FedEx yesterday announced that it reached a settlement of its remaining independent contractor class action lawsuits in 20 states with its Ground Division drivers for $240 million, pending court approval. Coming on the heels of its $226 million dollar settlement in the California class action against it, FedEx will pay out $466 million to resolve claims that it misclassified as ICs its Ground and Home Delivery drivers, who alleged they were employees under applicable laws. What’s the lesson that these FedEx cases offer to companies that use ICs? As detailed below, if you improperly document, structure, and implement your company’s relationship with ICs, you are needlessly exposing your business to costly legal consequences that could and should have been minimized or avoided.

The legal landscape for FedEx was mixed until August 2014. Prior to that time, FedEx had won a number of its earlier IC legal skirmishes and lost some. But, all that changed when the Ninth Circuit Court of Appeals in San Francisco slapped down FedEx in a blockbuster decision on August 27, 2014, concluding that FedEx misclassified its Home Delivery and Ground Division drivers as independent contractors as a matter of law. That decision was followed only five weeks later by a similar decision from the Supreme Court of Kansas, and the Kansas decision was then adopted in July 2015 by the Seventh Circuit Court of Appeals in Chicago. All of those decisions reached the same conclusion: “FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.”

The Kansas, Seventh Circuit, and Ninth Circuit decisions relied principally on the FedEx independent contractor agreement, which FedEx itself drafted and used with all its Ground Division drivers. The Kansas Supreme Court was not particularly soothing in its critique of the contract, noting that it agreed with yet another appellate court that FedEx’s independent contractor agreement is a “‘brilliantly drafted contract creating the constraints of an employment relationship 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 actual control over [the drivers] based upon interpretation and obfuscation.’”

Following those three decisions, FedEx went into settlement mode, resulting in these settlements totaling $466 million.

What is the lesson for businesses that use ICs?

These FedEx Ground settlements are a pointed reminder to businesses that use independent contractors that the form of their agreements is little protection if either (a) the document gives a right to independent contractors with one hand, and then takes it away with the other; or (b) the contract does not accurately represent the parties’ practice. These decisions confirm that the best protection for businesses using independent contractors is to structure, document, and implement the independent contractor relationship in a manner that is consistent with the laws in the states in which the business operates. The laws in most states vary considerably, yet have a common thread: the less direction and control over the individuals in question, the better.

If FedEx and its lawyers had drafted their IC agreements with a sharper eye on clever compliance instead of shrewdness found to have circumvented the law, FedEx would not likely have been dealt a fatal blow by those key appellate courts – and may have prevailed in those class actions or settled them for a fraction of what it eventually agreed to pay.

Many businesses that seek to reduce direction and control, yet maintain an independent contractor model, have resorted to the use of a process such as  IC Diagnostics™, a process that examines whether a group of workers would pass the applicable tests for independent contractor status under governing state and federal laws.  IC Diagnostics™ then offers a number of practical, alternative solutions to enhance compliance with those laws. For existing businesses, those alternatives include restructuring, reclassification, or redistribution, as more fully described in my White Paper.

For those businesses that can, consistent with applicable laws, retain their independent contractor relationships without undue exposure to misclassification liability, IC Diagnostics™ affords them a way to genuinely restructure, re-document, and re-implement those relationships in a manner that enhances independent contractor compliance and minimizes misclassification exposure. Not every business can restructure in a manner that complies with applicable laws, but most can.

But, structuring IC relationships in a compliant manner will not alone suffice. Those relationships need to be documented in a state-of-the-art and bona fide manner that comply with the law yet maintain the essential components of the company’s business model. By doing so, companies can maximize the likelihood that they will be able to avoid the types of IC misclassification exposure that FedEx Ground spent close to $500 million to resolve – simply because their IC agreements did not cut it with the courts.

Written by Richard Reibstein.