In the past 2-1/2 years, FedEx has suffered through some appellate court setbacks in the area of independent contractor misclassification, beginning with a decision by the U.S. Court of Appeals for the Ninth Circuit in San Francisco and ending with a decision by the Seventh Circuit in Chicago. Those decisions led FedEx to settle most of their remaining IC misclassification class actions covering their Ground Division drivers for several hundred million dollars.  FedEx has, however, enjoyed continued success in maintaining its position that its single-route Ground Division drivers are independent contractors for purposes of the National Labor Relations Act, the federal law that permits the unionization of workers who are “employees” under the NLRA.

The D.C. Circuit Decisions

Last Friday, March 3, 2017, the U.S. Court of Appeals for the D.C. Circuit issued a decision in favor of FedEx, denying enforcement of a decision by the National Labor Relations Board, which had held that single-route Ground Division drivers for FedEx were employees and not independent contractors. FedEx Home Delivery, an Operating Division of FedEx Ground Package System, Inc. v. NLRB, Nos. 14-1196, 15-1066, 15-1116 (D.C. Cir. Mar. 3, 2017). This was the second time that the D.C. Circuit denied enforcement of an NLRB decision that, if not reversed, would have required FedEx to bargain with a local Teamsters union as the representative of a bargaining unit of Ground Division drivers.

In the first decision by the D.C. Circuit, the court concluded that, as a matter of law, the drivers were independent contractors under the common-law agency test used to determine independent contractor status under the NLRA. FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009). The court noted in FedEx I that decisions by the NLRB and as to the application of the common-law agency test had shifted over time; at first, the NLRB had focused on an “‘employer’s right to exercise control’ over the workers’ performance of their jobs,” but later placed emphasis on whether the workers in question “have significant entrepreneurial opportunity for gain or loss.”

The court in FedEx I then examined a “non-exhaustive list of ten factors [set forth in the Restatement (Second) of Agency] to consider in deciding whether a worker is an independent contractor.”  It “look[ed] at those factors through the lens of entrepreneurial opportunity for gain or loss” and concluded that the “indicia of independent contractor status ‘clearly outweighed’ the factors that would support employee status.”  The NLRB did not seek Supreme Court review of the FedEx I decision by the D.C. Circuit.

In the second FedEx proceeding before the NLRB, the company had argued that the decision in FedEx I compelled a ruling in the second case in its favor.  The NLRB, however, chose to disregard the prior decision by the D.C. Circuit.  In its ruling, the NLRB said it “disagreed with [the D.C. Circuit’s] interpretation of the Act.”  That decision was promptly appealed by FedEx.

On review by the D.C. Circuit, the appellate court again reversed the NLRB. The court stated: “It is as clear as clear can be that ‘the same issue presented in a later case in the same court should lead to the same result.”  The court then stated emphatically: “Doubly so when the parties are the same.” After stating that the NLRB was simply seeking to “nullify this court’s decision in FedEx I,” it remarked:  “This case is the poster child for our law-of-the-circuit doctrine, which ensures stability, consistency, and evenhandedness in circuit law.”

 Analysis and Takeaway

The D.C. Circuit decision applies only to single-route FedEx Ground drivers, which was the company’s most vulnerable group of drivers in terms of IC misclassification. As I noted several years ago in an earlier blog post, FedEx Ground undertook a change in its relationship with Ground Division drivers when it implemented an Independent Service Provider (ISP) program where single-route drivers were only offered FedEx Ground routes if they acquired the rights to multiple routes.  This required them to (a) become a multi-route by incorporating as a business, purchasing from FedEx Ground three or more work areas in the same geographic area, and entering into an agreement with FedEx on an approved ISP arrangement for the work areas; or (b) 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). Because FedEx has now undertaken a new business model in most areas of the U.S., this newest D.C. Circuit decision, while plainly of great value for FedEx with regard to any remaining single-route territories, has less significance to FedEx in those areas where it has fully accomplished its ISP conversion.

FedEx has been widely criticized by some appellate courts for having “established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing.” But those cases were decided under a different test for independent contractor status, and under the test applied by the D.C. Circuit in applying the NLRA, FedEx came out on top.

This divergence in IC classification results, depending on the law being enforced, is not uncommon. As the U.S. Labor Department itself noted on its website in 2016, “Even if you are a legitimate independent contractor under one law, you may still be an employee under other laws.”

This type of caution, no less from the U.S. Department of Labor, can create uncertainty on the part of many businesses. What steps should a business take in the face of laws that are so variable in the area of IC misclassification?

As I noted in a blog post in February 2016, some commentators have suggested that businesses “play it safe” and convert all of their 1099ers to W-2 employees, while other businesses have decided to “play it smart” and enhance their level of IC compliance.  To that end, many companies have used a process such as IC Diagnostics™ that takes into   account the various tests for IC status in all applicable jurisdictions and offers companies customized and sustainable solutions to enhance their compliance with an array of federal and state IC laws. The ultimate objective is avoiding or minimizing the likelihood of becoming a defendant in an IC misclassification class action or the target of a regulatory audit or proceeding. How to do so is the subject of a three-part series in Law360 entitled Misclassification of Independent Contractors: The Crackdown, Its Costs, and How to Minimize or Avoid Its Risks,” which is based on the latest Update to my White Paper.

Written by Richard Reibstein.