On August 27, 2014, the U.S. Court of Appeals for the Ninth Circuit upheld California’s long-standing reliance on the “right to control” test as the primary factor determining whether workers are properly classified as independent contractors or employees and rejected the District of Columbia Circuit’s “entrepreneurial opportunities” test.

The Court’s Decision in Alexander v. FedEx Ground Package System, Inc.

In Alexander v. FedEx Ground Package System, Inc., full-time California delivery drivers engaged by FedEx Ground Package System, Inc. (“FedEx Ground”) sued for unpaid wages and employment expenses under California law, alleging they were misclassified as independent contractors. The drivers were engaged pursuant to an Operating Agreement that they signed with FedEx Ground. Under the agreement, workers were required to purchase uniforms from FedEx and to use certain equipment typically available only through FedEx; were subject to numerous standards of conduct, appearance, and behavior; and were forced to follow a strict schedule for loading/unloading trucks and delivering packages. Although drivers purchased their own delivery vehicles, FedEx Ground specified in detail even the configuration, shelf dimensions, and materials to be used to construct the inside of the vehicles. FedEx Ground determined the service areas for each route, set the prices with customers, resolved all issues with customers, and collected all funds from the customers. While drivers could seek to expand to additional routes (using helpers), FedEx Ground retained all rights to determine whether a driver was performing sufficiently in accordance with FedEx Ground’s policies and requirements before being granted an opportunity to expand. Further, FedEx Ground retained all rights to approve or reject the helpers and required that all helpers abide by the same standards to which the drivers were held under the Operating Agreement (for example, the same grooming, appearance, attire, and delivery-vehicle requirements).

The trial court entered summary judgment for FedEx Ground on the drivers’ employment-related claims, finding that the workers were properly classified as independent contractors. On appeal, the Ninth Circuit overturned the grant of summary judgment to FedEx Ground and directed the trial court to enter summary judgment in favor of the drivers, finding them conclusively to be employees and not independent contractors. In rendering its decision, the Ninth Circuit relied on long-standing California authority addressing independent contractor versus employee status. The court held that the primary factor in determining whether a worker is an independent contractor or employee in California is the right to control the manner or means by which a result is obtained, regardless of whether that right is exercised. The court found the evidence overwhelmingly established that FedEx Ground retained the right to control the manner and means by which the work was performed. While drivers might have been permitted limited freedom to make certain decisions in performing the work, FedEx Ground retained all necessary control over the drivers. In reviewing the additional, secondary factors considered under California law, the court found none of the factors weighed sufficiently in favor of FedEx Ground to tip the scale in favor of FedEx.

In finding for the drivers, the Ninth Circuit expressly rejected the “entrepreneurial opportunities” test that had been applied by another federal appellate court, the District of Columbia Circuit, in determining independent contractor status. Under that test, the primary factor used to determine a worker’s status is whether the worker has significant entrepreneurial opportunity for profit or loss. The Ninth Circuit rejected that test, holding there is no evidence California has replaced its long-standing “right to control” test. The court went further, however, in stating that even if the “entrepreneurial opportunities” test applied, the drivers here lacked important rights typical of a self-employed contractor. Those rights included the right to hire whomever they wished as helpers and to operate more than one vehicle or more than one route, as FedEx Ground’s consent was required for each.

Practical Implications

This case is noteworthy because it reaffirms the significant risks inherent in engaging a worker as an independent contractor in California and demonstrates that courts look well beyond what the parties say and rely on what the parties do in conducting business with each other. California employers that classify workers as independent contractors should carefully assess how much control they exercise (or have the right to exercise) over the method and manner of performing the work. Misclassifying workers as independent contractors can expose a company to substantial liability.

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