Should Your 1099 Contractors be W-2 Employees?

Mission Control Podcast

In today's special episode, Mike is joined by two amazing guests: Corey Combes, the owner of SouthShore Roofing & Exteriors in Tampa, FL, and James O'Connor, a Lawyer who is a partner at Phillips Lytle LLP in Buffalo, NY. James has been practicing labor and employment law for the last ten years. As Corey's attorney, he has helped him navigate the world of business regulations that many new business owners often get lost in. The focus of todays conversation is on when its time to switch your employees from a 1099 to W-2. James gives some amazing insights into this that would be beneficial for any business owner to know and understand.

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00:00:00:00 - 00:00:32:00 Mission Control: Welcome back to another episode of the Mission Control Podcast, brought to you by none other than your boy Mike Stearns. Ascend Digital and the team at Roofr. Look, if you're a contractor and you're looking for clean and pristine proposals that will give your target audience no choice but to buy, click the link below.

00:00:32:01 - 00:00:47:17 Mission Control: You'll see it. You'll be happy that you did. They also do things like roof measurements online roof quotes. I mean, they're just great and a great team, so go check them out. Today we have a very special episode. So we've got Cory Combs, who you may or may not know. And if you don't, you should. So we're going to help you with that.

00:00:47:20 - 00:01:17:01 Mission Control: And then we also have Mr. James O'Connor. He's an attorney that specializes in labor and employment law. We'll get more to that in in a minute. But, from my understanding, I'm just a marketing guy. There's, there's been some misinformation, some misunderstanding, and some lack of clarity around to 1099. And I also understand that it's been, it's been a point of emphasis for some agencies, and that could have some impact on your business now, tomorrow, next month, next year.

00:01:17:03 - 00:01:43:11 Mission Control: So. Well, we're going to give you a lot of great information. It's very important to know, and James will attest to this, that this is not legal advice nor should it be construed as such. So, without further ado, Corey James, get after it. Appreciate it. Thanks, Mike. yeah. One of the reasons I wanted to do this podcast with you guys is because, you know, I'm pretty active on social media and a lot of the contractor groups and what I keep seeing and I've been James is my attorney.

00:01:43:11 - 00:02:15:04 Mission Control: I've been working with him for, the last, you know, four years or so, developing contracts, trying to stay compliant, trying to stay ahead of some of the changes that these agencies have made. And I notice in these contracts for groups that there's a lot of bad information, either completely wrong misinformation or just flat out nonsense about how you classify your employees and how you stay compliant with independent contractors.

00:02:15:07 - 00:02:34:09 Mission Control: Plus, recently, there's been a lot of things that have changed with the IRS. The Department of Labor. And so I wanted to talk about those changes, how they're going to affect contractors, how they're affecting contractors now, and what we can do to stay compliant. So I'll let you introduce yourself, James. Sure. Thanks for that. Thanks, Mike, for having me on.

00:02:34:12 - 00:02:55:25 Mission Control: And thanks to Corey. yeah. James O'Connor. And I'm an attorney at, the law firm Phillips Lytle. in Buffalo. We have, 8 or 9 offices at this point, or throughout the northeast. And because I'm a lawyer, I have to add, as part of a disclaimer that my opinions are my own and not Phillips legal, the firm where I work.

00:02:55:27 - 00:03:19:15 Mission Control: but I'm a partner. I've been practicing and labor and employment law for about the last ten years. I do a lot of employment litigation as well as some labor negotiations. If you're, you know, a union workforce, part of my practice is also what we call counseling, which is when there's not an active lawsuit, pending at the time.

00:03:19:15 - 00:03:47:10 Mission Control: But, clients such as Corey or someone like him calls up and says, I have this issue. We're trying to hire this person they really want to be at 1099. What can we do? And, you know, my role in that capacity is, more of a counselor. And we talk through those issues because it's not a one size fits all approach, and there's no cookie cutter answer to some of these questions.

00:03:47:10 - 00:04:13:12 Mission Control: Everybody's business is different. Everybody's appetite for risk is different. And there really are no one set of rules that will apply across the board, which I think is part of the problem that you're seeing on your social media groups and, search boards, whatever it is that people think that because something works for them, it must apply in all situations.

