For years, courts have grappled, in a variety of contexts, with the question of whether a company’s workers are employees of the company, or independent contractors. While virtually all courts have agreed that the characterization of someone as an independent contractor in a written agreement is not determinative, and that the “economic reality” of the relationship and extent of an employer’s “right of control” are more important, various approaches have been taken on how to decide on the true nature of the relationship.
Several class action lawsuits were filed around the country on behalf of drivers working for FedEx Ground Package System, Inc. (FXG), alleging that the workers, who had signed agreements “acknowledging” they were independent contractors, were really employees, and that they accordingly had improper deductions taken from their earnings for costs and expenses, and were denied overtime pay.
The lawsuits were consolidated and transferred to a federal district court in Indiana, and the Kansas class action was designated as the lead case. The Kansas claimants asserted that under the Kansas Wage Payment Act (KWPA), improper deductions had been taken from their pay for expenses incurred on FXG’s behalf; and that they were also entitled to overtime pay. The Indiana district court ruled in FXG’s favor, holding that the workers were independent contractors, and hence not covered by the KWPA. The Seventh Circuit, however, stated that it was unsure what legal standard the Kansas Supreme Court would use to determine whether the workers were employees or contractors, and referred the case to the Kansas Supreme Court to decide what test applies and whether the drivers were employees under the KWPA.
After discussing various legal standards that had been applied in earlier Kansas appellate cases, and other court cases, the Kansas Supreme Court turned to an oldie-but-goodie, and decided that the IRS “20-factor test”, first applied by the IRS in a 1987 revenue ruling, provided the applicable framework for analysis in Kansas, and is now “the tool to be used in Kansas to determine whether an employer/employee relationship exists under the KWPA”.
Making slight modifications to previous articulations of the 20 factors, “to eliminate the ambiguous or duplicative descriptions”, the factors are as follows:
- the employer’s right to require compliance with instructions;
- the extent of any training provided by the employer;
- the degree of integration of the worker’s services into the business of the employer;
- the requirement that the services be provided personally by the worker;
- the extent to which the worker hires, supervises, and pays assistants;
- the existence of a continuing relationship between the worker and the employer;
- the employer’s establishment of set work hours;
- the requirement that the worker devote full-time to the employer's business;
- the degree to which the work is performed on the employer’s premises;
- the degree to which the employer sets the order and sequence of work;
- the requirement that the worker submit regular or written reports to the employer;
- the manner of payment to the worker, e.g., by the hour, day, or job;
- the extent to which the employer pays the worker’s business or travel expenses;
- the degree to which the employer furnishes tools, equipment, and material;
- the incurrence of significant investment by the worker;
- the ability of the worker to make a profit or suffer a loss;
- whether the worker can work for more than one firm at a time;
- whether the worker makes his or her services available to the general public on a regular and consistent basis;
- whether the employer has the right to discharge the worker; and
- whether the worker has the right to terminate the relationship at any time without incurring liability.
Applying each of these 20 factors one-by-one, and then considering the overall picture, the Kansas Supreme Court concluded that even though some factors pointed toward a finding that the drivers were independent businesspersons, “[v]iewing the factors as a whole leads to the conclusion that FedEx has established an employment relationship with its delivery drivers but dressed that relationship in independent contractor clothing”, especially in light of the company’s “control and micromanaging” of its drivers.
Conclusion: Whether workers who are treated by a company as independent contractors are in fact employees has become a fertile ground for litigation. Kansas employers who are contemplating the use of independent contractors should carefully consider whether those workers would in fact be entitled to that status under the 20-factor test, as explained by the Supreme Court in the Craig case.
Craig v. FedEx Ground Package System, Inc., case no. 108,526 (Oct. 3, 2014).