December 27, 2007: The Internal Revenue Service is expected to fine FedEx Corp., of Memphis, Tenn., $319 million because the company's delivery drivers should have been classified as employees for federal employment tax purposes, the company said in a Securities and Exchange Commission filing Dec. 21.

In FedEx's Form 10-Q, filed quarterly with SEC, the company reported that an IRS audit team has "tentatively concluded, subject to further discussion," that FedEx delivery operators should be reclassified as employees for federal employment tax purposes, based on the agency's audit for calendar year 2002.

According to FedEx, company officials learned Dec. 20 that the IRS would assess the tax and penalties, and that similar issues are under investigation for calendar years 2004 through 2006.

In response to the fine, the company said, "we believe that we have strong defenses to the IRS's tentative assessment and will vigorously defend our position, as we continue to believe that FedEx Ground's owner-operators are independent contractors."

"Given the preliminary status of this matter, we cannot yet determine the amount or a reasonable range of potential loss. However, we do not believe that any loss is probable."

In another part of the filing, FedEx said it faces "increased regulatory and legal uncertainty with respect to its independent contractors" and the company "made changes to its relationships with contractors that, among other things, provide incentives for improved service and enhanced regulatory and other compliance by our contractors."

Additionally, the company said it expects further changes to its relationships with its contractors, which are expected to increase the cost of its operations.

Teamsters Applaud Fine

In reaction to the company's announcement, the International Brotherhood of Teamsters, which has been waging a long-running campaign to organize FedEx Ground workers, said it has long held that the workers were employees, and not independent contractors.

"What a great Christmas gift to FedEx Ground workers who have suffered under FedEx's illegal independent contractor scam," Teamsters General President Jim Hoffa said in a statement Dec. 21. "It's a fundamental fact that FedEx has been skirting the law, and the Teamsters welcome the IRS decision."

He added: "It's game over for FedEx's independent contractor scam."

FedEx could face additional penalties totaling more than a billion dollars after the IRS completes its investigation into the company's illegal employment practices, which continue, the union said.

By Karen L. Werner