00:04:13:15 - 00:04:44:01 Mission Control: And from what I do in the legal world, that's just a very dangerous precedent. And we've really got to be cautious about, about doing that. So, yeah, I'm I'm thrilled to be here, excited to talk about this. I love nerding out about, labor and employment law. And, hopefully nobody has to ever deal with an investigation by one of these agencies or a lawsuit by an employee or, God forbid, a group of employees.

00:04:44:03 - 00:05:04:09 Mission Control: but one of the ways that we can mitigate that risk, because it is a risk, is to deal with it on the front end and be proactive. And so I'm excited to be a part of that. So thank you for having me. You're very welcome. So if I'm a contractor, it just seems to make more sense to give free advice, post to 20,000 other contractors and hear what they have to say.

00:05:04:09 - 00:05:25:15 Mission Control: Is that not a good idea? It's absolutely not a good idea. I mean, or go to TikTok, you know, that's where I get my news. So I yeah, that that's, a little bit of, you know, the blind leading the blind, so to speak. And just like I, you wouldn't want to listen to a bunch of lawyers talk about how to market or how to put a roof up.

00:05:25:17 - 00:05:43:27 Mission Control: you know, I heard it was this way. So I'm going to say that that's the only way to do it. And it works in all scenarios. We get that sometimes. I bet you do love you all. Yeah, that's I mean, that's a good point. was there something, Corey, though, that happened in your business that kind of sparked the interest in having this conversation?

00:05:43:27 - 00:06:27:08 Mission Control: Yeah, yeah. so last year I had a problem with one of my, one of the people in my sales team. It was 1099. And, you know, James and I have iterated our, independent contractor agreement a few different times to try to meet some of the conditions that we had with some salespeople. And what happened with this person last year, really, was the catalyst for me to, to to make everybody to just be based on some of the changes that have come, come down the pipe, you know, some of the things that James had counseled me on from a risk management standpoint, and then knowing what the legislatures were working on to

00:06:27:08 - 00:06:46:11 Mission Control: bring some of the new changes that were going to happen in 24. So, even though this person that worked for me did, they were technically independent because they were doing another sales position at a in a different industry. So I think we would have been fine if we would have gotten into a lawsuit with him, which, by the way, I fired that person.

00:06:46:11 - 00:07:09:21 Mission Control: I owed them a bunch of commissions. There were jobs that, you know, that they did, that they had undersold. And I got an email from this person that basically said, because they kind of knew that I wasn't 100% compliant with the rules, and the laws, allegedly was not 100% compliant, allegedly wasn't 100% compliant. Thank you, sir. You're welcome.

00:07:09:24 - 00:07:33:06 Mission Control: that I didn't want to open up myself to an investigation. After seeking counsel from my attorney, we decided that it might be a good idea to just settle. Right. And so we did. I personally knew that, I didn't want to go down that road with either a lawsuit or an investigation and all of that stuff. So we it cost me quite a bit of money.

00:07:33:09 - 00:07:57:09 Mission Control: We decided to go that route. And then we also decided to start making some changes, going to W2 so that I could further reduce my risk of getting in this situation again. So to maybe give some clarity on this, can you talk a little bit about the agencies? I know there's three big ones. And then what are some of their rules and guidelines?

00:07:57:09 - 00:08:37:00 Mission Control: Just basic rules and guidelines for 1099 versus W2. And then we can sort of get into the changes and how those affect contractors. Yeah, absolutely. So there are three big federal agencies that care about whether you're properly classifying your employees. And those are the IRS, the NLRB, National Labor Relations Board and the US Dol Department of Labor. There also are myriad state agencies, depending on which state you're operating in that also care, whether or not you're classifying them as employees or 1099 independent contractors.

00:08:37:03 - 00:09:08:27 Mission Control: And unfortunately, not all the agencies have the same test. it would make things much simpler to do business if they were, but they are not. And so it's important to understand that when you're seeing some of this information out there, it may technically be true, right? Somebody posts something on one of these groups or, message boards that says, you know, as long as you do these three things, you're good.

00:09:09:00 - 00:09:38:03 Mission Control: That may be true for one of the agencies, but it may also not be true for one or more of the other ones. We want to be compliant with all of them. Right. So, but generally the for instance, the IRS looks at three types of areas when they're determining whether or not you've properly classified your employees behavioral, financial and the type of relationship.

00:09:38:05 - 00:10:05:06 Mission Control: So behavioral is do you as the employer have the right to control or do you control the work that is done, how that work is done, not the result, how it is done if you do? Sorry, they're not an independent contractor. They're an employee. financial a are the business aspects of the worker's job controlled by you?

