I have said it time and again, beyond Federal W-8/1042/1042-S related audits and State level audits for under 1099 reporting the biggest liability accounts payable professionals must be aware of is paying workers misclassified by their employer as independent contractors.

Accounts payable departments are the last line of defense in reviewing a payment to a supposed "independent contractor" before that payment goes out the door and is subsequently reported on Forms 1099. And if AP does not meet that due dilligence obligation then things like this happen:

"Reggie Gray thought working for FedEx was his ticket to a better life. It turned out to be anything but: His years as a driver for FedEx Ground ended with him filing for bankruptcy and taking the company to court. Gray is one of the thousands of FedEx (FDX) drivers who have sued the company for classifying them as contractors, rather than employees. Many, including Gray, have won.

For Gray, it all started when he left his job in 2002 as a letter carrier with the U.S. Postal Service in Missouri, and signed a contract with FedEx Ground. He thought it would be a great way to start his own independent business with the backing of a major brand.

But Gray quickly realized he wasn't really independent. In fact, FedEx controlled almost all the aspects of his business, even though he had to put up a lot of his own money.

Gray had to purchase his delivery route for $5,000. He bought his own van for $17,000. FedEx later made him to buy another vehicle for $11,000 and hire a second driver when his route got so busy that one van wasn't enough to deliver all the packages. The vehicles needed constant maintenance -- oil changes, brakes, transmission and radiator replacements -- and all came out of his own pocket.

He paid for FedEx uniforms and decals for his vans, company mapping software and also leased a FedEx scanner for the package bar codes. He also had to pay for Department of Transportation inspections and random drug tests the company required.

Gray said FedEx managers in the terminal where he worked hounded him about the condition of the tires on his van and the conduct of a driver he hired to help him with his route.

The tipping point for Gray came when the IRS reviewed a copy of his contract and told him that he was actually an employee of FedEx, which implied that he was losing out on eligible benefits. He went online and found other drivers in the same situation. After his attempts to work things out with FedEx were unsuccessful, Gray decided to take legal action. (The IRS wouldn't comment on individual cases.)

In 2006, he and a few other drivers filed a lawsuit against FedEx seeking compensation for employee benefits and pay that were denied.

After several years in court, a jury sided with the drivers this past April. Gray was awarded more than $90,000 in damages.

FedEx drivers have won some significant legal battles recently. Courts in Oregon, California and Kansas have ruled that FedEx Ground drivers fit the legal definition of an employee. The National Labor Relations Board ruled on September 30 that drivers in Connecticut are FedEx employees. A decision is expected soon from the Seventh Circuit court of appeals, which has jurisdiction over cases in Indiana, Illinois and Wisconsin.

The company is currently facing 30 more active lawsuits from former contractors in several states."

Now FedEx is an extreme example. But still, that was $90,000 in damages for just one misclassified worker exluding any related IRS penalties yet to be levied.

The takeaway here is that as an AP professional it behooves you to not only review all payments going out the door to "independent contractors" and subsequently reported on Forms 1099 but also notice up management. And do it in writing so that you are protected if an IRS or state level examiner ever asks to review your worker contracts and finds these same workers to be employees and not independent contractors.