FedEx's Driver Disagreement

Is self-employment really the American dream? And what does it mean to be self-employed, anyway? FedEx (NYSE: FDX) and its independent contractor ground drivers are facing those questions right now.

Back to the beginning
In 1998, FedEx purchased Caliber Systems (and in turn, Pittsburgh-based ground shipper RPS) in an effort to better compete with UPS (NYSE: UPS) by offering a ground-based shipping service. In integrating RPS (now known as FedEx Ground) into the existing FedEx organization, FedEx intended to "operate separately, compete collectively." This meant keeping FedEx Express pilots and drivers as corporate FedEx employees, while maintaining independent contractor status for FedEx Ground drivers.

So while FedEx Express drivers are paid by the hour, FedEx Ground and Home Delivery drivers are paid according to the number of packages delivered, encouraging drivers to be extra-productive and efficient. From a corporate standpoint, FedEx Ground operates separately on certain functions (accounting and operations, for example) while sales efforts have been consolidated, with ground and express agreements negotiated together.

Fast-forward 10 years: FedEx Ground drivers have challenged their classification as independent contractors, winning lawsuits in several states. The IRS has taken notice, and it's looking to collect hundreds of millions in back taxes and fines, stating that the drivers should have been classified as employees. (FedEx plans to appeal this decision.)

The market has taken notice, too. Given somewhat disappointing second-quarter earnings, and fears over what will happen regarding the FedEx Ground driver situation, FedEx is about 30% off its 52-week high. The company and the IRS should clear up the tax situation by this spring.

In the meantime, questions remain over how these decisions will affect FedEx's corporate infrastructure. FedEx has successfully dealt with organizational change in its previous RPS integration and more recent Kinko's acquisition, so there's no reason to believe that the company won't be able to handle this latest change, even if it loses the IRS challenge.