Is there a supply chain mafia?

In 2022, FedEx Ground and its network of subcontractors hit the news in the lead up to the holiday shopping season.

Rising operating costs and strict performance expectations were putting the whole system under strain, and when executives from over 3,000 logistics companies, collectively representing 60% of FedEx Ground’s contractors, gathered at the Route Consultant Expo in Las Vegas, the situation seemed to have reached a boiling point.

FedEx Ground managed to avert a “Purple Friday” strike by these contractors, in part by suing Patton Logistics and Route Consultant owner Spencer Patton in Federal Court. When the case was dismissed and FedEx failed to appeal in March 2023, it seemed as if things would return to ‘normal.’

Until December 8, 2023, when it was disclosed that former FedEx Ground contractor PYNQ Logistics had filed a complaint in California District Court under the RICO Act. Usually associated with organized crime cases, the Racketeer Influenced and Corrupt Organizations Act covers actions committed in support of criminal organizations.?

The alleged criminal organization? FedEx Ground.

In this week’s episode of Dial P for Procurement, I share my learnings from the 100-page complaint, including what PYNQ has alleged about their own experience as a contractor as well as the structure of the FedEx Ground independent service provider (ISP) program.

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Introducing Tara Wright

Last year’s lightning rod was Spencer Patton, now it is Tara Wright. A commercial pilot for 30 years, Wright wanted a retirement job that would allow her to apply her transportation experience. She founded PYNQ Logistics in 2020, a female- and minority-owned business based in northern California.

In 2021, Wright spent $1.13 Million to buy two FedEx Ground delivery areas on the California-Oregon border – after availing herself of the services offered by Route Consultant, the firm that would soon be on its own very public collision course with FedEx.

In June of 2022, PYNQ was preparing to renegotiate their contract. FedEx Ground offered three renewal options, all of which looked to be less profitable than the in-place agreement. PYNQ’s contract expired on May 17, 2023, and termination letters from FedEx arrived the very next day.

With those termination letters came termination of another kind: PYNQ’s access to all of their service records. As stated in the complaint, FedEx Ground requires contractors to store all records in their system, not just the records associated with FedEx volume.?

This is just one of many steps PYNQ claims were taken to “undermine, sabotage, destroy and ultimately confiscate [the] Plaintiff’s business.”?

Risky Lift and Shift

According to the complaint, FedEx’s model shifts all of the costs and risks associated with running a Ground delivery organization to their contractors while controlling how they can respond to those changes.

FedEx Ground routes are designed to be bought and sold, that's the contractor way. FedEx touts the “flexible business operations” associated with the program, but it is the contractors who invest in equipment and cover the associated overhead.

For instance, all of the contractor-owned vehicles operating for FedEx Ground have to have the FedEx DOT number on them, and - as such - FedEx is required to insure those vehicles. But FedEx only covers them for pick ups, drop offs, and the travel in between. So, presumably, if a tree falls and crushes a trailer overnight, it is not covered by FedEx’s insurance. For that, the contractor has to carry their own insurance.?

However, as stated in the complaint, FedEx requires them to purchase that additional insurance from an FedEx-approved insurance provider. The same is true for uniform purchases. So contractors are responsible for the cost, but are not always free to make their own sourcing decisions.

With FedEx Ground maintaining tight centralized control, there is only so much the contractors can do to negotiate rates and terms once they sign their agreement. PYNQ alleges that the documents that actually govern the relationship are not shared with contractors until after they have signed the contract.

Checking the Numbers, Checking Them Twice

It is natural to expect FedEx Ground to be a sophisticated, data-driven organization. But PYNQ alleges that Ground station managers can override data in the system, the same data used to measure contractor performance.

No system can be without error correction, but the implication in the complaint is clear: numbers can be adjusted to make a contractor’s performance appear better or worse. If that is true, it seems like a data governance problem.

FedEx supposedly also requires access to all contractor financial documents for the duration of the contract, not just the ones associated with their business. That would certainly come in handy during a negotiation - wouldn’t procurement love to have that information about their suppliers? This is in addition to all of the contractor’s client records for equipment serving all routes, with FedEx Ground and otherwise.

Contractors are required to purchase and finance all of their own equipment and then lease it back to FedEx. If they don’t go through that process, the equipment won’t appear in the system used to allocate shipments, and it will sit idle.?

FedEx provides the forecasts and projections used by contractors for making decisions about how much equipment and how many employees to invest in, but if FedEx is not right, it is the contractor left on the hook, with too many or too few trucks and people on their hands.

FedEx also issues access badges for the contractors’ employees. Even the owners of the company, such as Tara Wright, need those badges to operate their own equipment. The complaint alleges that FedEx can force contractors to fire drivers on the spot, and FedEx Ground badged drivers can only drive for Fedex, not the other customers of the contractor. That makes it more difficult to be agile and remain profitable if the FedEx Ground estimates turn out not to be right.

The Art of Omerta

If you’ve read or watched Mario Puzo’s The Godfather (I’m a huge fan), you’ll be familiar with the concept of omerta. Omerta is a ‘loyalty oath,’ sort of like ‘snitches get stitches’ but classier, and with a nicer hat.

In 2014-2016, there were a number of settlements against FedEx for wrongly categorizing employees as independent contractors and therefore denying them their rightful employee benefits. In fact, as reported by Freightwaves, FedEx paid $450 Million to settle some of the lawsuits.

Of particular interest is a case brought by drivers in 2014, one that became a class action lawsuit. It was after this settlement that FedEx began building out the model that places the contractors - or independent service providers - in between FedEx Ground and the drivers.

Although PYNQ says that FedEx Ground manages the contractors' drivers and equipment as though they were part of their own network, contract terms prevent them from bringing a class action lawsuit. Did FedEx add that to the Ground contracts to prevent a repeat of the 2014 outcome??

Legally speaking, PYNQ Logistics has to demonstrate that they were acting as an employee rather than a true independent contractor. If they are successful, they can then proceed with a class action lawsuit if they so choose, bringing additional FedEx Ground contractors into the mix.

PYNQ also claims that FedEx Ground maintains “dirt files” on its contractors, something that would be illegal if they were employees but which independent contractors have no protections against. If true, that could provide a disincentive for contractors thinking about joining a future class action lawsuit.

FedEx has declared their intent to “vigorously defend the lawsuit,” as is their right. No one has been proven guilty of wrongdoing, and everyone will get their day in court.

Legal action against Patton Logistics threw cold water on the rumored “Purple Friday” strike in 2022. Could a countersuit or the existence of alleged “dirt files” do the same now? We will have to wait and watch to find out.

Explore other editions of the Dial P for Procurement newsletter here.