The Ground War At FedEx

Drivers are suing to protest their status as contractors -- and gaining traction

Back in 1996, when Roy Mason landed work as a delivery driver with Roadway Package System Inc., he liked the idea of being an independent contractor, instead of an employee. Although he drove exclusively for RPS out of its Arcadia (Calif.) terminal, Mason felt the company gave him wide latitude to manage his routes.

Two years later, FedEx Corp. acquired RPS, and Mason says that's when things changed. He says a new management team set out strict rules dictating everything from how he dresses to how he holds his truck keys as he approaches a customer's door. And the company imposes fines on drivers who don't meet its strict standards. A few weeks ago, Mason says, managers shadowed him on his route, then slapped him with a citation for leaving his truck door open as he sprinted to drop off a package on a customer's front porch. ``They are absolutely controlling everything I do,'' says Mason, 49.

Travis Boardman begs to differ. To him, the FedEx setup is ideal for anyone with entrepreneurial drive, and the rules are necessary. A contract driver since 1993, he now has six employees who run routes for him on Maryland's Eastern Shore. He grosses $250,000 to $500,000 a year and says he nets ``usually six figures.''

The two men's conflicting views are at the heart of a contentious legal battle at the $29 billion delivery giant over what exactly constitutes an employee. Mason and other angry drivers have filed more than two dozen lawsuits around the country claiming that FedEx illegally classifies the 14,000 drivers in its ground division as independent contractors. They argue that because they're essentially employees, they're entitled to many of the same benefits enjoyed by the 60,000 drivers of FedEx Express, the parent's original air express service -- including overtime, vacation pay, and expense reimbursement.

FedEx vigorously disagrees that they're misclassified. But right now, Mason and his colleagues are pulling ahead in the court battle. In October a California superior court judge reaffirmed his earlier ruling that among ground drivers who had filed a class action there, those who drive single routes should indeed be classified as employees. He concluded that FedEx exerts ``close to absolute actual control'' over them. Even as FedEx pursues an appeal, it is now under order to reclassify the California drivers. The California ruling ``could be a harbinger of things to come,'' says Andrew P. Morriss, a business law professor at Case Western Reserve University's law school.

That ruling came on the heels of similar defeats for the company at state labor boards in California, Montana, and New Jersey in the past 18 months. Ground drivers also recently succeeded in consolidating class actions pending in 23 other states into a single case in an Indiana federal court.

FedEx officials dispute the drivers' argument and say they expect to win the appeal in California and on the broader class action. While FedEx agrees it imposes some work rules on drivers like Mason, it maintains that they aren't employees because they don't have specific start times, can buy and sell their own routes and trucks, and can hire and fire employees. It argues that, like Boardman, most ground drivers prefer the status quo, which allows them to acquire multiple routes and -- like business owners -- hire employees to drive for them.

Indeed, roughly 20% of its ground drivers manage multiple routes, FedEx says. And 300 of them grossed more than $250,000 in 2004 by expanding their routes that way. ``This [business] model has been validated in more than 100 regulatory reviews,'' says Robert Ostrov, vice-president of contractor relations for FedEx Ground.

DISTINCT ADVANTAGE

Still, the cost of a defeat could be steep. Suits over independent contractor status have bedeviled companies ever since Microsoft Corp. (MSFT ) lost a major battle over the issue in 2000, forcing it to make a $97 million settlement that sharply curbed its use of contractors. Since then, other companies striving for more flexible labor, such as Hewlett-Packard Co. (HPQ ) and Verizon Communications Inc. (VZ ), have been ensnared in legal battles over how to distinguish a contractor from an employee.

For FedEx, the contractor model may be one reason why it has taken market share from archrival United Parcel Service Inc. (UPS ), whose drivers are largely full-time employees, says Satish Jindel, president of SJ Consulting Group Inc., a transportation consultancy. He estimates that the use of lower-cost contract drivers enables FedEx Ground to deliver packages for an average cost of $5.82 apiece, vs. the $7.17 average Jindel believes it costs UPS to deliver both air and ground packages over its integrated network. FedEx won't discuss Jindel's estimates but says its contract drivers ``are more productive because they get paid by results, not by the hour.''

The cost differential has helped FedEx Ground's share to jump from 13% to 18% since 2000, even as UPS has slid from 82% to 74%, estimates Jindel. By using independent contractors -- who can't legally organize into a union -- FedEx also has avoided labor strife, such as a messy 1997 Teamsters strike at UPS.

Plaintiffs' lawyers argue that if the company is forced to reclassify them as employees, it would have to pick up the tab they now pay for workers' compensation, unemployment insurance, and Social Security contributions. FedEx wouldn't be legally obligated to pay all the other benefits enjoyed by UPS drivers. But it could face internal pressure to extend the same health and retirement plans it provides to air drivers. Plaintiff attorney Lynn Rossman Faris of Oakland, Calif., who filed the California class action, asserts in the suit against FedEx that the company could be on the hook for more than $200 million a year. And if the company were forced to buy back drivers' trucks, that would represent a one-time expense of $630 million, says Faris, who calculates that drivers currently buy the vehicles at an average cost of roughly $45,000 each. In response to Faris' calculations, a FedEx spokesman says, ``we wouldn't even speculate because we're confident we're going to prevail. Any guestimate is far too premature.''

What's more, Mason and other plaintiffs say that though FedEx' rules leave room for some drivers to be enterprising, there's little freedom. They can't deliver for other companies, can't skip a day without finding an approved substitute, and can be fired if they run afoul of the many rules. ``They told me what time to be at work and when I could go home,'' says Gerold Pelkey of Sauk Centre, Minn., who drove for FedEx Ground between 2000 and 2003 and is a party to one suit. ``From the get-go, I was faced with termination if I didn't handle as many stops as they wanted.''

Nor did he make the $50,000 to $55,000 a year FedEx says a typical driver earns after expenses, he says. Interest on the loan for his route and truck, plus maintenance costs, says Pelkey, left him with $20,000 a year. ``My income was so low I qualified for the earned income tax credit two of the years I worked there,'' he recalls.

For now, the case pending in Indiana poses the biggest challenge to FedEx. The outcome may determine whether disgruntled drivers like Mason or advocates like Boardman have the right of the road.

By Dean Foust

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