GOP Teamster-UPS lobbyist rats out FedEx

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Who really runs UPS?

A secret report from a lobbyist who represents United Parcel Service Inc. 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.

10.3 Million Workers

The dispute may affect other industries. Companies that use some of the 10.3 million people working as independent contractors in the U.S. include Home Depot Inc., Allstate Corp. and Avon Products Inc., FedEx Chief Executive Officer Fred Smith said Jan. 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 yesterday 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's Clients

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 may have to pay $319 million in back taxes and penalties to the Internal Revenue Service 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 U.S. review results in an adverse ruling, said Jon Langenfeld, an analyst at Robert W. Baird & Co. in Milwaukee, in an interview last week.

Kies Report

In his Dec. 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 U.S. 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.

Washington State Letter

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.

California Ruling

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 U.S. 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.

'Good for Contractors'

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."


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