Fighting in FedEx: Understanding the FedEx Contractor Dispute (September 2022)

FedEx Independent Contractor Dispute Overview

Recent­ly, reports have come out about FedEx’s dis­pute with Spencer Pat­ton, one of its inde­pen­dent ser­vice providers (ISPs).  On Sat­ur­day, August 27, 2022. Freight­Waves report­ed that FedEx had cut ties with the con­trac­tor.  Pat­ton was FedEx’s largest ISP, and over­saw a net­work of 275 trucks and 225 employ­ees. Pat­ton says that FedEx is bul­ly­ing and silenc­ing their con­trac­tors. He warns that many are going to have to shut down if they con­tin­ue to oper­ate under their cur­rent con­tract with FedEx.  Pat­ton threat­ened to shut down his routes by Novem­ber 25, 2022 if the terms of his con­tracts with FedEx were not adjust­ed.  FedEx in turn, has ter­mi­nat­ed their agree­ment with Pat­ton. They have also sued him, argu­ing that he is mak­ing mis­lead­ing claims. 

Notably, Pat­ton is also the own­er of Route Con­sul­tant. Route Con­sul­tant bro­kers FedEx routes and pro­vides edu­ca­tion­al and con­sul­ta­tive ser­vices for FedEx and Ama­zon inde­pen­dent con­trac­tors.  Pat­ton is advis­ing oth­er ISP’s to rene­go­ti­ate their agree­ments with FedEx. On his web­site, he pro­vides a free tem­plate for mak­ing the busi­ness case to do so.  In this arti­cle, we will dis­cuss the con­text for the dis­pute and what it might mean going forward.

History of FedEx Ground

When FedEx was found­ed in 1971 by Fred Smith, it ini­tial­ly focused exclu­sive­ly on ship­ping via air (express ship­ments).  FedEx expand­ed to ground ser­vices in the 1990’s by pur­chas­ing Road­way Pack­age Sys­tem (RPS). They rebrand­ed RPS as FedEx Ground in 2000.  The intro­duc­tion of a ground ser­vice option was done to remain com­pet­i­tive with UPS which was found­ed in 1907, who had begun as a ground ship­ping provider. They intro­duced ship­ping by air in 1953 and intro­duced Next Day Air in 1985. 

Similar Service; Different Structure

FedEx and UPS pro­vide many sim­i­lar ser­vices but the way they struc­ture their busi­ness is very dif­fer­ent.  UPS’s has its own employ­ees deliv­er its ground ship­ments (out­side of very rur­al areas) while FedEx deliv­ers its ground ship­ments via a net­work of inde­pen­dent ser­vice providers.  In total, there are over 6,000 small busi­ness­es who con­tract with FedEx to deliv­er FedEx’s ground pack­ages.  This is in con­trast to FedEx air pack­ages which FedEx deliv­ers via its own employ­ees (even the deliv­ery to the final loca­tion, which is done by truck, is done by FedEx employ­ees).  One result is that as of this arti­cle (8/2022) FedEx ground and air pack­ages are not com­bined into a sin­gle deliv­ery. (Fac­tors such as how the dif­fer­ent depart­ment are gov­erned have played a role in main­tain­ing this struc­ture.)  This dis­tinc­tion is why you will see trucks that spec­i­fy “FedEx Ground” or “FedEx Express” but will not see this dis­tinc­tion on UPS trucks.

FedEx Contracts with Contractors

While FedEx gen­er­al­ly nego­ti­ates its agree­ments with indi­vid­ual con­trac­tors, con­ver­sa­tions with peo­ple famil­iar with the agree­ments iden­ti­fied some of the ele­ments of the con­tract structure:

• Flat week­ly amount per route – Esti­mat­ed at $500 per week
• Pay­ment per stop – Rough­ly $3.25 per stop. (In 2021, FedEx imple­ment­ed a low­er per-stop fee for eCom­merce deliveries)
• Pay­ment per piece — Rough­ly $.20 per piece

Changing Delivery Landscape

How the Carriers have Responded

To this point, the car­ri­ers have respond­ed in a num­ber of ways.  Both car­ri­ers apply Res­i­den­tial Deliv­ery Sur­charges to ship­ments which are in the $5 range depend­ing on the car­ri­er and ser­vice but can be nego­ti­at­ed.  To this point, this charge does not remote­ly cov­er the effi­cien­cy loss­es that take place in the deliv­ery.  UPS often will pro­vide dif­fer­ent rates from ground com­mer­cial and ground res­i­den­tial, but again, this does not make up for the dif­fer­ence in costs.

It is not imme­di­ate­ly clear why the car­ri­ers have not increased res­i­den­tial deliv­ery rates to mir­ror their costs.  Speak­ing to for­mer FedEx and UPS employ­ees, a num­ber of expla­na­tions were raised:

• Both car­ri­ers are hes­i­tant to raise rates on res­i­den­tial deliv­er­ies as they believe eCom­merce and res­i­den­tial deliv­er­ies will rep­re­sent the major­i­ty of growth in small par­cel ship­ping over the com­ing years. (This assump­tion is in line with many analysts)
• The car­ri­ers were hop­ing that over time, the deliv­ery den­si­ties of res­i­den­tial ship­ments would approach that of busi­ness­es (or at least rise far high­er than it is cur­rent­ly, which is only slight­ly high­er than one pack­age per deliv­ery). Because of this, they believed that there would be economies of scale and growth from cap­tur­ing a large por­tion of the eCom­merce ship­ping market.
• Both car­ri­ers have strug­gled with tru­ly under­stand­ing the full extent of their cost dri­vers, and it may be fair­ly recent that the car­ri­ers have tru­ly come to under­stand these factors
• Fol­low­ing on the ideas above, it is dif­fi­cult for either car­ri­er to make very sig­nif­i­cant changes to their pric­ing structures.

