Bloomberg Attempts to Quantify Misclassification Scheme

The most recent update article by Bloomberg on FedEx Ground's misclassification scheme tries to put the analysis in terms that traders and shareholders understand: cold hard cash.  Specifically, the estimated amount of money around the potential liabilities and operations costs for properly classifying FedEx Ground drivers.

Some excerpts:

At stake is a business model that provides FedEx Ground a cost advantage over UPS that may be more than 30 percent. That's the estimated savings enjoyed by businesses that use contractors rather than employees, according to Marick Masters, a business professor at the University of Pittsburgh.

and,

The dispute also has opened FedEx up to a series of related legal responsibilities, including a potential pretax liability from unpaid payroll taxes of as much as $2.5 billion. It may force the second-largest U.S. package-delivery company to either overhaul its contractor model or throw it out entirely.

FedEx, with $1.1 billion in net income in fiscal 2008, declined to say whether it had set aside reserves to cover the possible $1 billion in damages or the potential $2.5 billion tax liability. Spokesman Maury Lane said FedEx follows generally accepted accounting principles in disclosing reserves.

and

A Teamsters Union financial model predicts FedEx costs would go up $426 million a year if the company compensated the drivers as it does present employees. The model assumes FedEx would pay Social Security and Medicare taxes, unemployment and worker- compensation insurance, vacations, health insurance and 15 hours a week of overtime. 

and finally

FedEx is also contesting an initial assessment in December by the U.S. Internal Revenue Service that the company owes $319 million in payroll taxes, fines and interest for 2002 on their drivers, who the IRS says qualify as employees.

The pretax liability may equal $2.5 billion, or the equivalent of $5 per share, when the IRS finishes evaluating three additional years being audited, according to Jon Langenfeld, an analyst at Robert W. Baird & Co., in a January report. This is what Langenfeld called a worst-case scenario since companies and the IRS usually settle at lower levels. He rates the company 'neutral.'

FedEx's spokespodperson may dismiss this as 'speculation' but the FedEx lawyers in their legal disclosure forms talk directly to shareholders by saying, "The currently pending material litigation and other proceedings have been described in detail in FedEx's SEC filing and we intend to vigorously defend ourselves in these proceedings.  We will continue to monitor these issues and make changes to our relationships with independent contractors as may be appropriate."