Law.com Contributors Re-visit Misclassification - December 14, 2007

A pair of lawyers published an article at Law.com titled, "Misclassification of Independent Contractors and Employees Can Be Expensive."   And they don't mean in an unfair competitive advantage way.  Of course, FedEx Ground was an obvious object of the analysis.

While employers can effect great savings through classifying workers as independent contractors, employers who improperly classify employees as independent contractors face even greater liabilities in litigation brought by private parties or federal or state governmental entities, including the payment of lost wages and benefits, taxes, interest, penalties and attorney fees.

FedEx Ground Package System Inc. has been battling claims in multiple jurisdictions over its classification of drivers as independent contractors. On Oct. 15, 2007, Chief Judge Robert L. Miller of the Northern District of Indiana certified a nationwide class of more than 20,000 current and former drivers who brought suit under the Employee Retirement Income Security Act seeking benefits under several FedEx plans for which they were not eligible because they were deemed independent contractors.

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Legal battles like Estrada and Narayan over the misclassification of workers have lead to executive and legislative responses across the country, including Indiana, Minnesota, New Hampshire, New Jersey, New York and, recently, Illinois. In Illinois, the General Assembly has passed the Employee Classification Act, effective Jan. 1, 2008, which is applicable to construction contractors. The act provides that individuals performing construction services for a contractor will be deemed to be an employee unless the contractor can show that the individual meets several stringent tests. The act provides for both civil and criminal penalties and provides for a private right of action.

FedEx's legal troubles in Estrada should remind employers that actions speak louder than words. Simply contracting with a worker as an independent contractor is insufficient and is not dispositive of the worker's status. Courts will ignore the contract label if it is at odds with the actual relationship. The costs of erroneous classifications are great. Employers must carefully analyze the factual reality of their relationship with workers before classifying workers as independent contractors as opposed to employees.

FedEx is in danger of becoming a business school case study in misclassification and mismanaging this fundamental legal issue.