Does This Look Like an Employee to You?

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That wouldn't be Quicksilver's style, though. Gallagher and Hraha enjoy the free spirits, oddballs, and ex-cons who answer their help-wanted ads, like the guy who lived under the highway. ("He was always available for early deliveries," Gallagher says.) And they prefer the no-frills motivation style. "If they want to do it, they do it," Hraha says. "If they don't, I get somebody else, simple as that."

Ten years ago, when the partners got into the business, using contractors was standard operating procedure. In fact, it might have been impossible to survive if Quicksilver had assumed the overhead associated with employees. Contractors gave Quicksilver more flexibility, and the company grew. At first the company handled only prescheduled deliveries by car; then it added on-demand deliveries. Bike couriers came next. Bikers can pick up a package downtown, carry it quickly past traffic, and hand it off to a driver to take to the suburbs. That's when sales took off. In 1992 the company made a 5% pretax profit on $1.2 million in sales, using about 30 drivers and 15 bikers at any time, all contractors.

Now, Gallagher says, it would be almost impossible to reclassify. "I don't know how high my workers' comp would go, and that's a huge expense in our industry," he says. "That's not to mention what would happen to my unemployment-contribution rate. It would drastically affect our bottom line." There would be benefits to pay, too. Gallagher could charge clients more, but they'd probably shop elsewhere. Or he could pay couriers less, but they'd leave, too. The auditors pick off companies one at a time and put those businesses at a competitive disadvantage.

Gallagher and Hraha started as contractors themselves. They had been working for a title-insurance company. "I was in the judgment department," Gallagher explains. "The company purchased a computer database and basically eliminated my job." The company needed deliveries made, but cheaply. So the insurance agents asked Gallagher if he wanted to make deliveries as an independent contractor, and they set him up with Hraha, whom they'd employed as a delivery driver.

Stripped of benefits and job security, the pair began making night deliveries by car and meeting in the wee hours to take a break and plan their growth. While dropping off deliveries for the title company, they found they could pick up others and grow a real business. Their instincts were dead-on: after a few years they couldn't handle all the deliveries alone. A lawyer told them -- correctly at the time -- that the industry's employment standard was to use independent contractors. So they used contractors.

That was long before the IRS and the IDES began their new round of crackdowns. The trouble started in 1989, after Quicksilver's laid-off office manager applied for unemployment benefits. He'd been an employee -- one of the few there -- but the words courier service on his application sent up a red flag. Later Gallagher received notice that the state would be auditing Quicksilver, first for the tax years 1987 and 1988, then for 1989 and 1990. He's spent the five years since tangled up in two chains of audits, hearings, and appeals at the state and federal levels.

The auditor, Gallagher says, was surprisingly polite. "He's a foot soldier, very unbiased, just there to collect numbers." The hearing that followed his audit was more contentious. Gallagher showed up at the offices of the state Department of Employment Security at 9:30 a.m. with his lawyer, his accountant, and a consultant who had worked for the department.

In nine hours of testimony, Gallagher tried to prove that the service his couriers performed was outside the usual course of Quicksilver's business -- that his company was a "brokerage" that referred customers who needed deliveries made to independent contractors who made those deliveries. The IDES wasn't buying. (Would you?) The official decision stated: "The customer believes an account with Quicksilver is an account with that messenger company alone, and that the messengers are merely agents or representatives of Quicksilver." The IDES assessed $15,000 in back taxes and penalties. Getting that one scalding decision cost Gallagher $25,000 in professional fees.

Now Gallagher has taken the state audit to the second level of appeal. But no courier service has yet won a worker-classification case in Illinois, and it doesn't look as if Quicksilver will make history. "We'll take it as far as I can financially afford to take it," he says.

It gets worse. The state audit automatically triggered a letter of liability from the IRS, which presumes guilt and sends a bill, which a company can contest. Quicksilver lost the IRS audit, which found that the courier owed $80,729 in back taxes. Gallagher is appealing that decision, too. He doesn't expect to win in court, though; his lawyers tell him his only chance is to win an exemption for the entire industry from the state legislature .

So Gallagher has become a reluctant crusader for his competitors, too. "I backed into this," he insists. "But every day you get more involved." As he nears the audit endgame his reluctance grows. He knows that when he loses the last audit battle, he'll have to cut a deal if he wants to avoid bankrupting his business. Commonly, the IRS tells a company it will forgive past debts if the owner agrees to reclassify its workers as employees. But if he cuts a deal, he's a poor crusader.

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