The ruling from the Seventh Circuit has strong implications for drivers working across the United States who have been classified as “independent contractors” and forced to pay for fuel, lease payments, insurance, and other business expenses relating to their work.

On July 8th, 2015 the U.S. Court of Appeals for the Seventh Circuit adopted the decision of the Kansas Supreme Court in Carlene.M. Craig, et al v. FedEx Ground Package Sys., Inc. This decision holds that FedEx Ground drivers are employees and not independent contractors under the Kansas Wage Payment Act (KWPA). The Seventh Circuit now joins the Ninth Circuit in ruling against FedEx Ground on this issue,. In August 2014, the Ninth Circuit made the same finding in two cases against FedEx under California and Oregon law.

The FedEx Ground division, a subsidiary of FedEx Corporation, was created in 2000, to provide small package pick-up and delivery services through a nationwide network of pick-up and delivery drivers. FedEx Ground currently employs 32,500 uniformed drivers, managers and affiliated workers who are classified as independent contractors, a controversial policy that allows FedEx to save on health benefits, unemployment insurance, retirement accounts and overtime pay, among other things.

However, plaintiffs, current and former drivers for FedEx, claimed they were employees rather than independent contractors under the laws of the states in which they worked and under federal law. Therefore, they were entitled to repayment of all costs and expenses they paid during their time as FedEx employees. They also sought payment of overtime wages.

The Judicial Panel on Multidistrict Litigation (MDL) consolidated all these actions and transferred them to the District Court for the Northern District of Indiana. That court used the Carlene m. Craig, et al. caption, which was based on the Employee Retirement Income Security Act (“ERISA”) and Kansas law, as its “lead” case. The court certified a nationwide class seeking relief under ERISA and certified statewide classes under Federal Rule of Civil Procedure Rule 23(b)(3).

Cross summary judgment motions in Craig presented the question of whether the FedEx drivers were employees or independent contractors under the Kansas Wage Payment Act (KWPA). The evidence presented through the competing motions essentially revolved around a form Operating Agreement which FedEx drafted and used with all its Ground Division drivers.

The MDL then drew on its decision in Craig and ruled in FedEx’s favor on summary judgment on the questions of the plaintiff’s employment status in the other cases.

After MDL’ ruling in favor of Defendant, twenty-one cases were submitted for appeal before the US Court of Appeals for the Seventh Circuit in 2012. They present substantially the same issue: whether the district court erred by deciding as a matter of law that the certified classes of plaintiffs were independent contractors and thus could not prevail on their claims. Each case, however, arises under a different state’s substantive law. Therefore, the parties proposed to begin with the Craig appeal and put a hold on the remaining appeals pending on further order on Craig’s appeal.

Then the Seventh Circuit “certified” two questions to the Kansas Supreme Court to make a determination of independent contractor status:

1)            Are the FedEx drivers employees as a matter of law under the KWPA?

2)            Is the answer to the preceding question different for plaintiff drivers who have more than one service area?

Kansas Supreme Court answer the first question “yes” – the drivers are employees and not independent contractors – and the second question “no” – the answer is the same for drivers that have more than one service area (even though they have to employ other drivers to handle their second or third route).

In responding to the questions, the court applied a twenty-factor test which “includes economic reality considerations, while maintaining the primary focus on an employer’s right to control”. The right of control test determines “whether the employer has the right of control and supervision over the work of the alleged employees, and the right to direct the manner in which the work is to be performed, as well as the result which is to be accomplished.[…] It is not the actual interference or exercise of the control by the employer, but the existence of the right or authority to interfere or control, which renders one a servant rather than an independent contractor.”

Among the factors that the Court regarded as favoring employee status were the following:

• FedEx issued instructions and required compliance therewith.
• The services of the drivers were an integral part of FedEx’s business.
• There was a continuing relationship between the drivers and FedEx.
• FedEx requires written reports about deliveries.
• The drivers’ ability to earn a profit is constrained by FedEx’s controls.
• As a matter of reality and practicality, drivers cannot work for more than one company at a time.
• The drivers’ services are not regularly made available to the public.
• The drivers may unilaterally terminate their relationship with FedEx at any time without financial repercussion.

Contrary to FedEx’s view, the Kansas Supreme Court’s decision did not rest on whether FedEx exercises “actual control” over the plaintiff drivers but how FedEx controls all drivers based on the Operating Agreement and generally applicable policies and procedures. As the Supreme Court said “The District Court in this case primarily focused on the OA’s [Operating Agreement] statements of FedEx’s right to control the drivers, opining that the actual control that FedEx exercised over the drivers was not the question. But we consider the manner in which FedEx implemented the OA to be a compelling factor in determining the substantive question of the company’s right to control its drivers.”

