Independent Contractors: New Hampshire Defines, FedEx Whines

Wellesley, MA  (CompNewsNetwork) - New Hampshire has come up with their own 12 step program to determine whether contractors are truly independent or just employees. Meanwhile, the IRS has come down hard on FedEx, hitting the company with a $319 million fine for misclassifying drivers as independent contractors.

Let's start in New Hampshire. The state has come up with 12 criteria for determining independence, all of which must be met or the system defaults toward an employer-employee relationship. The criteria include the usual focus on control of the work, but there are a few new wrinkles:

A. The person possesses or has applied for a federal employer identification number of social security number or in the alternative, has agreed in writing to carry out the responsibilities imposed on employers under this chapter.

[This appears to imply that undocumented workers - who cannot have federal id numbers or social security numbers - are automatically employees.]
...

F. The person has continuing or recurring business liabilities or obligations.
G. The success or failure of the person's business depends on the relationship of business receipts to expenditures.

Like Massachusetts, New Hampshire is looking for objective evidence that the independent contractor runs a legitimate business. Both states accept the presence of employees with the IC as compelling evidence - but that will not help the typical sole proprietor without employees. Whereas Massachusetts has stipulated that a subcontractor in the same trade as the contractor is by definition an employee, New Hampshire does not focus at all on the sub's specific trade.

Having issued all this clarification, the states now sit back and let someone else figure out the details. That someone else, alas, is the poor insurance auditor, who has been given the unenviable task of determining the status of each and every subcontractor. You don't suppose that this detective work is contemplated in the current fee structure, do you?

In MA, auditors have some latitude. If the independent contractor/sole proprietor does not have any employees, they are likely to be added to the general contractor's payroll for workers comp. In New Hampshire, auditors are held to a higher standard. They must inspect records and operations of every GC and sub to determine whether the subcontractor meets all 12 criteria for independence. They do this at their own risk: If they make a wrong determination, they are in violation of state law.

Closing in on FedEx
The IRS in December determined that FedEx drivers were misclassified as independent contractors. They slammed the company with a $319 million fine and penalties. Since the fine only covers 2002, FedEx could face additional penalties totaling over a billion dollars after the IRS completes its investigation. FedEx has already lost the argument in a number of states, including California. Now they've lost at the federal level as well. They are going to sit down with the IRS this spring to hash out the implications of their latest losing argument. (For our numerous postings on this important case, just enter "FedEx" in the search box.)

FedEx managers are apparently hanging their hopes on a 1995 agreement between FedEx Ground's predecessor company (Roadway Package System) and the IRS, which 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." Unfortunately for FedEx, there is a growing body of evidence that the company exercises rigid control over every aspect of the relationship with their "independent" drivers, from uniforms and length of hair to schedule of pick up and delivery.

Much has been made of the liability facing FedEx in the area of employee benefits, but little attention has been paid to workers comp. We can safely assume that hundreds of current and former drivers have been injured on the job. When they come up with a total cost for violating fair labor standards, the comp costs will have to be added in. This long-profitable enterprise appears on the verge of accepting retroactive responsibility for as many as 17,000 employees. That's a lot of drivers and a truckload of liability.

This article reprinted with permission from http://www.workerscompinsider.com/.

Author: Jon Coppelman

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