Economy

FedEx Illegally Labeled Employees As Independent Contractors To Cut Costs, Kansas Court Finds

CREDIT: AP

FedEx drivers were illegally misclassified as independent contractors for years despite being treated like employees of the company, the Kansas Supreme Court found on Friday. The ruling moves FedEx Ground employees around the country a few steps closer to collecting hundreds of millions of dollars in back pay.

From the late 1990s through the first decade of the 2000s, FedEx set contract agreements with delivery and pickup drivers in order to avoid the higher costs associated with making the drivers full employees. Independent contractors are not protected by the same labor laws as payroll employees. The contracts allowed FedEx to bill drivers for their uniforms and equipment and protected the company from having to pay overtime when drivers cracked the 40 hour weekly mark.

In 2007, drivers filed suits in various states. These have since been consolidated into a nationwide class-action suit. The company told Forbes that it stopped using the independent contractor business model in question in 2011 and that “we fundamentally disagree with this ruling.”

Kansas’ high court found that FedEx exerted a degree of control over its drivers’ work conduct that exceeds what independent contractors would face. The company points to language in its contracts that leaves “the manner and means” of making timely deliveries up to drivers and that ostensibly prohibits FedEx staff from “impos[ing] any term or condition…contrary to this understanding” on drivers. But in reality, the court found, the company controls “the delivery days and times; delivery methods; reporting requirements; vehicle identification, specifications, and maintenance; and driver appearance” and threatens to terminate the contract of drivers who violate its edicts.

“[I]f a worker is hired like an employee, dressed like an employee, supervised like an employee, compensated like an employee, and terminated like an employee, words in an operating agreement cannot transform that worker’s status into that of an independent contractor,” the court wrote in its decision.

The Kansas ruling was requested by a federal appeals court that is hearing one of the several FedEx suits filed last decade, and it is at least the third formal win for drivers this year. Another appeals court in Oregon ruled in drivers’ favor in August, and the National Labor Relations Board found that FedEx’s former arrangement with drivers violated their labor rights during the same week that the Kansas ruling came down. With the Kansas court’s decision in hand, the Seventh Circuit Court of Appeals will continue considering the multiple appeals before them.

If drivers are ultimately successful, FedEx could face a huge penalty. The California-based drivers alone would be owed more than a quarter-billion dollars in back pay and damages, according to an attorney for the plaintiffs.

The FedEx cases are one example of a widespread cost-cutting practice that is facing increased scrutiny in the courts. In addition to the overtime and equipment cost rules that FedEx avoided by classifying drivers as contractors, such arrangements save companies on everything from payroll taxes to health insurance. One estimate from labor lawyers puts the cost savings from misclassifying employees at “upwards of 30 percent.” A Treasury Department study put the annual savings at $4,000 per worker.

The practice is especially common in the shipping business, where two out of three short-haul drivers at U.S. ports are misclassified according to union research. But it isn’t limited to trucking. Department of Labor research estimates that one in three companies nationwide misclassify workers. The cost-cutting tactic even crops up in strip clubs.

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