Thursday, August 28, 2014

Employee or Independent Contractor? Federal Appeals Court Issues Major Decision

For years, employment attorneys have been warning employers about the consequences of misclassifying workers as independent contractors when they are really employees.  Yesterday, the Ninth Circuit Court of Appeals strongly reinforced those warnings in the FedEx Ground cases. The court held that a class of 2,300 FedEx Ground delivery drivers in California were employees, despite written agreements with FedEx that called them independent contractors.  This decision will have significant impact in California and beyond, and serves as a reminder of the importance of classifying workers’ positions correctly.
In its ruling, the court painstakingly worked through the ten factors used by California courts – and many other courts and agencies, like the IRS – to determine whether workers are employees or independent contractors.  Citing a related case, the court found that FedEx exercised its “right to control” the plaintiffs, down to every “exquisite detail” of the work performed and the conditions under which they performed it, including the type of socks worn by the drivers.  FedEx argued that the drivers were free to perform their work as they chose, but the court did not agree.
As one of the judges writes in a concurrence, this decision will “substantially unravel FedEx’s business model.” It may also result in significant cost to FedEx and any similarly situated business. Imagine all the benefits that employees get, and independent contractors generally do not: overtime, paid vacation, health insurance, reimbursement for expenses, 401(k) or other retirement benefits, etc.  Although FedEx changed many of its practices after the suit was initiated, the cost of the plaintiffs’ claims will still be very high. No word yet on whether FedEx Ground intends to seek Supreme Court review, but given the stakes, it seems likely such an appeal will occur.
Legislatures have also been busy imposing new laws intended to protect individuals who should be classified as employees. For example, the construction industry has been under the microscope in Illinois, Pennsylvania, Nebraska, Minnesota, and other states.  Failure to properly classify a construction worker could mean that an employer is debarred from working on public projects, and may be required to pay stiff fines on top of any damages the worker may claim.
The misclassification of a worker as an independent contractor has many consequences, and there are a lot of eyes out there watching for employers to get it wrong.  Individual workers (and their lawyers) are interested in their own situations, of course, but state unemployment authorities, worker compensation agencies, and tax authorities care about misclassification too, because it affects what’s paid into those government agencies’ coffers.  Employers can’t afford to get the classification analysis wrong. That’s why employment lawyers should be forgiven for sounding like broken records on this topic.
Posted by: Kate Bischoff