FedEx Ground has agreed to pay the state more than $3
million to settle claims that the company misclassified its drivers as independent contractors, Attorney General Martha Coakley’s office announced Thursday.
Coakley’s office had alleged that Pittsburgh-based FedEx Ground had made insufficient payments to the state for payroll taxes, worker’s compensation and unemployment assistance as a result of the misclassification.
In the announcement of the settlement, Coakley called it a “step to level the playing field for businesses.”
The settlement followed a joint investigation by Coakley’s office, the Executive Office of Labor and Workforce Development and the Department of Revenue. The 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, according to Coakley’s office.
The settlement also provides for a payment for the 13 drivers named in the attorney general’s citation, according to Coakley’s office.
FedEx Ground drivers in the state have also brought their own lawsuit against FedEx Ground - which is pending and not affected by the settlement with Coakley’s office - and FedEx Ground denies liability in the settlement, according to Coakley’s office.
By Lindsay Beyerstein, In These Times
O
ver 10 million American workers are classified as independent contractors. But how many of them are really self-employed and how many are falsely labeled as such by unscrupulous employers?
That's one of the questions the Senate Committee on Health, Education, Labor and Pensions (HELP) set out to answer in a hearing on employee misclassification last week.
Employers mislabel their employees as contractors in order to avoid paying Medicare, UI and Social Security taxes. Amazingly there are no legal consequences for misclassifying workers, even if the employer does it on purpose. Committee Chair Tom Harkin (D-Iowa) pointed out this kind of tax evasion is costing cash-strapped state unemployment insurance funds billions of dollars a year.
A 2000 study commissioned by the Department of Labor found that up to 30% of employers misclassify at least some of their employees. The practice is rampant in the construction industry and in low-wage and gray market sectors of the economy.
By breaking the law, employers can cut their labor costs by up to a third. Frank Battaglino, who owns a sheet metal company in Maryland, testified about how hard it is for law abiding employers to compete with companies who cut corners.
"Increasingly we were being beat out of competitive bids by unusually low bids," Battaglino said. "We know this is a direct result of companies deliberately misclassifying their workers as independent contractors."
Who counts as an employee? The law takes a pretty commonsense view of the question. Basically, if you work for wages with the employer's tools at the employer's workplace under the employer's supervision, you're an employee. True independent contractors are literally in business for themselves. They invest capital in their own ventures and share in the profits or losses of their enterprises.
Deputy Secretary of Labor Seth Harris told the committee about one Wisconsin family restaurant that tried to evade minimum wage laws by classifying the dishwashers in their kitchen as "independent contractors."
Most workers don't realize that most of the rights they take for granted in the workplace derive from their legal status as employees. For example, most anti-discrimination laws are written in terms of what employers can do to their employees. Contractors may not be protected.
Help may be on the way for misclassified workers. In January of 2010, the DOL hired more inspectors to combat misclassification. The President's 2011 budget calls for an additional $25 million to help the DOL, IRS and other agencies address the problem.
Finally, Harkin and Sen. Sherrod Brown (D-OH) have introduced the Employee Misclassification Prevention Act, which would impose penalties for misclassifying employees as contractors and require employers to keep records on non-employees who work for them.
Last week the American Teamster's union announced that they are in favor of the Obama administrations crack down on misclassified workers. You can read more 
about the announcement in our news section. Teamsters Support Senate Efforts to Protect Misclassified Workers.
No real surprise here as the unions continue to try and remain stable in light of the trouble economy. They are going to be behind any efforts to corral jobs from both misclassified union and non-union work locations to help bolster their declining ranks. According to the Bureau of Labor Statistics, "The number of wage and salary workers belonging to unions declined by 771,000 to 15.3 million in 2009, largely reflecting the overall drop in employment due to the recession." In 1983, the first year for which comparable union data are available, there were 17.7 million union workers.
Certainly many union shops have been impacted by the down economy that has hit hard in the manufacturing areas like Autoworkers, etc. As the unions can enlist the government to help them identify what would or should be union positions will continue to bolster their ranks and dues.
Let us know how your company has been effected by unions and contract workers. Share information that might help another company challenged with this area of employment processing.
The impacts of the new health care laws on contingent workforce management will not be fully understood for some time, and could be subject to change before they
take effect. But some provisions of great concern are approaching rapidly, including a little understood and newly highlighted 1099 reporting provision slated to take effect on January 1, 2012.
Like the proposed Employee Misclassification Prevention Act (EMPA) bill, this new requirement would “pierce the corporate veil” of hidden independent contractor vendors and require immediate discovery and control over challenging spend categories such as statement of work consultants and sub-contractors.
