“We continue to believe that FedEx Ground‘s owner-operators are properly classified, and the business remains fundamentally strong.” --Frederick Smith, chairman, president and CEO of FedEx Corp.
Rarely has much money hinged on two small words - “proper classification.” As I noted in an earlier blog entry, the Internal Revenue Service believes FedEx has misclassified the independent contractors working for the company‘s FedEx ground division - some 15,000 people nationwide - and has slapped the company with a $319 million tax penalty for the year 2002 alone. The industry analysis I‘ve seen so far puts FedEx‘s total financial liability in this tax battle with the IRS between $1 billion and $2.5 billion.
That‘s some big, big money, even for FedEx, which earned a cool $479 million on $9.45 billion in revenue during its second fiscal quarter of 2008 ALONE.
FedEx staunchly believes it‘s in the right here - that the independent contractor model it inherited when it purchased Roadway Package Service) almost 10 years ago is still valid. But the courts may be starting to see this differently - especially at the state level.
A three-judge panel from the U.S. Court of Appeals for the 7th Circuit recently upheld a grant of class certification by the U.S. District Court in Indiana in case involving FedEx Ground driver claims for employee benefits under the Employee Retirement Income Security Act (ERISA) and other state claims. FedEx is also doing away with its independent contractor model in California, where is faced similar setbacks in the courts.
FedEx noted rather strongly following the 7th circuit‘s ruling that the court did not rule on the validity of its contractor model and has not decided class certification in any other multi-district litigation case. But the court‘s decision has cleared the way for the contractor model to get debated.
But Smith is adamant that none of this is going to change how the company does business, at least so far. “This procedural ruling does not change any aspect of the FedEx Ground operation and we will continue to provide the world-class service our customers have come to expect,” he said in a statement to the press following the court‘s decision.
“FedEx recognizes its ground-contractor model faces challenges on several fronts, [but] we continue to aggressively address these issues, and we have strong defenses to these challenges ... it is business as usual at FedEx Ground,” he added.
One thing is for certain in all of this: It will be interesting to see where this goes and what impact it may have in store for long-haul owner-operators in the truckload sector.