FedEx Case Focuses on Control of Work Performed by Independent Contractors

In Estrada v. FedEx Ground Package System, Inc., the California Court of Appeal considered whether Federal Express (“FedEx”) was required under Labor Code § 2802, which provides that an employer must indemnify his or her employees for all necessary expenditures or losses incurred by the employee in direct consequence of the discharge of his or her duties, to reimburse expenses incurred by drivers that that FedEx had attempted to classify as independent contractors.  FedEx attempted to rely on the express wording in an Operating Agreement executed by each driver that provided that identified each driver as an “independent contractor, and not as an employee . . . for any purpose,” and noted that “the manner and meaning of reaching the [parties’ mutual business objectives] are within the discretion of the [driver]”; however, the court concluded that the FedEx actually exercised sufficient control over the details of how the drivers performed their jobs so as to properly classify them as employees for purposes of  Labor Code § 2802. The Court of Appeal recited a number of indicators of control including the following:

  • Under the terms of the Operating Agreement, drivers were required to purchase or lease a truck (usually obtained from FedEx preferred vendors) meeting FedEx’s specifications, mark the truck with the FedEx logo, pay all costs of operating and maintaining the truck (including repairs, cleaning, fuel, tires, taxes, licenses and insurance), and use the truck exclusively in the service of FedEx (or mask the logo if the truck is used for any other purpose). To pay for the truck and other costs, drivers may obtain loans through FedEx’s business support programs (with repayment through pay deductions).
  • Drivers were required to provide “fully competitive” service to a “primary service area” assigned by FedEx, and the Operating Agreement acknowledged the driver’s “proprietary interest” in his/her primary service area’s customer accounts; however, FedEx also had the right to reconfigure primary service areas based on volume of business considerations and a driver who has his/her primary service area impacted by reconfiguration had a right “to receive payment” from FedEx or the benefited driver.  Customers were billed by FedEx, not the drivers.
  • Drivers were required to wear a FedEx-approved uniform and maintain his/her appearance “consistent with reasonable standards of good order,” his/her uniform “in good condition,” and his/her truck in a “clean and presentable fashion.”
  • FedEx regional managers supervised terminal managers and had weekly discussions about goals and procedures. Terminal managers, in turn, supervised and trained drivers.  FedEx reserved the right to have its management employees travel with the driver four times each year to verify that the driver was meeting FedEx’s standards, and agreed to train or familiarize the driver with its quality service procedures.
  • As was true of all FedEx employees, drivers were paid weekly at rates set by FedEx without negotiation (the drivers’ rate was based on a daily rate, a piece rate for packages handled, and bonuses for length and quality of service), and offered a “business support package” to help him/her obtain and maintain a truck, a scanner, clean uniforms, and other similar items, the cost of which was paid by the driver by deductions from his/her weekly settlements.
  • The duration of assignment was not limited to a specific job or project and instead drivers were allowed to elect the initial term of his/her Operating Agreement (from one to five years), with automatic yearly renewals unless, 30 days before expiration of the term, one party gave the other written notice of termination.
  • Several times each year, terminal managers evaluated each driver’s performance by means of a “customer service ride” and there were covert checks and security audits conducted in the field. Each driver received an annual progress review.  Terminal managers decide which “failures to service” or alleged breaches of the Operating Agreement to document, and they have discretion (subject to the regional managers’ and upper management’s approval) to recommend termination or non-renewal.
  • Each driver was required to use a scanner, which was leased from FedEx, to obtain signatures when packages are delivered. Every driver’s truck had a computer, and the driver was required to insert the scanner into the computer after each delivery so that customers had immediate access to delivery information via the FedEx website.  As was the case with trucks, drivers could obtain loans to pay for scanners through FedEx’s business support programs (with repayment through pay deductions).
  • The Operating Agreement recited that it and its attachments constituted the “entire agreement and understanding between the parties,” and that it could be modified only by a writing signed by both parties.  However, notwithstanding this merger clause, the drivers’ relationship to FedEx was actually defined by a number of other sources, including the FedEx “Ground Manual” and “Operations Management Handbook,” which set forth “policies and procedures” in great detail to ensure the uniform operation of FedEx terminals throughout California, as well as by recruiting materials, welcome packets, memoranda, training videos, bulletin board posters, round-table presentations, and similar means of communication.
  • FedEx offered its drivers a deferred compensation or retirement plan (the record is ambiguous on this point) and other “employee benefits” (including direct deposit, a seniority-based “time-off program” for unpaid leave, and a scholarship program for the drivers’ children).
  • Drivers worked full time (during work hours set by FedEx) and exclusively for FedEx, and were required to work every day FedEx provided service unless they had pre-approved replacements.
  • The drivers and their trucks were subject to inspection every day (the trucks had to be clean, the drivers in uniform and well groomed), and if either failed inspection, the driver could be barred from service.

The court concluded that, in practice, the work performed by the drivers was wholly integrated into FedEx’s operation and noted that the drivers looked like FedEx employees, acted like FedEx employees, were paid like FedEx employees, and received many employee benefits.  In addition, the court concluded that the drivers were totally integrated into the FedEx operation, performed work essential to FedEx’s core business, and had jobs with little or no entrepreneurial opportunities.  As a result, FedEx was not only liable for expense reimbursement it was also subject to a number of other employment obligations including break time requirements, overtime payment, payroll withholdings and taxes, workers’ compensation insurance and benefits paid to other employees.

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