IRS Reverses FedEx Ground Ruling

An Internal Revenue Service decision to reverse a previous assessment that FedEx had misclassified some package delivery drivers marks a strong victory for the carrier and its use of independent contractors at its parcel division.

FedEx announced Oct. 30 in a filing with the Securities and Exchange Commission that the IRS had reversed the 2007 decision that FedEx owed $319 million in back taxes for wrongly classifying the drivers in 2002.

The carrier said the decision supports the company’s point that the drivers at its FedEx Ground division are not company employees but independent contractors, which is central to the operation’s business model as it competes with UPS and its unionized company drivers.

“FedEx Ground's independent contractor model has been tremendously successful for customers, contractors and the company for more than 20 years,” said FedEx spokesman Maury Lane, “and we believe the IRS decision provides further vindication of the model.”

FedEx said it still faces an examination of its employment taxes for the 2004-2008 calendar years but the company said in its SEC filing it believes that audit “should reach the same conclusion on these issues for each of those years as well.”

The FedEx Ground unit provides a little more than 20 percent of the revenue at FedEx, but the business has showed greater strength in the economic downturn than other units. The ground division actually expanded its operating profit 7 percent in the quarter ending Aug. 31, to $209 million, and the 2 percent slip in revenue from the year before stood in sharp contrast to the double-digit drops at the express and trucking operations.

Industry observers say the strength at FedEx Ground has come in part because shippers have traded down to the lower-cost parcel service from express delivery.