00:10:05:08 - 00:10:37:13 Mission Control: For most of us, I think the answer is probably yes. How that person gets paid, whether expenses are reimbursed, who provides the tools and supplies, if you, as the employer, are the answer to some of those questions, guess what? You're the employer. They are an employee, not a contractor under the IRS regulations. And then the third is, you know, the type of relationship which, is in my practice, I have seen be less important to the IRS these days.

00:10:37:13 - 00:11:04:14 Mission Control: But, it essentially means, you know, are they allowed to have or provided, you know, benefits that are typical of an employee, like vacation pay, insurance, things like that. now, you may see on a message board as long as you don't pay them insurance, I'm just making this up. As long as you don't pay them, you know, give them offer them insurance or provide them with vacation pay or other employee benefits.

00:11:04:16 - 00:11:39:14 Mission Control: You're good. They it can be 1099. That's not true. the IRS would look at other aspects, mostly the behavioral. So, to take a statement directly from the IRS guidance, they say the general rule is that an independent contractor isn't independent contractor. If the payer you has the right to control or direct only the result of the work and not what will be done or how it will be done.

00:11:39:17 - 00:12:12:05 Mission Control: So you mentioned sales. Oh, wow. Okay. I'm thinking to myself because I know a little bit about your business. Do you distribute sales manuals? Do you have trainings on how to, close a deal or present a sale? Do you have trainings on how to enter sales once they're made into a process, or workflow? something that maybe Mike has designed, if the answer to any of those is yes, according to the IRS test, those folks are employees, not violating the rules.

00:12:12:05 - 00:12:41:01 Mission Control: You are. You are directing and controlling how the work is done. And for that reason, you are their employer and they cannot be. 1099 and that's just the IRS, right? And they admittedly are not, you know, really the ones do we worry about, the ones that I worry about, the NLRB and the US Dol because those folks have they can issue some serious penalties.

00:12:41:03 - 00:13:15:14 Mission Control: You know, the IRS, you can you can work with them, in my experience. But so let me, maybe let me give you maybe let me give you guys, sort of a simple way to look at this. if we're providing so if we have sales training that we're providing to our 1090 nines. So, for example, if you hire a consultant, then they have, a standard operating procedure, a sales process that you're training them on how they need to sell in your company, then that violates the IRS rules, correct?

00:13:15:14 - 00:13:35:10 Mission Control: It certainly could. Yes, yes. Now, if we're using a CRM and we're telling them, hey, listen, this is how the information needs to be put in, here's how your contracts have to be done. Here's the contracts that you have to use. Here's the estimating forms you have to use. All of those things could be in violation of what you just described, correct?

00:13:35:10 - 00:14:16:24 Mission Control: Yes. And in in that instance, it is more likely that they would be considered employees rather than 1098. I, I, I can't think of any other way of explaining to, an IRS investigator or a court, how given what you just described, you're not directing how the job done. Right? Right. So with a straight face, how am I really going to work with an investigator and say, hey, look, you know, I know you're doing your job, but these guys really are 1099 I can't say that with a straight face if all those things are true.

00:14:17:00 - 00:14:37:08 Mission Control: So so if you couple that with, you're providing shirts and you're providing trucks and you're providing cell phones and you're providing all of that. So now we're looking at everything in their totality okay. So we're giving them a process to follow. We're giving them we're directing them how they sell their jobs and where to put the information, what forms to use.

00:14:37:08 - 00:14:57:17 Mission Control: All of that stuff. And they're wearing our shirts and hats and they're doing, you know, giving them trucks and all that stuff. Now there's really no argument to be had that there. 1099 I would absolutely agree with that. Yeah. It seems next to impossible to create an environment where a salesperson could be to 99. Then it's difficult for sure.

00:14:57:17 - 00:15:38:07 Mission Control: And I think that that is by design. I think that the, not I think I know these agencies, particularly the NLRB and the US, Dol they have issued memoranda and, and guidance that explicitly states that they are, moving towards a model where, folks are going to be classified as workers rather than independent contractors. And the the policy reason behind it is they want to make sure the workers are all entitled to any and every right as an employee, that is available to other employees under the law.

