SACRAMENTO — 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.
