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FedEx Ground Gives Up Contractor Model in California

Fedex Watch, September 21, 2007

FedEx could pay between $26 million to $33 million in severance costs alone for abandoning its illegal contractor model in California, a change announced by company chief executive Fred Smith.

Smith calls this abandonment a 'transformation.' But this is a retreat from the contractor model. FedEx is offering special incentives to encourage single-route contractors to transform their operations into multiple route businesses or sell their routes to others. Information obtained by the Teamsters from FedEx drivers puts the incentives at $25,000 to $33,000 per contractor to leave their jobs at FedEx.

There are 1,055 such contractors as of March 2007, according to court filings. FedEx Ground commonly puts its total contractor workforce nationwide at 14,000 to 15,000.

California tax authorities, the California Court of Appeal and the National Labor Relations Board among others have all found the contractor model to be illegal. The FedEx Ground model is the subject of a potential class action lawsuit filed in 30 states. In the last two years, state revenue and labor authorities in New Hampshire, Massachusetts, Connecticut, New York, Pennsylvania, New Jersey, Maryland, Montana, Oregon and others have found that FedEx misclassified contractors.

"This is the beginning of the end for the contractor scam at FedEx Ground," said Teamsters General President Jim Hoffa. "FedEx pushed past the legal limits and pushed its drivers to fighting back to regain their rights."

This major change in company policy means that FedEx is abandoning the contractor model in California but keeping the misclassification practice for the rest of the country.

The Teamsters are sponsoring a shareholder proposal at the Fedex annual meeting in Memphis on Monday, Sept. 24, that seeks to split the chief executive officer and chairman of the board positions to assure board independence and better corporate governance.

The Teamster proposal is based in part on the board of directors' failure to instruct management to fully disclose the liabilities and potential financial impact of a major change in the FedEx Ground business model.

If adopted, the proposal will lead to greater board independence from management and more accountability to shareholders. At present, Fred Smith serves as both CEO and chairman.

To date the board has failed to conduct an audit on the risk potential concerning the independent contractor status of FedEx Ground drivers. As recently as last month, FedEx stated in corporate filings, "We strongly believe that FedEx Ground's owner-operators are properly classified as independent contractors, and we continue to vigorously defend ourselves in (all) proceedings."

"FedEx shareholders should be fully informed of the corporation's obligations and costs to bringing its model into compliance with the laws in California and nationwide," Hoffa said. "The board of directors needs to split the duties of chairman and chief executive to exercise proper oversight at FedEx and increase shareholder confidence in the board's independence."

This $26 to $33 million estimate is on top of the $17.8 million judgment awarded to drivers in California in civil litigation now under appeal by FedEx. It is also on top of an $8 million back tax determination ordered by the California Employment Development Department, also under appeal by FedEx.




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