Certified Public Accountants

FedEx and the Contractor vs. Employee Question – The Debate Continues

As Fedex just received a huge slap from the IRS about how they treat their independent contractor delivery staff, employers are once again debating the best way to classify their own employees.  Starting with the 2009 Recession, tough times have forced many business owners to shift their labor force more toward contractors.  The 12,000 plus package deliverers in FedEx’s Ground Division further demonstrate how grey the area is in defining the duties and roles that a contractor can fulfill.

 What determines a contractor?

The IRS’ legal definition of a contractor largely depends on how much control the employer has over the employee while he/she performs assigned tasks. If the employer tells the employee what will be done, when it will be done and, how it will be done, odds are the individual is classified as an employee – even if the employee is “given the freedom of action.” The debate for FedEx began five years ago in 2009 when several states threatened suits against FedEx if they didn’t reclassify their Ground Division drivers as employees.  Quickly thereafter, the IRS reversed its $319 million tax assessment against FedEx allowing them to continue the classification of drivers as contractors.

On August 27, 2014, the Ninth Circuit court of Appeals ruled that 2,300 FedEx Ground Drivers of the original 12,000 drivers concerned were in fact misclassified and should now be considered employees under California’s workplace protection statute.  The significance of this verdict is vast and expensive. FedEx may owe its new workforce of employee drivers hundreds of millions of dollars in back benefits such as healthcare, workers compensation, paid sick leave, vacation, retirement and other employee benefits.  Additionally, previously classified contractors were responsible for the trucks, uniforms, FedEx scanners, fuel, insurance and maintenance on their vehicles – all items that an employee would normally receive from an employer.

Conversely, an individual can be considered an employee if they perform services for the business and the business dictates what will be done and how it will be done.  There are three categories surrounding Common Law Rules for determining the control and independence of a worker:

Behavioral – Does the company control or have the right to control what the worker does and how the worker performs the job?

Financial – Are the business aspects of the worker’s job controlled by the payer – such as reimbursement of expenses, provision of tools or supplies and how the worker is paid.

Relationship type – Is there a written contract or employee benefits available to the employee?

If you’re seeing grey areas, that’s because there are many! Companies have been claiming independent contractor status for employees for decades.  Whether it is because they want to remove some of the financial burden of overtime, benefits and other compensation from the equation or just out of lack of understanding the rules and grey areas, classifying is challenging. Yet, legal disputes like the FedEx suit are changing the face of employment law and what the employer-employee relationship truly means for both the employer and the worker.  The IRS is continuing to define differences between employee and contractor and plans to release clarification soon. Until then, if you are unsure how to interpret the rules for your business, talk with us today.



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