IRS Assesses FedEx $319 Mln. in Driver Classification Dispute
By Eric Miller, Staff Reporter
This story appears in the Jan. 7 print edition of Transport Topics.
The Internal Revenue Service has struck another blow to FedEx Ground’s independent contractor business model, assessing the package delivery company back taxes and penalties of $319 million for 2002 after an audit determined that company drivers should have been classified as employees, the company said.
A company spokesman said FedEx would fight the IRS determination.
In a Dec. 21 filing with the U.S. Securities and Exchange Commission, FedEx said it was also told by the IRS that “similar issues” are under audit for 2004, 2005 and 2006.
Some issues in the 2003 audit remain under appeal.
The company indicated in the SEC filing that it does not believe any loss is “probable,” because of the IRS assessment of back taxes.
“We’re surprised by this preliminary finding because the IRS in 1994 affirmed our use of independent contractors for pickup-and-delivery services in a ruling letter for tax purposes,” Maury Lane, a FedEx spokesman, told Transport Topics. “A reversal of the agency’s original determination is unwarranted, and the associated tax assessment is inappropriate.”
FedEx plans to administratively appeal the determination within the IRS and then will go to court, if necessary, Lane said.
“We’re going to fight until we prevail,” he said. “It’s not against the law to work for yourself in any state or any commonwealth.”
FedEx, Memphis, Tenn., said it is facing “increased regulatory and legal uncertainty” with respect to its use of independent contractors, saying it is involved in numerous purported class-action lawsuits, state administrative proceedings and IRS audits.
The company said that “adverse determinations in these matters” could entitle some of its contractors to reimbursement for certain expenses and to coverage under wage-and-hour laws. It also could make FedEx Ground liable for employment and withholding taxes, it said.
On Dec. 20, Massachusetts Attorney General Martha Coakley assessed penalties totaling more than $190,000 against FedEx Ground for what she said was an intentional misclassification of 13 drivers as independent contractors rather than employees. (12-24 & 31, p. 2).
In October, a federal judge in Indiana granted class-action status to lawsuits filed against FedEx Ground by an estimated 14,000 drivers in 36 states (10-22, p. 9).
FedEx also suffered a setback in August when a California appeals court upheld a lower-court ruling that more than 1,000 FedEx Ground drivers were misclassified as independent contractors (10-8, p. 4).
After the California appeals court ruling, FedEx Ground began to offer financial incentives nationwide to its current 15,000 independent contractors. It said the incentives were aimed at improving service and changing the company’s relationships with the drivers by allowing them to expand their routes. The plan calls for single-route contractors to transform their operations into multiple-route businesses or to sell their routes to other drivers.
The company said the response to the new program has been “exceptional” with virtually all contractors accepting the incentives, which are initially expected to increase the company’s cost of operations.
“However, management believes the FedEx Ground business re-mains fundamentally strong and will continue to grow market share and improve the customer experience,” the company said.
Overall, FedEx Corp. reported a 6% decline in net income for the three months ending Nov. 30, partly because of costs for the FedEx Ground independent contractor incentive programs. Higher legal costs at FedEx Ground during the first quarter of 2008 negatively affected its operating income for the first half of its 2008 fiscal year, the company said.
FedEx also has been the target of proposed legislation in Congress attempting to make it easier for labor unions to organize drivers and requiring the IRS and the Labor Department to look more closely at contractor relationships.
A bill introduced in July by U.S. Sens. Barack Obama (D-Ill.) and Dick Durbin (D-Ill.) would eliminate long-standing “safe harbor provisions” that allow employers to avoid paying employment taxes and workers’ compensation (10-8, p. 53). The bill has been stalled in committee, but an Obama staffer said it could be discussed in committee as soon as this month.
Teamsters officials have said that if FedEx Ground drivers became employees, organizing them as union members would be easier.
“It’s a fundamental fact that FedEx has been skirting the law, and the Teamsters welcome the IRS decision,” James Hoffa, Teamsters general president, said in a Dec. 21 statement.
Although FedEx said it expects to win its appeal, transportation stock analysts at Stifel Nicolaus said in a Dec. 28 report that if the appeal is unsuccessful, “We believe that 2004-2006 tax-year audits should also result in similar back-taxes and penalties owed by the company, which could exceed $1 billion in total.”
The report also said, “We believe the independent contractor model and related issues (classification, taxes, wages, and benefits) remains the biggest risk to what we believe is an attractive international growth story.”
