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FedEx Ground vs. UPS: Two Worldviews     Two opposing models in the delivery business raise questions

  Overview: Independent Contractor vs. Employee
  Comparing FedEx Ground and UPS
     - About FedEx Ground
     - About UPS (United Parcel Service)
  Pros and Cons
     - FedEx Ground - Pros and Cons
     - UPS - Pros and Cons
  Summary: California FedEx Court Ruling

Overview: Independent Contractor vs. Employee

FedEx Ground runs its package delivery service on an independent contractor model - UPS does not.

The differences between these two companies and their methods of doing business are stark, and observers are watching with interest as the competing worldviews shake out into measurable results with the passing of time.

FedEx has had incredible success in the last several years since they scooped in to fill the void that was created by the UPS Teamsters strike in 1997. At the time UPS laid off 10,000 workers when package volume plummeted and FedEx bought RPS (a ground package delivery service based in Pittsburgh) as a result. RPS was based on a contractor model using independent contractors to deliver packages rather than outright employees and FedEx kept this intact.

FedEx may have initially used contract drivers as a way to cut costs and use the competitive edge to win market share from their rival UPS. Now it is a way of life.

The critics to the contractor model question whether it is a long-term success strategy or a short-term cost cutting gimmick that spurs immediate and rapid growth without the possibility of being completely sustainable. Advocates say it is a new and better way of doing business.

UPS is a very strong company that stands firmly behind its own business model and has no intention of adopting any of the FedEx contractor strategies. They believe their way of doing business will win out in the long run because of a more valuable package offered to their employees which results in more loyalty and motivation, and ultimately better service to the customer.

FedEx Ground prides itself in its flexible and growing business strategy, trying new things and being innovative in a very competitive field.

The independent contractor model of FedEx is under some legal scrutiny from court authorities however. For example, a California judge recently ruled that certain FedEx contract workers should be treated as employees rather than independent contractors.

One thing is certain...the competition will continue and these two competing worldviews will grapple until one or the other loses enough market share to change its ways.

The fallout from this battle will most likely have a large effect on the continuing saga of 'contractor vs. employee' questions for years to come.

Its impact will be widely felt.

Comparing FedEx Ground and UPS

• About FedEx Ground
• About UPS (United Parcel Service)

     - About FedEx Ground

In 2004 FedEx Ground had about 17,000 contract workers.

In 2003 it brought in nearly $4 billion in revenue. Currently it operates 27 hubs and is planning on opening 10 new sites...doubling its volume capacity to 5.8 million parcels per day. It is experiencing double digit annual revenue growth.

It is estimated that most FedEx Ground contractors work 10 to 12 hour days, without overtime pay. They are paid on a complicated piece-rate formula based on how many pickUPS and deliveries they make, with bonuses for good service. Drivers can make $40,000 to $70,000 a year.

The drivers use trucks bearing FedEx colors and logos, wear FedEx-style uniforms and serve customers of FedEx Ground. However, they must pay for and maintain their own trucks, uniforms, supplies, gas, maintenance, and other costs. They get no company benefits.

A FedEx contract generally covers one route, but it is possible for one person to own up to four contracts, which can raise the earning potential to more than $100,000 per year. Because of this existing contracts have become a commodity in and of themselves...sometimes bought and sold like businesses for as much as $30,000 plus.

Contract drivers go through an initial two-week training program and then are on their own. The company does not supervise their daily routines, but does conduct customer satisfaction surveys. The business is strictly results oriented...if the customers are happy that is all that counts.

     - About UPS (United Parcel Service)

UPS ground service generated $16.5 billion in revenue in 2003, (more than four times as much as FedEx Ground).

UPS drivers are employees. One hundred percent of their health insurance premiums are paid, trucks, gas and supplies are all provided by the company. It can take from 4 to 12 years to move up to a driver job after starting at a lower-pay job such as a part-time package handler, and the average job tenure for a UPS driver is more than 16 years. They are rarely hired from outside the company.

At UPS drivers are subject to close scrutiny and management. Nearly every move can be important and considered fair game for boosting efficiency and productivity. For example, drivers are instructed to get the ignition key out and position it with the serrated edge down as they walk back to the truck...saving a second or two in starting the truck when they get back to it.

Full benefits and a complete benefits package are offered to employees...making for a more dedicated and reliable workforce, according to the company ideal. They feel this gives UPS a more long-term advantage in costumer service and loyalty.

