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. These laws 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.
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–independent contractors 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: 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 sub being hired and the contractor doing the hiring are responsible for compliance. Contractors must verify the sub's status 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 Journal of Light Construction article also states that a 2007 investigation by Minnesota's Office of the Legislative Auditor estimated that 1 in 7 employers engaged in this practice. In the construction industry, the estimated ratio was closer to 1 in 3. In my experience, I would 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 for these new laws 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 to argue that they're acting out of concern for workers' rights, fair wage issues, workers' compensation insurance, etc., but as I see it, the bottom line is revenue generation for the state.
It's customary for an LBM operation to begin an installed sales initiative, or grow an existing program, by using subs 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.
However, now that these labor laws are looming, many of you are going to be forced to rethink our approach to installed sales altogether. How should you respond?
For some of you in this situation, I'll repeat what I've said many times before: the best-run, most profitable installed sales operations in the country are by and large using employee installers, not independent subcontractors. 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, type of material used, time it takes to complete the job, behavior on the jobsite, 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.
In contrast, 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 both you and the subcontractor agree), and hope for the best in customer service.
For those of you who don't want to go this route, be aware that it is getting tougher to use subcontractors. This means you absolutely have to be on top of your game when going to market with any labor option that does not include employees.
All is not doom and gloom, and this in no way will spell the end of installed sales or using subcontractors. It does mean that you need to tighten up on your contract management. A verbal agreement or a handshake deal wasn't enough already, 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 the sub is free to take other jobs at any time.
For each and every job, you will also need to use a subcontractor labor agreement or contract that includes when the individual job needs to be completed, a detailed scope of work or specification sheet, your company information, the subcontractor's company info, and an agreed-upon price for doing the work.
Completion certificates are also a must. These certificates are executed upon completion of each phase of work, and they 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. They also trigger you 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. 517.267.8757. E-mail: email@example.com