Regulations

INDUSTRY OMEN: Fed Ex Pays Up Big Time In Settlement

Posted on July 28, 2010 by - Also by this author - About the author

PAY SHOCK: Operators worry that a settlement requiring Fed Ex to pay back taxes and workers’ comp for misclassified independent contractors in Massachusetts could set a precedent for actions against chauffeured operators using I/Cs. A separate lawsuit for back wages is pending.

BOSTON — Attorney General Martha Coakley’s Office has entered into a multimillion dollar agreement with Pittsburgh-based FedEx Ground to settle claims the company misclassified its drivers as independent contractors.

The settlement, disclosed this week, requires FedEx Ground to pay more than $3 million back to the state’s general fund. The Attorney General’s Office alleged that FedEx Ground’s failure to properly classify drivers had led the company to make lesser payments to the Commonwealth for payroll taxes, worker’s compensation and unemployment assistance.

“We have made enforcement against employer misclassification a priority because employers who misclassify workers are gaining an unfair advantage over their competitors and unfairly depriving the Commonwealth of tax and other revenues," Coakley said. "With today’s agreement, we have recovered $3 million owed to taxpayers and taken a step to level the playing field for businesses."

In 2007, the Attorney General’s Office cited FedEx Ground for violation of the Independent Contractor Law, by misclassifying its drivers, failing to provide a proper paystub, failing to provide workers’ compensation, not paying overtime to certain drivers, and neglecting to deduct and withhold state income taxes. FedEx Ground appealed the matter to the Division of Administrative Law Appeals (DALA). The Attorney General’s Office citations against Fed Ex Ground included penalties of more than $190,000.

While FedEx Ground’s appeal was pending before DALA, the Attorney General’s Office coordinated further investigation with the Executive Office of Labor and Workforce Development and the Department of Revenue into FedEx Ground’s business practices. The joint investigation revealed that FedEx Ground’s misclassification of employees had resulted in significant underpayments to the Department of Revenue, Division of Industrial Accidents, and Department of Unemployment Assistance.

The settlement amount includes these significant underpayments. The settlement also provides for a payment for the 13 drivers named in the Attorney General’s citation. FedEx Ground drivers in Massachusetts have brought their own lawsuit against FedEx Ground that remains pending and is not affected by this settlement. FedEx Ground denies liability in the settlement.

The Massachusetts Independent Contractor Law provides that an individual performing any service shall be considered to be an employee unless: 1) the individual is free from control and direction in connection with the performance of the service, both under his or her contract for the performance of service and in fact; and 2) the service is performed outside the usual course of the business of the employer; and, 3) the individual is customarily engaged in an independently established trade, occupation, profession or business of the same nature as that involved in the service performed.

FALLOUT FOR CHAUFFEURED TRANSPORTATION?

The Fed Ex case resonates strongly in the chauffeured transportation industry, where a substantial number of operators run companies based on chauffeurs who are classified as independent contractors.

With the ascension of the Obama Administration, Democratic control of Congress, and heavy influence of labor unions of the political process, businesses are seeing a major increase in the number of employee- and wage-related rules at the federal and state level. Also, federal and state labor departments are more aggressively auditing businesses and enforcing rules more frequently in ways that favor the employee, W-2 business model preferred by big unions.

“This administrative precedent by the AG’s office leaves all Massachusetts transportation companies using independent owner/operators or contractors at risk for misclassification of workers and extremely onerous financial penalties,” wrote Dawson Rutter, a longtime operator in Boston and New York and a member of the NLA board of directors, in an e-mail. “In fact, I would expect that this will be the model that many states and the Federal Dept of Labor will use as a blueprint for prosecution of companies that utilize the I/O model.”

In reaction to the Fed Ex settlement, Rutter, whose company is employee-based, e-mailed comments to fellow board members and industry leaders Monday urging the NLA to take action and stake a clear position on the I/C wage issue.

“For quite a while now, several members of the board have been raising an alert on this issue, while others have chosen to ignore or discount this mounting problem,” Rutter wrote in the e-mail. “I would suggest that this information be made immediately available to the membership of the NLA and I also suggest that we discuss at the next board meeting what the NLA position will be as it relates to this issue. It is time to stop sticking heads in the sand on the I/O business model as it relates to limousine services.”

During the last few years, operators in New Jersey and Florida in particular have had to deal with costly lawsuits and settlements at the behest of not only government bureaucrats but opportunistic trial lawyers who read the current environment and then go trolling for potential independent contractor complaints.

Such actions have prompted industry associations, such as the Limousine Assocations of New Jersey and the New England Livery Association, to devote multiple meetings in the past year to warning operators about the aggressive labor enforcement and educate them about the finer legal and regulatory points they need to be aware of.

In fact, NELA issued a warning in its last newsletter to all of its Massachusetts members of enhanced audits and enforcement action by the Mass. Division of Unemployment, the Mass. Dept. of Revenue, the Mass. AG’s office and the IRS specifically targeted against companies that use the independent owner operator model, naming the Massachusetts limousine industry.

I/O wages, overtime, and workers comp issues were the main topic of the JULY 21 LANJ MEETING. LANJ executive director Barry Lefkowitz already has had to handle six settlement cases among New Jersey-based operators alone.

The concerns among I/O business model operators were underscored this year as several opted out of LCT’s annual 100 Largest Fleets List in the August issue because they did not want to call attention to themselves from regulators and lawyers. The 2009 list included 33 I/O fleet operators; this year’s list has only 17.

“Once states and the federal government realize how much money they can recoup as a result of these actions, these enforcement actions will spread like a wildfire and we need to give our members as much relevant information as we can to help them negotiate this minefield,” Rutter warned.

Sources: Massachusetts Attorney’s General’s Office; Dawson Rutter, Commonwealth Worldwide Chauffeured Transportation; Martin Romjue, LCT Magazine.

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