The Changing Tide of Employee Classification

Author: Brynn Stylinski, Associate Member, University of Cincinnati Law Review

For years, many employers have chosen to hire independent contractors rather than employees because contractors are not entitled overtime or benefits like those under the Family and Medical Leave Act (FMLA), but employees are. Many workers have filed lawsuits against employers, alleging that they been misclassified as independent contractors and are entitled to benefits as employees. In Alexander v. FedEx Ground Package System, Inc., the Ninth Circuit addressed this type of claim of misclassification by current and former FedEx drivers attempting to obtain back wages and benefits under the FMLA.[1] The court’s determination that the drivers were employees signals a shift in the judicial system’s approach to determining employee status. Though that shift will likely lead many employers to modify their agreements with contractors and employees to minimize the employers’ liability, hopefully it will allow more plaintiffs to obtain the benefits of which they have been deprived by their employers.

The Ninth Circuit’s View of Employee Status in Alexander

The plaintiffs in Alexander brought a class action seeking employment expenses and unpaid wages under the California Labor Code and alleging the denial of benefits due under the FMLA.[2] The success of these claims depended on whether or not the drivers were classified as employees. This and similar cases from forty different states were transferred to a multi-district litigation (MDL) court. The MDL court granted summary judgment for FedEx in nearly every case, denying the plaintiffs’ motions for summary judgment. The court held that the plaintiffs were independent contractors in every jurisdiction that applied common-law agency principles, including California.[3] The MDL panel remanded Alexander to the district court, and the plaintiffs appealed the MDL court’s ruling on their status as independent contractors to the Ninth Circuit. The court then applied California’s multi-factor right-to-control test, which examines an employer’s control over the manner and means of work along with several secondary factors. The appellate panel reversed the MDL court’s grant of summary judgment to FedEx, granted the plaintiffs partial summary judgment on their employee status, and remanded the case to the district court.[4]

The Ninth Circuit held that FedEx had the “right to control the manner and means” of the work performed by its drivers. It found that FedEx controlled the “appearance of its drivers and their vehicles” through clothing, personal maintenance, and vehicle requirements.[5] FedEx also indirectly controlled driver hours. Managers altered the number of deliveries to ensure they could be done within nine-and-a-half to eleven hours, and FedEx mandated when drivers could leave and they needed to return to the terminal. The court also found that FedEx controlled when and how drivers delivered packages. Finally, drivers were assigned service areas that FedEx could reconfigure at its discretion.[6]

Though FedEx did not control every element of the drivers’ work, such as their routes and whether they followed manager recommendations after evaluations, absolute control is not necessary for workers to be considered employees.[7] The court rejected FedEx’s argument that it controlled the results of the work alone. It found that some, but not all of FedEx’s controls related to results—namely the delivery of packages—while a number directly related to the manner and means of the work.[8] The court applied the “all necessary control” standard of Borello and found that despite the flexibility a driver might have in certain steps of the process, FedEx retained all necessary control to make the drivers employees.[9] FedEx did not simply hand packages over to drivers free to accept or reject them; instead it controlled when, how many, and where deliveries would occur, as well as the appearance of the truck and driver.

The court held that the party “attacking the employment relationship” has the burden of showing that the workers are independent contractors, and FedEx did not meet this burden.[10] FedEx argued that because the drivers had entrepreneurial opportunities—i.e., their ability to take up multiple routes and to hire third party helpers—they were independent contractors. However, under the right-to-control test, the ability to hire third parties or control aspects of their job, especially when approval is required, is only considered as one factor among many. The requirement of preapproval in these circumstances can even indicate the employer’s degree of control over the work. Because FedEx retained the right to deny drivers either opportunity, the court held that it retained control. [11]

In weighing the secondary factors of the right-to-control test, the court found that none of them favored FedEx significantly enough to outweigh its control of the manner and means of drivers’ work. Only three of the nine secondary factors slightly favored FedEx. The presence of the right to terminate at will highly favors a finding of employee status. Its absence in this case slightly favored FedEx, but did not mandate a finding of independent contractor status because employees can also contract to limit the employer’s right to discharge.[12] The “provision of tools and equipment” factor only slightly favored FedEx. Although the plaintiffs provided their own trucks and were not required to get their equipment from FedEx, 99% of drivers did receive equipment from FedEx.[13] The last factor that slightly favored FedEx was the parties’ understanding of the plaintiffs’ status. The operating agreement identified drivers as independent contractors; however, this was not dispositive of their status because the agreement’s other terms were ambiguous.[14] Of the other six secondary factors, five favored the plaintiffs and one was neutral.[15]

With many secondary factors favoring the plaintiffs and only a few slightly favoring FedEx, the secondary factors lent further support to the drivers’ status as employees. FedEx was unable to demonstrate the lack of control necessary to classify the drivers as independent contractors. The Ninth Circuit reversed the MDL court’s holding that the plaintiffs were independent contractors, and remanded the case to the district court to decide the drivers’ claims under the California Labor Code and FMLA in light of this decision.

