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Ongoing IC Classification Cases Cost FedEx Additional $204 Million in Liability

Mar 31, 2016 12:10:19 PM

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In case anyone needed any more reason to focus on proper Independent Contractor classification, we bring you the latest woeful episode from the ongoing saga of FedEx and their IC classification problems.

For those who don’t know about the challenges FedEx has been facing, here’s a brief recap of the sad situation. June 2015, FedEx Ground settled a case with the IRS wherein 2,300 drivers were proven by IRS attorneys to have been improperly classified as Independent Contractors between 2000 to 2007. The back tax payments and penalties combined set FedEx back an eye-popping $228 million. The case was a well-known object lesson for the workforce management industry and for all organizations leveraging ICs in their workforce mix.

Flash forward to March 2016 when FedEx Ground settled case for an additional 19 drivers improperly classified as independent contractors. Each of these 19 cases was mediated separately for a total cost of $204 million to be paid out by the parcel shipping giant. In spite of these significant liabilities, FedEx still somehow reported strong Q3 earnings with only a 19% decrease over the same quarter last year. Nevertheless, the multimillion dollar payouts would have been better applied to shareholder return, new business development and a host of other, more constructive uses.

It is worth noting that in the wake of the initial filing of these suits by the IRS, FedEx ceased to ply this operating model as early as 2011 in response to liabilities incurred by allowing IC’s to function as employees. Since 2011, the FedEx practice has been to mitigate risks by contracting only with incorporated businesses, which treat their drivers as employees; a policy FedEx workforce management leadership hopes will mitigate risks into the future.

If you are concerned about mitigating your organization’s risk with regard to IC classification issues, here are some steps you may take to ensure you don’t wind up with costly liabilities of your own. Start by perhaps engaging a 3rd party workforce management solution provider to validate the business structure of Independent Contractors working within your organization. If there is internal resistance among stakeholders in finance, or among executive leadership to this idea, you can build the business case in favor of a 3rd party provider by illustrating the potential for costly penalties to help make a persuasive argument.

For example, you might share the following points with other stakeholders. Misclassified Independent Contractors can lead to penalties in the following categories, and when added together add up very quickly:

  • Overtime if applicable
  • State employment tax
  • Federal employment tax
  • Workers compensation premiums
  • Unpaid benefits such as health insurance and vacation
  • Penalties and interest associated to each

If they’re not convinced, simply share with them the numbers facing FedEx to drive the importance of this activity home. Then introduce them to your nextSource representative who will provide an authoritative demonstration of how a solid provider/partner helps mitigate risks and avoid these costly problems.


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