From Muth Truths:

By: Chuck Muth

FedEx-cess, Part Deux

With this year’s national day of anguish – otherwise known as Tax Day – upon us, this seems like an appropriate time to follow-up on a column I wrote a couple weeks ago about FedEx and the danger its employment practices pose for many self-employed entrepreneurs coast-to-coast.

FedEx has been paying its drivers as “independent contractors” rather than “employees.” This practice results in lower labor costs and gives the company a financial advantage over its competitors, so it’s understandable why the company desperately wishes to continue doing so. However, this has raised red flags over at the IRS, which could well result in greater restrictions on all legitimate independent contractors in the future. So there’s something at stake here for a lot of America’s truly independent contractors, not just FedEx.

California’s Second Court of Appeals left no doubt as to whether or not FedEx’s drivers are independent contractors under existing law, writing in a decision last August: “We affirm the finding that the drivers are employees.” Not much room for interpretation there.

“Men and women who apply to FedEx for positions as drivers must complete applications, submit to background checks and strength tests, and satisfy appearance standards” wrote the Court. “The driver must provide his own truck meeting FedEx’s specifications (and) mark the truck with the FedEx logo.(and) use the truck exclusively in the service of FedEx, or mask the logo if the truck is used for any other purpose.”

In addition, FedEx drivers were obligated to “prepare driver logs, inspection reports, fuel receipts, and shipping documents, and (on a daily basis) to return these items and any collected charges and undeliverable packages to FedEx.” Drivers also had to agree “to wear a FedEx-approved uniform and to maintain his appearance ‘consistent with reasonable standards of good order,’ his uniform ‘in good condition,’ and his truck in a ‘clean and presentable fashion.’”

In summary, the Court found that the drivers were “wholly integrated into FedEx’s operation,” noting that they “perform work essential to FedEx’s core business, that they are required to work exclusively and full time for FedEx, that their customers are those assigned to them by FedEx, that no specialized skills are required, that they must wear uniforms and conform absolutely to FedEx’s standards and that, in the end, each driver has a ‘job’ with ‘little or no entrepreneurial opportunities.’”

The Court concluded that the drivers “look like FedEx employees, act like FedEx employees, are paid like FedEx employees, and receive many employee benefits.” Case closed. The damage award originally extended to the employees is being reconsidered, but likely will still reach into the millions after the dust finally settles.

Agree with the law or not, the California court decision leaves no doubt as to whether or not it believed FedEx was abusing the independent contractor option. Which doesn’t bode well, as disclosed recently in FedEx’s annual 10-Q report to the Securities & Exchange Commission (SEC), for the outcome of the “approximately 45 other purportedly class-action lawsuits, several individual lawsuits and approximately 25 state tax and other administrative proceedings that claim that the company’s owner-operators should be treated as employees, rather than independent contractors.”

FedEx also announced in its 10-Q report that the IRS recently concluded an audit of the company’s books for the 2002 tax year and also determined that “FedEx Ground’s pick-up-and-delivery owner operators should be reclassified as employees for federal employment tax purposes.” This will likely result in a whopping $319 million-plus penalty. And that’s just for 2002. The IRS is still auditing the company’s 2004 through 2006 returns.

But like an alcoholic who can’t come to grips with the reality of his problem, FedEx remains in serious denial over this matter.

“We believe that we have strong defenses to the IRS’ tentative assessment and will vigorously defend our position as we continue to believe that FedEx Ground’s owner-operators are independent contractors,” the company tells the SEC. FedEx further states that it “cannot yet determine the amount of a reasonable range of potential loss” should it lose its fight with the IRS, but maintains “we do not believe that any loss is probable.”

What in the world are these folks smoking?

Interestingly, despite the company’s purported belief that it will prevail over the IRS, it is, in fact, making changes to its delivery operations, at least in California.

“FedEx Ground faces increased regulatory and legal uncertainty with respect to its independent contractors,” the company grossly understates in its SEC report. “As part of its operations, FedEx Ground has made changes in its relationship with contractors.” Those changes include offering “incentives” to some contractors to add routes, thus transforming their operations from single-route operators to multi-route operators. “Virtually all California-based single-route contractors have accepted the incentives,” the company reports.”

One multi-vehicle FedEx contractor recently wrote to me explaining that “The legal hurdles FedEx faces have all revolved around single-van contractors,” adding that “Only a few isolated legal decisions have found Multiple Van Contractors to be employees.” Perhaps.

But considering the depth and detail of the court’s ruling in California, whether switching to multi-van contractors while retaining the same kind of control over the drivers’ conduct will satisfy the courts and the IRS in this matter is an open question at best. If the drivers’ relationship – whether through single-van or multi-van contractors – still, as the California court noted, “looks like a duck, walks like a duck, swims like a duck, and quack likes a duck,” other courts and the IRS could very well continue to rule that FedEx’s drivers are employees, not independent contractors.

In abusing the independent contractor model, writes Richard Samp of the Washington Legal Foundation, companies such as FedEx “are threatening the viability of the entire independent contractor model by providing regulators with the ammunition they need to justify efforts to expand the definition of employee.”

“The existence of employer abuses has provided ammunition to those who are pushing state regulators and legislatures to crack down on use of the independent contractor model,” concludes Samp. “Unless the free enterprise community can get its own house in order, we can expect to see more businesses.being threatened with financial ruin by over-reaching regulators. Given the tremendous entrepreneurial contribution that truly independent contractors make to the American economy, the business community needs to do all it can to ensure that the independent contractor model survives.”

Indeed, FedEx’s single-minded insistence on calling a duck a giraffe holds out the potential to dramatically harm the true independent contractor community nationwide. Perhaps it’s time for the business community and free-market policy advocates to contact FedEx and urge it to back away from this precipice before it takes the rest of us over the cliff with it.