A big back pay package is scheduled for delivery soon. It was never a question of if but always just a question of how much FedEx Ground would have to pay to settle the private lawsuit over misclassifying its drivers as independent contractors. Turns out the price is almost a quarter of a billion dollars for one state alone.
"The class settlement will create a $228 million fund to resolve claims by over 2,000 FedEx Ground and FedEx Home Delivery pickup and delivery drivers. Some claims date back to 2000 and some extend through 2007."
Most outside observers realized that uniformed drivers using prescribed equipment and following clear employer directives on methods and procedures failed the independent contractor tests. But wishful thinking (and consequent massive profits) can be very persuasive, if quite costly.
"In this case, the Ninth Circuit said that FedEx controlled the drivers and that they were independent contractors in name only. It was a major blow to FedEx, which has fought about its so-called independent contractor model of operation for many years. The financial benefit of the contract arrangement was big. For years, FedEx has been able to shift to its drivers the costs of FedEx branded trucks, FedEx branded uniforms, FedEx scanners, fuel, maintenance, insurance, and more. Drivers were not provided pay for missed meals, rest periods, overtime compensation, etc."
The now-rich attorney representing the class said, “The $228 million settlement, one of the largest employment law settlements in recent memory, sends a powerful message to employers in California and elsewhere that the cost of Independent Contractor misclassification can be financially punishing, if not catastrophic, to a business.” Well, yeah!
"The amount of this settlement is said to be comparable to what the United States Department of Labor has collected in back wages annually through nationwide enforcement of wage and hour law during the last seven years (2014: $250 million; 2013: $240 million; 2012: $275 million; 2011: $225 million; 2010 and 2009: $175 million)."
Why risk filing with slow bureaucratic government enforcement agencies that might generate penny-ante awards when private lawsuits can reap such munificent payoffs so relatively quickly?
For perspective, realize that this deal only applies to California where the workplace protection laws are quite strong. Meanwhile, there are dozens of similar lawsuits by the same “independent contractor” delivery driver groups in other states. Expect they are revving their engines in excited anticipation of their transition to regular employee status with full benefits.
What will happen to the compensation people who recommended this disastrous course of action? Maybe they have already run for the hills if not already tarred, feathered and carried out of town on a rail. Of course, those are old-fashioned consequences for negative performance results. Today, the guilty VP HR has probably opened his or her golden parachute and gently wafted to ground on a beach in Kauai or Fiji.
With this cautionary example before us, how many will rethink their formerly blithe endorsements of contractor arrangements that fail all the sniff tests? Perhaps this might mark a pause in the otherwise general trend towards the contracting and outsourcing of traditional employee functions.
E. James (Jim) Brennan is an independent consultant with extensive total rewards experience, specializing in job evaluation, market pricing and pay budget distribution. His decades of chemical/pharmaceutical HR corporate work were followed by consulting roles in manufacturing, government and tax-exempt industries that took him to most locations in North America. With many articles and other publications (his last book was on Performance Management), together with his speeches, seminars, radio and TV appearances, he has been retained for in-trial expert witness testimony both by and against the Internal Revenue Service in many cases challenging the reasonableness of executive compensation. He also serves on the Advisory Board of the Compensation and Benefits Review.
Image: Creative Commons Photo, "fxhd-truck" by David Guo's Master
Good one. I was aware of the FedEx practice, which always seemed predicated on the continued successful efforts of someone's fairly godmother - rather than the actual independent contractor criteria itself. But now apparently the coach (or in this case the FedEx truck), has turned back into a pumpkin.
Was actually half-suprised that the equally high-profile issue of the independent contractor drivers for Uber was not briefly addressed here. Maybe that one rises above the sniff test, although I thought I detected something in the air . . .
Posted by: Chris Dobyns | 07/08/2015 at 09:40 AM
Chris makes an excellent point. Another Compensation Cafe contributor claimed that Uber topic, for a separate later post.
Posted by: E. James (Jim) Brennan | 07/08/2015 at 11:42 AM
I breathlessly await the determination that McDonald's franchisees are employees.
Posted by: Tony Bergmann-Porter | 07/08/2015 at 07:31 PM
Believe Seattle made some such determination in denying local franchises the "small biz" exception from their $15/hr minimum wage rule invoked on April Fools day 2015.
Posted by: E. James (Jim) Brennan | 07/09/2015 at 01:20 AM
As a former employee of FedEx's major competitor, I can assure you that FedEx's practice was well-known. It was one of a couple of major areas where my employer felt FedEx had a major, unfair competitive advantage. My former employer was lobbying heavily in Washington to try, from their perspective, to "level the playing field".
I can't help but think there are quite a few people dancing with joy where I used to work over this ruling.
Posted by: Scott B | 07/13/2015 at 12:01 PM
It really messes up market pricing over periods of time when you have such a small pool of major competitors in your industry. One delivery giant didn't report any employee wages at all and another once shifted its pay policy to emphasize a stronger more aggressive contingent pay policy. The latter situation had one rival worried that it was "overpaying compared to the norm." They did a head-slap when advised to ignore the base pay and compare total comp numbers. The TC figures tracked appropriately with their strong base and minimal bonus.
Posted by: E. James (Jim) Brennan | 07/13/2015 at 08:08 PM