The Impact of Alexander

Alexander indicates a potential shift in the way courts determine employee status. It is a movement back to earlier common law analysis of the employer’s right to control and away from the more recent approach of analyzing entrepreneurial opportunities available to those claiming to be employees.

Following the D.C. Circuit’s decision several years ago in FedEx v. NLRB, numerous jurisdictions adopted the case’s emphasis on entrepreneurial opportunity in determining employee status.[16] In that case, the court focused on the need for entrepreneurial opportunities without considering their feasibility to determine employee status.[17] The FedEx v. NLRB approach favors employers by allowing them to insert opportunities in their agreements that they know their workers will never use. Under FedEx v. NLRB, employers like FedEx can technically allow drivers to take on multiple routes, thereby making the drivers look like independent contractors, but then require managers to provide so much work that it is impossible for drivers to reasonably take advantage of these opportunities. Prior to FedEx v. NLRB, there was no distinct trend of finding independent contractor status, and FedEx was “at the epicenter of the crackdown on independent contractor misclassification.”[18] Numerous scholars believed that FedEx v. NLRB signaled a shift in the approach courts would use to determine workers’ status.[19] Many courts began to adopt this approach, including the MDL court in the Alexander. It agreed with FedEx’s argument that under the entrepreneurial opportunities test the drivers were independent contractors.

The Ninth Circuit has signaled another shift, this time back to traditional common law tests for employer-contractor classification. In Alexander, the court explicitly declined to apply the FedEx v. NLRB test, instead focusing on the true degree of control that FedEx held over its drivers and returning to the common law right-to-control test. The same day as Alexander, the Ninth Circuit issued an opinion on the status of a class of FedEx drivers in Oregon, whom the MDL court had also deemed independent contractors.[20] Applying a similar common law right-to-control test and an economic realities test, the court found those drivers to be employees as well.[21]

The Ninth Circuit refused to accept a blanket application of the FedEx v. NLRB test, and other courts have rapidly followed suit. A Missouri court referred to the Alexander decision when it ruled on ERISA’s pre-emption of an employee’s state law claims.[22] That same court later explicitly rejected the FedEx v. NLRB test when it found the plaintiffs to be employees under a common law right-to-control test in an opinion which addressed two separate class actions against FedEx.[23] This indicates a possible jurisprudential shift that would be more favorable to plaintiffs by taking into account actual employer control and other circumstances when categorizing workers, instead of deferring to nominal opportunities.

Unfortunately, it is likely that employers will simply modify many of their workers’ contracts to preserve independent contractor status and avoid having to pay benefits to workers classified as contractors rather than employees. FedEx has already discarded the operating agreement that defined the drivers’ role in Alexander in order to classify its current drivers as independent contractors.[24] It is likely that many will follow FedEx’s example to preserve their workers’ status as independent contractors. However, a trend toward a more realistic test will help plaintiffs who have labored under misclassifications—similar to the FedEx drivers in Alexander—to obtain the benefits that they deserve.

The Future of Employee Classification

The Ninth Circuit’s decision to reject the entrepreneurial opportunities test and return to the common law right-to-control test indicates a return to a fairer and more realistic standard for determining employee status. It has already inspired a departure from deference to the FedEx v. NLRB test. Though potential plaintiffs’ success in such suits may soon be undercut by employers’ restructuring of contracts, the decision should give workers who have been misclassified a chance to successfully challenge their status. When courts take into account the different circumstances surrounding an employment classification dispute, they are more likely to make a decision that is fairer to the plaintiff and less biased in the employer’s favor. If courts continue this trend, their more balanced approach will correct the wrongs that misclassified employees have experienced.

 

[1] Alexander v. FedEx Ground Package System, Inc., 765 F.3d 981 (9th Cir. 2014).

[2] Removed to federal court in Alexander v. FedEx Ground Package Sys., Inc., No. C 05-0038 MHP, 2005 WL 701601, (N.D. Cal. Mar. 25, 2005).

[3] Id. at *987. The common law agency principle test includes variations on a factor based test including the right to control test.

[4] Id. at *987-8 (reviewing the case de novo).

[5] Id. at 988-90 (citing S.G. Borello and Son, Inc. v. Dep’t of Industrial Relations, 769 P. 2d 399, 404 (Cal. 1989) (internal citations omitted)). Control of “manner and means” is control over how the work is done.

[6]Alexander, 765 F.3d at 989-90.

