IRS Probing Trucking Companies : Possible Reclassification of Drivers as Employees Could Cost Area Firm Millions

In an action that could cost local trucking firms millions of dollars and have nationwide impact, more than a dozen harbor-area trucking companies are being audited by the Internal Revenue Service to determine if they have improperly classified drivers as outside contractors, according to trucking companies, drivers and industry trade groups.

The taxes and penalties that will be assessed if the IRS determines that the truckers should be classified as employees are so staggering that many harbor-area companies will be forced out of business, industry representatives say. The audits would set a tax rule affecting trucking firms nationwide, they say.

The federal agency has declined to discuss the audits, which began at least two years ago.

“We are fearing the worst, that they will try to make an example out of the harbor area,” said Joel Anderson, vice president of the California Trucking Assn., a 2,500-member statewide trade group that represents a majority of the harbor’s container carriers. He said the companies being audited would owe more than $50 million to the IRS.

The firms under scrutiny transport most of the goods moved from both Los Angeles and Long Beach harbors, Anderson said. All the more than 100 trucking companies in the harbor area use independent drivers, and one-quarter of the state’s commerce is transported by firms that use them exclusively, he said.

At issue in the audits, and two audits that are being appealed, are longtime standards used by the IRS to determine whether a worker is an employee. Generally, an employee’s status depends on whether the employer has “the right to control and direct the worker,” said an IRS spokesman.

Trucking industry representatives said the standards are confusing, open to varying interpretations and difficult to apply. They say harbor-area truck drivers are not employees primarily because they come and go as they wish, often working for any number of firms. Reclassifying the drivers, they also argue, would dramatically change trucking, making the firms responsible for everything from drivers’ traffic accidents to their health insurance.

Local truckers, however, say the IRS rules are not complicated. They say they are misclassified and should be paid as employees because they generally drive for one company. By refusing to classify them as employees, they say, the trucking firms are evading Social Security, state disability and unemployment taxes, while at the same time shifting much of the cost of doing business to the drivers.

The dispute stems in part from the federal deregulation of trucking, which began in 1980. That change had a dramatic effect on harbor-area firms, which began competing for the business of steamship lines by lowering rates. The trucking firms cut costs by replacing employees who drove company-owned rigs with independent owner-operators.

Today, the firms operate largely as brokers for the steamship lines. Steamship lines contract with trucking firms to move cargo containers; trucking firms hire truckers to haul the containers, and the drivers generally own or rent their cabs.

The IRS has the last word on how a worker is classified, regardless of how an employer may designate the worker.

Among the standards the IRS uses to determine employment status are: whether a worker has a continuing relationship with the firm; whether the worker can be fired without cause; who directs how the worker does the job; whether payment is based on time worked, piecework or by the job, and who supplies the workers’ tools, supplies and place of work.

Trucking industry representatives would not discuss specifics of the IRS audits.

However, Greg Stefflre, an attorney who represents nine of the firms, confirmed the audits. Industry sources said the audits are being conducted by local IRS offices. But final decisions on them--including two cases known to be on appeal--will be made in Washington, because of the national implications, truckers and industry representatives say.

Wilson Fadely, an IRS spokesman in Washington, said the agency has stepped up its enforcement campaign against companies in a number of industries that avoid taxes--including Social Security and unemployment levies--by classifying legitimate employees as outside contractors.

The IRS campaign reached harbor-area trucking firms at least two years ago, drivers and industry representatives say.

It began when several drivers used tax filings to challenge their employment status as independent contractors with H & M Terminals Transport Inc. of Carson and about two dozen other trucking companies in the harbor area. In several of those cases, the IRS determined that the drivers were employees, truckers and industry representatives say.

The IRS rulings for the individual drivers triggered the audit of H & M Terminals that is now being appealed, truckers and industry sources said. Officials at H & M Terminals have refused to comment.

“Our whole industry is awaiting the outcome of the H & M case,” said one company executive, who requested anonymity. His firm, which was audited after H & M Terminals, also has appealed a substantial tax penalty in its case, he said.

The truckers stand to gain benefits, back wages and the ability to unionize if the reclassifications are upheld. The truckers’ designation as independent contractors has prevented the Waterfront Rail Truckers Union, of which they are members, from obtaining certification from the National Labor Relations Board. And many of the costs borne by the drivers would be shifted to the companies.

Drivers have been picketing H & M Terminals since Aug. 10 to call attention to their employment status and what they say are illegal work practices.

“It’s about justice,” said Ernie Nevarez, an accountant who works with the Waterfront truckers. “The guys don’t expect money out of this; that’s not the main motivation. They’re just tired of the charade. They are tired of working in a system that doesn’t care about the law.”

Paul Galis, a spokesman for the Waterfront truckers group, said the drivers and the government are victims of the companies’ tax filing practices.

Until the late 1980s, when the Waterfront group began disputing the practice, drivers had been forced into complying with the companies by accepting independent contractor classifications, he said.

A typical driver will work for the same firm, be issued a company identification card and, in some cases, a U.S. Customs license in a company’s name because they haul imported goods from the docks, Galis said. Yet the drivers are unable to apply for unemployment, workers’ compensation or be represented by a labor union at work because they are listed as free-lance drivers.

The Waterfront group’s spokesmen said the drivers, many of them recent immigrants from Central America and Mexico, were ripe for exploitation because of their unfamiliarity with complex, sometimes overlapping, state and federal labor and transportation laws.

Nevarez said: “They don’t want to be made fools of anymore.”

The trucking industry argues that it has done nothing more than adhere to the common and widely accepted practice of using independent owner-operators.

Using independent contractors gives the companies flexibility, industry representatives say. And in an extremely competitive business environment such as the harbor’s, the cost savings that result can mean staying in business, they said.

“Operating costs would be 50% higher at a minimum” if the drivers were to be classified as employees, said Stefflre, the industry legal specialist.

One company owner said the audits, if upheld, will cripple the firms. “We would go bankrupt,” he said, adding that classifying the drivers as employees would place large financial and record-keeping burdens on the companies.

“The complications are so enormous that we don’t know how we could administer (the reclassification) if the IRS were to enforce it,” said the owner, who spoke on condition of anonymity.

Trucking industry representatives, as well those in other industries, say the IRS is focusing on the employee-independent contractor issue because of the federal deficit.

“This is a way to increase the government’s tax flow,” Stefflre said. “This is an income stream that they’d like to intrude upon.”

Anderson, of the California Trucking Assn., said the group has launched an information campaign to alert its membership and enlisted the aid of its national office. “Right now, the industry is walking on eggshells,” he said.

However, Barry Broad, legal counsel for the Sacramento-based California Teamsters Public Affairs Council, said the trucking industry’s arguments are “ridiculous.”

“What the industry is saying is that it is appropriate to run a tax scam,” Broad said. “It is simply an extension of the underground economy.”

He said the companies use independent contractors to undercut legitimate competition from other firms and to “immunize themselves from unionization.”

Nevarez, who represents about 100 harbor-area truckers in their efforts to obtain classification as employees, praised the IRS audits. But he criticized the federal agency, saying it has long been lax in enforcing its laws. And the longer the IRS waits to make a determination on the H & M Terminals case, the longer his clients are without benefits.

“My guys are hurting right now,” Nevarez said.