00:15:38:14 - 00:16:12:00 Mission Control: And those memoranda are coming from like, for instance, the chair of the NLRB or the general counsel for the NLRB, the fact sheets on the US dollar website. They all indicate to me that they are moving towards wanting folks to be employee versus independent contractor. That's crazy, because like, from my understanding, from what I've observed, it's not always just the employer, the ones the talent and the benefit of that.

00:16:12:00 - 00:16:28:27 Mission Control: A lot of the times it's the employees. Well, well, the contractor, the independent contractor that's like, I don't want to commit to this. I don't want this level of control. But I guess what they perceive as an acceptable level of control versus what one of these agencies perceive as an acceptable level control, it seems to be, you know, quite an imbalance there.

00:16:28:28 - 00:16:56:05 Mission Control: Yeah. That's right. And unfortunately, they all three agencies are explicit that just because you say you agree that you want to be an independent contractor doesn't mean that you are an independent contractor. Even if Corey and I were to say, yeah, I want to be independent contractor, I don't want to be a W-2. We write it, put it down in writing, and we sign, and I even say I'll waive any rights I have to claim I'm an employee.

00:16:56:05 - 00:17:26:09 Mission Control: It doesn't matter the agencies, if they want it to, if they're motivated, they can come in and say, despite all of that, we view you as a W-2 and we're going to penalize you accordingly. I have a quick question. So for my limited understanding, because again, I'm just a marketing guy, with like the IRS, right. And like write offs and deductions, there's certain things that you could do that would maybe draw more attention to yourself.

00:17:26:12 - 00:17:55:01 Mission Control: Does that the same if that is true, does that same theory apply to like these different agencies? Are there are there certain egregious missteps that contractors make to where it's like, okay, we're putting a target on your back? Yes, absolutely. And I think that's part of the reason why you did what you did, Corey, is because, there are certainly things that you don't want to do or have done to you that put you on their radar.

00:17:55:01 - 00:18:26:06 Mission Control: So with the IRS, you're right. It's crazy deductions, crazy write offs, some bean counters going to look at that and say, hey, this looks funny. Escalate this. We're going to review it the second time. And once you're on their list, you know, I'm sorry. It seems to me like you're on their list. You want to be able to say, yeah, that's been at least been my experience anecdotally from clients I've worked with is once they think they have somebody who's a violator, they're going to stay focused and check in every few years.

00:18:26:09 - 00:18:54:23 Mission Control: So with respect to the independent contractor, it's it's really about minimizing the risk that your workers are going to file a complaint because they do have the right to file a complaint, even when you settle. You may remember this from our settlement agreement. Yeah. Even when you're paid money to walk away and release your claims, you cannot by law waive your right to file a complaint with one of these government agencies.

00:18:54:26 - 00:19:18:29 Mission Control: You're only you're only waiving your right to recover money. Exactly. So in reality, I've been doing this for ten, 11 years. In reality, when you pay somebody to go away and you sign an agreement, even though they are made aware, they can still file and still make your life hell. Corey. Yeah, I've never seen it actually happen. They always just go away.

00:19:19:01 - 00:19:39:27 Mission Control: Doesn't mean it hasn't happened. I'm sure it still does happen where somebody takes their money and then says, you know what? I really want to give it to my former employer. I'm going to file a complaint anyway, even though I can't recover anything from it. And I'm sure that does happen. But it's got to be few and far between because I've never seen it.

00:19:39:29 - 00:20:01:19 Mission Control: And you know, I do these things quite regularly, so minimize the risk that your workers are going to file a complaint and you know, the other pieces, if you're making, you know, the type of money that we all want to be making, right? And you have no W-2 employees, that's going to be a red flag. Sure. It's going to be a red flag.

00:20:01:19 - 00:20:35:06 Mission Control: So let me ask you this. I mean, you know, and I'll, I'll, I'll kind of put this in contractor's terms here in just a second. But, this put me to ask a question. If you are non-compliant, meaning you have some 1099 salespeople that you're skirting the rules on, and you do finally get compliant. Is there a way or is there a statute of limitations where they can retroactively go back to that period of time where you were non-compliant and, you know, I'm going to say yes, but let's see what the attorney has.

00:20:35:09 - 00:20:58:09 Mission Control: Yeah, the answer is absolutely yes. and it varies how far back they can look depending on which agency you're talking about and which, lobbying violated. IRS can look back six years or seven years on most things, which is why we always recommend you keep your records for that length of time. some of the other agencies, like the Dol, can look back at least three years.

