Tuesday, June 24, 2008
FedEx Investigation Over Tax, Independent Contractors
Who says corporate rivalry is a bad thing? Bloomberg report by John Hughes (June 24 2008) details how the 'competitive fighting spirit' between FedEx and main rival UPS has lead to an Ohio state investigation into FedEx's classification of its 15,000 truck drivers as independent contractors.
The company has also faced a class-action lawsuit covering drivers in 20 states and been investigated in 25 states. The case went to trial in April 2004. At trial, over 35 drivers, FedEx executives, and expert witnesses testified. On July 26, 2004, the Court ruled that the FedEx Ground drivers are employees and not independent contractors. Here's a pdf copy of the Court's ruling.
The problem here is that FedEx uses a business model which kind of straddles the line between drivers who could be considered employees or contractors, depending on individual state laws. The drivers use trucks bearing FedEx colors and logos, wear FedEx-style uniforms. However, they must pay for and maintain their own trucks, uniforms, supplies, gas, maintenance, and other costs. A FedEx contract generally covers one route, but it is possible for one person to own up to four contracts, which can raise the earning potential to more than $100,000 per year. Because of this, existing contracts have become a commodity in and of themselves...sometimes bought and sold like businesses for as much as $30,000 plus. A good comparison of the business models of UPS and FedEx, along with other statistics relevant to their hiring practices, is available here.
The IRS has already been poking around FedEx labor practices since 2002, and is currently reviewing FedEx's trucking business for 2004 to 2006, and an adverse ruling could result in potential liabilities upto $1 billion.
Why the big fuss over a corporate strategy? Well, for starters, FedEx saves upto 30% by not treating its drivers as employees, in which case it would have to provide full benefits, including retirment and health benefits. Main rival UPS has its 91,800 drivers covered by a contract with the Teamsters Union. Which means FedEx has an unfair edge over UPS.
Which is also why FedEx was ratted out to Ohio state's unemployment compensation agency by a UPS lobbyist - Washington based tax lawyer Kenneth Kies - who sent the state a detailed 562 page report, including IRS letters to FedEx drivers advising them that they were considered FedEx employees for U.S. tax puposes, and prior regulatory ruling on the same matter from other states.
The Bloomberg report also quotes FedEx CEO, Chairman and President Frederick Wallace (Fred) Smith (Bio, Forbes profile) as saying that "The business model we use is good for our contractors. "That's what freedom's all about. We've given that entrepreneurial opportunity to thousands of contractors to own, grow and expand their own business.''
Unfortunately for FedEx, freedom also means that competitors get to send state regulators detailed reports of how your company is twisting regulations and short-charging workers. And it also means that workers will eventually unionize, and you'll end up paying them what you owe, plus hefty fines and back payments to the IRS and others.
References:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aFJ3yzlYJpXw
http://www.braunconsulting.com/bcg/newsletters/winter2004/winter20041.html
http://www.pattenfaithsandford.com/fedex_class_action%202005.htm
The company has also faced a class-action lawsuit covering drivers in 20 states and been investigated in 25 states. The case went to trial in April 2004. At trial, over 35 drivers, FedEx executives, and expert witnesses testified. On July 26, 2004, the Court ruled that the FedEx Ground drivers are employees and not independent contractors. Here's a pdf copy of the Court's ruling.
The problem here is that FedEx uses a business model which kind of straddles the line between drivers who could be considered employees or contractors, depending on individual state laws. The drivers use trucks bearing FedEx colors and logos, wear FedEx-style uniforms. However, they must pay for and maintain their own trucks, uniforms, supplies, gas, maintenance, and other costs. A FedEx contract generally covers one route, but it is possible for one person to own up to four contracts, which can raise the earning potential to more than $100,000 per year. Because of this, existing contracts have become a commodity in and of themselves...sometimes bought and sold like businesses for as much as $30,000 plus. A good comparison of the business models of UPS and FedEx, along with other statistics relevant to their hiring practices, is available here.
The IRS has already been poking around FedEx labor practices since 2002, and is currently reviewing FedEx's trucking business for 2004 to 2006, and an adverse ruling could result in potential liabilities upto $1 billion.
Why the big fuss over a corporate strategy? Well, for starters, FedEx saves upto 30% by not treating its drivers as employees, in which case it would have to provide full benefits, including retirment and health benefits. Main rival UPS has its 91,800 drivers covered by a contract with the Teamsters Union. Which means FedEx has an unfair edge over UPS.
Which is also why FedEx was ratted out to Ohio state's unemployment compensation agency by a UPS lobbyist - Washington based tax lawyer Kenneth Kies - who sent the state a detailed 562 page report, including IRS letters to FedEx drivers advising them that they were considered FedEx employees for U.S. tax puposes, and prior regulatory ruling on the same matter from other states.
The Bloomberg report also quotes FedEx CEO, Chairman and President Frederick Wallace (Fred) Smith (Bio, Forbes profile) as saying that "The business model we use is good for our contractors. "That's what freedom's all about. We've given that entrepreneurial opportunity to thousands of contractors to own, grow and expand their own business.''
Unfortunately for FedEx, freedom also means that competitors get to send state regulators detailed reports of how your company is twisting regulations and short-charging workers. And it also means that workers will eventually unionize, and you'll end up paying them what you owe, plus hefty fines and back payments to the IRS and others.
References:
http://www.bloomberg.com/apps/news?pid=20601109&sid=aFJ3yzlYJpXw
http://www.braunconsulting.com/bcg/newsletters/winter2004/winter20041.html
http://www.pattenfaithsandford.com/fedex_class_action%202005.htm
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