedEx IC agreements and their policies and procedures read like well-drafted legal documents, but they simply don’t cut it in the world of IC compliance. They were drafted in a manner that more closely resembled the manner in which good corporate and employment agreements are drafted – and that type of drafting can be a company’s worst enemy. Dotting one’s i’s and crossing your t’s is absolutely essential, but the problem for most companies is that the locations of the i’s and t’s are counterintuitive in the realm of IC compliance – as FedEx and its lawyers found out the hard way.

FedEx is not alone. The type of wording that the courts found to be non-IC compliant within the FedEx IC agreements and policies is rather commonplace. For that reason, IC agreements and policies created by many companies will continue to be thrown back in their faces by class action lawyers and may lead to considerable IC misclassification liability, which is oftentimes avoidable.

What can large and small companies do to avoid the FedEx experience?

Just because a company has drafted IC agreements does not mean they cannot or should not be enhanced. Evidently, though, FedEx did not undertake a thoughtful self-critical examination of its own documentation. Instead, it appeared to double down on all or most of its non-IC compliant terms and conditions.

While re-documentation of the IC relationship is not a simple task, it is readily attainable. The terms and conditions must be articulated within an agreement containing state-of-the-art provisions that are designed expressly for the particular business. Empty recitals, qualifications, and misstatements of how the relationship will be implemented should be avoided. Reservations should be crafted in an IC-compliant manner. Form agreements tend to be ill-fitting for most companies and, while they look and sound like good legal writing, are all too often turned around and used against the company by class action lawyers who specialize in this area of the law and know what to look for.

Merely re-documenting the agreement, however, is not enough. Companies should also examine closely the manner in which they implement the IC relationship, ensuring that it is carried out in a manner consistent with the IC agreement – and not at cross-purposes. This is one of the fallacies noted by the Ninth Circuit when it relied not only on the inartfully drafted IC agreement but also policies and procedures that apply to all ICs and undermined the independent nature of the independent contractor relationship.

How can this type of re-documentation and re-implementation be accomplished in an IC-compliant manner? Some businesses have chosen to use IC Diagnostics™, which creates thorough, practical, and sustainable documentation, customized to the particular business and at all times maintaining the key components of the company’s business model using state-of-the-art provisions that enhance, rather than detract from, IC compliance.