In another setback to FedEx on the independent contractor front, The U.S.
Internal Revenue Service has tentatively concluded that owner-operators who were
working in the firm’s ground delivery business in 2002 should be reclassified as
employees.FedEx may have to pay $319 million plus interest in tax and
penalties, the company said in a public filing Friday, December 21. The IRS is
auditing the company on similar worker classification issues during the period
from 2004 through 2006.
But FedEx is confident it will prevail. “We believe that we have strong
defenses to the IRS’s tentative assessment and will vigorously defend our
position, as we continue to believe that FedEx Ground’s owner-operators are
independent contractors,” FedEx said in its filing.
The IRS move will likely not only affect FedEx, but influence 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.
For years, FedEx and its FedEx Ground unit have been at the forefront of this
debate.
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.
FedEx said it doesn’t expect to incur a material loss in the California case.
But it does face having to pay hundreds of millions to the IRS.
“The IRS has tentatively concluded, subject to further discussion with us,
that FedEx Ground’s pick-up-and-delivery owner-operators should be reclassified
as employees for federal employment tax purposes,” FedEx said in its filing.
“The IRS has indicated that it anticipates assessing tax and penalties of $319
million plus interest for 2002.”
FedEx said that given the preliminary status of the matter, it cannot
determine the amount of potential loss. But, it said, “We do not believe that
any loss is probable.”
—Ed Frauenheim
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