00:20:58:12 - 00:21:32:28 Mission Control: state versions of or iterations of the Dol can also look back longer than the US. Dol New York State can look back six years on certain things. So yes, absolutely. I will say that if if you're under an investigation by one of these agencies and you have made a good faith effort to comply, whether that's before the complaint or even after, it does go a long way.

00:21:33:00 - 00:21:58:19 Mission Control: if you've got the right investigator and frankly, the right, the right lawyer, who can sit down and talk to this person and say, hey, look, this guy is just trying to make a living. And, you know, here are all the steps he's taking to ensure compliance. But like the IRS, they will trust but verify. Sure, they will check in and make sure those controls that you've put in place are permanent.

00:21:58:22 - 00:22:25:06 Mission Control: sure. Absolutely goes a long way. It's not determinative. You can't just say sorry, my bad rule, but it may limit the figure. Take from first degree murder on a manslaughter. Similar to that. Sure. Yeah. It definitely reduces the vigor with which they are, seeking their pound of flesh. Because that's what this is all about, right? Let's call it what it is.

00:22:25:10 - 00:22:43:15 Mission Control: Yeah, I want to get in. I want to get into this here. Yeah. Seeking the pound of flesh. But go ahead and finish in that. All they want to squeeze out as much as they can. I'm sure that they you know, they probably are our good people and and you know, they're they're probably nice people. don't get it twisted.

00:22:43:15 - 00:23:11:07 Mission Control: Their job is to secure money for their agency. And yes, it's about enforcing the laws and yes, it's about workers rights. But at the end of the day, these folks need to justify their existence. Yes. To their bosses. Yes. All right. The higher ups and the federal government and Congress, who, you know, authorizes these agencies to exist.

00:23:11:10 - 00:23:39:23 Mission Control: And what better way to justify your existence than to say we've brought in $3 billion in penalties? yeah. And I'm just making that number up. I don't actually know. I'm too scared to look into those numbers because I'm sure it's a high number. Yeah. It helped out this many contractor, independent contractors that were actually employees. Right. And, nine times out of ten, they're not that money is not going to those folks.

00:23:39:23 - 00:24:01:01 Mission Control: It's going to the agency when it's a penalty, for a violation. You know, it's it's the same across the board. It's the same with OSHA. It's the same with all those agencies. You know, a very rarely actually trickles down to the employee or worker. yeah. Because it's really, you know, at the end of the day, not necessarily about compliance.

00:24:01:01 - 00:24:39:22 Mission Control: That's the, that's the lever to, to get the money. Yes. And so let's, let's talk a little bit about, you know, why people violate these, these rules. Right. And from a contractor standpoint there's, there's and I don't want to say it's just a contractor violating these because it's not right. on the sales, you know, when I transitioned everybody over to W-2, the big objection from the sales team was, of course, that now they're going to pay more taxes because they are W-2, they don't afford the same write offs and things like that as they could when they're an LLC or an S Corp or whatever.

00:24:39:25 - 00:24:58:11 Mission Control: So it saves it saves taxes for the sales person. So that of course they want to do it. I think that's why they put that mechanism in there so that it doesn't matter if you make that agreement or not, because they would they understand that people are going to make that agreement all day long because it's financially beneficial to them.

00:24:58:14 - 00:25:19:25 Mission Control: and then on the contractor side, we save workers comp, we save state and federal income. And, there are some other fees and taxes that we pay on top of when we have W-2 employees, like, we pay into, unemployment. We pay, you know, so so there are a lot of things that benefit us if we don't have to pay those.

00:25:19:28 - 00:25:42:06 Mission Control: There's also laws on the books and some well, in a lot of states where you have to have benefits paid time off, paternity, maternity leave, things like that that you don't have to offer. Once those people, or 1099 are independent. So talk a little bit about that and, and why people do that and sort of what the agencies look at.

00:25:42:09 - 00:26:21:10 Mission Control: from their standpoint to, to, to recover that money. Sure. So, the, it's absolutely a risk management, analysis. And every employer is different and every business owner is different and has different goals, different appetites for risk. So there's certainly are situations where looking at all of those negatives that you just described with being a strictly W-2 workforce, which admittedly, there's a lot of negatives to making them W-2 there is.

00:26:21:12 - 00:26:48:21 Mission Control: It's costly, I get it. and for some employers, maybe it is worth the risk of, being found in violation given the amount of money that you would save by having these folks be 1099, set that money aside and save it for a rainy day. If you do get whacked with a violation, you're still up. You've still made money.

