By: Bill Pilchak and Rob Dare – 6/23/15
The recent $228 Million settlement of a long-fought lawsuit by Federal Express drivers alleging that they were misclassified as independent contractors has attracted plenty of press coverage and will almost certainly result in more claims. Plaintiff-side attorneys are already tuned into this lucrative practice, as multi-million-dollar settlements are fairly commonplace. In addition to FedEx, Lowes has settled a misclassification case for $6.5 million, a California trucking company paid $11 million and a janitorial services company paid $5.5 million, all within the past year. But, the Fed Ex publicity is likely to put dollar signs in the eyes of individuals classified as independent contractors as well.
Employers utilize independent contractors because they avoid employment costs. Independent contractors receive no fringe or ERISA benefits, receive no overtime compensation, employers do not pay Social Security or Medicare contributions, unemployment, workers compensation, etc., and taxes are not withheld or paid to government. However, these savings translate into two dangers: First, those savings plus often a multiplier and attorney fees are the damages plaintiffs will seek and/or assessments a governmental agency may demand. Second, it means that plenty of individuals and entities have a motive to scrutinize and audit the independent contractor designation, including the workers, their attorneys, the unemployment agency, the IRS, workers compensation carriers, and health care providers. Indeed, the $5.5 claim against the janitorial services company commenced when a janitor filed an unemployment claim, leading the finding that he was an employee.
Businesses may think that they have solved the problem by obtaining an agreement that the worker is an independent contractor. However, such an agreement is not determinative.
Another problem for business is that the determination whether an individual may be considered an independent contractor is not a black and white determination. Each case considers a number of factors. Fed Ex argued that its drivers could operate multiple delivery routes, had authority to hire third parties to help them with those routes and provided the vehicles in which they delivered packages, all of which support independent contractor status because they seemingly demonstrate that the driver is in business for him/herself. However, California, like Michigan, uses a right of control test and the Ninth Circuit Court of Appeals held last August that the drivers were employees as a matter of law, because Fed Ex controlled so much of the drivers’ operations: uniforms, workload, working days, delivery times, vehicle size and appearance and required adherence to Fed Ex policies and evaluated drivers.
Fed Ex was in a better position than most businesses to argue independent contractor status, given the driver’s investment in his/her vehicle and ability to hire its own employees. Independent contractors are in business for themselves, supply their own equipment, control their own schedules, and can turn a profit or a loss depending on how they conduct their business. The most dangerous situations are those where the individual comes to work day after day, does work under the direction and control of the company during hours set by the company, uses the company’s computers or equipment and is primarily reliant upon the company, as opposed to an array of customers, for his or her livelihood. Those situations are ripe for claims.
Boiling the analysis down to bare essentials, the primary question is: Is the independent contractor in business for him/herself, so that the “customer” exercises only limited control, such as scheduling services when mutually convenient? Or does the individual respond to supervision, direction, controls in the manner employees do? If the latter, the potential employer would be wise to adopt a strategy for converting independent contractors without alerting them to their potential claims.