The long-simmering court battle over whether FedEx Ground’s workers are independent contractors or employees appears headed to the appellate courts—and maybe the U.S. Supreme Court.
Last month, the Kansas Supreme Court ruled against Fed Ex. It ruled that its ground parcel contractors are employees by law and not independent contractors as FedEx has long classified them.
“FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing,” the Kansas Supreme Court said in its ruling.
This is second time in two months that a court has ruled that way, joining an earlier ruling by California’s 9th Circuit Court of Appeals that affected FedEx Ground workers in California and Oregon. The 9th Circuit overruled a 2010 court decision in Indiana.
The cost advantage to FedEx in classifying workers as independent contractors rather than employees (as long-time rival UPS does) is significant, experts and analysts say. FedEx saves millions of dollars annually in workers compensation and other labor costs by utilizing this classification.
Scott Group, senior transportation analyst at Wolfe Research, estimated that if FedEx loses these and the remaining 20 other cases involving independent contractor/employee rulings it could be liable for as much as $3 billion in cash damages for back pay, compensation and legal costs.
But Group said in a note to investors that such a payout was “unlikely” because a majority of courts has sided with FedEx on this issue in the past decade.
Next move for FedEx is whether it will appeal to the U.S. Court of Appeals for the 7th Circuit in Chicago, which appears likely. That court would then decide how to manage the 20 or so class-action lawsuits challenging the classification of FedEx Ground drivers as contractors, not employees.
“We fundamentally disagree with this ruling and are committed to protecting the rights of thousands of independent business owners to continue owning and operating their own businesses,” FedEx said in a statement. “The model that the court reviewed is no longer in use.”
FedEx added it would consider “available options in response to the (Kansas) court’s decision.”
In California, FedEx wants a review of the recent decision by the entire appellate court in an attempt to overturn the three-judge panel’s ruling.
If those appellate courts fail to produce to favorable ruling, experts and analysts said it was highly likely FedEx would appeal to the U.S. Supreme Court
Wolfe Research’s Group said the latest court ruling “would seem to set a bad precedent” but probably would not have a “material effect” on FedEx’s earnings. The analyst also said in a note to investors that the ruling was unlikely to alter the company’s fundamental independent contractor model.
That’s because in 2010, FedEx won a large court ruling that appeared to minimize the risk to its basic ground parcel independent contractor model.
The case is being watched closely by labor attorneys, experts in human relations, rival UPS and shippers. A ruling ultimately against FedEx might cause the company to fundamentally alter, or even scrap, its low-cost independent contractor model that has served it well during its 45-year history.
The decision could also affect heavy freight trucking companies that utilize owner-operators as well as company employees. For decades, labor experts have urged companies utilizing both to make distinctions between how they treat owner-operators and their employee drivers.
They even have devised a “20-question test” to differentiate how the two groups of workers are treated. For instance, experts advise employees to give owner-operators different uniforms, or none at all, compared with their employee drivers. Also, little things, such as access to the company cafeteria must be made different for the two groups.
But a key component in recent court rulings on independent contractors has been judges’ insistence that such workers be allowed to work for other companies. In FedEx’s case, some judges have ruled that the work load at FedEx has made it impossible for such workers to hold additional posts as other companies, courts have ruled.