FedEx Ground to pay $228 million to settle driver classification claims in California

Drivers argued they were company employees, not independent contractors.

The ground delivery unit of FedEx Corp. has tentatively agreed to pay $228 million to settle claims by about 2,300 drivers in California that the company improperly classified them as independent contractors and not company employees while they drove for the unit from 2000 to 2007.

The settlement, disclosed Friday in a Securities and Exchange Commission filing, must still be approved by a federal district court in California, Memphis-based FedEx said in the filing. FedEx said it took a $197 million pretax charge in its fiscal 2015 fourth quarter, which ended last month, to account for the expense. It had no additional comment in the filing, and was unavailable for comment at press time.

The district court received the case last year on orders from a three-judge panel of the Ninth U.S. Circuit Court of Appeals, which ruled last August that the plaintiffs—drivers for FedEx Ground and FedEx Home Delivery, which is part of the FedEx Ground corporate structure—were employees under California law rather than independent contractors. The drivers had been classified as contractors during the seven-year period. The panel, in reversing a December 2010 lower-court ruling, directed the district court to enter an order changing the workers' classification to that of company employees.

The drivers had argued that FedEx Ground exercised total control of its drivers, yet still classified them as independent contractors, denying them the benefits that generally come with being employees. The panel agreed with the drivers, ruling that FedEx Ground's relationship with drivers was so deep that it made them eligible as employees under California's "right to control" test. It dismissed the company's claim that its control of drivers was limited only to pursuing the results it sought, not the manner in which the drivers achieved them.

Judge William A. Fletcher wrote in the lead opinion that the company's actions, which ranged from limiting a driver to operating over specific territories or schedules to dictating their grooming habits and the appearance of their uniforms, are not part of a "control of results" strategy under California law.

In a statement late Friday, Beth Ross, attorney for Leonard Carder LLP, a Bay Area law firm that represented the drivers, said the tentative agreement is "one of the largest employment law settlements in recent memory (and) 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."

The amount of the settlement is comparable to what the Department of Labor has collected annually in back wages since 2009 through its nationwide enforcement of wage and hour laws, the law firm said.

FedEx had sought an "en banc" rehearing of the panel's ruling before the full circuit, but its request was denied.

There are still more than 20 pending cases across the nation concerning how FedEx Ground classifies drivers who have shipped packages on its behalf. The unit has relied on the independent contractor model ever since it bought Caliber Systems Inc., the parent of ground parcel carrier Roadway Package System Inc. (RPS) in 1998 and rebranded RPS as FedEx Ground. RPS used a nonunion, contractor model since its inception in the mid-1980s in an effort to undercut UPS Inc., the market leader and a unionized company. Assuming the RPS model was a natural fit for FedEx founder, chairman, and CEO Frederick W. Smith, whose animosity toward organized labor is well known.

FedEx said at the time of the panel's ruling that it was based on a model that is no longer in use. Since 2011, FedEx Ground has only contracted with incorporated businesses that treat their drivers as their employees, the company said. FedEx said at the time that through the years it has "significantly strengthened" the operating agreement that served as the basis for the adverse ruling.

The use of independent driver contractors is relatively common throughout trucking. It is believed that at least 30 percent of all U.S. truckload drivers are engaged in long-term, exclusive agreements with their motor carrier customers.