This story appears in the Jan. 7 print edition of Transport Topics.
The Internal Revenue Service has struck another blow to FedEx Ground’s independent contractor business model, assessing the package delivery company back taxes and penalties of $319 million for 2002 after an audit determined that company drivers should have been classified as employees, the company said.
A company spokesman said FedEx would fight the IRS determination.
In a Dec. 21 filing with the U.S. Securities and Exchange Commission, FedEx said it was also told by the IRS that “similar issues” are under audit for 2004, 2005 and 2006.
Some issues in the 2003 audit remain under appeal.
The company indicated in the SEC filing that it does not believe any loss is “probable,” because of the IRS assessment of back taxes.
“We’re surprised by this preliminary finding because the IRS in 1994 affirmed our use of independent contractors for pickup-and-delivery services in a ruling letter for tax purposes,” Maury Lane, a FedEx spokesman, told Transport Topics. “A reversal of the agency’s original determination is unwarranted, and the associated tax assessment is inappropriate.”
FedEx plans to administratively appeal the determination within the IRS and then will go to court, if necessary, Lane said.
“We’re going to fight until we prevail,” he said. “It’s not against the law to work for yourself in any state or any commonwealth.”
FedEx, Memphis, Tenn., said it is facing “increased regulatory and legal uncertainty” with respect to its use of independent contractors, saying it is involved in numerous purported class-action lawsuits, state administrative proceedings and IRS audits.
The company said that “adverse determinations in these matters” could entitle some of its contractors to reimbursement for certain expenses and to coverage under wage-and-hour laws. It also could make FedEx Ground liable for employment and withholding taxes, it said.
On Dec. 20, Massachusetts Attorney General Martha Coakley assessed penalties totaling more than $190,000 against FedEx Ground for what she said was an intentional misclassification of 13 drivers as independent contractors rather than employees. (12-24 & 31, p. 2).
In October, a federal judge in Indiana granted class-action status to lawsuits filed against FedEx Ground by an estimated 14,000 drivers in 36 states (10-22, p. 9).
FedEx also suffered a setback in August when a California appeals court upheld a lower-court ruling that more than 1,000 FedEx Ground drivers were misclassified as independent contractors (10-8, p. 4).
After the California appeals court ruling, FedEx Ground began to offer financial incentives nationwide to its current 15,000 independent contractors. It said the incentives were aimed at improving service and changing the company’s relationships with the drivers by allowing them to expand their routes. The plan calls for single-route contractors to transform their operations into multiple-route businesses or to sell their routes to other drivers.
The company said the response to the new program has been “exceptional” with virtually all contractors accepting the incentives, which are initially expected to increase the company’s cost of operations.
“However, management believes the FedEx Ground business re-mains fundamentally strong and will continue to grow market share and improve the customer experience,” the company said.
Overall, FedEx Corp. reported a 6% decline in net income for the three months ending Nov. 30, partly because of costs for the FedEx Ground independent contractor incentive programs. Higher legal costs at FedEx Ground during the first quarter of 2008 negatively affected its operating income for the first half of its 2008 fiscal year, the company said.
FedEx also has been the target of proposed legislation in Congress attempting to make it easier for labor unions to organize drivers and requiring the IRS and the Labor Department to look more closely at contractor relationships.
A bill introduced in July by U.S. Sens. Barack Obama (D-Ill.) and Dick Durbin (D-Ill.) would eliminate long-standing “safe harbor provisions” that allow employers to avoid paying employment taxes and workers’ compensation (10-8, p. 53). The bill has been stalled in committee, but an Obama staffer said it could be discussed in committee as soon as this month.
Teamsters officials have said that if FedEx Ground drivers became employees, organizing them as union members would be easier.
“It’s a fundamental fact that FedEx has been skirting the law, and the Teamsters welcome the IRS decision,” James Hoffa, Teamsters general president, said in a Dec. 21 statement.
Although FedEx said it expects to win its appeal, transportation stock analysts at Stifel Nicolaus said in a Dec. 28 report that if the appeal is unsuccessful, “We believe that 2004-2006 tax-year audits should also result in similar back-taxes and penalties owed by the company, which could exceed $1 billion in total.”
The report also said, “We believe the independent contractor model and related issues (classification, taxes, wages, and benefits) remains the biggest risk to what we believe is an attractive international growth story.”
