FedEx Admits State Tax Authorities, IRS Are Investigating Contractor Model

WASHINGTON, Jan. 11 /PRNewswire-USNewswire/ -- The Teamsters on Friday blasted FedEx Corp. (NYSE: FDX) for announcing plans to continue misclassifying its drivers as independent contractors although the California Supreme Court has declared workers there as employees. The company's independent contractor model is also being challenged by the IRS.

During a late afternoon conference call Thursday with reporters, FedEx admitted that its subsidiary FedEx Ground's independent contractor model is being probed by state tax authorities in addition to the IRS. FedEx managers would not go into any detail about the number of states looking into FedEx Ground's business operations nor the potential sum of any state back tax liabilities.

The IRS in December challenged the classification of FedEx Ground workers, and slammed the company with a $319 million fine and penalties. Financial analysts quoted in multiple news articles have said that since the fine only covers 2002, FedEx could face additional penalties totaling over a billion dollars after the IRS completes its investigation.

During its conference call, FedEx would only say that any possible figures at this time were not "material." FedEx Chairman Fred Smith and other managers tried to downplay the IRS audit determination as preliminary, but said the company planned a "vigorous defense."

"In defending FedEx Ground's indefensible and illegal contractor model, FedEx managers and Fred Smith have lost all credibility," said Teamsters General President Jim Hoffa. "FedEx Ground already changed their model in California because they lost in the state court there. FedEx Ground's model is being challenged in state courts, in federal courts, at the National Labor Relations Board, by the IRS and now we learn by state tax authorities. FedEx can only hope to delay judgment day. FedEx should live up to the law and acknowledge that their Ground drivers are employees in short order."

FedEx managers repeatedly cited a 1995 agreement between FedEx Ground's predecessor company (Roadway Package System) and the IRS and said the company was "disappointed and strongly disagree" with the recent IRS audit determination. That 1995 RPS-IRS Closing Agreement reads in part, "The Service agrees that it will not reclassify the RPS owner-operators as employees, except upon a determination after audit, that RPS has exercised control over the RPS Owner-Operators in a manner that conflicts with the 1994 Operating Agreement, Letter of Assurance and Exhibits."

"The existence of this 1995 RPS-IRS agreement does not affirm that FedEx Ground could continue forever to use contractors as the company saw fit," Hoffa said. "The IRS saw something in FedEx Ground practices that controlled these drivers beyond what the law allows just as the California court heard and ruled. The IRS must have gotten the real facts and they are acting to see FedEx adhere to the law. Now we have to see FedEx and the IRS fight it out."

The full 1995 IRS-RPS Closing Agreement is available at http://www.fedexwatch.com.