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Ground War

Drivers Deliver Trouble to FedEx By Seeking Employee Benefits

Some 'Contractors' Contend Company Calls All Shots;
IRS Examines Complaints
Chief Says 99% Like System

The Wall Street Journal, January 7, 2005
By Monica Langley

(See Corrections & Amplifications item below)

As a driver for FedEx Corp.'s ground division, Brion Butterbaugh must wear a full FedEx uniform, observe a long list of delivery and pick-up times and hook his truck keys on the finger FedEx tells him to when walking to doors to deliver packages (the little finger of the nonwriting hand).

Mr. Butterbaugh, 41 years old, isn't a FedEx employee. He's one of 13,500 "contract" drivers for FedEx Ground who operate their own trucks and pay for their gas and other expenses. The company says these drivers are "independent" and has advertised that becoming a contractor is a way to "be your own boss."

But some contractors have set off a high-stakes battle with FedEx by contending the company calls all the shots in their operations. They say rules such as the little-finger requirement show they're essentially employees of FedEx, with all of the risks and none of the benefits, such as health insurance and a retirement plan.

Last July, FedEx Ground drivers who had filed a class-action lawsuit against the company won a victory when a California state court ruled that they are employees because of FedEx's "close to absolute actual control" over drivers.

In recent months, officials in Montana and New Jersey likewise determined that certain FedEx Ground drivers in those states are employees. FedEx is appealing all the judgments, and FedEx Ground Chief Executive Daniel J. Sullivan says he's confident the company will prevail.

The Internal Revenue Service is also investigating FedEx's driver classification, prompted by driver complaints, according to people familiar with the situation. The tax agency will examine whether FedEx has "pushed the envelope of control so far" that it's no longer in compliance with an earlier agreement under which its predecessor company was permitted to count drivers as independent contractors, according to one knowledgeable person. An IRS spokesman declined to comment. FedEx isn't aware of any IRS probe, Mr. Sullivan said.

Mr. Sullivan says malcontents represent only a "very small number" of FedEx contractors. "We truly have independent contractors," he says. He notes that drivers can sell their routes, don't have specific start and finish times, and take on the risk that their truck will break down or get damaged. If FedEx reclassified contract drivers as employees and treated them as such, "ninety-nine percent would want to hang me," he says.

The issue has become potentially serious for FedEx over the past year as it battles United Parcel Service Inc. in the fast-growing parcel-delivery business. In its quarterly report to securities regulators last month, FedEx disclosed the proceedings over FedEx Ground's "owner-operators" for the first time and warned that they could "result in employment and withholding tax liability for FedEx Ground." It said it couldn't estimate the size of the potential liability.

U.S. companies have long sought to get an edge by treating workers as independent contractors instead of employees. Employees receive benefits such as health care, paid vacations and pensions. And the law requires companies to pay 6.2% of the first $90,000 of an employee's salary in 2005 for Social Security taxes as well as 1.45% of all salary for Medicare taxes.

From coal miners in the 1940s to Microsoft Corp. programmers in the 1990s, hired hands seeking to be classified as employees have clashed with companies. In recent years the IRS, courts and state agencies that determine worker classification have focused on one key issue: how much control the company exerts over the day-to-day activities of the worker. Although these bodies don't have a hard-and-fast formula for measuring control, a worker is likely to be considered an employee if he or she works set hours, is required to follow instructions on how to do the job, receives training from the employer and works on the employer's premises.

Such judgments have an impact on the public coffers, because self-employed contractors tend to pay less tax relative to their income. Some fail to report what they earn, or reduce their taxable income with deductions that company employees normally couldn't claim, such as home offices. Others fail to set aside enough of their gross income to make timely tax payments.

The IRS has estimated that in 2001 "sole proprietors" -- people such as the contract drivers who report their business income on their personal tax returns -- failed to pay $81 billion in taxes they owed. The Government Accountability Office, the investigative arm of Congress, has estimated that 38% of employers examined by the IRS have misclassified workers as independent contractors.

FedEx, which originally focused on shipping packages by air, got into the ground-delivery business in 1998 to compete directly with UPS. It acquired a ground-delivery company, Caliber System Inc., that had fended off a string of challenges, including one from the IRS, seeking to designate its drivers as employees.

The challenges over workers' status come as FedEx Ground's business is benefiting from the rebounding economy. FedEx Ground revenue grew to $3.9 billion for the fiscal year ended May 31, 2004, from $2.9 billion two years earlier. In the latest fiscal year, ground shipments generated 42% of FedEx's total volume of 5.5 million packages delivered each day, up from 30% six years earlier, according to the company. Both FedEx and UPS have tapped into the growth of just-in-time manufacturing, which demands that components be delivered in smaller quantities on precise schedules.

Including FedEx Ground, FedEx has around 15,000 independent-contractor drivers and about 60,000 employee drivers, most of them delivering packages shipped by air. Contract drivers give FedEx "a distinct advantage over UPS," says Donald Broughton, a research analyst at A.G. Edwards & Sons Inc. "Besides saving on capital outlay, FedEx benefits from drivers who are motivated to make that extra stop, to deliver that extra package for extra pay."

Luis Espinoza of Santa Cruz, Calif., says becoming a FedEx Ground contractor was a good outlet for his entrepreneurial drive. Mr. Espinoza worked odd jobs at minimum wage for a construction company until he signed up to drive for FedEx Ground. With a $5,000 investment and $700 monthly rental of a van, he started a route and now has three routes. He says he earns about $90,000 a year on revenue of $200,000.