According to Michael Tanner, a senior fellow of the CATO Institute:
The latest surprise is Section 9006(b)(1) . . . which requires that businesses provide a 1099 form to every vendor with whom they do more than $600 worth of business over the course of a year. . . Of course businesses already have to file 1099s for outlays on items like consultants. But the new rule will mean that even the smallest of businesses will have to issue a form — and file with the IRS — for virtually every purchase or payment. Consider how many business transactions go on every single day in a $14 trillion U.S. economy. Millions, perhaps hundreds of millions, of forms will be winging their way between businesses and between businesses and the IRS. The potential for mistakes and lost forms would be tremendous. And with errors would come audits and penalties."1
With legislation like this already passed into law, there is no need to wait for the Employee Misclassification Prevention Act to start bringing SOW consultants and incorporated independent contractor vendors -- including project services spend -- into your centralized Contingent Workforce Management program.
You will be required to not only track this spend, but issue 1099s, starting in just a year and a half. Given the tremendous amount of organizational change such a requirement represents, enterprises should look to starting the process of a deep contractor risk assessment now.
After all, even if this particular provision affecting 1099s laws is extended or overturned, the message from legislators and regulatory agencies is clear -- there will be no more hiding of independent contractors for purposes of misclassifying workers.
1. Tanner, Michael. CATO Institute. “Health Bill Floods Business In Paper.” May 6, 2010. http://www.ajc.com/opinion/health-bill-floods-business-521926.html?tag=content;selector-perfector
Posted by Liz Greene
FIRST SUMMARY JUDGMENT RULING FROM THE FEDERAL MDL COURT HOLDS THAT ILLINOIS FEDEX DRIVERS ARE EMPLOYEES, NOT INDEPENDENT CONTRACTORS
In PSC's ongoing coverage of the Federal Express Cases on Employee Misclassification, we bring you the latest update from Illinois District Court.
June, 2010. Source: http://www.fedexdriverslawsuit.com/
FedEx Ground and Home Delivery drivers have been found to be employees under the Illinois Wage Act. The decision was issued by U.S. District Court Judge Robert Miller in the multi-district litigation that Judge Miller has been presiding over for the past five years. (In re: FedEx Ground Package System, Inc. Employment Practices Litigation, Cause No. 3:05-MD-527 RM) This holding came in a May 28, 2010 Opinion and Order granting summary judgment to the Illinois drivers under the Wage Act. The Court did not rule on other claims made by the Illinois drivers, but indicated it will address those claims separately. The decision is important in that it is one of a growing number of decisions in the past few years holding that the FedEx Ground drivers are employees and not, as FedEx claims, independent contractors. The essence of the cases consolidated before Judge Miller is that FedEx Ground has intentionally and consistently misclassified drivers as independent contractors, when they are in reality employees. Judge Miller specifically found that the Illinois drivers were employees under the Wage Act because their work was an essential and a necessary part of FedEx's business. As former CEO Dan Sullivan testified, the drivers are the "centerpiece" of FedEx's "workforce" and they are an "essential component" of the company's business. The Court noted the fact that drivers must wear FedEx uniforms and maintain a personal appearance satisfactory to FedEx. Contractors supply their own vehicles, but they must bear FedEx's logos and advertising. Further, FedEx structures the routes so that the trucks are in use 9 to 11 hours a day. Contractors can hire replacement drivers, but only with FedEx's approval. Finally, the Court noted that FedEx managers were obligated to have business discussions and customer service rides each year in order to maintain FedEx's image and reputation. Drivers' motions for Summary Judgment in 40 other states are pending. Currently, there are 63 lawsuits consolidated in the multi-district litigation. Motions for Summary Judgment have been filed, briefed and are awaiting decisions in almost all of these cases.
Labor Department Announces Enforcement Actions Against More Than Half of the Subcontractors on 'The Province' at RIT Project
Enforcement actions part of statewide crackdown on employers who mis
classify workers as independent contractors or pay them "off the books"
Albany, NY (June 08, 2010) -
State Labor Commissioner Colleen Gardner announced today the results of two enforcement sweeps at the ‘The Province' at RIT (Rochester Institute of Technology) construction project. Widespread violations of State labor laws were found, including nonpayment of overtime, off-the-books employment, failure to carry workers' compensation insurance, and
misclassification of employees as independent contractors by more than half (12 of 21) of the subcontractors interviewed by DoL on the site.
