• A Reminder About the Dangers of Employee Misclassification
  • October 13, 2014 | Author: Ashley T. Kasarjian
  • Law Firm: Snell & Wilmer L.L.P. - Phoenix Office
  • The Ninth Circuit provided a clear reminder to companies to ensure that employees are not misclassified as independent contractors. In Alexander v. FedEx Ground, a group of full-time delivery drivers from FedEx challenged their status as independent contractors, asserting claims for employment expenses and unpaid wages under the California Labor Code, along with other claims. The case has a complicated procedural history, as it was initially heard as part of multidistrict litigation involving a class of 2,300 FedEx drivers in California. The facts, however, are largely undisputed and the message is one that should resonate for companies operating throughout the United States.

    In determining whether the drivers should be considered employees or independent contractors, the Ninth Circuit focused on FedEx’s right to control the manner in which the drivers perform their work. For example, the drivers are required to deliver packages to FedEx customers, wear FedEx uniforms, follow FedEx schedules and adhere to FedEx grooming standards. Managers from FedEx may join and supervise each driver up to four times per year. The drivers entered into automatically renewing agreements spanning from one to three years and, with consent from FedEx, the drivers are permitted to hire others to help perform their work. The drivers provide their own vehicles, which are required to meet all applicable federal, state and municipal laws and regulations. The vehicles are ultimately approved by FedEx, which specifies the logos and insignias and requires the vehicles to be painted “FedEx white.” Drivers maintain the vehicles at their own expense, but can only use them for FedEx while they are performing work for FedEx. FedEx asserted that the drivers were given “flexibility and entrepreneurial opportunities that no employee has.”

    The parties acknowledged that the determination of employment status under California law is governed by the multi-factor test set forth in S.G. Borello & Sons, Inc. v. Department of Industrial Relations. Borello requires that a number of factors be weighed: “The principal test of an employment relationship is whether the person to whom service is rendered has the right to control the manner and means of accomplishing the result desired.” California courts also consider “secondary” indicia of the nature of the relationship, including:

    • the right to terminate at-will, without cause;

    • whether the one performing services is engaged in a distinct occupation or business;

    • the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;

    • the skill required in the particular occupation;

    • whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;

    • the length of time for which the services are to be performed;

    • the method of payment, whether by the hour or by the job;

    • whether or not the work is part of the regular business of the principal; and

    • whether or not the parties believe they are creating the relationship of employer-employee.

    These factors, however, are intertwined with one another and none of them are determinative. Likewise, the fact that the parties contractually agreed that the drivers would be independent contractors was not conclusive. Based on its analysis of the factors, the Ninth Circuit held that the drivers are employees as a matter of law under California’s right-to-control test and remanded to the district court with instructions to enter summary judgment for the plaintiffs on the question of employment status.

    It is imperative that every company understand the laws of the various jurisdictions in which it operates. There are various state, federal and administrative tests that are used in determining whether a worker is an employee or independent contractor-including the IRS 20-Factor Test and the economic realities test of the Fair Labor Standards Act. Notably, a determination by one court or administrative agency does not guarantee that another court or agency will rule the same as the standards can be different.

    When a worker is misclassified, the employer may be responsible for substantial penalties, including taxes that should have been withheld from the employee, overtime pay, failure to pay workers’ compensation and failure to provide minimum healthcare coverage. A company should not wait to evaluate the classification of its independent contractors until a complaint has already been made or an agency investigator is waiting at its doorstep.