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Must retail delivery drivers be employees?

By Brian Leary, bleary@mccarter.com

Buried in the details of recent settlements between FedEx Ground (“FedEx”) and various state attorneys general is a foreboding philosophical bias that delivery drivers, working either directly or indirectly for FedEx, must be employed by someone. For retailers who have historically outsourced much of their delivery and trucking services to carriers that rely heavily, if not exclusively, on independent contractor drivers, the legal risk exposure has become far greater than many realize.

The attack on the independent contractor business model is being fueled by organized labor, state governments seeking to grow tax revenue, and by a plaintiff’s bar lured by the prospect of multiple damages and attorney’s fees in classification cases. Retail transportation operators need to be aware of best practices which can minimize classification risks, and their lawyers need to be aware of legal arguments unique to the motor carrier industry which, to date, have been under-utilized.

FedEx litigation: Alive and kicking
In late December, Judge Robert Miller, the federal judge in Indiana who’s been presiding over dozens of class action suits brought against FedEx by drivers across the country, ruled that the drivers in the vast majority of the remaining cases before him were independent contractors. Not surprisingly, headlines in the legal press blared: “FedEx Drivers Are Not Employees, Judge Rules.”1  The celebration was premature.

First, in almost all of these states the test to determine whether a worker is an employee or independent contractor is some variation of the common law test, where the key issue was whether FedEx could control the manner and method of the work done by the drivers. Because these cases were class actions, the judge was limited in his analysis to evidence of “control” common to all of the drivers, namely the standard contract between the drivers and FedEx. In other words, since the agreement said FedEx couldn’t control the manner and method of the drivers’ work, it didn’t matter in practice if FedEx told the drivers when to eat, what routes to follow, and when to go to the bathroom. As the judge himself suggested, the outcome would likely be different if the class were defined differently or if these were individual claims where facts specific to each defendant had to be examined.

Second, last summer Judge Miller ruled in favor of the FedEx drivers in a class action brought under Illinois law. Illinois, like many other states, uses a far more restrictive employee classification test (commonly called an “ABC test”).  It’s been long understood that keeping the contractor off the employer’s premises was one way to help satisfy this test. But Judge Miller concluded that FedEx’s routes and customer premises are, in essence, FedEx’s premises, and so he ruled that FedEx’s drivers are employees. Judge Miller sent several class actions back to their respective states where the ABC test will be applied. He also ruled that FedEx drivers are employees under additional uniquely restrictive provisions in the wage statutes in New Hampshire and Kentucky.

Implication for retailers’ courier agreements
Retail delivery operators might be tempted to think the FedEx cases mean little to their delivery models because they don’t contract directly with drivers, but rather with courier companies who in turn provide drivers and indemnify the retailer in the event of misclassification. Such thinking is dangerous.

The early lesson of FedEx is that in a significant number of states (ABC test, or some variation of it) independent contractor drivers who perform the same function as a retailer’s employee delivery drivers, or who work exclusively for a retailer either directly, or through a courier, potentially could be found to be an employee of the retailer. Likewise in common law “right to control” states retailers who attempt aggressively to control the activities of their courier company drivers with contractual termination-at-will provisions, restrictions on work for other customers, uniform and truck branding requirements and company led training programs are at risk.

Evolving best practices
Indemnification obligations are only as comforting as the financial well-being of couriers. It’s more important than ever for delivery operations to conduct annual audits of their courier’s financials. Further, in certain states, such as Illinois, a courier’s failure both to obtain proper operating authority to do business as a motor carrier, and to enter into written lease agreements for the use of their driver’s equipment and services would likely make those drivers “employees” under state law. Retailers then should consider audits to insure that their couriers have taken these and other reasonable steps to insure that the couriers’ classification problem doesn’t become the retailer’s problem.

Federal preemption
In response to the private suits and state enforcement actions, FedEx last May dramatically modified its business model. Now, drivers must offer proof of incorporation, pledge to use only employee helpers and, in an increasing number of states, agree to take on multiple routes. Again, this is consistent with the evolving philosophical view of many states that workers have to be employed by someone. Such a philosophy though runs directly counter to the goal of federal motor carrier deregulation in the ’90s which was intended to make it easier for independent contractors to compete for routes. A strong argument, supported by a trilogy of recent Supreme Court cases, can be made that lawsuits for misclassification, which would force a retailer (private motor carrier) to alter its use of independent contractors, are preempted by federal law (because they affect “rates or routes or services”) and should simply be dismissed.2 

Conclusion
In light of the significant damages sought by drivers in these cases (essentially their equipment expenses and, often, missed overtime), the lessons of FedEx need to be heeded and best contractual practices need to be implemented. Likewise, the courts need to be educated about the complexities and efficiencies of the retail delivery network which de-regulation was meant to protect, but which state legislatures and regulators, perhaps unwittingly, have placed in danger.

Brian Leary is a partner at McCarter & English, LLP. He represents several national retailers in the defense of government enforcement actions and consumer and wage and hour class actions. He can be reached at bleary@mccarter.com.

1. Law360 Newswire, Dec. 15, 2010

2. See Morales v. Trans World Airlines, Inc., 504 U.S. 374 (1992), American Airlines v. Wolens, 513 U.S. 219 (1995), and Rowe v. N.H. Motor Transp. Ass’n., 552 U.S. 364 (2008)