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Independent Contractor Misclassification Cases Cost yet another Truck Delivery Firm Millions to Settle

“Independent contractor misclassification.”  Those three words are enough to ruin the day of any trucking company’s CEO.  Plaintiffs’ class action lawyers have honed in on delivery companies as defendants in misclassification cases, claiming that they misclassify employees as independent contractors and have deprived drivers of overtime pay, benefits, and other workplace protections.  The recent settlement by 3P Delivery, Inc., which provides delivery services for major retailers, highlights this costly legal development.  

3P Delivery historically classified its drivers as independent contractors and not employees.  In 2008, 3P Delivery was sued by two drivers in Oregon and two drivers in Washington for misclassification, claiming that “3P engages in a fraud designed to make its Drivers appear to be running independent businesses, when in reality its Drivers are 3P employees.”  

Each of the two lawsuits sought damages including denial of overtime and other wage payments, paid holiday pay  and other employee benefits, penalty wages for failure to pay wages in a timely manner, and reimbursement of the drivers’ expenses for operating their vehicles (such as the cost of leasing or purchasing the drivers’ trucks, fuel and cargo expenses, and insurance).

Among the allegations in the class actions were that 3P:

  • requires drivers to fill out applications;
  • furnishes  drivers with pallet jacks, hand trucks and straps;
  • pays drivers by a method chosen by 3P (either a fixed weekly amount or commission);
  • requires drivers to adhere to 3P standards as set forth in a “Contract Driver Guide Book”;
  • advertizes that it maintains its own fleet of clean vehicles;
  • controls the workload of drivers;
  • does not permit substitute drivers;
  • instructs drivers how to load, transport, and unload shipments;
  • retains the right to terminate the drivers at will;
  • prohibits drivers from using their vehicles to offer delivery services for other companies;
  • requires the drivers to submit a daily log of deliveries; and
  • evaluates the performance of the drivers.

The “fraud” claim was based on the allegation that 3P tried to disguise its alleged misclassification by requiring its drivers to sign a contract with 3P Delivery, forcing the drivers to secure business licenses, creating business cards for each driver, and directing (and assisting) drivers in becoming either a Limited Liability Corporation (LLC) or a regular corporation.

After the entry of court orders permitting the two lawsuits to proceed as class actions, the parties engaged in substantial pretrial discovery that yielded disclosure by 3P Delivery of over 160,000 pages of documents.  Earlier this month, following court-ordered mediation, the parties agreed to settle both cases for $2.25 million: $1.125 million for the Oregon case and $1.125 million for the Washington case

Two Takeaways:

1.  The “real” costs:  The cost of defending and settling class action cases of this nature is often equal to or greater than the damages to be awarded each member of the class.  Here, in addition to the $2.25 million in settlement funds allocated to settlement, the class action lawyers are seeking at least $1.2 million in the Oregon case and $1.0 million in the Washington case in plaintiff’s legal fees for hours they expended.   Further, to defend itself, 3P Delivery likely expended a greater amount in paying defendant’s own legal fees to its lawyers.  Thus, when the final “bill” is tallied for the lawsuit, the “real” cost of this case to 3P Delivery may have exceeded $7-8 million as a result of 3P having classified its drivers as independent contractors.

In addition, companies that settle claims of this nature with class action lawyers usually have to “settle up” with the IRS and state revenue departments as well as state unemployment and workers compensation agencies.  The cost of satisfying those government obligations, which can include penalties and fines, can often be larger than the overall cost of a class action.

2.  Ways to minimize or eliminate independent contractor misclassification.  There is no federal law and only a few state laws that prohibit trucking and delivery companies from classifying its drivers as independent contractors.  The 3P Delivery case is an example of how a company can become a casualty of failing to structure its relationship with its drivers in a bona fide manner that complies with applicable employment, tax, benefits, and independent contractor laws.

Misclassification typically starts with structuring a business without being aware of the sizeable legal risks of operating a business in a way that fails to comply with labor, tax, and employee benefits laws applicable to independent contractors and employees. When a business finally becomes aware of the risks, there are three alternatives:  (1) do nothing, as most businesses seem to continue to do; (2) disguise the misclassification and try to make it appear to be legitimate without changing the underlying indicia of misclassification, such as what 3P Delivery allegedly did (requiring its drivers to incorporate as LLCs or regular corporations); or (3) enhancing compliance with federal and state independent contractor laws in a bona fide manner , after undergoing an “IC Diagnostics”TM process

If the latter alternative is chosen, there are at least three effective steps companies can take to enhance their compliance with independent contractor laws and minimize or eliminate exposure to future misclassificationliability.  See http://www.pepperlaw.com/publications_article.aspx?ArticleKey=1769.  While taking steps to enhance compliance now will not eliminate past misclassification liability, those companies that take bona fide compliance steps are far less likely to become future targets of class action lawyers and government regulators than companies that choose to do nothing or disguise their misclassification.

Copyright © 2012 Pepper Hamilton LLP

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About this Author

Partner

Richard J. Reibstein is a partner in Pepper Hamilton’s Labor and Employment Practice Group. In the area of independent contractor compliance, Mr. Reibstein designs programs for companies to enhance compliance with such laws at the federal and state levels, and defends businesses before administrative agencies and the courts in single plaintiff and class action employee misclassification claims.  He is co-chair of Pepper’s Independent Contractor Compliance practice and is co-publisher of the...

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