Addressing a Legal Threat to Local Delivery Operations (The FedEx Ground Case on Driver Classification)

The recent ruling by the Ninth Circuit Court of Appeals that FedEx misclassified its Ground drivers as independent contractors is “a shot across the bow” to companies offering local delivery. That’s because most companies with a local delivery component to their business — whether a national furniture retailer offering scheduled delivery or a tech startup with an app offering one-hour food delivery — treat drivers as independent contractors to avoid all the extra costs that come with treating them as employees, such as unemployment insurance, workers’ compensation, and benefits. After taking a closer look at most local delivery operations, including the vast majority of the local delivery and courier industry, it’s readily apparent that drivers are essentially employees because their companies don’t (1) offer them the freedom to accept other work during the day, and (2) they dictate the end-customer experience drivers must provide. That is the two-part general test the IRS suggests companies use. Although the FedEx ruling suggests many companies with a local delivery operation are potentially at legal risk, the emergence of specialized local delivery software platforms for shippers, the adoption of smartphones among drivers, the increasing availability of telematics in vehicles, and a close examination of the top growing pain of “crowdsourced” transportation companies, suggest a potential solution is on the horizon.

Local Delivery Software Platforms for Shippers

Courier companies have a longstanding reputation of being low quality, which is why many companies that offer local delivery have historically worked directly with independent contract drivers to better control the customer experience. Couriers, however, no longer deserve this reputation. Smartphone adoption among drivers, mature dispatch software in the hands of couriers’ professional managers, and a litany of customers (like Amazon) providing large, fairly predictable base business have the industry achieving quality levels comparable to UPS and FedEx.

Unfortunately for shippers, offering local delivery across the Unites States typically requires working with dozens of couriers, and often more than one courier to cover large markets. Shippers end up needing to integrate with dozens of different dispatch software systems in order to get tracking data, and have to load the data into business intelligence solutions to closely monitor and manage quality. Transportation Management System (TMS) providers have long struggled to meet the unique challenges that come with local delivery, leading shippers to build their own platform (Amazon’s approach) or to spend millions of dollars and years customizing their TMS.

Recently, however, specialized local delivery software platforms have emerged. The top platforms are pre-integrated with hundreds of couriers, have real-time data down to the package and driver levels, and combine a broad set of quality management capabilities, including the ability to serve up training videos and tests to couriers’ drivers; pass customer service “cases” back and forth across shipper teams, couriers and drivers; automated end-customer surveys; and proactive alerts that warn of potential delivery issues before they impact the customer. Companies can use these specialized platforms to work with couriers and achieve a level of control over the customer experience that’s comparable to what they had when hiring their own drivers. Critically, however, they avoid the independent contractor / employee classification issue and are now shielded from liability — with a delivery cost that’s comparable to working directly with drivers.

Driver Adoption of Smartphones and Availability of Telematics

Ten years ago, dispatching jobs to drivers and capturing delivery process information (e.g., recipient signature) required that a company provide a mobile device or a company-owned vehicle with telematics to drivers. The mobile device was specialized, the data service expensive, and a significant amount of device configuration and on-going support were required. Over the past few years, the prices for smartphones and data plans have decreased to the point where they are within reach of everyone, and the vast majority of local delivery drivers now have a personal Android phone (iPhones are too expensive). And all of the widely adopted dispatch systems, such as CXT Software, Datatrac, Fleet Complete and eCourier, have apps easily installed from the Google Play store. Companies can now send and receive delivery information to drivers, and get real-time GPS location and events such as “arrived at delivery location” without having to provide them with anything other than a login and password.

Telematics, which provides data to and from vehicles in order to manage vehicle performance, provide delivery and routing information and capture performance metrics, are inching closer to being an OEM part. Leading providers, such as Telogis and Fleetmatics, are forging partnerships with commercial vehicle manufacturers — e.g., truck cabs, box trucks and cargo vans. Fast forward a few years and it’s easy to envision that telematics providers will have a better, more full-featured interface for drivers of commercial vehicles than smartphones can have.

Telematics systems and mobile dispatch apps will eventually give drivers access to shipping marketplaces, such as uShip, and will empower drivers to sign on as independent drivers whenever it’s convenient for them. The telematics system or app will know a driver’s location, vehicle type, and currently assigned / accepted delivery jobs, and be able to suggest additional, complementary jobs. Companies with local delivery operations will be able to justify the independent contractor status of their drivers because the drivers will actually be offered other work throughout the workday.

Lessons to Learn from Crowdsourced Transportation Providers

Many legal commentators believe it’s a matter of time before “crowdsourced” transportation companies, such as Uber and Lyft, who treat drivers as independent contractors will face FedEx Ground’s legal reckoning. In fact, Uber is currently facing a class action suit in Massachusetts by drivers claiming that they are actually employees. While nothing stops a driver from working for both services, the companies actively discourage the practice. They are fighting a bitter war for drivers in what some observers see as a “race to the bottom” by significantly cutting fares to increase the demand for rides (much to drivers’ chagrin), and offering large bonuses and other perks to drivers who defect from the competitor. It’s very interesting to see, then, how many new retail technology companies — Deliv, Postmates, Shyp, Instacart, and Sprig, to name a few — have local delivery as a core part of their offering, knowing they will eventually face the same driver recruitment and potential legal challenges. Matching up new supply (drivers) with emerging demand (orders) is a challenge, and establishing the infrastructure necessary to recruit and manage a driver network is expensive. Do these companies really need to build their own proprietary driver networks and app to manage it (the very backend of their business), while also building partnerships and technology to integrate with retailers (still the backend) and a unique customer experience and app (the frontend)?

Despite Lyft and Uber’s driver war, most drivers I’ve talked to use both apps at some point during their workday, whichever has the right mix of ride opportunities and rate of driver-pay. A shared driver network among the emerging retail technology companies would improve availability, broaden geographical coverage, and dramatically lower costs. This shared supply model emerged in airline shopping (SABRE), pharmaceutical distribution (McKesson, Cardinal Health and AmerisourceBergen), office products distribution (United Stationers), and other industries as they matured. I’d expect a shared model to emerge in local delivery, as well with most of these companies focused on partnerships and the customer experience parts of their businesses instead of transportation and logistics. The winner in developing that shared supply of local delivery drivers will emerge as an important company.

The independent contractor issue will continue to play out in the courts over the next few years, and each company that uses independent contract drivers will undoubtedly face their own reckoning. Five years ago there weren’t any good options for maintaining a good supply of drivers and a high quality customer experience. Today, technology has created new options, and will continue to evolve and create even more in the near future, eliminating the risk, cost and operational distraction companies face when working directly with drivers.

Rob Howard is the founder and CEO of Grand Junction (, a software-as-a-service (SaaS) platform for managing the unique requirements of local delivery and customer-facing logistics. Prior to Grand Junction, he cofounded Ensenda, a non-asset based third-party logistics (3PL) provider focused on the last mile. Rob has a fifteen-year track record of driving innovation and leading both start-ups and nonprofits to success.