MUTH’S TRUTHS

We all know a few bad apples can spoil the whole barrel. And never is this saying truer than when it comes to a rogue company or industry abusing its privileges, thereby inviting the government to stick its nose even further into the business of business. Think Enron, and the resulting compliance nightmare known as Sarbanes-Oxley. Or just ponder the red-tape regulation-palooza headed the mortgage industry’s way this year.

Which is why the nation’s self-employed independent contractors need to be aware of the dangerous line FedEx is walking these days. The regulatory wolf rabidly believes that when it comes to imposing new controls on American businesses, it absolutely, positively has to be there overnight. And FedEx is inviting the hairy one with big fangs in.

At issue is the difference between being a self-employed independent contractor and a company employee. Generally speaking, independent contractors perform various services for various people. Employees work directly for one company. Independent contractors pay their own taxes and provide for their own benefits, such as health insurance and retirement. Employees have taxes deducted from their paychecks and receive unemployment benefits and workers comp.

Employees cost a company more money because of this, which is why many companies choose to outsource certain services to independent contractors. For example, a business might contract out grounds-keeping to an independent lawn care service rather than hire a full-time gardener. The independent lawn care owner, providing his services to various businesses, is self-employed; the full-time gardener is an employee.

The government, especially the IRS, doesn’t much like independent contractors. If they had their way, every worker would be designated an “employee,” thus falling under more of their direct control and scrutiny.

For their part, independent contractors don’t much like government. They prefer to be, um, independent. Which is why an abuse of the independent contractor option by FedEx should be of grave concern to all true independent contractors.

At the heart of this matter is FedEx’s claim that its delivery drivers are independent contractors and not employees. This claim seems laughable on its face, even for those who aren’t familiar with the “official” definition of independent contractors. Let’s face it, the drivers drive FedEx trucks, wear FedEx uniforms and identify themselves as FedEx representatives. I mean, come on. If it walks like a duck and quacks like a duck, it’s not a gorilla, right?

But beyond this common sense surface observation, let’s look at some of what the IRS says constitutes an employee relationship, as outlined in its infamous “20 Factor Test.”

• Does the company direct when, where and how work is done?
• Are workers subjected to company-provided training?
• Are the workers’ services integrated into business operations?
• Is there a continuing relationship between the company and the worker?
• Are the workers hours or days of work dictated by the company?
• Is it full-time work?
• Does the company require the work to be done in a specific order or sequence?
• Is the worker required to provide regular written or oral reports?
• Does the worker primarily use company-provided equipment, tools, and materials?
• Does the worker provide services for several unrelated companies?
• Does the company enjoy a unilateral right to discharge a worker?

As the IRS states, “You don’t need to have all the factors in your favor to be able to treat a worker as an independent, but you are more likely to pass the common law test if the more important factors point to independence.” Unfortunately for FedEx, the Second Court of Appeals for the State of California ruled last year that FedEx failed the 20 Factor Test miserably.

Let’s just look at one, simple example here. The IRS says your worker “is probably an employee if you require him or her to follow instructions on when, where and how work is to be done.” The IRS further states that if a company determines “what gets done when, it indicates you control how the work is performed.” And the IRS considers this is “a very important factor” in determining if a worker is an employee or an independent contractor.

So let’s say FedEx promises to deliver your package by 10 a.m. on Wednesday morning. Can the FedEx driver wearing the FedEx uniform in the FedEx truck deliver your package at 3 p.m. on Thursday? Or even at noon on Wednesday? Of course not. The driver has no such flexibility, or, dare we say it, “independence.”

There’s more. Much more. Which I’ll detail in a follow-up column to this one. But for now, here’s the bottom line:

A California court ruled that FedEx drivers are employees, not independent contractors. The Appeals court said “the drivers look like FedEx employees, act like FedEx employees, are paid like FedEx employees, and receive many employee benefits.” Putting it in layman’s terms, otherwise known as plain English, the Court concluded “that if it looks like a duck, walks like a duck, swims like a duck, and quacks like a duck, it is a duck.” Now where have I heard that before?

Or putting it even more plainly, the Appeals court stated flatly, “We affirm the finding that the drivers are employees.” Period. And if FedEx continues trying to call a duck a gorilla, it will endanger the rights and prerogatives of all legitimate independent contractors.

This is not to say I agree with the government’s position on this issue. In my opinion, every worker should have the right to freely enter into whatever kind of employment relationship the worker and the employer deem acceptable to both parties with no government intrusion whatsoever. But the reality is that Big Brother already has its hooks in the employment market and there are those in Congress who would like to further put the squeeze on independent contractors.

FedEx’s abuse of the independent contractor provision will only add fuel to the regulatory fire. They should cut their losses and change their employment practices before the big, bad wolf comes for the rest of us.

Posted on March 16th, 2008 by Chuck Muth
Filed under: National