The sweeps were carried out by the New York State Joint Enforcement Task Force on Employee Misclassification on January 26 and February 9 of 2010. The Task Force is an interagency strike force formed in 2007 to address the problem of employers who improperly classify employees as independent contractors or who pay workers "off the books." The strike force that visited ‘The Province' work site included investigators from the NYS Department of Labor and the Workers' Compensation Board.
"In each of these cases, employers brought in crews of out-of-state workers who were typically paid off-the-books," said Commissioner Colleen Gardner of the New York State Department of Labor. "Our announcement today is a victory for workers and taxpayers. We were able to recover these workers' hard-earned wages from out-of-state contractors within a few months."
Gardner added, "The problem of employers misclassifying workers as independent contractors or paying them "off-the-books" is happening statewide. My message to those employers, whether you are from New York or another state, is: ‘You are cheating your workers and the taxpayers, and undercutting honest businesses. We are looking for you - and the chances that you will get caught have never been better.' "
Chair Robert Beloten of the New York State Workers' Compensation Board said, "A business that doesn't carry insurance threatens its workers' well-being and gains an unfair advantage over its law-abiding competitors. Our stop-work order program is an essential tool in dealing with employers who refuse to follow the law and provide workers' compensation coverage for their employees."
Four subcontractors were found to owe a total of $42,835.32 in unpaid overtime wages and liquidated damages. An additional $22,500 in penalties was assessed by the Department of Labor's Division of Labor Standards. The department has already collected $33,728.13 for the labor law violations from three subcontractors, and a fourth subcontractor has agreed to pay a balance due of $31,607.19.
The Department of Labor's Division of Unemployment Insurance found that 12 of the 21 contractors on the site had misclassified 211 workers and owe the Unemployment Insurance Trust Fund more than $80,000 in unemployment insurance taxes.
Three subcontractors were also issued stop-work orders by the Workers' Compensation Board for not carrying workers' compensation insurance.
To learn more about the entire release visit the NYS DOL website.
To learn if you are at risk and how your company can save thousands to millions, please click on our Risk/Reward icon below.
Continuing a trend in Congress to limit employers’ use of independent contractors, on April 22, 2010, Rep. Lynn Woolsey (CA) and Senator Sherrod Williams (OH) introduced the Employee Misclassification Prevention Act (H.R. 5107, S. 3254) (“EMPA”) in the House and Senate respectively.
The EMPA would amend the Fair Labor Standards Act (“FLSA”) and render worker misclassifications a violation of federal law. Employers would be required to maintain records reflecting hours worked and wages paid for employees and non-employee workers. They also would be required to provide workers a “notice” that identifies:
- The worker’s classification
- A yet to be created, Department of Labor website (containing an on-line complaint link)
- Contact information for the applicable Department of Labor office
- Other additional information as prescribed by regulation.
For workers classified as non-employees, the Notice would be required to state:
Your rights to wage, hour, and other labor protections depend upon your proper classification as an employee or non-employee. If you have any questions or concerns about how you have been classified or suspect that you may have been misclassified, contact the U.S. Department of Labor.
Employers who violate the notice and/or record keeping requirements or misclassify a worker would be subject to a civil penalty of up to $1,100 per worker for a first offense and up to $5,000 per worker for willful or repeated violations. Employers who misclassify workers and violate the minimum wage and overtime requirements would be subject to
treble damages (3X). The proposed legislation also contains broad anti-retaliation/discrimination provisions.
To enforce the Act’s provisions, the Department of Labor would be directed to perform targeted audits focusing on employers in industries that frequently misclassify employees. The Department of Labor and Internal Revenue Service would be permitted to refer incidents of misclassification to each other. The states would be directed to increase their own penalties for worker misclassification, conduct audits for the purpose of identifying employers who misclassify workers, and report the results of the audits to the Department of Labor on a quarterly basis.
While the EMPA is in the earliest stages of consideration by both houses of Congress, its introduction is significant because it follows introduction of the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (“TRAC”) (H.R. 3408, S. 2882), which would revise the Revenue Act of 1978’s safe harbor provision (the safe harbor provision allows an employer to treat a worker as a contractor if certain requirements are met), make it more difficult for employers to classify workers as independent contractors, and significantly increase employer penalties in the event of misclassification. It also follows President Obama’s proposed budget for 2011, which includes significant funding for the U.S. Department of Labor’s Wage and Hour Division to increase the Division’s number of investigators, train investigators to detect misclassification of workers, and focus on industries where misclassification is most prevalent. In sum, the EMPA serves as a reminder that curtailing employers’ use of independent contractors remains a significant issue in Congress. Employers who have not yet done so would be well-advised to review their independent contractor relationships and ensure that they are on the up and up before the Department of Labor and/or a corresponding state agency does it for them.
