FCNews Webinar: Avoiding pitfalls when hiring subcontractors

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November 21/28, 2016: Volume 31, Number 12

By Ken Ryan

Flooring retailers who misclassify installers as independent subcontractors when the government views them as employees is an issue that threatens the retail trade. That’s according to Jeff King, general counsel of the World Floor Covering Association (WFCA), who was the guest presenter during a Nov. 10 FCNews Marketing Mastery webinar titled: “Subcontractors–How to avoid costly legal mistakes.”

The webinar, hosted by Jim Augustus Armstrong, FCNews columnist and founder of Flooring Success Systems, set a webinar record for registered attendees. King is the resident expert on an issue that is not going away anytime soon, not even with a new administration set to take office in January. “It is a hot topic, and there are not a lot of easy answers but there are precautions we can take,” he said.

In 2014, the last year in which statistics were kept, $400 million was collected nationally in lawsuits related to the subcontractor issue (not just flooring related). The federal government, state government agencies and plaintiff’s lawyers see this as a big-time revenue opportunity. According to King, construction is one trade in which lawyers and government entities see as particularly fertile ground for subcontractor abuses.

There have been some well-publicized cases involving this issue. In 2015, Lowe’s agreed to pay a $10 million fine for inappropriately using subcontractors, in some instances requiring them to wear Lowe’s clothing and placing company signage on work sites. In that one case, plaintiff’s lawyers collected $1 million.

However, it is not just the large retailers who get nailed. In fact, King said it is the smaller dealers who are most vulnerable. Uni Floor, a flooring dealer in Overland Park, Kan., was required to pay 22 workers a total of $159,144—representing $79,572 in back wages plus an equal amount in liquidated damages—after a U.S. Department of Labor Wage and Hour Division investigation. The Wage and Hour division determined that Uni Floor violated overtime and recordkeeping requirements of the Fair Labor Standards Act when it failed to pay installers overtime and treated them as independent contractors instead of employees.

The investigation concluded the flooring installers met the definition of employees, triggering overtime protections under the FLSA. The company violated the FLSA’s recordkeeping requirements when it failed to maintain time records for these employees. In this case, Uni Floor provided the equipment used by the workers, controlled their day-to-day schedules and paid them flat salaries. The employer also bid for all work and supervised jobsites daily.

While flooring dealers may view the government entities and lawyers as money-grabbing opportunists, there are those in government who believe there are businesses trying to cheat the system. Brad Bobowski, acting district director for the Wage and Hour Division in Kansas City, who was involved in the Uni Floor case, said, “Far too often, employers misclassify workers as independent contractors when the law defines them as employees. We are committed to rooting out misclassification and, as this case shows, will take enforcement actions needed to achieve that goal.”

The Wage and Hour division said it has aggressively expanded its efforts to combat employee misclassification in sectors where workers are especially vulnerable and violations are rampant. To assist in combating the problem, the department has entered into agreements with 34 states to share information and coordinate enforcement efforts.

A complex maze
During his hour-long presentation, King said what’s particularly onerous for dealers is that there are multiple government and state agencies that can get involved, and there are multiple tests within these agencies and each state has its own laws. There is also reciprocity between most states and the federal government to share information.

As King explained, “The DOL alone has three different tests. You can be determined to be an IC by the IRS but not for Wage and Hours. You can satisfy one test but not another test.”

King said one important area to be cognizant of is control. As in: Do you supply your subcontractors with tools? Do you supply the benefits? Are they exclusively your contractors? Do you supervise them at work sites? The answer to all those questions should be no.

Demonstrating supervisor control is a red flag. In the Kansas case, a supervisor from the retail store went to the jobsite every day. “That was deadly for them,” King said. “You don’t look independent if someone is supervising you. So ask yourself, do you sit there and tell the installers how to do their job? Do you treat them like professionals? You don’t tell your lawyer how you do his job, so don’t tell your subcontractor how to do his. The more control you show the worse off you are.”

Equipment and tools is another key differentiator. If you are providing your subcontractors with vans or installation tools, you could run into problems. “Providing equipment is something you do for employees and not your subs,” King said.

Experts advise dealers to have a contract with their subs and to insist that the ICs fill out their work hours on an invoice. In fact, some states require that ICs put hours on their invoice. The work hours is mainly to protect dealers in the event they get sued—in which case it would be better to have a record of hours submitted. However, most dealers do not require hours and instead pay by the job, the square foot, etc.

Dealers can challenge any lawsuit but it can be costly. As King explained, “A client of mine once told me, ‘I have been poor twice. Once when I lost a lawsuit and once when I won a lawsuit.’”

King, who has viewed thousands of cases, told dealers their subcontractors should be a separate business with their own tax ID number and responsible for their own insurance. “You don’t want to be a giving them a 1099 with a social security number. They need to be a legal entity—they have to apply for a tax ID.”

Despite a new Republican administration taking over, King doesn’t see any great change, at least not immediately. Again, many of these situations are dealt with on the state level. As such, he says, “The states still want their back taxes, the states still see money and the plaintiff’s lawyers still see money.”

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