The race between UPS and FedEx Ground to win the most market share is just as hot and fast as a NASCAR race between Dale Jarrett's UPS car and Jason Leffler's FedEx.
More than just competition between companies, it is also between two business models. One company hires employees with benefits and protections under the law. The other company saves up to 30% by classifying its drivers as independent contractors (ICs) who they claim are in business for themselves.
Which driver is an employee? Which one is an independent contractor? Both wear uniforms. Both drive trucks emblazoned with the company colors and logos.
Answer: FedEx Ground runs an independent contractor model and UPS hires only employees.
By offering attractive benefits packages and high pay, UPS says their employees’ loyalty and satisfaction results in a higher level of service for their customers. FedEx Ground counters that their way motivates drivers to work harder and smarter to make a profit.
``The business model we use is good for our contractors,'' FedEx CEO Fred Smith said. ``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.''
Drivers with multiple contracts or routes can earn over $100,000 and even hire their own employees. They are independent, self-directed and are not monitored. If the customers are happy, FedEx is happy. No boss looks over their shoulder telling them what to do, they are their own boss.
Drawbacks include no benefits, no overtime pay, sick time, vacation or insurance and drivers pay for everything: the truck, gas, maintenance, supplies, uniforms, insurance. Social Security benefits at retirement will be less because taxes are not collected while working as an IC. The amount of freedom is not much either when drivers really have only one client: FedEx.
Annette Craig, of King of Prussia, PA worked 16 to 18 hours a day with no overtime as an IC. She was hit by a car while delivering for FedEx and then found out she was not eligible for workers' compensation. The company terminated Annette's contract weeks later and then repossessed her company-financed truck. Now she is homeless, staying with a cousin and at friends' homes while her daughter lives with family in Florida.
Working at UPS as an employee has its pros and cons too. Drivers have job security, good benefits and a Teamsters union contract and collective bargaining. Gas, maintenance, insurance and all other expenses are paid by the company, the average tenure is more than 16 years and nearly all drivers are hired from within the company.
Everything is tightly scheduled and controlled, for good and bad. One rule is that drivers walking back to the truck must get the ignition key out and hold it with the teeth down, saving a second or two in starting the truck.
On the downside, salaries top out around $70,000 and it can take four to twelve years to get a job as a driver after joining the company. Those union benefits also come with the possibility of a strike and work disruption, like in 1997.
The appearance that FedEx contractors are actually employees without the benefits lead to FedEx's labor practices being investigated in 25 states and a class-action lawsuit covering drivers in 20 states. FedEx announced it may have to pay $319 million in back taxes and penalties to the IRS for worker misclassifications in 2002. The IRS also audited FedEx's trucking unit for 2004 to 2006 and the potential liability could be $1 billion.
In July, 2004 L.A. County Superior Court Judge Howard J. Schwab issued a ruling that contractors with multiple routes are legitimate ICs who operate a business. Single-route contractors though should be classified as employees. FedEx disagreed with the ruling but if it holds up they will either have to reclassify single-route contractors into employees or change the relationship to be less restrictive and controlling, allowing the drivers to be true independent contractors.
Check out shirah’s extensive reporting too.
What do you think? Is FedEx right to contract with consenting adults of sound mind or is FedEx wrong for taking advantage of drivers?
Sources:
FedEx Watch
Bloomberg
Braun Consulting
Pittsburgh Post-Gazette
IRS