Most of us are aware of the past actions to Microsoft and more recently UPS and FedEx in the IRS's pursuit of tax revenue via misclassified worker investigations. 
But if misery loves company, these firms have lots of friends.
Here are some that have line up as their closest "friends":
- Hewlett-Packard (Marks v. Hewlett Packard Company)
- Time Warner Inc. (Herman v. Time Warner Inc.)
- Allstate Insurance Company (Equal Opportunity Employment Commission v. Allstate Insurance Company/Romero v. Allstate Insurance Company)
- S.G. Borello & Sons, Inc. (S.G. Borello & Sons, Inc. v Department of Industrial Relations)
- ...and many more have suffered the consequences of worker misclassification.
Perhaps FedEx Corporation’s legal battle will become the newest landmark case, with approximately 30 state class action suits and an Employee Retirement Income Security Act (ERISA) class action filed against the company; settlements are estimated by some to be $1 billion.
Already a California appeals court decision in August 2007 ruled in favor of the plaintiff and FedEx lost its appeal of a $5.3 million verdict. The verdict resulted from a class action that claimed FedEx treated its independent contractors as if they were employees but did not provide them with payment and benefits that full-time employees would receive. The ruling proved that the workers in question, delivery drivers for FedEx Ground, were in fact employees of FedEx and not independent contractors due to the level of control that the company exercised over them.
And if all of the recent legislative action, lawsuits and case studies aren’t eye-opening enough, employers now have more to be concerned with, as current data analysis tools on the market, already in use by several State Unemployment Insurance agencies, allow users to easily analyze the IRS 1099 abstract file with technology that searches and identifies triggers for an audit.
With this technology, a user can establish criteria for queries and can target employers for an audit if, for example, a worker received only one IRS Form 1099 within one year but is paid what the agency views as high-level income. In this case, the agency might suspect that the employer was concealing full-time employment in order to avoid paying unemployment taxes. In the event that an independent contractor is reclassified to employee status during an audit, the employer is responsible for all back taxes, including employer and employee contributions and of course, applicable penalties and fines.
The Department of Labor (DOL) will find employers in violation of the law an
d will take legal action against them if they do not have an effective plan in place to protect workers from violations of their workplace rights. Companies without such a plan are breaking the law.
The DOL Spring 2010 publication, issued this week, specifically says, “Employers and others must ‘find and fix’ violations — that is, assure compliance — before a Labor Department investigator arrives at the workplace. Employers and others in the Department’s regulated communities must understand that the burden is on them to obey the law, not on the Labor Department to catch them violating the law. This is the heart of the Labor Department’s new strategy. We are going to replace ‘catch me if you can’ with ‘Plan/Prevent/Protect.’”
This means that companies must have a plan to prevent the misclassification of workers as independent contractors. The DOL investigates violations of the Fair Labor Standards Act (FLSA), which includes misclassifying workers as independent contractors. The DOL applies its own test (the Economic Realities Test, which has a different emphasis than the IRS’ 3 Areas of Control Test) for determining whether a company has misclassified an employee as an independent contractor. If the DOL determines that the worker was misclassified, and otherwise would have been entitled to minimum wage and overtime pay under the FLSA, the company may be required to pay the employee back wages and prospectively re-classify the worker as an employee entitled to minimum wage and overtime. These expenses can be cost-prohibitive.
This aggressive new policy exposes employers to investigations by the DOL – investigations in which employers will need to prove their innocence by showing that they have an effective plan in place to protect workers from violations – including violations of the FLSA.
Does your company have a plan?
PSC can help create and prevent. Contact us or take our Free Risk/Reward Assessment.
In our continuing coverage of the government's stepped up efforts to reign in misclassified workers, the US Department of Labor (DOL) in the Obama 
administration, is now softening and trying to change the predatory approach and is trying to help employers with an internet resource designed to assist employers in navigating the legal changes of federal employment regulations.
The new DOL Web site features a series of interactive online Advisors, which, the DOL claims, “help users determine if they are in compliance with federal employment laws by asking questions, providing information and directing the individual to appropriate resolutions.”
Topics covered include:
- payroll and overtime
- workplace poster requirements
- health benefits
- re-employment rights for returning uniformed service members
- federal contractor compliance
To see the site and learn more, the link is http://www.dol.gov/elaws/
CHECK OUT OUR NEXT BLOG WHICH WILL TALK MORE ABOUT THE D.O.L.'s GUIDANCE ON PREVENTION.
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