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The IRS makes a convenient bad guy. but the agency says it's just doing its job, trying to recover some of the $2 billion a year in lost revenues it attributes to misclassification -- money that should have been paid in income taxes, Medicare, Social Security, and state and federal unemployment insurance, debt that the rest of us have to cover. "There's a side to it that company owners ignore," says Tony Warcholak, former director of employment-tax administration for the IRS. "Contractors aren't covered by unemployment insurance, and they become an additional cost to the state if they end up on welfare."
States hard hit by the recession have also stepped up their efforts to reclassify contractors, to recoup some of the money paid out in unemployment benefits. Illinois is one of the toughest, in a class with California, Georgia, Michigan, New York, and Texas. Most states, including Illinois, use the "ABC" test to differentiate between contractors and employees. Even vaguer than Section 530, it comprises three broad criteria, all of which a company must meet: (a) Does the company exercise control over the worker? (b) Does the worker perform services at the company's place of business or in its course of business? (c) Does the individual work in an independently established trade? It's an easy test to fail, especially when "control" can be as simple as dispatching a driver, and "place of business" is extended to include anyplace a driver picks up a package.
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Kris Guse makes about $400 a week driving for Quicksilver Messenger Service -- enough to cover his dirt-cheap rent and slacker expenses. One week, when the Grateful Dead was in town, he made just half that. He gets no salary, no hourly wage -- just a 55% commission on every delivery he makes, whether it's a $5.40 deferred delivery to Meigs Field three miles away or a $65.90 emergency delivery 68 miles to Hebron. Drivers who really push, he says, can make $1,000 a week.
Before this job, Guse worked in a furniture shop. "We made beautiful stuff, and I loved the work, but the boss and I disagreed," he says. "I told him, 'If our results are the same, what does it matter whether I do it your way or mine?"
Guse rolls in at 9:30 a.m., hours after hungrier drivers have left for their first deliveries. He gets a package going out to Hoffman Estates, an office park in Chicago's northwest suburbs. When he gets there he parks illegally in front of a wheelchair ramp, trots into the office to deliver an envelope, returns, and radios the dispatcher at Quicksilver's downtown office. A good dispatcher is the key to a courier service's success, keeping both customers and drivers happy. Hraha knits together a series of short hauls for Guse that bring him back downtown in stages, making money all the way. "With this job, I take whatever route I want. They don't argue with me." Guse sets his own hours, too. In the summer he keeps a fishing rod in the backseat, and, he says, on particularly slow days -- or particularly nice days -- "I'll tell them, 'Let me go, I've got other things to do."
Does Guse fit the IRS's definition of an employee? Or the state's? Or any reasonable person's? He's certainly integral to Quicksilver's business -- if the couriers aren't employees at a courier service, who is? And the company tells him where to pick up and drop off deliveries. But he's free to refuse a delivery, he decides how to get there, and he can come and go as he pleases. He's free to work for other services, but he doesn't. The car is an investment but not a big one.
Gallagher's couriers would look more like by-the-book contractors if he could get a business card, a piece of letterhead, any advertising the courier has placed, or even an invoice from each one. His lawyer Nancy Jeorg tells him this. Gallagher is incredulous: "A biker that has business cards?! Who advertises?!" Jeorg knows it's unrealistic. "It's an outdated idea of the independent contractor. It hasn't kept up with the times," she says.
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Lots of people have tried to bring the definition up-to-date; even the IRS admits that the fuzzy semantics are a problem. Periodically, Congress holds hearings. Accountants, lawyers, business owners, and labor groups give testimony. Nothing happens. Each interested industry has its political action committee working on Congress, too. Gallagher belongs to the Expedited Package Independent Contractors Council (EPICC), which is trying to win an exemption for the industry at the federal level. Joe Morris, the EPICC's executive director, sees no prospects for a solution anytime soon. "No one in Congress has adopted this fight as his own," he says. "We're in a wait-and-see period."
Powerful interests oppose any solution that would make fewer people employees. Independent contractors are harder to unionize, so labor is opposed. Employees fit more neatly into Clinton's national health-care dreams, so the current administration is opposed. The president's proposal would give the IRS permission to eliminate the Section 530 safe harbor.
As long as the definition of an employee remains hazy, there's always some hope of interpreting the rules favorably. So some industries have focused not on finding an overall solution but on winning exemptions for themselves from Congress. Some, such as real estate agents, have succeeded. Although real estate agents work exclusively for one company, from its office, using its equipment and even training at its expense, they're classified as contractors. The IRS can't touch them.
Courier-industry folks point to real estate agents with outrage -- how can they be contractors if we're not? But they're envious, and they hope to mimic the real estate agents' success, with the help of people like Kevin Gallagher.
Gallagher began his efforts to win a state exemption at the end of 1992. With help from his lawyer Jeorg and Joe Berrios, a lobbyist and former state representative, he wrote and filed House Bill 179, which would exempt Illinois couriers from any penalties for using independent contractors.
It cost Quicksilver $3,500 to hire the lobbyist for four months and to get things this far. To push the bill further, Gallagher needed more money. "We couldn't do this through the local association, the Messenger Service Association of Illinois, because some members use employees," he explains. "So we formed a group outside the association." That group raised $20,000 for the lobbyist. If the bill passes, the lobbyist will get another $20,000 from the group.
