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U.S. Appeals Court “unravels FedEx’s business model” and rules that drivers are not Independent Contractors

U.S. Appeals Court “unravels FedEx’s business model”

In a stunning, but absolutely correct decision, the Ninth Circuit Court of Appeals has ruled that drivers for FedEx Ground Package System should not have been classified as independent contractors and instead are employees. The court acknowledges that this ruling “unravels FedEx’ business model” but notes that FedEx “was not entitled to “write around” the principles and mandates of [the law].”

Background: FedEx Ground is obviously a well-known company and built its business model around its characterization of its drivers as independent contractors. This classification avoided for FedEx all of the additional expenses associated with employees including increased taxes, insurance, unemployment contributions and other things.

This business model was first challenged over a decade ago by drivers in California who argued that they were misclassified as independent contractors and should have been treated like employees. A $5 million judgment in their favor, along with an additional $12 million in attorneys’ fees, spawned additional litigation. Estrada v. FedEx Ground Package System, 64 Cal.Rptr.3d 327 (2007). After Estrada, class-action lawsuits in 40 states were filed challenging the FedEx Ground model under state and federal law. Most of this litigation was consolidated in the multi-district litigation docket or MDL and transferred to a federal court in Indiana. There, the court denied class certification for most of the litigation and granted summary judgment rulings in favor of FedEx in most of the states. The drivers took an appeal to the Ninth Circuit for the California and Oregon cases.

The Ninth Circuit conducted a thorough and careful examination of the Operating Agreement and concluded that through this document FedEx retained sufficient rights to control the work of the delivery drivers such that they should be characterized as employees as matter of law. First the lower courts entry of judgment in favor of FedEx and ordered that judgment be entered in favor of the drivers. It also rejected FedEx is motion to decertify the class of drivers holding that this ruling “does not rely on any individualized evidence.”

The opinion reads like a treatise on independent contractor law. Carefully applies the details of the operating agreement to the California and Oregon independent contractor tests. Among the factors that it found to support its holding was the fact that FedEx required its drivers to hold its keys on their pinky finger when exiting the vehicle. It summed up its ruling like this:

Viewing the evidence in the light most favorable to FedEx, the OA grants FedEx a broad right to control the manner in which its drivers’ perform their work. The most important factor of the right-to-control test thus strongly favors employee status. The other factors do not strongly favor either employee status or independent contractor status. Accordingly, we hold that plaintiffs are employees as a matter of law under California’s right-to-control test.

The opinion was written colorfully, referring at times to dogs and at other times to ducks. Of dogs, it wrote:
Abraham Lincoln reportedly asked, “If you call a dog’s tail a leg, how many legs does a dog have?” His answer was, “Four. Calling a dog’s tail a leg does not make it a leg.”
Of ducks, it wrote:

The Court of Appeal in that case appropriately called the trial court’s observation an application of the looks like, walks like, swims like, and quacks like a duck test.
Finally, it acknowledge that its ruling changes the way FedEx does business:
Although our decision substantially unravels FedEx’s business model, FedEx was not entitled to “write around” the principles and mandates of California Labor Law by constructing a contract which, after a contested trial, the California trial court in Estrada called:[A] brilliantly drafted contract creating the constraints of an employment arrangement 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 control over [the drivers] based upon interpretation and obfuscation.
Estrada, 64 Cal. Rptr. 3d at 334.
FedEx is seeking an en banc review of this decision. We’ll keep you posted.