April 1 (Bloomberg) -- FedEx Corp. didn’t illegally deny overtime pay to contract delivery drivers who accused the company of wrongly calling them entrepreneurs while treating them as employees, a Seattle jury decided.

More than 320 contract ground drivers at FedEx, the second- biggest U.S. package-delivery company, sued in a 2004 class- action, or group, lawsuit, demanding overtime at 1 1/2 times their regular pay. They also wanted reimbursement for uniforms.

“Contractors freely chose to enter contracts with FedEx and operate their businesses as they choose,” Maury Lane, a FedEx spokesman, said after yesterday’s verdict.

FedEx, based in Memphis, Tennessee, still faces a national class-action lawsuit over driver pay and lost a similar case in California last year. Yesterday’s decision in Washington state court has no bearing on the federal case in South Bend, Indiana. The U.S. Internal Revenue Service is examining the company’s tax classification of the contractors for 2002, and 2004 to 2006.

“This is great, but they still have some issues to deal with on this front, but this clearly sets a positive momentum” said Morgan Keegan & Co. analyst Art Hatfield. He rates the shares “market perform.”

The Indiana case involves more than 30,000 former and current contractors. They alleged they’re supposed to be entrepreneurs and that FedEx shouldn’t be allowed to require them to wear company uniforms or dictate rules about their personal appearance and the cleanliness of the trucks.

Contract Drivers

The group in that case is a mix of multiroute workers who can hire their own employees, and single-route drivers who are responsible for their own deliveries. The Seattle case covered only drivers with single routes.

Contract drivers in the federal class action allege that because of the company’s control over them, they should be treated as full-time employees and receive regular workers’ benefits. FedEx has denied the allegations and has asked U.S. District Judge Robert Miller in South Bend to dismiss the case.

FedEx’s contractor ground-delivery model probably gives the company a competitive advantage against United Parcel Service Inc., the world’s largest package-delivery company, Marick Masters, a business professor at the University of Pittsburgh, has said. UPS’s drivers are employees and are represented by the Teamsters union.

‘Win-Win Model’

“It’s a win-win model,” FedEx lawyer Kelly Corr told jurors during the trial, saying the company’s structure benefits both the carrier and contractors.

Plaintiffs’ lawyers representing drivers in the federal class action monitored the Seattle trial and jury decision. Those lawyers estimate a $1 billion payout in the federal case if the contractors prevail.

FedEx paid $26.8 million to 203 contractors and their lawyers in a California state case last year.

The IRS is investigating whether FedEx misclassified contract drivers for tax purposes in 2002, and 2004 to 2006. The tax agency issued and then withdrew a $319 million preliminary assessment, that said FedEx categorized contractors improperly.

FedEx fell 22 cents to $44.27 at 12:58 p.m. in New York Stock Exchange composite trading.

The Seattle case is Anfinson v. FedEx Ground Package System Inc., 04-2-39981, Superior Court of Washington, King County (Seattle). The Indiana case is In re FedEx Ground Package System Inc. Employment Practices Litigation, 3:05-md-00527, U.S. District Court, Northern District of Indiana (South Bend).

To contact the reporter on this story: Laurence Viele Davidson in Atlanta at lviele@bloomberg.net; Brad Broberg in Washington state court in Seattle at bbroberg@comcast.net.

Last Updated: April 1, 2009 13:00 EDT