Delivery Companies Pressured

California is stepping up its campaign against delivery companies that avoid an array of payroll taxes by classifying their drivers as independent contractors.

Since early 2003, state regulators have assessed more than $37 million in back taxes and penalties against 153 courier services and delivery companies, ranging in size from a subsidiary of United Parcel Service Inc. to companies with only a few dozen drivers.

Now, the Department of Employment Development said it planned to pick up the pace by completing audits on 450 more delivery companies by the end of next July. The state’s crackdown targets a growing effort by delivery companies to cut labor costs by shedding hourly workers and then hiring them back as commission-only contractors who deliver packages in their own vehicles.

That leaves the employees responsible for making state-mandated unemployment and workers’ compensation insurance contributions, as well as shouldering Social Security and other payroll taxes.

In California, employers that switch to the independent contractor model can lower their labor costs by 30% to 40%, unfairly under-cutting competitors with conventional employees, regulators said.

Enforcement actions to date have identified about 15,000 drivers as being incorrectly classified as independent contractors. Regulators estimate that tens of thousands more could be working illegally as contractors for employers who are failing to pay the state over $100 million in back payroll taxes and workers’ compensation premiums.

“Companies have found a way to pass on the cost of having employees down to the drivers,” said Walter Branam, head of the state task force that is auditing courier services and delivery firms.

“They call them independent contractors and tell them they are responsible” for paying all taxes, including Social Security contributions and workers’ compensation insurance premiums.

State auditors contend that most delivery drivers who are paid as independent contractors are illegally classified because the companies they work for maintain almost complete control over their routes, schedules and working conditions, Branam said.

In October, California insurance fraud investigators, accompanied by Massachusetts State Police officers, served a search warrant on the offices of NICA Inc., a Braintree, Mass., company that provides services for courier firms that convert their drivers to independent contractors. NICA said it does 30% of its business in California.

The search warrant remains under seal and the state Department of Insurance declined to comment on the investigation.

However, NICA, as part of its program, sells “group occupational accident insurance” to drivers in lieu of state-required workers’ compensation coverage, a practice that California regulators in the past have identified as potential insurance fraud.

NICA defended its business as legal and dismissed the dispute as “a difference of opinion with state regulators.”

The company, which has worked with 400 companies employing 16,000 drivers in 42 states, said its strategy could be good for drivers as well as its clients.

Contract drivers, if they hustle and are truly independent, can cover more territory and make more money than hourly workers, argued Tim Bergin, NICA’s western region sales director.

“You can double your income,” said Ty Conley, a NICA-affiliated driver in San Bernardino. “I can work for myself and have so much more freedom.”

But owners of traditional, employee-based companies say the independent contractor strategy gives an unfair advantage to competitors who use it. Fred Sardella closed his Riverside-based Intra County Business Mail in February after losing a large contract to deliver pharmaceuticals to a competitor using independent contractor drivers.

“You going to beat them? You can’t, not when 50% to 60% of your operating expense is drivers,” Sardella said.

As complaints have grown, so have the legal challenges to the practice, including high-profile cases involving subsidiaries of UPS and FedEx Corp. Complaints filed by California regulators and private lawsuits filed on behalf of drivers are now pending in 24 states against companies that use contractor drivers.

“We don’t want low-income people in the state of California to not have the safety net that the state intended for them,” said Deputy Atty. Gen. Steven Green, who represents the state in a case involving UPS-SonicAir Inc., a unit of Atlanta-based UPS.

SonicAir, which specializes in same-day deliveries of urgently needed goods, relied on contract drivers even before UPS acquired the company in 1995. The state Department of Employment Development found that SonicAir had improperly classified its drivers as independent contractors and owed the state $625,000 in back payments for payroll taxes and insurance premiums.

The California Unemployment Insurance Appeals board twice upheld the decision and Sacramento County Superior Court Judge Patricia C. Esgro later denied a SonicAir appeal, saying its drivers were independent only in the terms of the “take-it-or-leave-it” contracts they signed.

The company’s drivers “were performing an integral and entirely essential aspect of Sonic’s business, which is inconsistent with independent contractor status,” the judge wrote. “Sonic’s drivers’ income was simply not dependent upon any initiative, judgment or managerial abilities demonstrated by a driver.”

Sonic is appealing Esgro’s ruling.

“We believe very strongly that our evidence is clear in terms of why these men and women are independent contractors,” said UPS spokesman Norman Black. He argued that Sonic contractors are independent because they are “not required to wear a uniform; own and drive their own vehicle ... and they are free to accept work any time from any other company.”

As UPS battles regulators in California courts, rival FedEx Corp. is engaged in a legal fight with current and former drivers at its FedEx Ground Package Systems Inc. subsidiary.

Last year, Los Angeles County Superior Court Judge Howard J. Schwab ruled in a class-action lawsuit that FedEx Ground drivers, who are required to buy their own trucks, should be deemed employees because the company has “close to absolute actual control” over them.

Last week, Schwab ordered FedEx Ground to pay $5.3 million in damages to drivers and $12.4 million in attorneys’ fees.

FedEx Ground plans to appeal Schwab’s ruling and is contesting 31 similar suits that have been consolidated in U.S. District Court in South Bend, Ind.

“We have always operated with independent contractors,” said spokesman David Westrick. “We intend to defend that as much or as far as we need to.”

FedEx Ground could be in for a tough time convincing more judges that its drivers truly operate independently, said John Kirkwood, a former FedEx Ground independent contractor driver. Kirkwood, who now drives a cement truck in the Sacramento area, said he had landed a $1.7-million-a-year contract to make FedEx deliveries for a large stationery dealer, but FedEx management yanked the business from him and gave it to other drivers.

“We had no say so. They told us what to do,” Kirkwood said. “What they do is take advantage of the workers. It’s a way of getting out of paying stuff.”