FDX, UPS: Independent Contractor Expert Call Summary
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Our Take on FedEx Ground & ICs
- Reasonably Robust: Our expert call with Rich Reibstein largely confirmed that FedEx Ground’s multi-route, multi-employee independent contractor (IC) model is more robust and refined than millions of other IC arrangements. While it would be difficult to structure IC arrangements perfectly under current law, FedEx has been proactive and restructured ahead of most legislation.
- Already Restructured: The FedEx Ground IC structure remains under legal attack and it is a key risk for the firm. However, FedEx has long recognized the advantages and exposures of relying on IC. The company has already spent years restructuring its lCs to better conform with the various IC definitions. Spending and incentives associated with this restructuring depress FedEx Ground’s margins in the mid-00’s.
- Expect More Legislation: As State and (eventually) Federal legislation narrow the opportunities for IC labor structures, it is reasonable to expect FedEx to have ongoing legal expenses (including court losses) associated with independent contracting. In addition, the plaintiffs’ bar appears to smell money in IC lawsuits and is actively seeking them. However, the FedEx Ground IC model, including the cost and flexibility advantages that it provides, does not appear to be in jeopardy.
- Not Unlike Small Franchises: Franchise arrangements, where a company like McDonalds exerts significant control over the franchisees, are not entirely distinct from multi-route, multi-employee FedEx Ground ICs. Some might argue that FedEx forced the aggregation of single route ICs into larger contractors and such issues may result in legal challenges. To us, the form of employment seems likely to be more relevant than the motivation behind it.
- Other Industries Impacted: We contacted Richard to better understand the sustainability of FedEx Ground’s labor advantage over UPS. However, it is clear that other transport and construction industries could be impacted with the growing tide of IC legislation and plaintiff interest. With approximately 10 million independent contractors in the United States, many other sectors of the economy could be impacted by fines and 30%-40% labor cost increase that separates ICs from full-time employees. Construction, Transportation and Staffing appear most exposed. Tighter IC regulation (and tighter labor regulation in general) tends to benefit Staffing companies.
Summary of Expert Call with Richard Reibstein
Independent Contractor Background
- Independent contractors cost companies on average ~35% less relative to regular workers due in large part to the following major factors:
- Payroll taxes
- Unemployment contributions
- Benefits such as healthcare and 401k
- Workers’ compensation
- There has been a huge increase in the number of independent contractors in the past 20 years and we now have over 10 million in the US.
- In 2007 the US realized it had a tax gap and the government began looking at companies that might be attempting to circumvent the independent contractor laws.
- Some states put laws in place to crack down on independent contracting. Massachusetts was the first and others have followed their lead.
- There have been a number of bills proposed at the national level in the past 4 years dealing with both independent contractor tax and labor issues, but there has not been bipartisan support for them. I think as we go forward these bills will pass because the tax gap is becoming an increasingly pressing issue.
The FedEx Ground Model
- FedEx Ground and FedEx Home Delivery utilize independent contractors to make their deliveries because RPS was built on an independent contractor model.
- At the point when FedEx Ground purchased RPS they were operating much more in compliance with the contractor laws than they currently are.
- The key difference in the worker-management relationship in an independent contractor model is that management is not supposed to instruct the worker on how to do their job. They can tell them what to do, but now how to do it.
- FedEx has decided to restructure their relationship with Ground drivers. Drivers are now required to have more than one route, which essentially means that FedEx is attempting to control their independent contractors.
- Although FedEx is committed to this direction the states are creating their own laws which have been posing problems for FedEx.
- For example, FedEx paid $30 million in California because drivers were determined to be misclassified. A large portion of this payment was legal fees and that is just one example of the hidden costs associated with an independent contractor model for FedEx going forward.
- Few companies are looking at the writing on the wall because they cannot change their structure easily or inexpensively.
What to Expect in the Next Four Years
- More and more states will adopt laws cracking down on companies using independent contractors. There might be a grassroots movement to start alerting misclassified independent contractors that they should be eligible for benefits.
- The Federal government may increase the enforcement level because they were recently given a bigger budget by President Obama. The Secretary of Labor, Hilda Solis, has focused on those industries where misclassification is most prevalent.
- It is likely that states will begin sharing information in an attempt to coordinate efforts against misclassified independent contractors.
- Recent federal laws have proposed to eliminate the safe harbor clause because it states that if a company has misclassified a group of workers on accident they can enjoy a safe harbor and avoid penalty. FedEx has been able to defeat the IRS with this safe harbor clause.