[7] Id. at 990 (Citing Air Couriers Int’l v. Emp’t Dev. Dep’t, 59 Cal. Rptr. 3d 37, 44 (Cal. Ct. App. 2007)).

[8] Id. at 990 (holding that no reasonable jury could find a specified set-up of vehicle shelves or controlling driver’s fashion was related to the results of work, namely the “timely and professional delivery of packages.” It was manner and means).

[9] Id. at 991-2 (Citing Borello, 769 P. 2d at 401-2 (“all control necessary to be an employer”), 408; JKH Enterprises, Inc. v. Dep’t of Indus. Relations, 48 Cal. Rptr. 3d, 563, 568 (Cal. Ct. App. 2006) (Finding that drivers with no performance regulations aside from general delivery times were employees under the all necessary control standard); Air Couriers Int’l v. Emp’t Dev. Dep’t, 59 Cal.Rptr.3d 37, 44 (Cal. Ct App. 2007) (Finding courier drivers to be employees due to all necessary control)).

[10] Alexander, 765 F. 3d at 992-3. (Internal citations omitted).

[11] Id. at 993. FedEx relied on a finding of independent contractor due to “significant entrepreneurial opportunity.” (Citing FedEx Home Delivery v. NLRB, 563 F.3d 492, 497 (D.C. Cir. 2009), but the test was not applied in California).

[12] Id. at 994-5.

[13] Id. at 986-7, 995.

[14] Alexander, 765 F.3d at 996.

[15] Id. at 994-96 (reasoning that the distinct occupation or business showed that the drivers’ work is “wholly integrated into FedEx’s operation[;]” they are treated as employees; and the customers belong to FedEx) (citing Estrada v. FedEx Ground Package System, Inc., 64 Cal.Rptr.3d 327, 334 (Cal. Ct. App. 2007)). Plaintiffs were also favored by: whether the principal directs the work (when the degree of freedom was balanced against the control); skill required, as it required only driving; length of service because the contracts allowed for a potentially infinite duration in the absence of one party terminating the relationship; and the fact that delivery of packages is “essential to FedEx’s core business.” The method of payment was neutral as the drivers were neither paid strictly hourly nor strictly per job.

[16] FedEx Home Delivery v. NLRB, 563 F.3d 492 (D.C. Cir. 2009); See also Johnson v. FedEx Home Delivery, 04-CV-4935 JG VVP, 2011 WL 6153425, at *15-16 (E.D.N.Y. Dec. 12, 2011) (emphasizing the freedom to engage in other employment and use vehicle for other purposes as reasons the requisite right to control was lacking); In re FedEx Ground Package Sys., Inc., 869 F. Supp. 2d 942, 989 (N.D. Ind. 2012) (finding right to control alone was not sufficient for independent contractor status, but ability to increase “entrepreneurial opportunities” through addition of routes favored independent contractor status); Spellman v. Am. Eagle Exp., Inc., CIV.A. 10-1764, 2013 WL 1010444 (E.D. Pa. Mar. 14, 2013) (stating strong indication of independent contractor status through entrepreneurial conduct as a reason to deny class certification).

[17] FedEx v. NLRB, 563 F.3d at 498-99.

[18] Richard J. Reibstein, Earthquake in the Independent Contractor Field, Loc. Gov’t & Sch. Newsl. (349 Fair Lab. Standards Handbook for States) at 3 (“government regulators, state legislators, and plaintiffs’ class action lawyers since 2007” had been finding misclassifications).

[19] See e.g., Jenna Amato Moran, Independent Contractor or Employee? Misclassification of Workers and Its Effect on the State, 28 Buff. Pub. Int. L.J. 105, 116 (2010); Mitchell H. Rubinstein, Employees, Employers, and Quasi-Employers: An Analysis of Employees and Employers Who Operate in the Borderland Between an Employer-and-Employee Relationship, 14 U. Pa. J. Bus. L. 605, 620 (2012) (finding support for the idea of a new test based on entrepreneurial opportunities and more support for creating a new factor in the fright to control test).

[20] Slayman v. FedEx Ground Package Sys., Inc., 765 F.3d 1033 (9th Cir. 2014).

[21] Id. at 1047. The economic realities test, another common law test, looks to multiple factors to decide if an employer exercises control over the terms and conditions of employment.

[22] Gray v. Fedex Ground Package Sys., Inc., 4:06-CV-00422 JAR, 2014 WL 4386741 (E.D. Mo. Sept. 5, 2014).

[23] Wells v. Fedex Ground Package Sys., Inc., 979 F. Supp. 2d 1006, 1024-25 (E.D. Mo. 2013) (joint opinion also ruling on Gray).

[24] U.S. Court Clears Fedex Ground Drivers to Pursue Wage, Benefit Claims, 29 Westlaw J. Emp. 4 (2014).

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