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Does This Look Like an Employee to You?

This feature examines how the IRS defines "independent contractors" and "employees" and one company that disagrees.

The IRS sees Kevin Gallagher's free-spirited bike messengers as employees; he swears they're independent contractors. The IRS means to make Gallagher an example. He's perilously close to making himself a martyr. Either way, he loses

Kevin Gallagher is battling tax auditors. And although he's enlisted the support of lawyers and accountants, of his local and national industry associations, and of legislators at the statehouse and in Washington, D.C., he's probably going to lose.

The auditors want Gallagher to reclassify his workers. His company, Quicksilver Messenger Service, in Chicago, pays its drivers and cyclists as independent contractors -- autonomous businesses providing services for a fee. Straight commission, no benefits. But the Illinois Department of Employment Security (IDES) and the Internal Revenue Service say they should be employees -- that, in fact, they are, and that Gallagher, Quicksilver's chief executive, should have been withholding income taxes and Social Security all along.

The first battle won't finish Gallagher off. He'll lose to state auditors, but there's a limit to the penalty they can impose -- in Gallagher's case, almost $15,000. Next, he'll lose to the IRS, which has estimated that he owes more than $80,000 in unpaid taxes. That's more than any annual profit that Quicksilver has ever made. But then comes the Labor Department, which will tally up all the overtime Gallagher owes to those retroactive employees, and the sky's the limit. If he reclassifies his workers, benefits will whittle away at what there is of his margins, and if some sort of national health-care bill passes, that could finish him off, he says. Oh yes, and one more thing: once his drivers are employees, they'll be easier to unionize, which the teamsters would like to do.

The same battle is going on in dozens of industries, over roofers and manicurists, accountants and exotic dancers. And although it's not the first time combat has been joined, it's more intense than ever before. Partly, it's about revenues. Independent contractors -- especially 20-year-old bicycle messengers -- don't pay their taxes as reliably as employees who have them withheld. And it's easier for auditors to track down one established company than 100 footloose kids.

But the battle is also about competing ideas of employment -- the government's, the owners', and the workers' themselves. The number of contractors is growing as workers demand greater independence and flexibility and as companies in a competitive marketplace rush to outsource unessential operations, to dodge workplace litigation, and to shrug off the growing cost of benefits. Looking at the new class of workers, it's difficult to say whether they're victimized or self-actualized. Ask them, and they're not sure themselves about what they are or what they want to be. Or what they're owed.

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Quicksilver's offices look like a dorm without the intellectual implications -- scuffed white walls, threadbare carpet, secondhand furniture, and food wrappers. Bicycles, intact or in pieces, obstruct the entrance to one lobby, where someone snoozes in front of a television. Through the next door, past a beer-company poster of a healthy young woman, and over the noise of another TV, George Hraha, the company's co-owner, president, and dispatcher, is cussing out a recalcitrant biker. More bikers wander in to pick up deliveries. Some look hearty, hip, and sportive, as if they live every office drone's freedom fantasy; others look desperate. Twenty yards beyond the window rumble the elevated trains that define Chicago's downtown, the Loop.

In his office the CEO is explaining his fight against reclassification and how it became a crusade to save his industry. Gallagher, 39, is immediately likable -- down-to-earth and gregarious, with thick graying hair and a luxuriant mustache. He eagerly pulls file after file from a cabinet he's dedicated to the campaign, talking obsessively and wincing every time he uses the wrong word, a giveaway word. Describing the two partners' division of labor, he says, "George handles everyday operations: dispatching, hiring -- ach! I mean contracting! Oh God, this has got me punchy! But he gets the contractors. I'm more involved with customer relations, sales, accounting."

And increasingly, with litigation and legislation. Gallagher estimates he easily spends 20% of his time on the reclassification face-off. There are weeks when that's almost all he does. "If I were going into the business today, I would use employees, only because of the time that I spend on this issue."

Gallagher further concedes, "Employees would make my life a little bit easier, to be honest with you. With contractors, the day after a Grateful Dead concert, you may be down 10 drivers. They just didn't feel like coming in. And that's their prerogative. With employees, I'd have more control." Then, too, he'd have a little more control over, um, presentation. Gallagher laughs. "Personal hygiene, and everything that goes along with that."