FedEx to settle driver misclassification lawsuit for $240 million

Drivers for FedEx Ground Package System in 20 states will receive $240 million from FedEx to settle lawsuits that claim FedEx misclassified them as independent contractors, according to a Reuters report.

The report cited the plaintiffs lead lawyer Beth Ross as saying that if the settlement is approved, it would be divided among 12,000 drivers—with some of those drivers receiving tens of thousands of dollars.

In the report, the drivers claimed that, as employees, they were owed overtime pay and reimbursement for expenses, among other benefits. “If the litigation were to continue ... a final resolution would be several years away, and would require significant time and expense to resolve the complex liability and damages issues presented,” the drivers said in court filings, as noted in the report.

In a statement issued to Logistics Management by FedEx, it was clear that the company is glad to put this issue to rest.

“We are pleased to put this matter behind us as it relates to a contract that has not been in use for a number of years,” read the statement. “FedEx Ground has made enhancements to its business in anticipation of rapidly changing competitive, legal and regulatory conditions. We continue to strengthen our contractual relationships with service providers to deliver industry-leading service to our customers.”

Until 2011, FedEx contracted directly with independent contractors, allowing the Memphis, Tenn.-based company to save on taxes, fringe benefits, health care costs, pensions and other workers’ costs, the report stated.

This is not the first time FedEx has made a large payment to resolve a worker misclassification dispute. In July 2015, it settled a lawsuit brought by more than 2,300 California workers at FedEx Ground and FedEx Home delivery, resulting in parent FedEx Corp. agreeing to create a $228 million fund. That payment was needed to settle claims brought by the workers who claim that they were misclassified as independent contractors and should have been considered FedEx employees.

FedEx has long said that it did not misclassify these workers. The independent contractor is the heart of the business model for how FedEx does business. By comparison, its major competitor, UPS, has more than 265,000 Teamsters making up the bulk of its work force.

By classifying workers as independent contractors rather than employees, FedEx saves untold millions on taxes, fringes, health care costs, pensions, worker’s compensation and unemployment insurance obligations.

In the past decade or so, several state and federal agencies—including the IRS—and have cracking down on companies claiming to use independent contractors who in reality perform like employees of the company. Industry observers note that how FedEx makes the origin of these cases dissipate should be viewed as a lesson for other companies.

“Drivers for FedEx ground and FedEx Home Delivery are still contractors,” said Jerry Hempstead, president of Hempstead Consultants. “What’s different is the insertion of another layer of management between FedEx and the driver. They have money in reserve to pay this obligation, and they no longer have exposure to this issue because they restructured how they award routes to contractors.”

In 2007, then-Massachusetts attorney general Martha Coakley fined FedEx Corp.’s ground delivery unit more than $190,000, alleging the company illegally classified 13 drivers as independent contractors rather than employees. But the California fine dwarfed that slap on the wrist more than 1,000-fold.

Many other trucking companies– mostly in the non-union truckload sector—use an independent contractor model similar to FedEx Ground.