Why the Court's Ruling on FedEx Drivers Could Jeopardize the Franchise Model

What’s the line between an employee and an independent entrepreneur? With recent lawsuits, businesses that rely on contractors and franchisees are under fire – and may need to change up their entire business models.

On Wednesday, the Ninth Circuit Court of Appeals ruled that 2,300 individuals working for FedEx Ground in California and Oregon had been misclassified as independent contractors instead of employees. That means that FedEx may have to pay up millions of dollars for the costs of branded trucks, uniforms and scanners, as well as wages, overtime compensation and penalties.

The crux of the argument is that FedEx exercises so much control over drivers – their appearance standards, what they are delivering, when and how – that to classify drivers as anything but employees is a money-saving scam by FedEx. The lawsuit claimed that by framing drivers as contractors, FedEx was able to have workers complete the same work as employees at UPS or the U.S. Postal Service for less pay and no benefits.

“FedEx Ground built its business on the backs of individuals it labelled as independent contractors, promising them the entrepreneurial American Dream,” Beth A. Ross, the attorney at Leonard Carder who represented the Californian drivers, said in a statement. “However, as Judge Trott said in his concurring opinion, not all that glitters is gold.”

Meanwhile, FedEx describes its drivers as independent contractors who are entrepreneurs, not employees.

“Today, FedEx Ground contracts with nearly 9,000 small businesses that are owned and operated by entrepreneurs who value independence and innovation and apply their own management skills to operate successful businesses,” reads the FedEx website.

Currently, the decision only affects FedEx drivers in California and Oregon, meaning around the rest of the U.S. drivers will remain independent contractors. FedEx will likely appeal the decisions to the Supreme Court.

If the whole scenario of the over-controlling company and supposedly independent entrepreneurs sounds familiar, that’s because it is. In the last few months, there have been a number of cases with independent contractors and franchisees taking companies to court for being treated as employees, minus the perks. Most recently, the National Labor Relations Board ruled that McDonald’s was a joint employer in employees’ lawsuits against the burger chain. Plus, 7-Eleven franchisees in California are taking their franchisor to court in part due to their claim that the company’s excessive control rendered them employees, not independent franchisees.