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Lessons from the Fedex Business Model

With money leaking out of its budget every year, FedEx needed to do something to save money. One of the largest expenses of any business is the salary and benefit costs that are provided to workers. Because many delivery truck drivers are unionized, it is not uncommon for a driver to average $30 per hour. If FedEx could change that to $15-$20 per hour, they could save millions. How could they get drivers to take a paycut?

They didn’t. What FedEx decided to do was change their business model. They adopted an independent service provider model that allowed for independent contractors to provide delivery services instead of paid employees. This allowed them to agree to specific terms with individuals or other businesses who were willing to put in the lowest bid.

The average driver for FedEx that delivers packages door to door makes about $35,000 per year. Other drivers with benefits can make about $80,000 per year. Now that cost-savings is in jeopardy.

Many Companies Are Incorrectly Classifying Independent Contractors

The nature of the independent contractor [IC] is that they get to dictate the terms of how work is completed. The instant someone begins to tell someone how much time they have to deliver work, the way that work must be delivered, and institutes penalties for not meeting those requirements is the instant an IC is often seen as an employee instead. This is the problem that the FedEx business model faces.

It is not uncommon for FedEx to direct contractors to arrive by a certain time. They dictate how certain duties are performed, like when a package isn’t properly sorted. Many regulators are noticing this and taking action against companies that are trying to skirt the definition of an independent contractor. The US Labor Department is especially concerned, even holding large companies responsible for the actions of their franchisees.

The only problem is that there is no 100% clear definition of how much independence must be offered for someone to truly be an independent contractor. Call them independent providers, independent business owners, or freelancers, but nothing changes. FedEx mandated that drivers wear their own branding, not accept work from others, and drive trucks with their logos as well. In return, drivers received a non-negotiable contract.

Why Is the Independent Service Provider Model Different?

By negotiating more with businesses than individuals, FedEx gives people more independence. They can negotiate with an employer who has a contract with FedEx instead of being mandated to negotiate 1 on 1 with FedEx alone. Business owners can choose to have FedEx branding in return for more money being paid on the contract. Businesses negotiate terms with FedEx.

The only problem is that drivers are still not being treated as independent contractors. The only thing that FedEx has really done is shift the responsibility of the hiring process. Now it is the contracting businesses that are running afoul of IC laws. Drivers still have to follow certain rules, get paid according to contract rates, and the court system has once again taken notice.

In October 2014, the Kansas Supreme Court ruled that even though employees are working for someone else, there are still acting as FedEx employees and that gives them the same status. The ruling is expected to be appealed, but if it stands, it would mean an end to the FedEx business model as it stands today. Employees could unionize easily, labor costs would become higher again, and there would be less budget flexibility.

That would make FedEx be a lot like the UPS business model. It would also lessen their chances of being able to effectively compete.

Are Higher Wages Able to Provide More Stability?

Some say that changing the FedEx business model to what the rest of the delivery industry experiences would actually give the company more stability. When drivers get higher wages and more benefits, they are more likely to stay in their jobs. At the moment, FedEx is committed to staying union-free, which prevents integration and causes redundancies in some areas, but ultimately saves them money. They keep their delivery services segmented and see that as the future of their company.

Not every driver is complaining. Many drivers have a structure today that offers them more pay for more deliveries throughout the day. To many, that’s the epitome of the American dream. If you work hard, then you earn more. Being able to achieve comes from an investment in oneself. That’s the core of the FedEx business model. The only problem is that the legal system in America might not agree.

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