IRS and Fedex Ground Logos

(Best Syndication) Federal Express has been able to make inroads into the ground shipping business by using private contractors. Unlike the United Parcel Service (UPS) who uses salaried union workers, FedEx Ground has been able to compete by using drivers who provide their own vehicles. The private contractors hired by FedEx are paid by the package and by the mile.

The strategy seemed like a great idea. The drivers were responsible for their own taxes, their own liability insurance, and their own gas. But now the company may suffer. The Internal Revenue Service (IRS) has ordered the Federal Express to pay back taxes and fines totaling $319 million for ground employees the firm misclassified as independent contractors.

But it could get worse. This ruling only involves 13,000 employees they hired around 2002. The IRS is also looking into the status of private contractors they hired between 2004 and 2006.

The decision has prompted the company to change their strategy. In their statement released on Thursday they said “FedEx Ground has made changes to its relationships with contractors that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by our contractors.”

Many in the business community welcomed an alternative to UPS Ground and the Postal Service. In some instances the company was able to negotiate a lower shipping rate for their customers. The drivers were also motivated because they were paid for their productivity. But this did not sit well with the Brotherhood of Teamsters.

In a statement by the union, they expressed pleasure with the IRS decision. The union called the use of independent contractors “illegal”. They have been claiming all along that the contractors were actually “employees” and should be categorized as such by the IRS.

"What a great Christmas gift to FedEx Ground workers who have suffered under FedEx's illegal independent contractor scam," said Teamsters General President Jim Hoffa. "It's a fundamental fact that FedEx has been skirting the law, and the Teamsters welcome the IRS decision."

FedEx expressed optimism with their business model in their second quarter earnings report. “Management believes the FedEx Ground business remains fundamentally strong and will continue to grow market share and improve the customer experience.” But they were realistic saying the ruling is “expected to increase the cost of operations.”

See what others are saying and join the discussion at our Forum

By Steven Potter
Best Syndication News Business Writer