August 15, 2007: BNA Labor Report: Delivery drivers are employees entitled under state law to reimbursement for work-related expenses, despite their description as independent contractors in an operating agreement they signed with FedEx Ground Package System Inc., a California appellate court ruled Aug. 13 (Estrada v. Fedex Ground Package Sys. Inc., Cal. Ct. App., No. B189031, 8/13/07).

Writing for a three-judge panel of the California Court of Appeal, Justice Miriam A. Vogel observed that "the parties' label is not dispositive and will be ignored if their actual conduct establishes a different relationship." The court also upheld the certification of the case as a class action but sent it back to the trial court for a recalculation of the reimbursable expenses and a reduction in the amount of attorneys' fees to be paid by FedEx.

Anthony Estrada and Jeffrey Morgan sued FedEx under the California Labor Code for reimbursement of their work-related expenses. The trial court certified a class of 209 current and former drivers who performed pickup and delivery services for FedEx on a full-time basis in a single work area. The court found that the drivers were employees and ordered FedEx to reimburse some of their expenses--totaling roughly $5 million--and ordered FedEx to pay the drivers' costs and attorneys' fees, totaling roughly $12.3 million.

In this third appeal, the appeals court considered FedEx's challenges to the trial court's finding that the drivers are employees, the trial court's class certification order, its reimbursement awards, and its attorneys' fee award.

The trial court had found that, for purposes of determining the drivers' right to reimbursement for their expenses, the drivers are employees within the meaning of California Labor Code Section 2802. Subdivision (a) of Section 2802 provides that an employer must indemnify his employee for all necessary expenditures incurred by the employee in discharging his duties. The statute fails to define "employee," so the appeals court looked to the common law, observing that "the essence of the test is the control of details" over the manner in which the worker accomplishes the work.

Justice Vogel analyzed the nonnegotiable "Pick-up and Delivery Contractor Operating Agreement" that each FedEx driver must sign. The agreement specifically identified the driver as an independent contractor rather than an employee. It set forth the parties' "mutual business objectives" and stated that the method of reaching these objectives was within the driver's discretion.

Drivers were required to lease a scanner, purchase or lease a truck meeting FedEx's specifications, mark the truck with the FedEx logo, and pay all costs for the truck. Frequently, drivers relied on a "business support package" from FedEx to fund this equipment, the cost of which they repay by deductions from their weekly "settlements" or paychecks.

However, the court said, the drivers were subject to strict oversight. They were expected to wear a FedEx uniform. Terminal managers supervised and trained them. They worked full time under hours set by FedEx and were forbidden to refuse a delivery. Each driver received an annual progress review. The appeals court concluded that "the drivers look like FedEx employees, act like FedEx employees, are paid like FedEx employees, and receive many employee benefits" and therefore were FedEx employees within the meaning of Labor Code Section 2802.

The court added, "FedEx's control over every exquisite detail of the drivers' performance, including the color of their socks and the style of their hair, supports the trial court's conclusion that the drivers are employees, not independent contractors." Based on these facts, the appeals court rejected FedEx's contention that drivers were independent contractors.

Justice Vogel also upheld the trial court's certification of the class, noting that common issues predominated.

The appeals court also ordered the trial court to revisit the issue of the actual amounts to be awarded to the drivers for their expenses. At trial, there had been a misunderstanding between the parties' lawyers as to whether actual receipts for expenses, such as gasoline and maintenance costs, were required or whether spreadsheets would suffice. The appeals court said FedEx would "obtain a windfall if it was not required to reimburse the drivers for provable expenses that had been part of the case from the beginning."

The appeals court also ordered the trial court to allow reimbursement for the drivers' work accident insurance premiums, which had been disallowed because they were erroneously characterized as "workers compensation."

Attorneys' Fees

Estrada had requested $619,691 in costs and $6,789,325 for attorneys' fees, a total of $7,409,016, plus a 2.0 multiplier as compensation for delay and contingency, for a total of $14,818,032.

The trial court reduced the fee by 18 percent and gave Estrada a total of $12,373,875 for costs and fees, citing the years of intensive litigation involving enforcement of an important right that conferred a significant benefit on a large class.

The appeals court upheld Estrada's right to recover the fees but found the amount "excessive." It ordered the trial court to reduce the amount, noting that the same facts cannot be used to justify both the award and the multiplier. Even though the amount of the fee ultimately is within the trial court's discretion, it must be reasonable, Justice Vogel wrote.

The court also considered several issues raised on cross-appeal by the drivers. It rejected their contention that the trial court should have allowed them to prove their expenses by lay testimony and by expert analysis based on an economic model. The appeals court said such estimates and educated guesses are allowed where damages cannot be proved although here they could easily be proved by receipts and records. It also upheld the trial court's rejection of the drivers' contention that FedEx should reimburse them for the cost of leasing or purchasing their delivery trucks.

Justice Robert M. Mallano and Judge Frank Y. Jackson joined in this opinion.

Estrada and the other plaintiffs were represented by Lynn Rossman Faris of Leonard Carder LLP in Oakland, Calif.; Beth Ann Ross of Leonard Carder LLP in San Francisco; and Ellen Lake of Oakland, Calif. FedEx was represented by James M. Nelson of Seyfarth Shaw LLP in Sacramento, Calif.; Robert M. Schwartz of O'Melveny & Myers LLP in Los Angeles; Chris Hollinger of O'Melveny & Myers LLP in San Francisco; and Jonathan D. Hacker and Walter Dellinger of O'Melveny & Myers LLP, Washington, D.C.

Text of the court decision may be accessed by clicking here.