Disgruntled drivers have filed suit against FedEx Ground in numerous states, claiming they should be considered employees and not independent contractors as the company designates them. This spate of lawsuits against FedEx by its "independent" drivers calls into question the legitimacy of a business model used by one of America's most successful corporations, and the outcome could provide significant political and legal aftershocks for all American businesses.

If FedEx Ground is found to be abusing independent contractor status, there could be a tightening of regulations and new enforcement efforts affecting many businesses legitimately using independent contractors. There also might be a legislative reaction, inhibiting use of an important and logical business model. The Sarbanes-Oxley legislation that followed the corporate abuses at Enron and others is proving a compliance nightmare for many businesses.

In an increasingly globalized economy, many companies are restructuring and hiring independent contractors. It makes sense for firms to outsource work to an independent contractor if the work is of a specialized nature or needed only occasionally. Independent contractors also can provide expertise that would be too expensive or time-consuming for a firm to develop in-house.

Under U.S. law, a person can be classified as only an employee or an independent contractor -- there is no intermediate category. The key criterion is who controls how the work is done. A company controls its employees as to when, where and how to work, what equipment to use, what clothes or uniforms to wear, what vehicles to use and even the logos on the vehicles. In contrast, an independent contractor agrees to have the company as his client. He uses his expertise to get the job done, without direct supervision by the company. How the work is performed, in what order, with what equipment and in what clothing are not relevant issues for true independent contractors.

Sometimes, however, an individual's decision to become an independent contractor is not voluntary. Companies can exploit the working relationship and arbitrarily classify employees independent contractors. In order to maintain or obtain a job, the employee goes along with the questionable status. Then the "independent contractors" are responsible for their own payments of federal, state and Social Security (FICA) taxes, as well as paying for their unemployment and workers' compensation insurance. The company is off the hook not just for withholding but also for payment of the employer's share of the taxes. In addition, companies don't need to offer benefits such as paid sick leave, vacation, health insurance and stock options, thus adding a bundle to their bottom lines.

The "control of work" issue is at the heart of the Fedex Ground lawsuits -- as are the subsidiary questions of responsibility for back pay, taxes and benefits. A judgment for the drivers could force the company to reclassify them as "employees," and thus be liable for back pay and benefits earned by similarly situated employees. In addition, if the IRS finds a company guilty of misclassifying its workers, it can order the company to pay all back withholding taxes plus interest, even if the "independent contractors" have already paid their taxes. The IRS also might levy fines and press criminal charges against company officials.

The IRS is obviously concerned about lost tax revenue -- but so should we all be. Tax avoidance by some leaves the law-abiding to make up the difference for the cost of government at all levels of society. If such corporations as Fedex Ground are shirking their civic responsibilities to make an extra buck, they shift the burden to others. That's bad enough, but the tax avoidance may not stop there.

The alleged independent contractors may be compounding the problem. A recent Treasury Department study finds that among subchapter S corporations (a business form often used by independent contractors), there is large scale tax avoidance taking place -- into tens of billions of dollars. The problems range from not making required quarterly tax payments on time to not paying income and other required taxes at all.

All businesses have an interest in stopping abuses of independent contracting. The larger the perceived impact of "cheating," the louder will be calls at both the federal and state levels to ramp up enforcement, conduct more audits and increase the penalties. Such actions will affect law-abiding companies and true independent contractors, who may suffer increased harassment, investigations and record keeping or even litigation costs.

In the end, fewer individuals may be willing to form businesses based on the independent contractor model, and the cost-savings advantage to larger firms of using independent contractors may be partially or completely offset by increased compliance costs, a losing situation for those companies that truly need the flexibility of independent contractors to compete in a globalized economy.