My chronicle of how the IRS and Tax Court affect taxpayers' daily lives.

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Wednesday, September 16, 2009

FedEx in big trouble for classifing workers incorrectly

The IRS has a list of 20 factors in considering workers as employees or independent contractors.  Employers would rather classifiy workers as contractors because it relieves them from liability for workers compensation, unemployment tax, withholding and remitting employment taxes, as well as wage and hour laws, anti-discrimination laws, and OSHA regulations. 

Unfortunately, there are many situations when classifying a worker as an independent contractor is inappropriate.  Factors that the IRS considers include (list is not comprehensive)
  • Behavioral control - when and how to do work, what tools and equipment to use, what sequence to follow, training provided to the worker. 
  • Financial control - worker's out of pocket expenses, worker's investment in their own activities, extent to which the worker makes services available to others, method of payment (fixed vs. hourly)
  • Relationship of Parties - presence of written contracts, employee style fringe benefits, defined length of relationship, workers other sources of funds
Federal Express (and subsidiaries) have long treated their workers as independent contractors, despite excercising extreme control over what, where, when, and how they do their jobs.  The IRS has determined that FedEx Ground will be subject to penalties for misclassifying their employees - $14 million for 2002 alone!
The IRS has proposed a $14 million assessment against FedEx Corporation for the 2002 calendar year, due to the company classifying drivers in FedEx Home Delivery as independent contractors which the IRS believes should have been classified as employees. Substantially all of the proposed assessment relates to employment and withholding taxes for the 2002 calendar year. Information on the assessment was included in the Form 8-K that FedEx Corporation recently filed with the Securities and Exchange Commission (SEC) ...
FexEx, in it's recent 8-K filing with the SEC, has indicated:
We intend to contest the erroneous conclusions in the audit. We expect that a final resolution may not occur for some time. We believe that we have strong defenses to the proposed assessment and will vigorously defend our position, as we continue to believe that all of FedEx Ground’s independent contractors, including those providing the FedEx Home Delivery service, are independent contractors.
 All I can say is GOOD LUCK.  It is very clear to me that these workers were inappropriately classified.  FexEx required them to purchase special FedEx box trucks, run routes planned by FedEx within the time periods set by FedEx.  The workers were given training and had to adhere to a set of requirements put forth by FedEx. 

These fines have the potential to put FedEx out of business.  FedEx better have a liability reserve on their financial statements, otherwise the auditors are going to be subject to shareholder lawsuits.

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Aaron Blau, E.A. is the Vice President of the Central Arizona Chapter of Enrolled Agents and a member of the Government Relations Committee of the National Association of Enrolled Agents. The opinions and ideas expressed here are in no way representative of the official position of the National Association of Enrolled Agents, Arizona Society of Enrolled Agents or the Central Arizona Chapter of Enrolled Agents.

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