Category Archives: Independent Contractors

FedEx Independent Contractor Misclassification Lawsuits Wait for Answer from Kansas Supreme Court

Recognizing that the FedEx independent contractor class action lawsuit “is of great importance not just to this case but to the structure of the American workplace”, the U.S. Court of Appeals for the 7th Circuit has requested input from the Kansas Supreme Court on whether FedEx drivers are improperly classified as independent contractors in Craig v. FedEx Ground Package System, Inc., No. 10-3115 (CA7 July 12, 2012).

Craig v. FedEx Ground Package System, Inc. involves 479 Kansas FedEx drivers who allege that they were improperly classified as independent contractors rather than employees under the Kansas Wage Payment Act. It is one of 21 cases appealed to the 7th Circuit regarding substantially the same issue about whether FedEx misclassified current and former drivers as independent contractors instead of employees. When these class action lawsuits were originally filed in U.S. district courts throughout the United States, the Judicial Panel on Multidistrict Litigation consolidated the actions and transferred them to the U.S. District Court for the Northern District of Indiana. In 2010, the district court granted summary judgment in favor of FedEx, finding that the drivers could not prevail on their claims. The drivers appealed those decisions to the 7th Circuit Court of Appeals.

Explaining that when hearing appeals involving diversity, the 7th Circuit’s “task is to ascertain the substantive content of state law as it either has been determined by the highest court of the state or as it would be by that court if the present case were before it now”, the 7th Circuit found that it is not clear how the Kansas Supreme Court would decide the issues currently before the 7th Circuit in Craig as the caselaw is not clear and the Kansas Supreme Court has applied a facts-and-circumstances test when deciding similar issues in previous cases. For these reasons, the 7th Circuit requested the Kansas Supreme Court answer 2 questions, and has stayed all proceedings in the 21 FedEx appeals, including Craig, until it receives answers to those questions from the Kansas Supreme Court.

The questions are:

    1. Given the undisputed facts presented to the district court in this case, are the plaintiff drivers employees of FedEx as a matter of law under the Kansas Wage Payment Act (KWPA)?
    2. Drivers can acquire more than one service area from FedEx. See 734 F. Supp. 2d at 574. Is the answer to the preceding question different for plaintiff drivers who have more than one service area?

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.

Some Plan Implications of Reclassification as IBM Reclassifies Employees from Salaried to Hourly

Paul Secunda has an interesting post today on the Workplace Prof Blog about IBM reclassifying workers from salaried to hourly. The corporate buzzword for this is “reclassification”, and the story, which originated on NPR Marketplace, also mentions FedEx reclassifying drivers as independent contractors, and Allstate reclassifying agents as independent contractors.

For plan documents, the grandfather of reclassification is Microsoft. Several years ago, Microsoft reclassified employees as independent contractors, and within their plan document, excluded employees classified as independent contractors from becoming participants. Microsoft’s reclassification language spread through qualified plan documents, and is memorialized in IBM’s plan document, as of the January 1, 2005 restated plan, as:

    “1.20. “Employee” means an employee of any Employer who receives stated compensation other than a pension, severance pay, retainer, or fee under contract. The term “Employee” excludes any Leased Employee and any person who is included in a unit of employees covered by a collective bargaining agreement that does not provide for his membership in the Plan. Any person deemed to be an independent contractor by any Employer and paid by the Employer in accordance with its practices for the payment of independent contractors, including the provision of tax reporting on Internal Revenue Service Form 1099, shall be excluded from the definition of Employee for all purposes under the Plan, notwithstanding any subsequent reclassification of such person for any purpose under the Code, whether agreed to by the Employer or adjudicated under applicable law.”

Section 1.46 of IBM’s plan document defines “Regular Employee” as:

    “1.46. “Regular Employee” means an Employee as so defined by the rules and regulation of his Employer, who is (i) compensated by salary or by commission, or partly by salary and partly by commission, (ii) subject to the Employer’s performance evaluation program, and (iii) employed for an indefinite period.”

Eligibility is contained in Section 3.01 of IBM’s plan document, which states:

    3.01. Eligibility
    (a) Except as provided in subsection (c), each Employee of an Employer shall be eligible to become a Participant at any time during service as a Regular Employee.

In this type of plan which restricts eligibility to Regular Employees as defined by the plan document, and Regular Employees are defined as employees paid by salary or comission, hourly employees are not eligible to participate in the 401(k) plan. For plan documents, this is the real issue with Reclassification because it can be used by some companies to restrict plan participation.

Once an employee becomes a participant in the plan, they cannot be reclassified out of participating. For reclassified employees, Section 3.04(a) of IBM’s plan states that:

    3.04. Effect of Status Change on Participation.
    (a) Except as provided in subsection (b), a Participant who
      (i) has been employed by the Employer or an Affiliate as a Regular Employee, then
      (ii) ceases to be a Regular Employee, but
      (iii) remains in the employ of an Employer or an Affiliate
    shall continue to be a Participant in the Plan, but shall not be eligible to receive allocations of Deferred Cash Contributions or Matching Contributions, and shall not be eligible to make After-Tax Contributions, while his employment status is other than as a Regular Employee.

