IRS Says California Drayage Operator Improperly Classified Driver

This story appears in the Dec. 6 print edition of Transport Topics.

In a potentially far-reaching decision, the Internal Revenue Service has determined that a Southern California drayage operator classified a truck driver as an independent contractor rather than an employee.

An IRS “determination letter” sent last month to the unnamed drayage driver and Total Transportation Services Inc., Rancho Dominguez, Calif., concluded that there was evidence that the motor carrier had “behavioral control” and “financial control” over the employee.

“We conclude that the firm had the right to exercise direction and control over the worker to the degree necessary to establish that the worker was a common-law employee, and not an independent contractor operating a trade or business,” stated the Nov. 4 letter written by Susan Rosenberg, a Holtsville, N.Y.-based IRS employment tax technician.

The driver’s name and address was redacted from the letter and Rosenberg did not return a phone call.

Since the IRS did not comment, it is unknown if it is the first such agency ruling for a drayage operator servicing Southern California ports.

Earlier this year, the IRS and U.S. Department of Labor announced plans for a national crackdown on employers who misclassify employees to avoid payment of unemployment insurance, worker’s compensation insurance or payroll taxes.

However, an IRS spokeswoman suggested that since the 2011 federal budget has not yet been formally approved by Congress, the agency’s beefed-up independent contractor misclassification information and enforcement campaign has not yet been implemented.

Victor LaRosa, president of TTSI, told Transport Topics that his company is appealing the IRS determination and that the company sent a response letter to the IRS last month. LaRosa said the employee only worked for the company for one month last year and that he had “totally distorted the facts.”

“We’re pretty much willing to take this whole thing through the whole appeal process to show that this is an actual independent owner-operator,” LaRosa said. “There’s not really much substance to this particular individual’s claims.”

LaRosa said the company was unaware of the employee’s complaint until recently because it never received the letter from the IRS. LaRosa disputes the IRS claim that a letter was sent to the firm in August 2009.

“It was just really fishy the way this whole thing came down,” LaRosa said. “The IRS never really notified us to get our side of the story.”

The determination was the result of what the IRS calls the SS-8 process, a procedure in which an employee makes a request for a determination of employment status. The ruling is not the result of an IRS audit.

A November report by an advisory council to the IRS said the SS-8 process is generally viewed as suspect by employers. The advisory council report urged the IRS to send letters to employers in industries with a history of noncompliance offering a way to avoid penalties through an employment tax voluntary disclosure program.

“Employers believe that IRS determination is biased toward the conclusion that workers at issue are employees,” the report said. “In addition, there is a concern that the SS-8 process increases audit exposure.”

The letter to TTSI said that the IRS determination was based on information provided by the driver.

“We requested information from the firm concerning this work relationship,” the IRS letter said. “Because we received no reply, we are issuing this determination based on the information available to us.”

LaRosa said that the use of independent contractor drivers is a long-standing industry practice.

“It’s really strange,” LaRosa said. “You’d think I’d get a hundred of these letters. I only got one.”

However, the IRS said the determination also could apply to some other TTSI drivers.

“This ruling pertains to all workers performing services under the same or similar circumstances,” the letter stated.

The letter noted that the driver had signed an independent contractor agreement, but that TTSI provided the driver all the equipment, including a truck, chassis, container and insurance. The letter also said the driver received his assignments from the carrier, but that he did not require day-to-day instructions from TTSI.

The letter notes that the driver “did not invest capital or assume business risks,” and “therefore, did not have the opportunity to realize a profit or incur a loss as a result of the services provided.”

The IRS contractor determination comes during a federal court fight between American Trucking Associations and the Port of Los Angeles, which is attempting to ban independent operators from providing drayage services at the port.

Robert Digges, vice president and chief counsel for ATA, said he was not familiar with the details of the IRS case. “However, given its very early procedural posture, I don’t think it represents much of anything at this point,” he said.

In the port drayage case, a federal district judge ruled in favor of the port’s employee-only concession program earlier this year, but the two-year-old legal dispute is currently on appeal and a final decision on ATA’s lawsuit could come as early as this summer.

TJ Michels, a spokeswoman for the Los Angeles-based Coalition for Clean and Safe Ports, said the IRS finding was “hugely significant.”

“The IRS applied the most stringent possible test and determined that a typical Los Angeles port driver is hardly a small businessman — he’s a disguised employee,” Michels said.