Rulings Raise Issues for Employers of Independent Contractors

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By Anna Kwidzinski and Michael Trimarchi

Two federal court rulings on package delivery drivers in California and Oregon may have broader state tax implications for employers with independent contractors.

The U.S. Court of Appeals for the Ninth Circuit, in two nearly identical decisions, ruled Aug. 27 that drivers for FedEx Ground Package System Inc. were employees under California and Oregon law, based on evidence of the company's right to control their work hours, routes, appearance and equipment.

“The Ninth Circuit was principally focused on minimum wage and overtime law and whether under state law the drivers were entitled to those payments. These are big-ticket items,” said Bruce M. Cross, a partner with the law firm Perkins Coie in Seattle. The decisions likely would apply for state tax purposes, which could make FedEx liable for state unemployment, workers' compensation and payroll taxes, he said Aug. 29.

Status Depends on Applicable Law

Cross emphasized that tests for whether someone is an employee or independent contractor vary widely among federal tax laws, federal labor laws and state laws.

The Internal Revenue Service conducted a federal employment tax audit of FedEx Ground for some of the years included in the subject actions but confirmed in 2009 that it would not make any assessments, according to parent FedEx Corps.' Forms 8-K and 10-Q filed with the Securities and Exchange Commission in November and December 2009.

IRS standards for whether a worker is an employee or independent contractor are less protective than the federal Fair Labor Standards Act and many state laws, Cross said. A worker “can be an employee for unemployment and workers' compensation but not for any other purpose,” he said.

According to the circuit court decisions, similar cases were filed against FedEx in about 40 states from 2003 to 2009. The cases changed the way FedEx does business, said Richard J. Reibstein, a partner with the law firm Pepper Hamilton LLP in New York.

FedEx Ground spokesman Patrick Fitzgerald told Bloomberg BNA on Aug. 28 the business model that is the subject of the litigation is no longer in use. “Since 2011, FedEx Ground has only contracted with incorporated businesses that treat their workers as employees,” he said.

A court debated whether drivers were entitled to minimum wage and overtime under state law.

In an Aug. 29 interview with Bloomberg BNA, Reibstein and Lisa B. Petkun, a partner in Pepper Hamilton's Philadelphia office, emphasized the importance of the contract language combined with the actual conduct of the business.

Companies should ensure that their contracts do not contain contradictory language by claiming to allow an independent-contractor discretion to take an action but then requiring the employer's consent before the contractor can take that action, Petkun said. Employers also cannot exert direction and control contrary to contract provisions, she said.

“The takeaway for others is that there is a greater need to structure documents and implement relationships consistent with the Ninth Circuit decision and applicable state law,” Reibstein said.

The court rulings may have broader implications for employers when classifying workers as employees or independent contractors. The issue of California's more-stringent test for determining worker classification, compared with the test used by the IRS, was discussed Sept. 4 during a monthly conference call between the tax agency and the payroll industry. A payroll professional asked, “How would the IRS want a worker classified for federal tax purposes in such a situation?”

Anita Bartels, senior program analyst for employment tax policy with the IRS, said that although the agency would not follow the state recommendation, it would be a factor in a federal tax investigation. The agency would have to go through its process to determine worker status under federal law.

Question of Control Over Workers

In the California case, about 2,300 package delivery drivers formerly working for FedEx were employees and not independent contractors under state law, the Ninth Circuit said, basing its ruling on evidence of the company's right to control work hours, routes, appearance and equipment (Alexander v. FedEx Ground Package System Inc., No. 12-17458, 2014 BL 237668, 9th Cir., 8/27/14).

In the Oregon case, the Ninth Circuit reversed a ruling in favor of FedEx after applying the right-to-control test to statutory claims by 363 drivers (Slayman v. FedEx Ground Package System Inc., No. 12-35525, 2014 BL 237667, 9th Cir., 8/27/14).

“We fundamentally disagree with these rulings, which run counter to more than 100 state and federal findings, including the U.S. Court of Appeals for the D.C. Circuit, upholding our contractual relationships with thousands of independent businesses,” Cary Blancett, general counsel for FedEx Ground, said Aug. 27.

The Ninth Circuit ruled that by characterizing its drivers as independent contractors, FedEx entered into operating agreements with the drivers providing that “the manner and means” of achieving results is within the driver's discretion and stating that no officer, agent or employee of FedEx “shall have the authority to direct [the driver] as to the manner or means employed.”

To contact the editor on this story: Michael Trimarchi at

To contact the reporter on this story: Anna Kwidzinski in Washington at

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