IRS Drops $319 Million Levy over FedEx Owner-Operators

This story appears in the Nov. 9 print edition of Transport Topics.

FedEx Corp. said an Internal Revenue Service audit team has proposed that no assessment of federal employment taxes be made against the company’s ground parcel unit for 2002, an important step in FedEx’s continuing legal battle over whether some of its workers are independent contractors or employees.

The parcel carrier’s Oct. 30 announcement of a revised tax adjustment cements a move made more than a year ago, when the IRS withdrew its tentative assessment of $319 million against FedEx Ground for its 2002 taxes.

FedEx Ground is also being audited for 2004-08, and the company said it believes the audit team “should reach the same conclusion on these issues for each of those years, as well.”

FedEx Ground has been in-volved in civil litigation for years over its use of owner-operators. Some former and current drivers have argued that the independent contractors should be classified instead as employee drivers. The issue has risen to the U.S. District Court level, where Judge Robert Miller in Indiana is overseeing the procedure across several states.

“FedEx Ground’s independent contractor model has been tremendously successful for customers, contractors and the company for more than 20 years, and we believe the IRS decision provides further vindication of the model,” FedEx said in an Oct. 30 statement.

While the IRS decision frees FedEx management from some worry over tax liability, it does not eliminate civil lawsuits regarding the classification issue, a plaintiff’s lawyer in the case said.

“The IRS decision will have no effect on the civil litigation whatsoever,” said Robert Harwood, a partner with the Harwood Feffer law firm.

“There are more than 30 motions for summary judgment on this. They are all sitting with the judge, awaiting a decision,” Harwood said.

Stock analyst Donald Broughton of Avondale Partners said the IRS decision should not have come as a surprise.

“Say what you want about the IRS, but they follow their own rules. In 1994, the IRS gave RPS — the predecessor to FedEx Ground — a list of rules on how to use independent contractors, and FedEx has always done that and followed up on further rulings.”

“This never should have been an issue,” Broughton said. The tax issue flows from the civil litigation, in that companies are supposed to withhold income and payroll taxes from employees, but for independent contractors, a corporation files 1099 forms and the contractors are expected to pay their own taxes. The IRS has been auditing FedEx Ground over the issue, independent of the civil litigation.

State governments also have been interested in the case. On Oct. 20, the attorneys general of Montana, New Jersey and New York wrote a joint letter to FedEx, telling the company they would commence litigation over what they considered “continuing misclassification of [FedEx Ground] drivers as independent contractors rather than employees.”

In another labor law development that could affect FedEx, Memphis, Tenn., the National Mediation Board proposed a change in the way votes in a labor election are counted.

The Nov. 3 proposal by the mediation board, an independent federal agency that deals with railroad and airline labor issues, concerns how to define a majority in an election for union representation.

By the current policy, a majority of all eligible voters must ask for union representation for a request to be considered valid. That means not voting is equivalent to casting a no vote.

The NMB proposal would change that policy to a majority of those actually voting. The FedEx Express division is considered an airline under federal law.

The proposal quickly stirred up strong reaction, with Teamsters President James Hoffa applauding it and the National Right to Work Legal Defense Foundation opposing it.

“This reform brings union elections up to modern standards of democratic election law,” Hoffa said in a Nov. 3 statement.

“Individual workers should never be forced into union ranks against their will, and it’s unconscionable that union bosses want to be able to impose unionization without an actual majority of employees showing support for a union,” the Right to Work group said.

FedEx already has been involved in a legislative dispute before Congress over work laws. An amendment to the Federal Aviation Administration funding bill addresses whether FedEx Express should be considered an airline or a trucking company in terms labor rules. However, that proposal has not advanced beyond the committee stage.