The Internal Revenue Service has told FedEx that it has been misclassifying its delivery drivers as independent contractors and is ordering the shipping company to pay back taxes and penalties.

FedEx revealed in a regulatory filing that it heard from the IRS on Dec. 20 that an audit team had concluded an audit for 2002 regarding the classification of its "pickup-and-delivery owner-operators" at FedEx Ground and determined that they should be reclassified as employees for federal income tax purposes. The IRS indicated to FedEx that it anticipated assessing tax penalties of $319 million plus interest for 2002. The IRS is also conducting audits for subsequent years.

But FedEx plans to challenge the ruling. "We believe that we have strong defenses to the IRS's tentative assessment and will vigorously defend our position, as we continue to believe that FedEx Ground's owner-operators are independent contractors," said the company. FedEx added that it cannot yet determine the amount it might potentially lose from the IRS decision.

The International Brotherhood of Teamsters, which has been trying to organize FedEx drivers, hailed the decision and estimated that the potential losses to FedEx could total over $1 billion. "It's game over for FedEx's independent contractor scam," said Teamsters general president Jim Hoffa in a statement.