Wage Withholding Wisdom: Ruling on FedEx Independent Contractors May Have State Tax Implications


Determining whether a worker is an employee or an independent contractor can be a tricky landscape for employers to navigate, and recent federal court rulings regarding FedEx’s independent contractors have the potential to further complicate matters.


The U.S. Court of Appeals for the Ninth Circuit, in two nearly identical decisions, ruled Aug. 27 that drivers for FedEx Ground Package System Inc. were employees under California and Oregon law, based on evidence of the company's right to control their work hours, routes, appearance and equipment.


In the California case, about 2,300 package delivery drivers formerly working for FedEx were employees and not independent contractors under state law, the Ninth Circuit held in Alexander v. FedEx Ground Package System Inc., No. 12-17458, 2014 BL 237668, 9th Cir., 8/27/14.


In the Oregon case, (Slayman v. FedEx Ground Package System Inc., No. 12-35525, 2014 BL 237667, 9th Cir., 8/27/14), the Ninth Circuit reversed a ruling in favor of FedEx after applying the right-to-control test to statutory claims by 363 drivers.


Independent contractors like the FedEx workers do not receive benefits from their companies. They also receive Form 1099-MISC for miscellaneous income rather than Form W-2, Wage and Tax Statement, because no tax deposits are made for independent contractors, and payroll departments do not ordinarily process the payments. Under California law, businesses that make payments to independent contractors are required to file Forms 1099-MISC with the state.


In a Sept. 4 payroll industry conference call with the Internal Revenue Service, a payroll professional asked whether a worker could potentially be classified simultaneously as an employee under California law but remain an independent contractor under federal law. California’s test to determine whether a worker is an employee is more stringent than those used by the IRS.


“I can’t tell you whether we would classify them as independent contractors or employees based on that one fact,” said Anita Bartels, senior program analyst for employment tax policy at the IRS. Such a situation would be uncommon, Bartels, said. However, it would be possible for a worker to qualify as an employee under California law and be an independent contractor under federal law.


Even among federal agencies, the range of the independent contractor tests varies. Generally, employee status is determined by examining whether an employer had control over the manner and means that a worker performs services. Employers that exhibit a great deal of control are determined to be employers and must withhold employment taxes on wages.


Employers that unintentionally misclassify workers as independent contractors can be required to pay certain amounts of the employment tax liability that was not withheld. Under California law, employers that have independent contractors who the Employment Development Department determines to be employers must report these workers as employees for payroll periods following the assessment. The employer is required to pay the assessment, which can include liabilities for failure to withhold state income tax. Because these amounts can be too large to pay immediately, the department can permit employers to pay assessments in installations, it said in DE 231MW, Reporting Wages and Making Payments Following an Assessment for Misclassified Workers.


To avoid misclassification of workers under California law, employers can look to DE-38, Employment Determination Guide, which is provided by the department.


For more information, see Payroll Administration Guide.


By Allison M. Gatrone