IRS Auditing Harbor Trucking Firms Over Status of Drivers : Transportation: It seeks to determine if the rig operators have been improperly classified as independent contractors rather than as employees. Millions in taxes and penalties could be at stake.


In an action that could cost local trucking firms millions of dollars and have nationwide effect, 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.

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

The federal agency has refused to discuss the audits. They began at least two years ago when harbor-area drivers, who are predominantly Latino immigrants, turned to the IRS to clarify their employment status.


The companies see the audits as a threat to the way they do business.

“We are fearing the worst, that (the IRS) 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 most of the harbor’s trucking firms. 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 Los Angeles and Long Beach harbors, Anderson said. All of the more than 100 trucking companies in the harbor area use independent drivers, he said, and one-quarter of the state’s commerce is transported by firms that use them exclusively. If the IRS rules against the companies, it could have significant effect on consumer costs, said Anderson.

At issue 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.

The truckers stand to gain benefits, back wages and the ability to unionize if the reclassifications are upheld.

“It’s about justice,” said Ernie Nevarez, an accountant who works with the Waterfront Rail Truckers Union, which is trying to obtain National Labor Relations Board certification. “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.”

The industry, meanwhile, argues that it has done nothing more than adhere to the common and widely accepted practice of using independent owner-operators, which gives the companies flexibility, while shifting expenses and liability costs to the trucker.


“Operating costs would be 50% higher at a minimum” if the drivers were to be classified as employees, said Greg Stefflre, an attorney who represents nine of the firms.

The IRS got involved when local drivers used tax filings to challenge their employment status as independent truckers with H&M; Terminals Transport Inc. of Carson and about two dozen other local trucking companies. In several of those cases, the IRS determined that the drivers were employees, say industry and driver sources.

Those filings triggered an audit of H&M; Terminals that is now being appealed, said truckers and industry sources. Officials at H&M; Terminals have refused to comment.

Industry representatives say the employment standards are confusing, open to varying interpretations and difficult to apply. They say the 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.

However, the local truckers say the IRS rules are not complicated. They say they should be paid and classified 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 steamship lines’ business by lowering rates. The trucking firms cut costs by bringing in independent owner-operators to replace employees who drove company-owned rigs.


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 containers; and 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, piece work or by the job; who supplies the workers’ tools, supplies and place of work.

“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, has appealed a substantial tax penalty in its case.