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WASHINGTON—A secret report from a lobbyist who represents United Parcel
Service Inc. (UPS) prompted an Ohio state investigation
into employment practices of FedEx Corp., leading to a
finding that FedEx owed back taxes and interest.
Kenneth
Kies, a Washington tax lawyer and lobbyist whose firm
has been paid $540,000 by UPS since 2002, sent Ohio
officials a 562-page report in December 2006 alleging
that FedEx misclassified truck drivers as contractors. A
copy of the report, including a cover letter in which
Kies asked for confidentiality, was released to
Bloomberg News by Ohio officials.
“We took
it and opened our own investigation,” said Judi
Cicatiello, Ohio’s unemployment compensation deputy
director. She said it was “very” unusual to get such
detailed allegations. Her agency determined in May 2007
that the drivers were employees and FedEx owed $654,000
in taxes and interest. The company is appealing.
The
report is the first disclosure indicating that UPS may
have played a role in prompting an investigation of
FedEx’s employment of 15,000 drivers as independent
contractors. The strategy gives FedEx a cost advantage
over UPS, whose 91,800 drivers are covered by a contract
with the Teamsters Union.
The
benefit for companies such as Memphis, Tennessee-based
FedEx may be as much as 30 percent compared with
treating the workers as employees and providing
retirement and health benefits, said Marick Masters, a
professor at the University of Pittsburgh’s Katz School
of Business who studies labor issues.
Since
2002 FedEx has gained 9 percentage points in market
share on Atlanta-based UPS. Neither company discloses
wage and benefit expenses by employee type.
The
dispute may affect other industries. Companies that use
some of the 10.3 million people working as independent
contractors in the US include Home Depot Inc., Allstate
Corp. and Avon Products Inc., FedEx chief executive
officer Fred Smith said January 10 on a call with
analysts. Newspaper-publishing companies also have faced
scrutiny over whether their carriers are employees or
independent contractors.
“As a
matter of policy, UPS does not discuss the activities of
its consultants or advisers,” UPS spokesman Norman Black
said Monday in an e-mail.
“We
certainly have provided government regulators with
publicly available information on this thing, this whole
controversy, without question,” Black said earlier in an
interview. “This is an issue that has grown to the point
that it is important to us because, as I said, we
believe this situation is unfair to taxpayers, as well
as the workers and competitors.”
Kies
didn’t return telephone calls to his Washington office.
At the time of the report, Kies’s Federal Policy Group,
where he still works, was a part of Clark Consulting.
UPS was one of about 50 clients including General Motors
Corp. and General Electric Co. Some paid more than $1
million a year, compared with UPS’s $80,000 fee for
2006, based on federal filings. UPS is the only
package-delivery business among the firm’s clients.
“We have
seen an increase in the number of state investigations
and have been trying to better understand what prompted
these inquiries,” FedEx spokesman Maury Lane said in a
statement. “We are surprised by today’s report of UPS’s
apparently concealed involvement in this activity.”
FedEx’s
labor practices have been under investigation in 25
states and prompted a lawsuit as a class action covering
drivers in 20 states. FedEx said in December that it
might have to pay $319 million in back taxes and
penalties to the Internal Revenue Service (IRS) for
worker misclassification in 2002.
The IRS
also was auditing FedEx’s trucking unit for 2004 to
2006, the company said. The potential liability may rise
to $1 billion if the US review results in an adverse
ruling, said Jon Langenfeld, an analyst at Robert W.
Baird & Co. in Milwaukee, in an interview last week.
In his
December 15, 2006, letter to Ohio officials, Kies said
the report showed “potentially significant
noncompliance” with state tax laws. “These drivers
should be classified as employees,” he wrote.
Kies,
the former chief of staff for the Congressional Joint
Committee on Taxation, included in the Ohio report IRS
letters to drivers advising them they were considered
FedEx employees for US tax purposes, FedEx-related court
decisions, documents on regulatory rulings in two other
states and a FedEx Ground contractor operating
agreement.
“We
request that you treat this submission as confidential
and protected from disclosure as information provided by
informants,” Kies said in his letter to Ohio
authorities. Cicatiello, the Ohio official, said her
agency considers the letter and the report public
documents.
FedEx
paid Ohio the back taxes and interest for the years 2003
through 2006, Cicatiello said. Cicatiello said she
didn’t know on whose behalf Kies filed the documents.
Companies reporting to authorities about rivals’
practices “probably happens more often than you think,”
said Charles Elson, director of the John Weinberg Center
for Corporate Governance at the University of Delaware
in Newark. “Companies typically compete providing
products. Sometimes their competition extends to other
regimes.”
Clark
Consulting also sent a report to Washington state in
late 2006 or early 2007, FedEx alleged in a June 9
lawsuit aiming to force disclosure of the sender’s
identity. The state refused because it considers the
report confidential, said Elaine Fischer, spokeswoman
for the Washington Department of Labor and Industries.
In its lawsuit, FedEx doesn’t name Kies or UPS.
The
agency is investigating whether FedEx drivers are
independent contractors and the company should be paying
worker-compensation premiums, Fischer said.
Massachusetts Attorney General Martha Coakley in
December fined FedEx $190,000 for what she called
intentionally misclassifying 13 drivers as contractors.
The
California Supreme Court in November upheld a trial
court decision that single-route contractors in the
state were full-time workers.
As long
as they are legally considered independent contractors,
FedEx drivers can’t be unionized under US law, said
Joshua Javits, a Washington labor arbitrator and a
former National Mediation Board chairman. If they could
be, a union would seek benefits “comparable to their
main competition, which is UPS,” he said.
The
Teamsters have been working to overturn FedEx’s use of
drivers as contractors and to organize the workforce.
FedEx’s
ground unit accounted for almost a fifth of the parent
company’s $38 billion in revenue for the fiscal year
ended May 31. Its ground market share grew to 23 percent
in this year’s first quarter from 14 percent in 2002,
according to SJ Consulting Group Inc., based in
Sewickley, Pennsylvania, which tracks industry market
share. During the same period, UPS’s share fell to 70
percent from 79 percent.
The
“increased scrutiny” of the contractor model may limit
growth of FedEx’s ground unit and expand UPS’s market
share, Justin Yagerman, a Wachovia Capital Markets LLC
analyst, who follows the companies, wrote in a June 19
report.
FedEx
defends its contractor system as an opportunity for
drivers to work for themselves and has said it has
strong defenses to the challenges the model faces.
“The
business model we use is good for our contractors,” CEO
Smith told analysts in a conference call. “That’s what
freedom’s all about. We’ve given that entrepreneurial
opportunity to thousands of contractors to own, grow and
expand their own business.” (With reporting from
Washington and Atlanta, Bloomberg) |