And this really is the heart of Reclassification when is comes to qualified plan documents – the reclassification has an impact plan eligibility and on employer contributions into the plan. For participants who are reclassified out of employer contributions, they remain as participants but their accounts will not grow as the employer prospers. The NPR Marketplace story states that IBM reported a 25 percent jump in profits a couple of weeks ago so it is not clear why IBM decided to engage in reclassification.

[tags]Pension Protection Act, ppa, reclassification, IBM, eligibility, independent contractor, NPR Marketplace, Workplace Prof, Paul Secunda, ERISA[/tags]

Hearings on Misclassifying Employees as Independent Contractors

The Congressional subcommittee on Income Security and Family Support began hearings today on the Effects of Misclassifying Workers as Independent Contractors. In conjunction with the hearing, the Joint Committee on Taxation prepared a report on the Present Law and Background Relating to Worker Classification for Federal Tax Purposes. (nod to Prof. Paul Caron (Cincinnati) of the TaxProf Blog).

The report from the Joint Committee on Taxation discusses the current elements of the facts-and-circumstances test which determine whether an employee is properly classified as an independent contractor. For qualified plan purposes, most pre-approved plans contain specific language on whether an independent contractor is included in the plan’s definition of employee. The standard plan language normally follows the definition of Employee contained in Treasury Regulation 1.410(b)-9, which states:

Employee. “Employee” means an individual who performs services for the employer who is either a common law employee of the employer, a self-employed individual who is treated as an employee pursuant to section 401(c)(1), or a leased employee (not excluded under section 414(n)(5)) who is treated as an employee of the employer-recipient under section 414(n)(2) or 414(o)(2). Individuals that an employer treats as employees under section 414(n) pursuant to the requirements of section 414(o) are considered to be leased employees for purposes of this rule. In addition, an individual must be treated as an employee with respect to allocations under a defined contribution plan taken into account under section 1.401(a)(4)-2(c)(ii) and with respect to increases in accrued benefits (within the meaning of 411(a)(7) under a defined benefit plan that are based on ongoing service or compensation (including imputed service or compensation) credits.

One of the interesting proposals is for a check-the-box agreement between the employer and the independent contractor affirmatively acknowledging that the worker is an independent contractor instead of applying the current facts-and-circumstances test.

One of the interesting parts of the report by the Joint Committee on Taxation is a mention of Section 864 of the Pension Protection Act, titled “Treatment of Test Room Supervisors and Proctors Who Assist in the Administration of College Entrance and Placement Exams”. In large tax laws, there are sometimes odd items contained in the Act and this was one of those odd items that caught my attention when I first read through the Pension Protection Act.

The Joint Committee on Taxation, in discussion Section 530 of the Revenue Act of 1978, states:

Section 530 of the Revenue Act of 1978 (“section 530”) generally allows a taxpayer to treat a worker as not being an employee for employment tax purposes (but not income tax purposes), regardless of the worker’s actual status under the common-law test, unless the taxpayer has no reasonable basis for such treatment or fails to meet certain requirements.

Section 864 of PPA is mentioned in the same section of the report as:

Under section 1706 of the Tax Reform Act of 1986, section 530 does not apply in the case of a worker who, pursuant to an arrangement between the taxpayer and another person, provides services for such other person as an engineer, designer, drafter, computer programmer, systems analyst, or other similarly skilled worker engaged in a similar line of work. Thus, the determination of whether such workers are employees or independent contractors is made in accordance with the common-law test.

Under section 864 of the Pension Protection Act of 2006, the similar worker consistency requirement does not apply with respect to services performed after December 31, 2006, by an individual who provides services as a test proctor or room supervisor by assisting in the administration of college entrance or placement examinations. This exception only applies if the service recipient is an organization that is described in section 501(c) and the service provider is not otherwise treated as an employee of the organization for employment tax purposes.

The Technical Explanation to PPA provides this explanation of Section 864:

Under the bill, section 530 of the Revenue Act of 1978 is amended to provide that in the case of an individual providing services as a test proctor or room supervisor by assisting in the administration of college entrance or placements examinations, the consistency requirement does not apply with respect to services performed after December 31, 2006 (and remuneration paid with respect to such services). The provision applies if the individual (1) is performing the services for a tax-exempt organization, and (2) is not otherwise treated as an employee of such organization for purposes of employment taxes. Thus, under the bill, if the requirements are satisfied, the IRS is prohibited from challenging the treatment of such individuals as independent contractors for employment tax purposes, even if the organization previously treated such individuals as employees.

It is almost law review article worthy to explore how individuals providing services as test proctors or room supervisors assisting in the adminstration of college entrance or placement examinations created enough Congressional concern to have a section of PPA devoted to ensuring that they are treated as independent contractors. [tags]Pension Protection Act, independent contractor, proctor, employee, 410(b), 401(a)(4), participant, retirement, pension, ppa[/tags]