FedEx Loses Investors as Courts Upend Founder's Model
FedEx Corp. tells its ground-service drivers when to work, what to charge customers and what kind of socks and shoes to wear, the workers say. Drivers who sued the company argue that makes them employees.
Founder and Chief Executive Officer Fred Smith, who has served as co-chair of U.S. Republican presidential candidate John McCain’s campaign, opposes changing their status from independent contractors to employees.
The trouble is the FedEx CEO isn’t getting much support from shareholders. Calculating from five years ago, before its court losses on the drivers’ claims, FedEx’s total stock return was 25 percent, compared with 11 percent for United Parcel Service Inc.
Since a judge in Indiana certified a nationwide lawsuit Oct. 15 for drivers demanding FedEx federal pension benefits reserved for employees, total return for the company dropped 19 percent compared with a decline of 13 percent for UPS, the world’s biggest package-delivery company.
FedEx, which has more planes in its delivery fleet than UPS, has had to pay higher prices for jet fuel in the last 18 months. Amid a slowing economy, some customers have switched from premium services such as FedEx’s to cheaper delivery methods, Smith has said.
Rulings Awaited
The FedEx CEO now awaits rulings by U.S. District Judge Robert Miller in South Bend, Indiana, on whether the drivers are employees. If they are, they’ll seek USD 1 billion in damages.
At stake is a business model that provides FedEx Ground a cost advantage over UPS that may be more than 30 percent. That’s the estimated savings enjoyed by businesses that use contractors rather than employees, according to Marick Masters, a business professor at the University of Pittsburgh.
In March, the same Indiana judge ruled that workers in 20 states could sue as 20 individual groups to win employee status. Because those class actions and a nationwide suit involve so many drivers, anticipated rulings by the Indiana judge on whether the workers are misclassified pose the biggest threat to date to Smith’s vision.
Tax Case
The dispute also has opened FedEx up to a series of related legal responsibilities, including a potential pretax liability from unpaid payroll taxes of as much as USD 2.5 billion. It may force the second-largest U.S. package-delivery company to either overhaul its contractor model or throw it out entirely.
FedEx, with USD 1.1 billion in net income in fiscal 2008, declined to say whether it had set aside reserves to cover the possible USD 1 billion in damages or the potential USD 2.5 billion tax liability. Spokesman Maury Lane said FedEx follows generally accepted accounting principles in disclosing reserves.
The bigger problem for the package service may be how to overhaul the business model to make it compliant.
Shift to Contractors
Treating workers as contractors rather than employees has been gaining popularity among U.S. employers with the number in the workforce rising 25 percent to about 10.3 million from 1999 to 2005, according to the U.S. Government Accountability Office. The reason for the increase is the cost differential according to Masters, the business professor.
A Teamsters Union financial model predicts FedEx costs would go up USD 426 million a year if the company compensated the drivers as it does present employees. The model assumes FedEx would pay Social Security and Medicare taxes, unemployment and worker- compensation insurance, vacations, health insurance and 15 hours a week of overtime.
FedEx’s Lane declined to comment on the Teamsters’ model or Masters’s 30 percent savings estimate, except to call both “speculative.” He declined to say how much FedEx saves by using contractors.
FedEx describes the drivers as small-business owners who invest in their trucks and are free to hire helpers or substitutes.
New Model
Before converting the drivers to payroll workers, said Pat Becker Jr., Becker Capital Management Inc. chief
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