Butler Williams & Skilling Blog

Employee Misclassification Lawsuit Settles for $26.8 Million

FedEx recently agreed in principle to settle a California lawsuit filed by its workers alleging that FedEx had misclassified them as independent contractors for $26.8 Million. The lawsuit alleged that FedEx should have classified the workers as employees under federal labor laws, and sought damages for unpaid overtime work and expense reimbursements. According to FedEx officials, the IRS had also been pursuing tax penalties against FedEx in the amount of $319 Million based on the misclassification of its workers, but that the IRS had withdrawn the proposed penalty. FedEx also faces legal challenges to its classifications of workers in the states of Washington and Indiana. 

Many workers who should be classified as employees under federal labor and tax laws are misclassified by their employers as independent contractors to the detriment of the employee and the benefit of the employer. Under the law, an employer must show that a worker meets the qualifications of an independent contractor, which typically involves an evaluation of the amount of control it exercises over the worker. Employers have an incentive to classify a worker as an independent contractor because the cost of an independent contractor is typically significantly smaller than that of an employee. Employers can require independent contractors to work longer hours because they are not eligible to receive overtime pay under federal labor laws. Independent contractors are also not entitled to participate in the employer's benefits plans offered to employees, such as health insurance, dental insurance, retirement plan contributions, stock options, and family and medical leave, which saves the employer on paying these costs. Thus, workers who are classified as independent contractors must pay the costs of these benefits rather than the employer. 

Unfortunately, most workers don't question the classification either until they are fired or other traumatic events in their life cause them to need benefits to which they would be entitled as an employee, such as a serious health condition for which they need family and medical leave.  Workers who are classified as independent contractors should take proper steps, such as seeking a ruling from the IRS, to be sure that this classification is proper. Most applicable federal laws allow a worker to challenge the classification, and provide protection against retaliation by the employer.

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