FedEx agrees to pay $228 million to settle long-running Calif. independent contractor case

Settling a widely followed lawsuit brought by more than 2,300 California workers at FedEx Ground and FedEx Home delivery, parent FedEx Corp. has agreed to create a $228 million fund and resolve a decade-long lawsuit involving misclassification of workers.
 
The extraordinary payment by the nation’s second-largest parcel delivery company is to settle claims brought by the workers who claim they were misclassified as independent contractors and should have been considered FedEx employees.
 
FedEx confirmed the settlement in a July 2 Securities and Exchange Commission 8-K filing, but otherwise has made no comment on the matter. The settlement still must be approved by the U.S. District Court for the Northern District of California.
 
Some claims date back to 2000 and some extend through 2007. The settlement comes after a 2014 Ninth Circuit Court of Appeals ruling that FedEx misclassified drivers as independent contractors.
 
FedEx has long said it did not misclassify these workers. The independent contractor is the heart of the business model for how FedEx does business. By comparison its major competitor, UPS, has more than 265,000 Teamsters making up the bulk of its work force.

By classifying workers as independent contractors rather than employees, FedEx saves untold millions on taxes, fringes, health care costs, pensions, worker’s compensation and unemployment insurance obligations.
 
In the past decade or so, several state and federal agencies—including the IRS—and have cracking down on companies claiming to use independent contractors who in reality perform like employees of the company.
 
In this case, the Ninth Circuit ruled FedEx Ground controlled the drivers and that they were independent contractors in name only. They wore FedEx uniforms, were outfitted with FedEx hand-held scanners and pushed costs such as fuel and maintenance of the trucks onto the contractors. UPS, by comparison, pays for the fuel and upkeep of its fleet of brown trucks.
 
Beth Ross, an attorney at Leonard Carder LLP, the law firm representing the FedEx workers called the $228 million settlement “one of the largest employment law settlements in recent memory,” and said it sends a powerful message to employers in California and elsewhere that the cost of independent contractor misclassification “can be financially punishing, if not catastrophic, to a business.”
 
Jerry Hempstead, a consultant and long-time follower of the small package sector, says it was important for FedEx to settle this case. “But how they made the root cause of the suit go away is a lesson to many other firms,” Hempstead told LM. “Drivers for FedEx ground and FedEx Home Delivery are still contractors. What is different is the insertion of another layer of management between FedEx and the driver.
 
“They have money in reserve to pay this obligation and they no longer have exposure to this issue because they restructured how they award routes to contractors,” Hempstead added. “They added a layer so as to distance themselves from direct control of the drivers.”
 
FedEx has faced other lawsuits on this issue, but this was far and away the largest settlement in the transportation sector on the independent contractor/employee issue.
   
In 2007, then-Massachusetts attorney general Martha Coakley fined FedEx Corp.‘s ground delivery unit more than $190,000, alleging the company illegally classified 13 drivers as independent contractors rather than employees. But the California fine dwarfed that slap on the wrist more than 1,000-fold.
 
Many other trucking companies–mostly in the non-union truckload sector—use an independent contractor model similar to FedEx Ground. Attorney Ross told Forbes.com that the potential impact from this settlement could be “seismic” as it ripples through other parts of the transportation industry.
 
Reaction in the blogsosphere was harshly against FedEx and its founding CEO Fred Smith.      Typical of the sentiment was one posting from someone called “Mr. FedEx,” who posted:
 
“Here’s the essence of FedEx Ground scam. FDX passes off all possible costs to the contractor, and then simultaneously controls the drivers as though they were employees. You, the contractor, get a decent amount in return for FDX just killing it overall with their profit margins. When are you going to understand that you are just there to pay Fred’s bills and make it seem like you run the business when you don’t? You’re just Fred’s mechanic and overseer.”