FedEx: They're Employees. No, They're Not

Get ready for an intense new round in the long-running fight over which workers are independent contractors.

Hard economic times have prompted some employers to classify more members of their labor forces as contractors. That way the companies don't have to dole out benefits or pay taxes on workers' wages. Workers, of course, often want those benefits, and financially strapped government bodies are desperate for the tax revenue.

For years, shipping giant FedEx (FDX) has been at the center of this fracas because it treats 12,000 package deliverers in its FedEx Ground Div. as contractors. The company's current situation illustrates how murky the legal waters on this issue can get.

On Oct. 20 the attorneys general of New York, New Jersey, and Montana threatened to sue FedEx if it doesn't reclassify the 12,000 delivery people as full-time employees. The states say they are owed millions in payroll taxes and that FedEx workers deserve fringe benefits befitting full-time employees.

But just 10 days later the IRS announced that it was reversing a $319 million tax assessment against FedEx that had been based on the allegation that the company misclassified drivers as contractors. The IRS won't explain its action—and FedEx won't comment—but for federal tax purposes the drivers now appear to be independent contractors after all.

Making matters even more complicated, even as the IRS let FedEx off the hook, the agency said it is taking a closer look at other companies that use contractors. The IRS announced that, starting in February, it will undertake extensive audits of 6,000 yet-to-be-named companies, in part to review employee classification. Meanwhile, lawmakers in several states—including New York, Maryland, Washington, Colorado, and Minnesota—have recently passed laws tightening rules over contract workers in an attempt to protect individuals and keep tax money flowing to state coffers.

MORE CONTRACTORS AHEADThe legal definition of a worker turns on how much control a company has over the person: The more control, the more likely the individual will be considered an employee rather than a contractor. Littler Mendelson, a large law firm that represents employers, predicts that half of all Americans who are rehired after being laid off in the current downturn will return as "contingent" workers, such as contractors or temps.

Studies show contractors cost up to 30% less than payroll employees, mainly because they have to pay for their own benefits and employment taxes. They also aren't covered by most workplace laws, such as those related to discrimination and medical leave.

Companies that don't rely heavily on contractors criticize the practice. United Parcel Service (UPS), where drivers are unionized employees, complains that FedEx's policy is, in the words of spokesman Malcolm Berkley, "unfair to taxpayers, competitors, and the workers themselves."

Counters FedEx spokesman Maury Lane: "If the model weren't so successful, they wouldn't be so virulent to try to stop it." As for the comparisons of how much contractors cost vs. employees, FedEx Ground spokesman Perry Colosimo says the figures are "purely speculative, as we have no plans to classify FedEx Ground contractors as employees."

FedEx inherited its independent workforce in 1998, when it acquired the trucking company once known as Roadway Package System. Most of the company's 275,000-plus workers are employees.

FedEx describes its delivery contractors as thriving entrepreneurs. The company points to Ray M. Skiptunis, with nine routes in New Jersey, as an example. Skiptunis, who employs 15 people, says he feels every bit the independent businessman: "I'm at risk financially. I have $300,000 to $400,000 worth of equipment, and if something bad happens, I take a hit."

But critics claim most FedEx Ground drivers are fully controlled by the company. FedEx effectively has say over everything from uniforms to how many packages are delivered. And they face restrictions on working for rivals.

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