If you have followed this blog for the last several months, you’ve read that the issue of worker classification is an on-going battleground for small businesses and the IRS.

In the latest high-profile development in this area, on February 27, 2014, the Ninth U.S. Circuit Court of Appeals ruled in the California case of Alexander v. Federal Express that 2,300 FedEx Ground drivers were misclassified for purposes of tax and employment laws. For years, FedEx called them—and paid them—as independent contractors. “We hold that plaintiffs are employees as a matter of law under California’s right-to-control law.”  As a result, FedEx owes the California drivers who brought the suit back pay, tax withholding, and other benefits for the period of 2000-2007 — even though each driver had signed an “independent contractor” agreement with FedEx.

Admittedly, this case was based on a specific California statute. Still, it is expected to be cited by other courts across the country who are currently considering the same issue of worker classification. It also appears to be consistent with the current administration’s goal of bringing as many workers as possible under the “protection” of current employment, tax and benefit laws.

One of the lessons of this case is is that the IRS doesn’t care if you call your worker an employee or an “independent contractor.” If you exercise the requisite level of control of that worker, the worker will be deemed to be an employee for purposes of  tax, labor and employment law. Where does the IRS come up with its rules? You can view them on the IRS website. 

Stay tuned for more on this issue.