A client of mine works as a Federal Express driver. When I noticed a legal/financial story on FedEx at MSNMoney.com, I took notice. The article, written by Jeff Schnepper, concerned the legal relationship between Federal Express and its drivers.

If a business pays anyone more than $600.00 in a tax calendar year, those payments must be reported to the IRS. The employer either has to claim the person as an “employee,� resulting in a W-2 being issued at the end of the tax year, or treating this person as an “independent contractor,� resulting in a 1009 being issued at the end of the tax year. Either way, the income and relationship is reported to the IRS for tax purposes to ensure that all income and payroll taxes are paid.

When we think about taxes, most of our thoughts gravitate to income taxes, corporate taxes, or property taxes, but payroll taxes are paid by everyone who works. These are the Social Security and Medicare taxes we have withheld in our paychecks, for which the “full� tax rate is 15.3% of income. Employers must match the tax paying 7.65% (or one-half) of these payroll taxes; the self-employed pay the entire payroll tax (15.3%). This means that above and beyond your actual salary, your company pays its share of matching payroll taxes to the IRS.

By trying to characterize its relationship with its drivers as “independent contractors,� FedEx is trying to shift responsibility for paying the employer’s share of payroll takes onto the backs of the drivers. To quote from the article framing the legal issue, “What got the IRS and FedEx into a tussle was the package company’s assertion that drivers were contractors who operate their delivery routes as independent businesses, even though the drivers use FedEx equipment, wear FedEx uniforms and work under explicit FedEx rules.� This correctly describes FedEx’s business model – drivers are required to purchase FedEx vans and “own� their routes, yet otherwise they “look� like an employee of FedEx.

While the IRS is loosening some of the strictures in the code, FedEx is probably on the losing end of this argument. To qualify as an independent contractor, the employee must have almost complete discretion on how to carry out their jobs and provide all of the necessities to carry out their responsibilities. For instance, an independent contractor hired to clean a house may bring most or all of the cleaning equipment to the house, as opposed to having it provided, and will make all decisions on how to clean and what to wear. On the other hand, if this person was given a uniform or dress code and was expected to work every Tuesday from 9-4, this is more of an employer-employee relationship. This is where you have heard of “nanny-gate�-type of political problems, i.e., regular household help (nannies or housekeepers) for whom no payroll or income taxes are paid.

As Mr. Schnepper points out in the MSNMoney.com article, the ramifications of defining FedEx drivers as employees versus independent contractors affects a wide swath of employment relationships. This case is bringing industry-wide practices to the spotlight, which will probably change the way some transport companies do business, but it may very well affect you down the road. Keep your eye on this case and make sure to consider both Federal and State guidelines when determining a worker’s status.