FedEx’s 401(k) and Misclassification of Employees as Independent Contractors

Yesterday, the Huffington Post ran an article by Amy Biegelsen about FedEx drivers’ status as independent contractors – FedEx Fails to Deliver for Drivers. I know a lot has been written about this topic over the years, specifically about the way FedEx classifies their drivers as independent contractors, but this article is a good read because it contains updates about the various lawsuits FedEx has faced over the years, and the ineffective response from Congress to address this situation.

It was just a few months ago, on Dec. 14, 2010, that FedEx drivers in 20 class-action cases were found to be independent contractors by U.S. District Judge Robert Miller in the multi-district litigation involving this issue assigned to the U.S. District Court for the Northern District of Indiana (South Bend). The drivers have appealed to the 7th Circuit Court of Appeals, which heard oral arguments on Jan. 12, 2012 but has not issued a decision yet.

From a plan document perspective, what makes the FedEx situation so interesting is that most plan documents contain some version of this language in the definition of Employee or Eligible Employee:

“Automatically excluded from eligibility to participate in the Plan is any individual who is a signatory to a contract, letter of agreement, or other document that acknowledges his status as an independent contractor not entitled to benefits under the Plan or who is not otherwise classified by the Employer as a common law employee and with respect to whom the Employer does not withhold income taxes and file Form W-2 (or any replacement Form), with the Internal Revenue Service and does not remit Social Security payments to the Federal government, even if such individual is later adjudicated to be a common law employee”

FedEx’s Summary Plan Description (SPD) to their EGTRRA 401(k) plan says:

“Only team members who satisfy the conditions of eligibility will be entitled to benefits. Those who are not regular team members of FedEx Kinko’s Office and Print Services, Inc., such as independent contractors and individuals who contract with third parties to perform services for FedEx Kinko’s Office and Print Services, Inc., are not eligible for benefits. All determinations concerning whether any individual or groups should be classified as team members will be made by FedEx Kinko’s Office and Print Services, Inc., in its sole and absolute discretion. You are not eligible to participate in this Plan if:

  • Your employment is covered by a collective bargaining agreement that does not provide for your participation in this plan;
  • You are a non-resident alien who receives no earned income from the company that constitutes income from sources within the United States; or
  • You have been classified by the company as a leased employee or an independent contractor, even if a court or government agency having competent jurisdiction reclassifies you as a Team Member.”

When I worked for the IRS, the last phrase was referred to as the Microsoft language because it was generally believed that Microsoft was the first company to receive a determination letter for a qualified plan containing this language after the IRS had studied it.

It is this language, which was included in many EGTRRA prototype and volume submitter plan documents pre-approved by the IRS, that may kill any potential recovery for the FedEx drivers for retirement benefits if a court determines that they were improperly classified as independent contractors. Because the independent contractors who are excluded via this language are usually Non-Highly Compensated Employees (NHCEs), the plan sponsors which utilize this language to exclude independent contractors have an added benefit of passing the ratio percentage test or average benefits test due to artificial NHCE and Benefiting NHCE numbers.

4 Responses to FedEx’s 401(k) and Misclassification of Employees as Independent Contractors

  1. J. Stewart Borrow

    Suzanne, I wanted to point out an error in your blog post on the FedEx workers and the 401(k) plan. You indicated in your post that the Microsoft language was named because it was the first company to receive a determination letter providing for the exclusion of independent contractors. In fact, Microsoft was involved in litigation that went up to the 9th Circuit which held that individuals who had been classified by Microsoft as independent contractors and excluded from participation n the plan but which the IRS determined were in fact common law employees, were required to be covered by Microsoft’s employee benefit plans. Prior to the Microsoft case, no qualified plan provided for an exclusion of someone the employer determined to be an independent contractor because the plan could not cover an independent contractor even if the employer wanted to because it would violate the exclusive benefit rule. The language providing that individuals who are classified by the employer as independent contractors will be excluded from the plan regardless of whether a court or administrative agency determines that they should be common law employees as a way of preventive lawyering. So the Microsoft languagee arose as a way of avoiding the result found by the 9th Circuit in the Microsoft case.

    • Administrator

      The nickname was just an internal nickname among my colleagues at the IRS which came from reviewing Microsoft’s plan documents and my comment should be read in that context.

  2. This issue was addressed by the IRS in a Technical Advice Memorandum issued on July 28, 1999. While there were several decisions in the Vizcaino v. Microsoft litigation, I believe the 9th Circuit’s final opinion was submitted in May 2009.

    • Administrator

      Thanks Adam. I pulled a copy of the technical advice memorandum. With the history of Vizcaino v. Microsoft, and the way it just keeps going on, and on, and on, I wonder if the May 2009 opinion will finally end this case.