There was a time when FedEx ruled the night sky. Its aircraft flew the uncluttered airways over the United States with only the occasional red-eye passenger jet for company.
Even at the busiest airports, in cities synonymous with delays, the company’s night flights enjoyed no-wait takeoffs and landings as the jets crisscrossed the nation, picking up and delivering packages in the darkness as the rest of America slept.
That was in the beginning, and things change. FedEx became a verb, and sending packages overnight across an entire continent eventually became commonplace. FedEx attracted competitors – UPS, DHL and the U.S. Postal Service, most visibly – and expanded its ground delivery capabilities to meet the demands of its customers.
In the early years, many of the pilots who flew for FedEx at night dreamed of having a day job with an airline with better pay and lighter schedules. Now, FedEx and other freight carriers are deluged with applications from airline pilots fleeing that collapsing industry.
While its flying jobs are attractive, if not always glamorous, FedEx is encountering turbulence on the ground. In class-action suits filed against the company, its 13,500 contract drivers are claiming that they really are employees, not independent contractors, and therefore entitled to benefits such as medical insurance and retirement plans that FedEx gives to its other workers.
The drivers have won their lawsuit in California, and labor authorities in Montana and New Jersey have ruled that they are in fact employees. FedEx is appealing all three decisions and says it is confident it will prevail. In addition to the lawsuits, though, the drivers have apparently also complained to the Internal Revenue Service about the situation.
The reason for IRS, or state labor authorities, to be involved has little to do with the central dispute over company benefits. The interest of the IRS is generally in the withholding and payment of Social Security taxes – about 15 percent of a worker’s gross wage. In the case of an independent contractor, the amount paid is calculated not on gross income but on what is left after expenses are deducted. For example, a contract driver could deduct the depreciation on the truck, gasoline, insurance, etc., while an employee driver performing identical work couldn’t deduct anything.
The IRS has developed rules for what distinguishes an employee from an independent contractor, and most states have similar rules. In addition to cash-flow issues, both the federal government and the states have legal interests in defining employees because of workers rights and employment rules, which do not generally apply to independent contractors.
The pivotal rules deal with the level of control. Generally, if the employer tells a person what to do, where to do it, when to do it and how to do it, authorities are going to view that person as an employee, no matter how many pieces of paper say he or she is an independent contractor. And, as we might expect, it is the control question that is the basis of the drivers’ class-action lawsuits against FedEx.
From an economics standpoint, it isn’t exactly clear what the interest of the IRS might be in the outcome. While the timing of its cash flow is affected, for example, the expenses now deducted by the drivers would simply shift to FedEx, and that would reduce its taxable income. More broadly, it isn’t at all clear what the net impact on the economy would be if we had tighter, or looser, definitions of who is a worker and who is an independent contractor.
What we do know is that the economics of the workplace is changing, and the changes are reshaping the relationship between employer and worker.
The employee benefits that some of the FedEx contract drivers are seeking – health insurance and retirement plans – are the very things that most corporations are trying to cut back or eliminate. And to the degree that these employer benefits are replaced by individually chosen programs, the economy may well become more efficient.
The courts do not have the opportunity to reach beyond the scope of the law to envision broad economic effects, so the FedEx case will be decided on how well its performance contracts and operational policies match up to the wording of legal definitions of worker control.
But we have that opportunity, and we should be looking at this. The world is changing. And, as Charles Darwin once wrote, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
James McCusker is a Bothell economist, educator and consultant. He also writes “Business 101,” which appears monthly in The Snohomish County Business Journal.
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