FedEx is Not Alone in Fighting Independent Contractor Battles.

The Internal Revenue Service, several states and the courts are stepping up their pursuit of legal remedies and penalties for companies that misclassify company employees as independent contractors. FedEx has been at the center of these legal battles for more than a decade as unions, states and some courts seek financial enhancement if independent owner-operators are reclassified as employees.

  Just think what would happen if a basic tenet of your company's operating business plan were threatened by an outside third party?

  Now you must know what keeps FedEx Corp. Chairman and CEO Fred Smith up at night.

  FedEx has been at the center of long-running legal dispute with the Teamsters union, some states and the courts over classification of what FedEx claims are independent owner-operators in its small-package home delivery unit, formerly called RPS.

  The unit, the chief competitor to small package giant UPS, is based on workers being classified as independent contractors. That classification saves FedEx millions of dollars every month in worker compensation, unemployment and health care costs.

  Several courts and the IRS have disputed FedEx's claims, and the company has had to modify its business model in California and elsewhere to accommodate these legal challenges.

  Turns out FedEx is hardly alone in these battles. The employment law firm of Ogletree, Deakins, Nash, Smoak and Stewart estimates it has seen a 13 percent rise in misclassification claims this year compared with last year's work load.

  The IRS says it will audit some 6,000 U.S. employers starting next February in an attempt to quantify how many employers are misclassifying its workers. That's the agency's biggest push in this area in more than 25 years.

  Companies such as Comcast, Microsoft and others are joining FedEx in these battles. Back in 1984, the IRS estimated employers had misclassified some 3.4 million workers. The agency said that cost the federal government some $1.6 billion in lost tax revenue that year.

  Given that 25 years have past since the IRS looked at this issue seriously--and that the growth of independent contractors has grown exponentially since--it's easy to see why the federal government is taking a more serious look now. It's possible that such "misclassifications" are costing the government in excess of $10 billion now.

  The IRS says it is using a three-part analysis on a "case-by-case" basis. But how those cases are actually chosen is a murky process. Does politics play a part? How about geography? Are certain industries--trucking, for example?--more susceptible than others? 

  Nobody knows. That's what makes the IRS's pursuit of these cases even riskier for employers. As Donald Rumsfeld used to say, it's the "known unknowns" that make this issue even murkier.

  Certainly, under the Obama administration, this issue doesn't seem to be going away. In fact, it seems to be mushrooming. Employers, beware.

John Schulz consults with leading institutions through GLG