FedEx Suffers Independent Contractor Setback

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