Your ability to use subcontractors as a primary labor source for your installed sales operations might be a thing of the past if legislation already approved by several states becomes the national standard.

Mike Butts A number of states either have passed or are working on legislation that would all but eliminate the independent contractor from our landscape. Minnesota's law is by far the most stringent of those reviewed, with fines of up to $5,000 for both the sub and the hiring contractor (that's you) if found to be in violation.

Several years ago, I published a paper entitled "Key Issues for Installed Sales," which outlined the IRS "20-factor" for determining whether a subcontractor was indeed a sub or a de facto employee. In the interim, I have written columns and articles on this subject. Some are in the Installed Sales section of ProSales' Web site.

According to the Washington Post, nine states have passed laws or regulations to crack down on misclassification practices. Based on messages to ProSales and from legislative affairs coordinators and executives of regional lumber associations, we know that laws similar to Minnesota's are now in place in New Jersey, Illinois, Washington, Colorado, Maryland and Nebraska. I understand that several New England states are also considering similar legislation, and I wouldn't be surprised to see other states follow this path if in the near term.

Let's look at some of the specifics contained in the Minnesota law as summarized recently by the Journal of Light Construction, a sister publication of ProSales:

  • Tough requirements. Under the new law--Statute 181.723, which took effect Jan. 1--anyone who wants to work as an independent contractor in Minnesota's residential or commercial construction industry must first obtain an Independent Contractor Exemption Certificate (ICEC) from the state's Department of Labor and Industry. In addition to paying a $150 fee, applicants must provide documentation proving that they do the following: file appropriate tax; perform specific services; incur expenses; assume liability; stay off the contractor's payroll; assume the risk of realizing a loss; have liabilities; and track revenue and expenses.
  • Sole proprietorships only. The law does not apply to individuals in construction sales, landscaping, or construction cleanup, or to business entities like LLCs, C or S corporations, or partnerships. It applies only to the large percentage of remodelers and builders who are sole proprietorships and one-man shops.
  • Compliance. Both the worker or sub being hired and the contractor doing the hiring are responsible for compliance. Contractors must verify the status of their subs before jobs begin, update their records periodically to ensure that subs haven't let their exempt status lapse, and maintain ICEC records for five years after the initial hiring date. Failure to comply can result in fines of up to $5,000 for the sub and the hiring contractor, as well as liability for all withholding and payroll taxes (including penalties and interest) if the sub is later reclassified as an employee.

The article also states that a 2007 investigation by the state's Office of the Legislative Auditor estimated that 1 in 7 employers engaged in this practice and that in the construction industry, the ratio was closer to 1 in 3. In my experience traveling across North America, I would offer a guess that their numbers are pretty accurate for contractors operating as sole proprietors and independent contractors working on a job-by-job basis. This is, in our industry, the normal day-to-day operation.
It's not difficult to understand the rationale when one looks at the budget shortfalls most states face today. The revenue lost from thousands of independent contractors who "slip through the cracks" working as so-called 1099 employees is quite a sum. Most state legislators will try and soften this with concern for workers rights, fair wage issues, workmen's compensation insurance, etc., but as I see it, the bottom line is revenue generation for the state.

It is customary for an LBM operation to begin an installed sales initiative, or grow an existing program, by using subcontractors as a ready source of labor. This option allows you to offer installation service without having to bear the expense of employee installers whom you may not be able to keep busy 40 hours a week. This approach also partially eliminates the fear that you are somehow competing with your contractor customers by offering installed sales. After all, how can you be seen as competing when you are giving the work right back to them?

However, now that these labor laws are looming, we are going to be forced to rethink our approach to installed sales altogether. Then again, maybe not. Those of you who have attended one of my Installed Sales Best Practice presentations have heard me say many times that the best run, most profitable installed sales operations in the country are by and large using employee installers and not sub-contractors. Why? Because whoever controls the labor controls the quality of the job.

If you are using employees to perform installation service, you can exercise total control over where they work, what type of job the installer will produce, type of material used, time it takes to complete the job, behavior on the jobsite, how long they stay on the site, etc. You as an employer can exercise total control over every aspect of the installation process-from product in your store to the ultimate customer satisfaction.

However, if you are using subcontractors you can only request that a job be started at a certain time, recommend installation methods (unless you have taken the time to write specific scope of work documents to which you both--subcontractor and you--agree), and hope for the best in customer service.

So ... we understand from the legislative headlines that it is getting tougher to use subcontractors. That may be so, but they will not simply go away. This means we absolutely have to be on top of our game when going to market with any labor option that does not include employees.

Even in Minnesota, there remains a provision in this new law that allows for an individual to apply for an Independent Contractor Exemption Certificate. This is just a form that certifies to the state that the contractor will file taxes properly, perform specific services, incur business expenses, and assume liability assume risk.

All is not doom and gloom, and this in no way will spell the end of installed sales or using subs. It does mean that you need to tighten up on your contract management. A verbal agreement or a handshake deal wasn't enough now, and it's even less likely to suffice in the future.

You need a formal annual agreement that sets forth the terms of your understanding between your company and the subcontractor performing labor. This agreement needs to spell out that the sub is a separate business entity, subject to taxes as such, not subject to any benefits associated with being an employee of your company and that he/she are free to take other jobs at any time.

You will also need a subcontractor labor agreement or contract to use on each and every job that includes when the individual job needs to be completed, a detailed scope of work or specification sheet, your company information, subcontractor's company info, and agreed-upon price for doing the work.

Completion certificates are also a must. These are executed upon completion of each phase of work and indicate by signature that the job was done to the total satisfaction of the customer, the contractor doing the work and your representative who initiated the contract. These documents are the trigger to pay your subcontractor as well.

I have a complete outline of these procedures, as well as formal contracts written by a construction attorney that I furnish my clients. I am happy to report that we've been ahead of this curve for a while now.

Mike Butts is president of LBM Solutions, a DeWitt, Mich.-based LBM supply consulting and training firm.