Courts have a way of shaking up the insurance industry. We are going to look at two cases today that may change the rules in two areas: independent contractors and fiduciary liability.

FedEx Offers to Pay $228 Mil to Settle Independent Contractor Case An average of almost $100,000 each, that’s what FedEx Ground has offered to pay to 2300 drivers in California under a proposed $228 million settlement of a dispute over whether the drivers were employees or independent contractors.

The drivers contend that they were employees and not independent contractors. They argued that FedEx controlled delivery scheduling, required that they operate FedEx-branded trucks, wear FedEx-branded uniforms and use FedEx scanners. They also said they didn’t receive overtime pay, weren’t paid for missed meal or rest periods, and didn’t receive other benefits due employees.

Between 2003 and 2009, cases were filed against FedEx in approximately 40 states, including New York, New Jersey and Pennsylvania.1 The Federal courts have a procedure to consolidate similar cases into one matter via the Judicial Panel on Multidistrict Litigation. The consolidated multidistrict litigation (“MDL”) proceedings in the FedEx case were held in the District Court for the Northern District of Indiana (“the MDL Court”). The MDL Court ruled in favor of FedEx, holding that the drivers were independent contractors as a matter of law.”2

The drivers were granted permission to appeal each of the state cases individually and in August 2014, the Ninth U.S. Circuit Court of Appeals in California reversed the MDL decision as respects the California and Oregon cases, ruling that the drivers in those states were employees.3 FedEx could have appealed to the full Ninth Circuit Court panel, but in June 2015 it offered to settle the case by paying $228 million.4

LATE BREAKING NEWS: After this article was written, the U.S. 7th Circuit Court of Appeals also reversed the MDL, ruling that FedEx Ground drivers were employees, in this case involving drivers in Kansas. The case will be sent back to the Kansas District Court to determine the amount of damages to be awarded. Craig v. FedEx Ground No. 10-3115 July 8, 2015 (See: http://media.ca7.uscourts.gov/cgibin/ rssExec.pl?Submit=Display&Path=Y20 15/D07-08/C:10-3115:J:PerCuriam :aut:T:fnOp:N:1583690:S:0)

As insurance mavens, our first thought is: Can a firm look to its insurance for indemnification for claims of this type? The most likely source of coverage would be employment practices liability. Unfortunately, almost all EPLI policies exclude claims involving wages and hours, the Fair Labor Standard Act, misclassification, and the like. The few companies willing to cover claims of this type provide defense-only coverage with a limit of just $100,000 or $250,000. A handful of companies do offer defense and indemnity coverage, but impose a minimum $250,000 retention.5

Insurance doesn’t appear to be the solution at this moment for most firms. Bob Bregman, Senior Research Analyst at International Risk Management Institute, suggests that firms be proactive and hire a consultant to do a wage and hour audit. He believes an audit will discover almost all violations and allow the firm to correct them.6 The US Department of Labor can audit on its own initiative and impose fines and penalties in addition to payments to employees. The cost can be substantial. In one case a phone-support company was assessed $144,000 for back wages and fines for Fair Labor Standards Act violations.7

Another reason for an audit is the announced upcoming increase in the threshold for overtime pay for supervisory employees. It will be increased by executive order from $23,600 to $50,440 to adjust for the increase in purchasing power of the dollar today compared to 1975 when the ceiling was originally set. That will make many more salaried employees with supervisory duties eligible for overtime. (All hourly workers and all salaried workers without managerial duties are presently covered.) Misclassification is widespread. A survey by the School of Industrial and Labor Relations at Cornell University found that more than 10 percent of all workers were misclassified.8

There’s no one set of rules to resolve independent contractor versus employee questions. Various sources list numerous characteristics to distinguish employees from independent contractors. Unless specified by law, it’s a question of determining which characteristics are most important in a particular case.

The IRS is vitally interested in the question because employers must pay social security taxes based on their employees’ pay. On its website the IRS lists a general guide to distinguish an independent contractor from an employee broken into three categories:

Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
Financial: Are the business aspects of the worker’s job controlled by the payer? (These include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

3.Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?9 In addition, the IRS has a 57-question form that can be submitted for an official ruling. But that only settles the classification for IRS purposes; someone can be an independent contractor for certain purposes, such as Internal Revenue Service, but not be considered as an independent contractor for other purposes, such as workers compensation.

In 2010, New York enacted the Construction Industry Fair Play Act. The law provides that any person performing services for a construction contractor is presumed to be an employee of that contractor. To be classified as an independent contractor, he or she must meet all three of the criteria shown in the law:

The person is free from control and direction in performing the job, both under contract and in fact,
The person is performing services outside of the usual course of business for the company, and;
The person is engaged in an independently established trade, occupation or business that is similar to the service he or she performs.10

Courts in Canada have struck a middle ground. They’ve created something referred to as a “dependent contractor.” If a contractor works exclusively for one principal he or she may be classed as a dependent contractor, even if he or she meets the requirements to be classified as an independent contractor. At the moment, the main benefit to Canadian dependent contractors is that courts have held that a dependent contractor is entitled to notice prior to termination. And that can be a significant benefit. In one case— interestingly involving insurance agents— the terminated agents were held to be entitled to 26 months of severance pay.