FedEx Ground argued to the Seventh Circuit that the federal appellate court should not follow the Kansas Supreme Court’s answers to the certified questions. The Seventh Circuit rejected FedEx’s arguments, noting that “Certification would be a pointless exercise unless the state court’s answers are regarded as an authoritative and binding statement of state law.” Certification is appropriate when the case concerns a matter of vital public concern, where the issue will likely recur in other cases, where resolution of the question to be certified is outcome determinative of the case, and where the state supreme court has yet to have an opportunity to illuminate a clear path on the issue. Therefore, the Seventh Circuit concluded that “the state answers are binding.”

 

Consequences of the Seventh Circuit’s decision holding delivery drivers to be employees and not “independent contractors”

The Kansas Supreme Court noted in its opinion that the twenty-factor test under Kansas law as to whether an individual is an employee or independent differs somewhat from the “economic realities” test under the federal wage and hour law. Under the federal test, the determination of an individual’s status focuses more on whether, as a matter of economic reality, a worker is dependent on a given employer. Because the “right to control” test is generally regarded as more favorable to a finding of independent contractor status, the decision by the Kansas Supreme Court as adopted by the Seventh Circuit suggests that the company is even less likely to prevail in those states that borrow or use a variation of the federal “economic realities” test.

However, the most damaging part of the decision by the Kansas Supreme Court came with its response to the second question.  At the end of 2010, FedEx shifted into a new business model under the pressure of the independent contractor laws.  That business model gave its single-route drivers three options for continuing to work with FedEx on a going-forward basis:

• Become a multi-route Independent Service Provider (ISP) by incorporating as a business,
• Become an employee driver of an approved FedEx Ground ISP (that is, become a driver for another driver that has set up a business as an ISP)
• Terminate his or her relationship with FedEx Ground at the expiration of its current independent contractor agreement, which would not be renewed.

The Kansas Supreme Court concluded that “the employer / employee relationship between FedEx and a full-time delivery driver . . . is not terminated or altered when the driver acquires an additional route for which he or she is not the driver.”

Drawing the line between being an employee or and independent contractor is an issue of great importance not just to this case but to the structure of the American workplace. The number of individuals classified as independent contractors in this country is growing. There are several economic incentives as to why employers wish to use independent contractors and there is a potential for (and evidence of) abuse in misclassifying employees as independent contractors. For instance, employees misclassified as independent contractors are denied access to certain benefits and protections. Not only that, misclassification results in significant costs to government (between 1996 and 2004, $34.7 billion of Federal tax revenues went uncollected due to the misclassification of workers  and puts employers who properly classify their workers at a disadvantage in the marketplace).

The interpretation of the difference between employee and independent contractor follows the same line in the state of New Jersey. In January 14, 2015, the New Jersey Supreme Court issued a similar ruling holding delivery drivers to be employees based on a similar question asked by the United States Court of Appeals for the Third Circuit in reference with the case Sam Hargrove, et. al. v. Sleepy s, LLC. Specifically, the Court had to decide which test should be applied under New Jersey law to determine whether a plaintiff is an employee or an independent contractor for purposes of resolving a wage-payment or wage-and-hour claim.

In its decision, the Supreme Court stated that the ABC test derived from the New Jersey Unemployment Compensation Act, N.J.S.A.43:21-19(i)(6), provides more predictability and may cast a wider net than the FLSA economic realities test.

• The ABC test presumes that an individual is an employee unless an employer can show that:
• The employer neither exercised control over the worker, nor had the ability to exercise control in terms of the completion of the work;
• The services provided were either outside the usual course of business or performed outside of all the places of business of the enterprise; and
• The individual has a profession that will plainly persist despite termination of the challenged relationship.

Failure to satisfy any one of these three criteria results in an employment classification.

If you are a current independent contractor but you feel you should be considered as an employee, please contact us at (856) 685-7420 for a free consultation with our team of experts.

You can read the entire decision of the U.S. Court of Appeals for the Seventh Circuit in the following link: https://media.ca7.uscourts.gov/cgi-bin/rssExec.pl?Submit=Display&Path=Y2015/D07-08/C:10-3115:J:PerCuriam:aut:T:fnOp:N:1583690:S:0

You can read the entire decision of the U.S. Court of Appeals for the Ninth Circuit in the following link:

https://cdn.ca9.uscourts.gov/datastore/opinions/2014/08/27/12-17458.pdf