Lawsuits bring changes to FedEx Ground

| Saturday, July 28, 2012, 8:58 p.m.

John Dionise answered an ad for a holiday delivery driver seven years ago, thinking it could lead to a corporate job with FedEx Ground.

He's still with FexEx Ground. But instead of drawing a paycheck, he has a business that employs 25 drivers, owns a fleet of trucks and delivers packages to residences along routes that stretch from Butler to Bethel Park.

“The potential for growth, to me, seemed to be a lot more attractive,” he said. “The ability to do my own thing, run my own thing was more attractive than starting out in a cubicle.”

Dionise is an example of how FedEx Ground's independent contractor system has changed in the seven years since contractors in 24 states started filing lawsuits, claiming they should be classified as employees — with better pay and benefits and the ability to unionize — because the company controls most aspects of their work.

Instead of driving one route, Dionise spends much of his day making sure deliveries are on time to a dozen service areas, trucks are serviced and schedules are adjusted for the ebb and flow of packages through the FedEx Ground Home Delivery center in Aleppo, where volume rose 10 percent in the past two years.

Robinson-based FedEx Ground said its contractor system is a key part of its business model that helped it keep costs low and carve out a 28 percent share of the ground package delivery market in the United States. Courts mostly sided with the company over time, spokesman Patrick Fitzgerald said, but a definitive answer isn't likely to come soon.

The U.S. Court of Appeals for the 7th Circuit, for example, is considering a challenge to a December lower-court ruling that sided with FedEx Ground. On July 12, the appeals court ordered the Kansas Supreme Court to provide an interpretation of that state's law on what constitutes an employee, versus a contractor.

“This case will have far-reaching effects on how FedEx runs its business, not only in Kansas but also throughout the United States,” the court said of the class-action lawsuit with 479 plaintiffs. “And it seems likely that employers in other industries may have similar arrangements with workers.”

Twenty-one similar cases are on appeal, the decision notes. Independent contractors are becoming more common — employers have economic incentives to use them — but there is “potential for abuse in misclassifying employees as independent contractors,” the court said.

Matthew M. Houston, a New York attorney representing plaintiffs in the Kansas lawsuit, declined to comment, saying the case remains an open appeal.

Fedex Ground hasn't waited for the courts to produce a final answer. In the seven years since the first lawsuit raised the issue of contractor or employee, the company's methods have changed - prompted by the lawsuits and its growth. Today, many more of its contractors operate multiple delivery routes, and fewer are single-route drivers. “There is a big difference in the numbers,” said spokesman Bryan Iams. Specific numbers were not available, he said.

Now, every FedEx Ground contractor is required to be incorporated as a small business, treat its drivers as employees, secure workers compensation coverage and unemployment insurance for them, among other requirments, Iams said.

“We've had reviews and validation of the model by more than 100 state and federal rulings” that largely concluded contractors are small businesses, not employees, Fedex Ground's Fitzgerald said.

FedEx Ground traces its routes to trucking company RPS Inc., founded in 1985 in Pittsburgh. RPS relied on contractors for deliveries and Memphis-based FedEx Corp. continued the practice when it acquired the company and other trucking operators in 1998. It created the FedEx Ground brand in 2000.

FedEx Ground remains the No. 2 package delivery company behind rival UPS, which recently lowered its 2012 earnings forecast because of a weakening global economy and said its third-quarter results would be below last year's. UPS drivers are company employees represented by the Teamsters union.

Analysts have said that FedEx Ground's low-cost business model puts it at a competitive advantage to UPS, and is likely to be the long-term winner over UPS's unionized employee model.

“From the beginning, we've used an independent contractor business model,” Fitzgerald said, but the number of contractors shrunk from more than 11,000 five years ago to 8,800.

Yet, he said, “They handle more volume. They're growing as the company is growing.”

Most contractors get into the business by buying a route for $20,000 and up. Densely developed neighborhoods generate higher package volumes commanding prices into six figures.

The company pays contractors by the package and by the mile, Fitzgerald said, though he wouldn't specify rates, saying they vary.

FedEx Ground's top-earning, multiple-route contractor makes more than $5 million a year and many top $1 million, although the average earns “several hundred thousand” dollars, he said.

Route owners buy and service trucks, costing up to $40,000 apiece, Dionise said. They pay fees to the company to cover uniforms, scanner rentals and truck washing. Each sets pay for drivers.

Dionise pays drivers a flat daily rate that he wouldn't specify. He's talking with brokers about offering health care insurance.

“It would be nice to have more of a commitment somehow from FedEx” on health care, he said, noting rates for the company's available plan are high.

Turnover among drivers usually can be traced to pay and benefits issues, he said, not because drivers don't like the work — even though it can mean driving more than 200 miles a day on rural routes and making 125 or more stops.

Kim Leonard is a staff writer for Trib Total Media. She can be reached at 412-380-5606.

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