Germany and France have similar rules. In the UK, Prime Minister David Cameron has appointed a “freelance czar” to suggest the best ways to treat the problem. 11 There has even been talk of adopting dependent contractor status in the U.S. Wilma Liebman, a former chairwoman of the National Labor Relations Board, proposed it in a dissenting opinion she wrote in 2005 in an NLRB case involving newspaper carriers. 12

Dependent contractors are steadily becoming a part of the world economy. Uber is caught in the argument13 as are almost every one of the other sharingeconomy companies such as Lyft, Postmates, TaskRabbit, Instacart, etc. Dependent contractor status might be a solution for this country, too.

Supreme Court Unanimously Expands Fiduciary Liability It’s common for both small and large employers to use a mutual fund company, a bank or other investment company to provide their 401k plans. The retirement plan providers include the largest and best known financial companies, such as Fidelity Investments, Vanguard Group, Bank of America, and John Hancock, as well as numerous smaller firms. Typically, participants are able to select from a list of funds offered by the selected provider. It’s hoped that this will insulate the employer from responsibility for investment decisions and outcomes because participants select the fund they want from the list of offerings provided by the retirement plan provider. The U.S. Supreme Court just said not so fast.

Edison International is a holding company for a number of utilities and energy companies. Its 401k plan served more than 20,000 employees. Under its plan, employees could choose a variety of investments including “institutional or commingled pools, forty mutual fund-type investments (etc.).”14

In Tibble v. Edison, the plaintiffs, current and former Edison 401(k) plan beneficiaries, claimed that Edison failed to meet the ERISA fiduciary standard of prudence because the mutual funds the plan offered were “retail class” shares of mutual funds, rather than the less expensive “institutional class” shares of the same funds.

While it may sound trifling, even a small difference in the costs assessed by a mutual fund company can become large over the life of an investment. For example, let’s say two people invest $5,000 each year for 20 years, but the fund one charges 0.25% in expense fees while the other charges 1.25%. If both funds returned 6% annually before fees, the person paying the higher fee would have about $18,000 less at the end of 20 years — $161,000 versus $179,000.15

In a unanimous 9-0 decision, the U.S. Supreme court ruled that Edison International had a duty to review a 401(k) plan’s investments on a continuous basis and conduct regular, periodic reviews as to an investment’s appropriateness and prudence.

Edison had also argued that three of the funds had been selected in 1999 and therefore claims of breach of fiduciary duty as respects those funds were barred by the six-year statute of limitations. The court said that because the duty is continuous, the statute did not bar the claims.16 (The Supreme Court did not determine whether Edison had violated its fiduciary duties. That issue was returned to the lower court.)

Commenting on the case, the National Law Review pointed out that “Tibble (v. Edison) may signal a trend in Supreme Court decisions toward a more expansive view of ERISA fiduciary duties, at least as they apply to the management of retirement plan investments…it comes close on the heels of a Court decision just last year that rejected the fiduciary-friendly ’presumption of prudence’ long endorsed by all seven US Circuit Courts of Appeals that had addressed the issue.”17 However, that case, which involved investing in stock in the employer/corporation, was not all bad news for fiduciaries. The court also ruled that a price drop is not, by itself, evidence of imprudence.

Rafael Droz, vice president, Claims, Financial Lines AIG lists two important lessons for fiduciaries based on the Tibble decision:“Fiduciaries must engage in ‘procedural prudence’; at a minimum plan fiduciaries should meet regularly to consider all plan investments, however long-standing, and document such meeting. “ERISA fiduciaries cannot rely on ERISA’s long six-year statute of limitations to protect them; evidently every new day is a new opportunity to be liable for a fiduciary breach of duty.”18

PRACTICE POINT: Every firm with an employee benefit plan should have fiduciary liability insurance. It’s not expensive and it’s important. Employee benefit plans usually name a fiduciary, but ERISA’s definition of plan fiduciaries is broader that just the named individual(s). According to ERISA “many of the actions involved in operating a plan make the person or entity performing them a fiduciary. Using discretion in administering and managing a plan or controlling the plan’s assets makes that person a fiduciary to the extent of that discretion or control. Thus, fiduciary status is based on the functions performed for the plan, not just a person’s title.”

In smaller firms this can be the operating owners and officers, just the people you deal with regarding the firm’s insurance— they can be sued as fiduciaries. Do you want to tell them that they’re not insured when the claim comes in?

Two Big Cases: Fedex Ground vs Drivers and Supreme Court on Fiduciary Liability

Jerry Trupin