Some current and former FedEx Ground drivers offer another view. These drivers say FedEx terminal managers set rules for nearly every facet of their work. "I have to obey or I'm gone," says William Beattie of Mentor, Ohio, a driver for 15 years. "I can name only one business decision I'm allowed to make without FedEx approval -- where to get my gas."

Mr. Beattie testified for the company a few years ago in earlier fights by contract drivers to be considered employees. Now he says he's changed his mind because of "an endless barrage of dos and don'ts." He says, for example, that FedEx routinely won't let him try to deliver packages on a Saturday, even if his truck is loaded at the terminal and ready to go. A FedEx spokesman says customers like the predictability of knowing that FedEx Ground operates from Monday through Friday.

Jerry Jones, a 45-year-old certified public accountant in Houston, became a contractor in 2003 after seeing an ad for FedEx Ground. The company has sought contractors with ads reading, "Put your drive to work. Want to own your own business? Be your own boss? It's simple. Come partner with FedEx." Mr. Jones says the micromanaging of his daily routine runs counter to the impression left by the ad and an interview with the company. "FedEx's pitch that you can work for yourself is a complete illusion," says Mr. Jones, who plans to sell his truck and route.

A FedEx driver in San Diego, Marjorie Pontarolo, says she sometimes has to wait behind locked gates at the terminal to go out on her route until other trucks are loaded and the manager gives the release signal. "When my truck is loaded, shouldn't I be able to start my route if I'm an independent contractor?" asks Ms. Pontarolo, who is a plaintiff in the suit by California drivers against FedEx.

Mr. Sullivan says locked gates and stalled start times "should not happen."

John Marcellino, who drives in the area around Yosemite National Park in California and is also a plaintiff, says a FedEx manager told him to cut his hair and take off his earring. "I'm even told when to change my truck's tires and get an oil change," Mr. Marcellino says.

Directives on appearance are necessary to maintain the proper FedEx image, according to Mr. Sullivan. He says the company sets rules on vehicle maintenance to ensure safety, minimize breakdowns that slow service and comply with government regulations.

Lori Lizotte, a mother of three children in Minot, N.D., had her husband drive her route -- until FedEx insisted she stop. "They videotaped my husband, and caught him not locking the truck door," she says. "It's my truck and I carry the insurance so I would have the responsibility."

FedEx says videotaping drivers isn't common but is done in "exceptional circumstances." Mr. Sullivan says the company wants truck doors locked to prevent packages from being stolen.

The complaints constitute "small anecdotal problems but not a systemwide problem," Mr. Sullivan says.

A particular cause of friction is FedEx's practice of promising certain pickup or drop-off times to valued customers beyond the service guarantees offered by the company nationally. Some drivers say this makes it harder to organize their day efficiently and lessens their chance of receiving the bonus offered to those who complete 98.5% of the day's stops. Donald Avenelle, a former contract driver based in Perrysburg, Ohio, says that in his haste to meet the target he regularly urinated in cups or old bottles in the back of his truck.

Recently, drivers who have a Kinko's copy center in their routes have been required to wait until after 6 p.m. to pick up packages. FedEx purchased the Kinko's chain in February.

Mr. Sullivan says the company makes extra demands on drivers' schedules because it's meeting the demands of customers in a highly competitive business. The more customers FedEx Ground has, the more money everyone makes, he says.

Mr. Butterbaugh, the Madison, Tenn., driver, is a 17-year veteran in the business. He moved to the Nashville, Tenn., area from Ohio a few years ago so he could write country-music songs after his deliveries.

As Mr. Butterbaugh wrapped up his pickups and deliveries one night this week, his terminal manager called his cellphone with an order: Starting the next day, he should deliver packages to the local Family Christian Store by 1 p.m.

"I often can't make it there 'till 2:30," Mr. Butterbaugh says he protested the next morning at the terminal. "I know the store employees and they don't care what time I get there." But the manager said the store chain, an important nationwide customer for FedEx Ground, had made a deal with FedEx for earlier deliveries.

Mr. Butterbaugh makes about $70,000 in gross annual pay from his route, but says he clears less than $40,000 after paying gas and other expenses. FedEx declined to say how much its employee drivers earn. Employees get benefits that contract drivers don't, including paid sick and vacation days, a retirement plan and health insurance.

Mr. Butterbaugh rides with both truck doors open for quick deliveries and sometimes drives for 12 hours a day. On a recent day, he started with a fast-food breakfast at 6 a.m. After that he sipped just one Pepsi and didn't eat for the rest of the day to cut down on bathroom breaks. Still, he says, "I love the work and the people."

A few weeks ago, he gave his father-in-law a FedEx shirt and took him along for the day. On the route the two men ran into Mr. Butterbaugh's terminal manager and the terminal coordinator, wearing street clothes in an unmarked van, making deliveries in his zip code. FedEx says managers normally don't make deliveries but had to do so in this case because of an emergency situation involving an accident by another truck.

The managers scolded Mr. Butterbaugh over his father-in-law's attire, he says. "They had the nerve to criticize my father-in-law for not wearing the FedEx black pants and black shoes," Mr. Butterbaugh says. "He was worried sick that I could get fired."

Corrections & Amplifications:

Caliber System Inc., a ground-delivery company acquired by Fedex Corp., fended off a string of challenges, including one from the IRS, seeking to designate its drivers as employees. The article above incorrectly said the IRS challenge sought to designate the drivers as contractors.


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