Can FedEx Ground Survive? - July 18, 2006

We're not the only one's asking ourselves that question.

A publication called State Tax Notes, one of the specialty online reports for tax lawyers, recently did an article on the contractor scam at FedEx titled "Tax Troubles for FedEx Ground?"  The article is behind a for-fee firewall but clips from of it found their way to us.

In a concluding section called "Can FedEx Ground Survive", the authors write:

One reason FedEx Ground has been so successful in its competition with UPS is that it cut costs by classifying many of its drivers as independent contractors. Because a ruling from the California Unemployment Insurance Appeals Board will likely require FedEx Ground to change that classification, there is a question about whether the delivery company can survive. If it does, will the cost of payroll taxes, insurance, and benefits be passed on to consumers in the form of higher prices? Only time will tell. One attorney involved in the California class-action suit believes the judgment in the suit could cost FedEx Ground more than $200 million a year. Although that would be unfortunate for FedEx Ground, there are some upsides for the rest of us. First, FedEx Ground's massive profits appear to have been greatly enhanced through the company's improper use of so-called contractors. Second, from a tax standpoint, income tax compliance for contractors and other "sole proprietors" is considerably lower than that for regular employees.  Classifying employees as contractors exacerbates that problem.

That is not to say that using contract employees is not a legitimate business model. However, what FedEx has been doing appears to be illegitimate because it combines the benefits of having employees with the benefits of using independent contractors. In sum, FedEx Ground likely has a decision to make. It can either continue to operate as is and pay payroll taxes, unemployment taxes, expenses, and benefits for its employees, or it can loosen up on the control it has over its drivers. Because the latter would likely include ending its delivery scheduling practice, that might not be feasible. Regardless of what the company decides, the California action is almost certain to hurt FedEx Ground's bottom line.  

This article from State Tax Notes will not only be read by tax professionals, but also by state tax revenue agencies around the country.  Perhaps the tax man elsewhere will be visiting FedEx Ground.  Soon.