FedEx is a great company. Fabulous concept, terrific brand, reliable service. But you can be great and still make big mistakes. And it looks like FedEx made a whopper in an area many businesses would find of interest.

We're talking about using contract workers for some or all of the jobs you have. Big companies will do it to both reduce the managerial headache of having more people on payroll and to cut costs. Having employees means being on the hook for payroll taxes, unemployment tax, worker's comp, benefits, and more. If your company is smaller, benefits are more expensive per person because you don't have the negotiating leverage that a massive business does.

Personally, I think that you're usually better off with employees. You generally do want control over their time and how they do their jobs. But, working with contractors can have its place. It can be a "great idea" for a smaller company, as I heard from Robert Cudd, a senior partner and tax attorney at the law firm Polsinelli. Even if you pay the same amount overall that you would with employees, there's less administrative work. "But you've got to structure yourself so it's OK," Cudd said.

FedEx made a big mistake, according to a three-judge panel for the Court of Appeals for the Ninth Circuit just said. From 2000 to 2007, the company treated its FedEx Ground drivers as independent contractors. They had to have their own trucks, pay for their own operating expenses, rent FedEx uniforms and scanners, and provide their own commercial insurance and workman's comp. The theory was also that entrepreneurs would thrive and improve service, helping the company cut into UPS's business. Now FedEx is being told that these people were always employees by law.

FedEx emphasized that it had many court decisions supporting its position, including a previous one from the Court of Appeals for the D.C. Circuit. But the recent ruling shows how a company can find its position upended. If the company's further appeals aren't successful, it could face what the lead attorney for the plaintiffs told me would conservatively be $250 million to $350 million in back expense reimbursement and even overtime. And that doesn't include attorneys' fees. Some lawyers and executives blew what was supposed to be a boon for the company. Here are some ways you can avoid an expensive mistake of your own.

Don't be greedy

"A lot of reasons why companies have problems are they get too aggressive," Cudd said. It's a matter of risk management. Instead of working in a way that is predictably successful and legally acceptable, they push for that extra bit of cost cutting. Save the risk for areas where you can get the biggest reward, as in opening new markets or breaking ground in new product or service types. Greatness is not the byproduct of pure cost cutting.

Work with contracting companies

Eventually FedEx got smart and changed its approach, working with incorporated businesses that had a stronger legal independent existence. If you're an entrepreneur, there are companies that will take on your employees and contract their services back to you. However, if you go this route, be sure the employees are still getting at least the level of benefits and pay that you'd provide, otherwise you could wind up with people bailing out.

Let independent people be independent

The big hook in such cases is usually the issue of who controls the person's time and methods of working. If they only work for you and you set the schedules and how they do each bit of work, you're in charge and, chances are, a court or the IRS or state revenue agency will insist that your contractors are actually employees. "You have to say, 'Do whatever you want to do as long as we have the end product.' You're better off to let people work where they want to and not offer them a place to work," Cudd said. And not just say do what you want, but act that way.

Published on: Sep 4, 2014
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