Here are some facts about UPS Package Operations (from the UPS website):

 2003 Delivery Volume: 3.4 billion packages and documents
 Daily Delivery Volume: 13.6 million packages and documents
 Service Area: More than 200 countries and territories;
      Every address in the United States
 Customers: 7.9 million daily (1.8 million pick-up, 6.1 million delivery)
 Retail Access: The UPS Store, 3,400; Mail Boxes Etc., 1,100 (global);
      UPS Customer Centers, 1,000; Authorized Outlets, 17,000;
      UPS Drop Boxes, 45,000
 Operating Facilities: 1,748
 Delivery Fleet: 88,000 package cars, vans, tractors, motorcycles

Pros and Cons

• FedEx Ground - Pros and Cons
• UPS - Pros and Cons

It will be easier to compare them more rationally as time goes on, as we can look at more measurable statistics, but for now we will discuss some of the practical differences between the two systems and business models.

     - FedEx Ground - Pros and Cons

Fed Ex Ground Pros:

 Drivers can expand their business by hiring their own employees
 Income can go over $100,000 with multiple contracts or routes
 A sense of independence, working for yourself and managing yourself
 Working "harder and smarter" can make you more money
 Contractors manage their own business
 Drivers are not monitored and are self directed

FedEx Ground Cons:

 No benefits, no overtime pay, no sick time, no insurance
 Drivers pay for vehicle, gas, supplies, insurance, and everything else
 No company retirement, seemingly less stable environment
 No Teamsters contract or collective bargaining
 Drivers have only one client: FedEx

     - UPS - Pros and Cons

UPS Pros:

 Drivers are employees with security and benefits
 Tightly managed and controlled schedule and environment
 Company guides improvement and efficiency overall
 Teamsters contract and collective bargaining
 Average tenure for drivers is more than 16 years
 Nearly all drivers are hired from within the company

UPS Cons:

 Unless moving up the "corporate ladder" drivers salaries cap out around $70,000
 Tightly managed and controlled schedule and environment
 Teamsters can lead to a strike and cause work disruption
 It can take 4 to 12 years to get a job as a driver after joining the company

Summary: California FedEx Court Ruling

Some legal authorities consider the strategy of FedEx in outsourcing jobs and costs to independent contractors as being risky.

They say that the more FedEx tries to exercise direction and control, the less successful they will be if there is a complaint lodged.

Legally, independent contractors can't be directly supervised, supplied with workspace or tools, or otherwise treated like employees. FedEx Ground has successfully defended its contractor system from several legal challenges, but in July a California judge ruled that certain contract workers should be treated as employees.

Filed as a state wage and hour violation case by three contract drivers in California, the suit was expanded to a state class-action suit.

In the California case L.A. County Superior Court Judge Howard J. Schwab issued a 23-page ruling on July 26th, 2004. He ruled that those contractors with multiple routes were legitimate contractors who operate more like businesses than employees. But he decided that single-route contractors should be classified as employees.

The judge termed a single-route contract as a "Single Work Area".

He noted that the contractors have only one client, FedEx Ground. They must drive trucks with company logos, wear uniforms with company logos, and report daily to company distribution hubs. They attend regular briefings on safety and company issues and their contracts can be terminated for any number of infractions. This means that in effect they can be fired for failing to follow company policies.

Some of the more interesting aspects of the judges ruling follow:

"A close reading of the Operating Agreement, which all SWAs (Single Work Area, or Single-route contractors) must sign in order to be able to work for FedEx Ground, is comprised primarily of platitudes and guidelines."

"For all practical purposes, by the nature of their work, the SWAs are engaged in the exclusive and full-time pickup and delivery service for FedEx Ground and are identified as such. FedEx Ground also provides business cards for the SWAs with its logo."

"Of importance to the court is the clear evidence that SWAs are totally integrated into the FedEx Ground operation...The SWAs wear required uniforms and drive specifically mandated FedEx Ground logo-laden trucks. The SWAs are long term in years of service..."

"Most important of all, the court finds that the work of the SWAs is essential for FedEx Ground's core operation, the pickup and delivery of packages. If lightning were to strike so that there were to be no FedEx Ground, there would in fact be nothing left for the SWAs to do and they suddenly would be bereft of business."

"The court finds that in entering the relationship, FedEx Ground purposely created controls of an employment nature, hoping that in spite of those strictures, the status would still be seen and considered to be that of an independent contractor."

FedEx "respectfully disagreed" with the ruling. If the ruling holds up they will either have to convert single-route contractors into California employees or change the relationship to comply with the less restrictive control associated with an independent contractor.

Finally, in his ruling the judge stated:

"The court makes no value judgment as to whether independent contractor or employee status is a better business model or more beneficial for society. The court agrees with FedEx Ground that independent contract status is a legitimate and acceptable mode of commerce."

That pretty well sums it up.

Both UPS and FedEx Ground have strong cases for their business model and its performance...only time will tell if one or the other has the superior edge that will win out in the long run.

As an employer, if you have any questions about contracting or other issue relating to your workplace please contact us at Braun Consulting Group.

Workplace Diversity: Does It Work? 

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