Patton’s Demands

Implications

Every­one involved in the dis­cus­sions agreed that there will like­ly be both short-term and long-term impli­ca­tions.  Some of the points raised include:

• The par­tic­u­lars of the dynam­ic between Pat­ton and FedEx will play out in the com­ing months. Whether they set­tle out of court of the case goes to court remains to be seen.  Regard­less, the impact will be felt much more broadly.
• FedEx will need to use con­tin­gency dri­vers to ser­vice the lanes that Pat­ton used to ser­vice. The cost for ser­vic­ing these lanes will like­ly be as much as 50% more expen­sive in the short term
• It is unclear whether Patton’s state­ments about the eco­nom­ics of the inde­pen­dent ser­vice provider is accu­rate or not, but there is rea­son to assume that their mar­gins have tight­ened as the mar­gins for FedEx ground has shrunk
• As con­trac­tors rene­go­ti­ate their agree­ments with FedEx, those rates will need to be passed on to FedEx cus­tomers. It was high­light­ed that FedEx is in a chal­leng­ing spot at the moment, as the slow­down in the econ­o­my has led to reduc­tions in ship­ping costs.  This may occur as soon as the 2022 rate increas­es.  Should FedEx announce aggres­sive rate increas­es for 2022 (par­tic­u­lar­ly around eCom­merce and res­i­den­tial ship­ments), it remains to be seen whether UPS will fol­low suit
• As eCom­merce con­tin­ues to devel­op, the car­ri­ers will like­ly need to con­sid­er strate­gies to ensure that these deliv­er­ies (which used to rep­re­sent a small frac­tion or total deliv­er­ies, but now rep­re­sent the bulk of ship­ments) are profitable
• Strate­gies to ensure prof­itabil­i­ty include a shift in ser­vices towards high­er cost ser­vices. This may already be hap­pen­ing with FedEx reduc­ing ground econ­o­my ship­ments sig­nif­i­cant­ly over the last year
• Intro­duc­tion of new sur­charges (and increas­es to cur­rent sur­charges) to ensure that res­i­den­tial deliv­er­ies are prof­itable – FedEx intro­duced a Deliv­ery and Returns Sur­charge for all Ground Econ­o­my pack­ages in 2022. There is an expec­ta­tion that there will be new sur­charges intro­duced, or more aggres­sive increas­es to cur­rent sur­charges (such as res­i­den­tial surcharges).
• Both FedEx and UPS will con­tin­ue to pur­sue high­er-mar­gin clients. These include: 1) B2B ship­pers, who have the economies of scale men­tioned ear­li­er.  2) SMB clients, who do not have the steep dis­counts that enter­prise clients have received.  3) Clients who uti­lize more expen­sive ser­vices, or whose pack­age pro­file is more expensive.
• One point that led to inter­est­ing dis­cus­sion was the pos­si­bil­i­ty of the car­ri­ers diverg­ing on their approach to this mar­ket. Over the past few years, the car­ri­ers have large­ly moved in lock­step on pric­ing for res­i­den­tial deliv­er­ies, with only fair­ly minor dif­fer­ences.  It remains to be seen whether this will con­tin­ue to be the case

Summary

The clash between FedEx and Spencer Pat­ton is still at its ear­ly stages, as FedEx cut tied with Pat­ton and has sued him while Patton’s com­pa­ny, Route Con­sul­tants mean­while, recent­ly host­ed a con­fer­ence with thou­sands of FedEx Ground con­trac­tors, indus­try ana­lysts and oth­ers in atten­dance where he called on FedEx to end Sun­day deliv­ery and pushed back on recent con­trac­tu­al changes among oth­er issues.  The local impact on Pat­ton remains unclear.  We may see oth­er FedEx con­trac­tors speak­ing up.  More like­ly, it will push oth­er con­trac­tors to open a pri­vate nego­ti­a­tion with FedEx about their terms, which would not cause the pub­lic uproar, but will like­ly result in high­er prices of cus­tomers across the board, with an empha­sis on those in eCom­merce and B2C.

Sources:

• https://www.freightwaves.com/news/fedex-ground-cuts-ties-with-militant-driver-contractor
• https://www.reuters.com/business/fedex-missteps-fuel-contractors-crusade-pandemic-delivery-boom-fades-2022–08-26/
• https://www.fedex.com/en-us/about/history.html#1965–1980
• https://about.ups.com/us/en/our-company/our-history.html
• https://s21.q4cdn.com/665674268/files/doc_financials/2022/ar/Annual-Report.pdf
• https://d18rn0p25nwr6d.cloudfront.net/CIK-0001048911/68a6290d-91f2-4e75-b3c6-df952bf4cd17.pdf
• https://www.routeconsultant.com/industry-insights/renegotiate-isp-agreement
• https://www.prnewswire.com/news-releases/route-consultant-founder-spencer-patton-calls-for-network-wide-financial-remedies-for-fedex-ground-contracted-service-providers-csps-301590299.html
• https://www.fedex.com/content/dam/fedex/us-united-states/services/Other_Surcharge_Changes_2022.pdf
• https://www.prnewswire.com/news-releases/contractor-expo-2022-brings-thousands-of-fedex-contractors-to-las-vegas-301610257.html