Report says FedEx overcharged business customers at residential rates

A Bloomberg report published yesterday reported that FedEx has been “systemically overcharging” customers by billing business and government offices at higher residential rates.

The report stated that this development came to light in the form of an internal e-mail by a FedEx sales executive in an internal e-mail which was unsealed in a class action lawsuit filed in a federal court in Memphis last year, which claims FedEx Corp. and FedEx Corporate Services overcharged commercial and government customers up to $3 each for millions of delivered packages.

The sales executive, Alan Elam, said in an August 2011 e-mail that he has brought this issue to the attention of many people over the past five or six years, with no action being taken to address it.

What’s more, Bloomberg reported that the plaintiffs, who claim violations of federal civil racketeering laws, seek three times the amount of the alleged overcharges in their lawsuit.

“We allege that FedEx has and continues to engage in a pattern of intentionally charging its customers residential delivery fees for deliveries to obviously non-residential addresses such as courthouses, government offices and banks,” Steven J. Rosenwasser, a lawyer for the plaintiffs, told Bloomberg.

And the lawsuit, according to the report, stated that among the parties FedEx has charged residential delivery fees to include Bank of America Corp. and Toyota Motor Credit Corp., among others.

An industry source whom declined to be identified said that this is not the first time he has heard of this practice, adding that anecdotally he has heard of FedEx deploying this practice more so than other carriers.

In describing a typical example of how the overcharging occurs, he said a FedEx driver arrives at a business customer’s location, where it does not have a signature on file. When delivering to a business, a driver cannot leave a package without a signature or a signature being on file.

“If a driver arrives to drop off a package and the business is closed or the person whom is supposed to sign for it is not there, he or she may put a release on it not realizing a residential surcharge fee is applied to the customer,” the source said. “This is typically done so a driver does not have to return later to redeliver the package and don’t realize that the sender is now paying a residential surcharge for that delivery.”

In an interview, with LM, Jerry Hempstead, president of Hempstead Consulting, said that the misapplication of the residential surcharge fee may be one of the “worst kept secrets” in the industry, explaining that this issue has been openly shared and discussed in public forums and industry conference for years.

Hempstead added that the residential surcharge fee is oftentimes triggered by a button on a driver’s hand held tracking device.

“My observation also is that on a business-to-business shipment a driver is normally required to get a signature,” he said. “So what happens if there is nobody around is that the driver likely feels secure leaving the packages without a signature, however, he is required to get one. “My guess is that if he hits the residential button then he can leave without a signature because on a business-to-consumer shipment the driver may leave a shipment, in a safe secure place, away from exposure to the view of the street and protected from the elements, without a signature. My [instinct] tells me this may be the root cause—an unintended consequence due to a work around by the driver of the signature rule. It’s an educated guess on my part.”

The driver may be hitting the key without any knowledge that when he hits the key it triggers a fee back to the sender for a residential delivery, explained Hempstead.
In fairness to FedEx, he noted shippers also hit the residential designator key when they are preparing a shipment and by so doing trigger the fee upon themselves.

Shippers have been instructed to always challenge their carriers’ sales representatives on the application of these fees and agree together that there are a number of misapplications and that because of that one has grounds to negotiate a discount in the residential fee, said Hempstead.

“Auditors and consultants have found numerous instances of misapplications of residential fees along the way, however, I am suspect that there may be some management complicity in this because of the way it’s managed and encouraged to capture the revenue,” said Hempstead. “It just may be one of those ‘stuff happens’ things and the cure costs more than the illness.”

A FedEx spokesperson was quoted in the Bloomberg report as saying the documents in the lawsuit do not tell the entire story of the case and that the company will continue to defend the allegations in the court of law and not the media.

Hempstead explained that the model at companies like FedEx and UPS, its biggest competitor, depends on credibility, veracity, and trust.

I just can’t fathom a Fred Smith or a Mike Glenn or a Kurt Kuehn or Scott Davis wanting to compromise what they have built over nickel and dime stuff like a misapplication of a residential fee,” he said. “The monster is way too big to believe that this small line item is what makes the balance sheet sing. In the end I believe this suit will result in a much more accurate billing process on the part of FedEx. They will get focused and put a Six Sigma team together and do a root cause analysis and they will quickly put this issue behind them.”