Less than three months after settling independent contractor misclassification charges with the Massachusetts Attorney General for $3 million, FedEx Ground has agreed to pay Montana $2.3 million to settle that State’s misclassification claims against the worldwide courier.

According to the Attorney General of Montana Steve Bullock, FedEx Ground is paying the State for its failure to pay unemployment insurance taxes for its drivers, whom the Attorney General claims were employees that FedEx Ground has been misclassifying as independent contractors. The $2.3 million includes interest and penalties for misrepresenting employee information in its quarterly unemployment insurance reports to the State.  (Click “More” for “Takeaway” below)

As a result of the settlement announced yesterday, FedEx Ground will implement a new pickup and delivery model in Montana whereby drivers will register as independent incorporated businesses and be responsible for their own hiring, training, and supervision of personnel as multi-route independent service providers (ISPs). Montana reportedly agreed in the settlement to afford FedEx Ground six months to implement its ISP business model in the State, which is similar to the model being implemented by the company in New Hampshire, Maryland, Tennessee, and most recently Massachusetts. However, as Attorney General Bullock was quoted as saying, “This settlement does not provide any assurance that we won’t be back fighting a year from now” if FedEx Ground continues the “degree of control that the state found they’ve been exercising over these [drivers] the last few years.”

FedEx Ground reportedly admitted no wrongdoing in the settlement and, according to its spokesman, “remains committed to the independent-contractor model.”

This settlement with Montana does not affect the sixty class action cases still pending against FedEx Ground in federal court. While FedEx Ground has won some court battles in the past two years, it has also lost a number, most notably a $30 million class action judgment against it for damages and legal fees in California under that State’s labor laws. Last fall, FedEx Ground escaped from a $319 million assessment by the IRS for unpaid federal payroll taxes, penalties, and interest under the “safe harbor” provisions in the Revenue Act of 1978. That “safe harbor” provision would be eliminated if Congress passes the “Fair Playing Field Act of 2010.” 

Aggressive enforcement by state labor commissioners and attorneys general can force companies not only to pay hefty fines and penalties, but also to restructure their relationships with independent contractors or reclassify them as employees. As vividly demonstrated by the long-running saga of FedEx Ground, this type of corporate conduct can be costly, including payment of its own legal fees defending class action cases and doing battle with government regulators.

Proactive corporate conduct designed to enhance independent contractor compliance may make sense for most companies that utilize the services of a significant number of independent contractors, but have not yet become the target of state or federal regulators or plaintiffs’ class action lawyers.


Written by Richard Reibstein.