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Irs Deals Blow to Fedex on Use of Contractors

Posted on: Thursday, 24 January 2008, 06:00 CST

By Frauenheim, Ed

CLASSIFYING WORKERS A recent setback to FedEx on the independent contractor front could trigger a broader IRS review of the way companies classify drivers.

Many firms define drivers as independent contractors, says David West, director of the Seattle-based Center for a Changing Workforce, and those companies could find themselves on the hot seat in the wake of a preliminary finding by the IRS that owneroperators at FedEx's ground delivery business in 2002 should be reclassified as employees.

"It's possible the IRS will look at these other cases as well," West says.

In a public filing December 21, FedEx said the IRS had tentatively concluded that FedEx Ground's pick-up and delivery owner- operators should be reclassified as employees for federal employment tax purposes. FedEx also said it may have to pay $319 million plus interest in tax and penalties for 2002 and that the IRS is auditing the company on similar worker classification issues during a period from 2004 to 2006.

The FedEx disclosure is part of a broader debate about the way firms farm out work to independent contractors. Companies can create a more flexible workforce through the use of contractors, in addition to being able to avoid paying employment taxes. But worker advocates argue that such arrangements often amount to shams that let companies shirk both taxes and their responsibilities to workers who actually are employees under the law.

The FedEx news is likely to have an impact on the practice of using independent contract workers, says David Reis, head of the employment law group at San Francisco-based law firm Howard Rice Nemerovski Canady Falk & Rabkin. An understanding of the consequences of classifying workers as independent acontractors has been "somewhat lacking," says Reis, whose firm represents employers. "This is going to make people a lot more vigilant," he says.

For years, FedEx and its FedEx Ground unit have been at the forefront of the issue. FedEx Ground argues that it contracts with independent operators to work its routes. The drivers own their own trucks, but FedEx has a series of requirements governing their work, such as the display of company colors and logos on trucks.

FedEx has been hit with multiple lawsuits challenging its treatment of FedEx Ground owner-operators. In its recent public filing, FedEx said the California Supreme Court has refused to review an appellate court decision upholding a trial court ruling that found a number of California contractors should be reimbursed as employees for some expenses.

But FedEx is confident it will prevail in the IRS case. FedEx spokesman Maury Lane says FedEx Ground has been operating under a "settlement agreement and ruling letter" with the IRS on the question of independent contractors dating to 1994. "We don't believe we've made any changes" in violation of the 1994 agreement, he says.

West, whose organization focuses on issues faced by temporary, contract and part-time workers, welcomed the preliminary conclusion by the IRS. "It shows they take the rules on employee classification seriously, at least when it comes to independent contractors."

-Ed Frauenheim

A contracted FedEx Ground driver checks a map at a Pennsylvania FedEx facility injjhis 2005 photo. A recent IRS ruling has tentatively conpuded that FedEx Ground's owner-operators should be reclassified as employees for federal employment tax purposes.

Copyright Crain Communications, Incorporated Jan 14, 2008

(c) 2008 Workforce. Provided by ProQuest Information and Learning. All rights Reserved.

Source: Workforce

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