The brain teaser game, What am I? can keep kids and adults occupied for hours:
The more you take of me, the more I leave behind. What am I?
I have a face but no eyes, hands but no arms. What am I?
I disappear every time you say my name. What am I?
(Don’t worry. Answers are below.)
The less popular brain teaser game, Am I an independent contractor or an employee? can keep courts and lawyers occupied for years.
Last week the Ninth Circuit issued a pair of decisions in the nearly-decade long misclassification dispute between FedEx and its drivers, with the Court of Appeals ruling that drivers in California and Oregon are FedEx employees, not independent contractors. Alexander et al. v. FedEx Ground Package Sys., Inc. (California); Slayman et al. v. FedEx Ground Package Sys., Inc. (Oregon).
The Big Picture
The driver-as-independent-contractor model has been under attack for years, with federal and state governments and putative class litigants alleging that drivers, in many instances, are misclassified and should be considered employees under applicable law. The challenge for all parties in these disputes is that the standards for determining whether someone is a contractor or an employee is different under federal tax law, federal wage and hour law, federal benefits law, and federal anti-discrimination law, and varies even more greatly from state to state, with individual states often applying multiple tests within the same state, depending on whether the analysis is for purposes of unemployment law, workers compensation law, wage and hour law, or other state employment statutes. Because of the matrix of tests, the same relationship can be classified in different ways under different laws and in different states.
In the mid-2000s, FedEx drivers filed a rash of class and collective actions around the country, alleging that FedEx had misclassified them as independent contractors, and that they should instead have been deemed employees. The lawsuits alleged a hodgepodge of mostly state law claims, including under state wage and hour laws, wage payment laws, leave laws, and various other claims.
Many of these lawsuits were consolidated into multi-district litigation in the Northern District of Indiana (the “MDL Court”). In December 2010, the MDL Court issued the mother of all summary judgment opinions, evaluating the standards for independent contractor misclassification under multiple laws across 26 states. In a 95-page opinion, the company came out mostly ahead, with the MDL Court ruling that drivers were independent contractors in 23 of the states, and employees in three.
But then came the appeals, and the tide now turns.
The Ninth Circuit’s Decision
On August 27, 2014, the Ninth Circuit issued a pair of opinions that reverse the MDL Court’s decision as to FedEx drivers in California and Oregon. The Ninth Circuit ruled that under the various California and Oregon tests, the drivers were in fact employees.
These decisions are significant, but not because they create new law or new standards. They don’t. The Ninth Circuit in these cases considered the same facts reviewed by the MDL Court and applied legal tests that had been well-established. California continues to apply the multi-factor S.G. Borello test with its primary right-to-control factors and its list of secondary indicia that may also be considered. Oregon continues to apply its state law version of the right-to-control test for illegal wage deduction claims and a separate economic-realities test for unpaid overtime claims.
Rather, these cases are significant because the Ninth Circuit reached a different conclusion – and for employers in California and Oregon, what the Ninth Circuit thinks is far more important than how an MDL Court in Indiana interprets California and Oregon law.
The Ninth Circuit placed heavy emphasis on the fact that, in the Operating Agreement between FedEx and the drivers, FedEx retained the right to control the physical appearance of drivers, including hair and facial hair requirements; the physical appearance of vehicles, including the color, logo, and internal shelf arrangements; the drivers’ use their vehicles when not delivering FedEx packages; the drivers’ workloads; and the reconfiguration of drivers’ territories.
The Court conceded, but considered less important, the fact that the company retained limited control over precise routes or the sequence in which packages were delivered. The Court also conceded that the company allowed drivers to retain assistants, but the Court deemed this factor to be of little help to the company, since it retained the right to reject the assistants and required them to comply with various requirements it imposed.
The Ninth Circuit conceded that various secondary factors were either neutral or weighed in favor of independent contractor status, such as the requirement for drivers to purchase their own tools and vehicles, the inability of FedEx to terminate drivers except for cause, and the contractual language defining the parties’ expectations that the relationship was an independent contractor relationship.
Overall, however, the Court determined that under both California and Oregon law, the rights that the company retained to control multiple aspects of the drivers’ work were sufficient to render the drivers employees under the applicable California and Oregon tests. Many of these rights were retained by the company, in writing, in the parties’ Operating Agreement.
The Court expressly acknowledged the business impact of its decision. In the California case, Judge Trott (who agreed with the panel’s opinion) wrote separately to note that “our decision substantially unravels FedEx’s business model.”
FedEx, however, in a statement released shortly after the decision, noted that it has substantially changed its Operating Agreement since the version that was considered in these cases and that it presently contracts only with incorporated businesses that treat their drivers as employees. It is also seeking en banc review of the decision.
The Bottom Line: Companies who treat drivers as independent contractors should be prepared for continued challenges to the relationship on the grounds that the drivers are actually employees. It is becoming harder and harder for companies to withstand these challenges, with the Ninth Circuit applying an especially pro-employee interpretation of the law.
Answers: Footsteps, a clock, silence.
Editor’s Note: This blog post is a joint submission with BakerHostetler’s Employment Class Action Blog.