UPS is caught in a rift between the leadership of the Teamsters union and its rank-and-file members over labor contracts, a development that could unnerve corporate shippers and hurt its holiday shipping business.

UPS's labor issues were supposed to be mostly settled in June, when the company's domestic package-delivery employees—a majority of its U.S. workers— approved a new five-year national master contract that included wage increases as well as revised health and pension benefits.

But UPS is still negotiating separately with many local bargaining units across the country—over issues like health-care benefits, wages for part-timers and restricting overtime.

The International Brotherhood of Teamsters represents about 249,000 employees of UPS's 323,000 full- and part-time domestic workers. About 235,000 of those are covered by the master contract. That contract cannot take effect until 16 supplemental agreements and riders are negotiated and approved.

One of the dissatisfied groups is Teamsters Local 89, a critical part of UPS's operation because of both its size and locale. Local 89 represents about 10,000 employees in Louisville, Ky., who work at or close to UPS's Worldport, the giant automated package hub that sorts and processes 1.6 million packages daily.

Separately, UPS also has to negotiate a contract for its freight division, since the first attempt was rejected in June.

The timing is tricky for UPS, which is heading into its peak holiday shipping season.

Andy McGowan, director of global media relations at UPS, said it's still "business as usual" at the shipper. The company and the Teamsters have agreed to indefinite contract extensions as it resolves the outstanding issues, he said. "We continue to make progress."

Customer anxiety over UPS's unsettled labor issues hurts business. "Any time there's friction between hourly workers and management, it doesn't sit well with customers," said Keith Byrd, co-founder of Transportation Impact LLC, which audits and negotiates on behalf of shippers. "There's a three-way thing going on here. The more commotion and skepticism there is, the more customers will start worrying again."

Corporate shippers are spooked by labor negotiations because they think it could result in possible slowdowns or interruptions—at worse a strike— that might delay their packages.

Even when labor talks were going smoothly earlier this year, UPS customers were hedging their bets. The company's volume growth in the second quarter was "a little less than we expected," Chief Executive Scott Davis told analysts in an earnings call. In a filing with the Securities and Exchange Commission, the company cited labor negotiations with the Teamsters for its "hindered volume growth" in the quarter.

In Louisville, Local 89 is urging its members to "Vote No Again" on its latest regional supplement. Ballots are due back on Oct. 9.

"We think the international union did a very poor job," said Local 89 President Fred Zuckerman. He said among other things the proposed health changes for many of his members added expense, cut benefits and created disparity among workers.

"They didn't meet or even understand the needs of the employees." Mr. Zuckerman said he believes "we have a bigger fight with the international union than we do with the company."

Ken Paff, national organizer for a dissident teamster group called Teamsters for a Democratic Union, said its part of a "rank-and-file rebellion." He said "this has been a pretty big earthquake in the union and at the company."

Leigh Strope, a Teamsters spokeswoman, said the union is "working through an internal democratic process"—hearing members concerns and addressing them. "The process takes time," she said.

Ms. Strope acknowledged there has been confusion and misinformation about the new health-care plans, but said the union has made improvements and "most concerns have been alleviated now."

She called the contract the "best private-sector labor contract in the country," noting it includes raises of almost $4 an hour, creates 2,500 new full-time jobs and contains many new job protections.

Though approved, the national master contract cannot go into effect until all of the outstanding issues with the locals are settled, according to UPS.

Both UPS and the Teamsters can agree to continue the contract extensions indefinitely. UPS doesn't like to, though, according to a former executive who asked not to be named, because UPS believes it gives FedEx Corp. the opportunity to try to woo UPS customers to spread their risk or switch to FedEx. The vast majority of FedEx's workforce is nonunion.