141 drivers classified as independent contractors by FedEx Ground will receive $5.8 million in settlement of their misclassification lawsuit brought under federal and Maine wage and hour laws. The amount includes their class counsels’ legal fees of $1.9 million. Scovil v. FedEx Ground Package System, Inc., d/b/a FedEx Home Delivery, Case No. 1:10-cv-00515-DBH (D. Maine, March 14, 2014).
The federal court lawsuit in Maine alleged that the FedEx Ground improperly denied the drivers’ overtime pay for hours worked over 40 in a workweek, improperly made deductions from the drivers’ pay, and improperly required the drivers to pay for their own expenses. There were seven named plaintiffs, but only two of the seven signed the settlement agreement, arguing that the amount being paid by FedEx Ground should have been even more substantial.
The federal court judge noted that if the drivers’ case was tried, damages could have topped $10,000,000, with the potential for double damages under state and federal wage laws. The court nonetheless found that the proposed settlement of $5.8 million was fair, reasonable, and adequate.
In approving the settlement last week, the court acknowledged that “the proposed settlement…is clearly a compromise that discounts to some degree…the drivers’ total claims” but is a “fair trade-off for the uncertainties of trial and appeal and a prolonged delay in receiving any money. In that regard, the court noted that FedEx Ground has won some independent contractor misclassification cases and lost others. The court also found that the amount (one-third of the $5.8 million settlement) sought by the lawyers for the class for counsels’ legal fees, costs, and expenses was reasonable.
Analysis and Takeaways
FedEx Ground and its drivers have been at the center of the independent contractor misclassification issue for many years. FedEx has lost in such states as California, Illinois, and Massachusetts; won under the state law of Kansas and the federal National Labor Relations Act; won before the IRS (which reportedly concluded that the drivers were independent contractors but that FedEx was entitled to the benefit of safe harbor relief under Section 530 of the Revenue Act of 1978), and settled cases with state Attorneys General, including those in Montana and Massachusetts. Dozens of cases brought by class action lawyers and other states’ Attorneys General remain pending, including a case reportedly going to trial in Missouri.
In addition to the cost of the settlements as well as the judgments rendered against FedEx Ground, the company has incurred very considerable legal fees for its own lawyers defending these legal proceedings around the country. Few businesses can afford to defend themselves against a rash of lawsuits or afford to pay multi-million dollar judgments and settlements.
How can a business, which makes use of independent contractors, avoid or minimize independent contractor misclassification liability? As noted in my White Paper, there are alternatives that businesses can take to avoid or minimize such misclassification liability, including restructuring, re-documenting, and re-implementing their business models; voluntary or government-sponsored reclassification; or redistribution of independent contractor through the use of a workforce management or staffing firm.
Most businesses built on an independent contractor model or that use a substantial number of 1099ers prefer to maintain their business model by opting for the first alternative: restructuring their independent contractor relationships to enhance compliance with applicable state and federal labor, tax, and employee benefit laws. This alternative can be accomplished through the use of a process such as IC Diagnostics™, that has been developed, refined, and improved over a period of over four years, using comprehensive diagnostic tools to assess the level of compliance and guide the restructuring, re-documentation, and re-implementation to minimize exposure to liability under various federal and state laws.
The same tools used to enhance independent contractor compliance are also key tools used in defending administrative and court challenges to a company’s worker classifications. The cost of defense, however, typically far outweighs the cost of avoiding lawsuits in the first place. While businesses that operate with an enhanced level of independent contractor compliance cannot completely avoid scrutiny by governmental regulators and plaintiffs’ class action counsel, it is a given that the higher the level of compliance, the less likelihood that the business be subject to legal challenges at all.
Written by Richard Reibstein.