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Independent Contractor Case Is Cautionary Tale

Business Finance Magazine, December 9, 2008

Brannen in Brief

Companies that rely heavily on independent contractors to perform ongoing responsibilities to attain cost savings could find themselves on the wrong side of a costly lawsuit if a court decides that the workers are de facto employees, as a California Superior Court recently determined in Estrada v. FedEx. Appropriate employee classification is defined by a number of common law factors plus interpretations in court cases. This high profile case, which continued for nearly a decade, could create a big ripple effect in cases around the country.

FedEx Ground/Home Delivery agreed to pay a $27 million judgment that includes payments of $14.5 million to California drivers who the company misclassified as independent contractors after the judge ruled that they were legally employees and entitled to reimbursement for such things as social security taxes, workers' compensation insurance, liability insurance, purchasing or leasing trucks, and fuel. But the money FedEx will pay in the California case will pale in comparison to what they may be forced to pay in a nationwide class action suit relating to employee misclassification involving some 27,000 drivers which is pending in Indiana. Some followers of the case say it could cost the company several billion dollars.

Attorneys specializing in workforce litigation recommend that companies with a substantial contingent workforce audit the status of each worker to make sure they're not committing a technical foul -- especially because now more than ever, cash-strapped governments need to generate as much revenue from employment-related taxes as possible.

Even though there are some hard and fast rules that separate independent contractors from employees in the eyes of the law, grey areas abound where employers walk a fine line. Attorneys suggest that employers start an audit by addressing questions such as whether or not the company can control details including workers' breaks, performance, kind of equipment used, and work schedules. If so, the workers are probably employees. Do workers offer their services to other businesses and maintain their own offices? If the answer is yes, they're more likely to be independent contractors. The most important rule of thumb may be that if the worker is regularly performing services for the company over an indefinite period of time, the person is probably an employee. And if they're not classified as such, the company risks big penalties.