00:26:48:23 - 00:27:16:28 Mission Control: Not every employer is like that. I think the calculus for you was, you know, it's not close to being worth that. it's going to depend on the amount of revenue that is generated. Not not necessarily the amount of profit going into the owner's pockets, which is a big difference. Pay attention to that, guys, because they're going off of revenue generated and not the profit in your pocket.

00:27:17:01 - 00:27:45:07 Mission Control: Yep. Think about that. Yep. Other factors include, the length of time of the violation. You know, some of these penalties are daily violations, particularly with the NLRB. and, you know, they can be daily violations of 1000 $2,000. Okay. So you're telling me that they'll look at it from the length of time that you engage in relationship with that person all the way through to when the investigation started?

00:27:45:07 - 00:28:14:21 Mission Control: They'll find you per day. They can. Yeah. How? Yeah. And part of the the reason why, those investigations are so costly is forget about the lawyer fees, which I again concede are going to be substantial. If this is a if you're a major company and you're doing a ton of work and you've got a ton of employees, or workers, I should say, okay, would you, would you clarify that just a little bit?

00:28:14:21 - 00:28:53:06 Mission Control: Because we've got people that are going to be from 1 to 2 employees all the way up to some of the larger companies. They're going to have 20, 30, 40, 50 employees. So, how does this affect the smaller guys? So the smaller guys, it's really about, mitigating the risk that somebody files a complaint, period. Because if they do and you are so small to use a, you know, for lack of a better term, if you're really operating on thin margins and you're, you know, more or less just scraping by, something like this could ruin you.

00:28:53:12 - 00:29:17:28 Mission Control: It just cut. If you can't afford, you know, a ten, $15,000 fine plus a $5,000 legal fee, you know, you may end up closing up shop over it. Now, if you are slightly larger than that, but not much larger, it may not affect you as much. You may look at this as, geez, I really can't afford, I'm just going to throw out numbers.

00:29:18:00 - 00:29:47:03 Mission Control: I can't afford the 100 grand a year extra. It's going to be for me to make my ten employees or five employees, workers. W-2s. I'm going to roll the dice and just hope and pray and treat my workers well and hope that they don't file a complaint. but if they do, I'm gambling that the amount I'm going to pay the government is going to be less than what I would pay to convert them to w-2s.

00:29:47:05 - 00:30:10:23 Mission Control: So those folks, it may not matter much the larger you get. Yeah, the more likely it is in my experience, working with folks such as yourself, you're going to want to convert them to W-2. Yeah. because the number of employees one person files a complaint. Well, guess what? They're looking into everybody who got it. Yeah, you got it.

00:30:10:29 - 00:30:36:01 Mission Control: And, you know, it's not technically a class action. It's not called that. But it's the same concept of if they get, you know, a piece of bread, meat in their teeth these days, they're going to be digging through and seeing how deep does this rabbit hole go. And if they think that there's a pot of gold at the end of that rainbow, guess what?

00:30:36:03 - 00:31:13:14 Mission Control: They're going to be hunting. And if you've got 50, 60, 70 employees, that number can get real high real quick. This is not even considering the fact that under a proposed rule, you could be deemed a joint employer of your subcontractors, not necessarily for this purpose, but, in general. And now instead of your 70 independence, you could be potentially responsible for everybody you do business with.

00:31:13:16 - 00:31:33:04 Mission Control: Whoever's assignments you know, roofing subcontractor, anybody that you use for labor for an example. And we'll put a pause on that because we're going to dig into that hearing a little bit, you know, about some of these proposed legislations. I have a question. So some people may or may not make an informed decision and say it's the juice worth the squeeze.

00:31:33:04 - 00:31:56:10 Mission Control: The upsides there. I'm going to roll the dice and see if I don't get caught, because I can't afford to pay 100,000 to have these ten w-2s right there going to be independent contractors. And that makes sense for me. I'm not an attorney, but from my understanding, like, let's say the difference between murder manslaughter is intent. So is that a contributing factor when one of these agencies decide to pursue a case, if they feel as if there was malice and you intentionally did it, does that make a difference?

00:31:56:11 - 00:32:21:14 Mission Control: Sure, absolutely. It's it's not, a determinative. You can't just say I was trying to do my best. I really didn't mean to do this. That's not going to win the day, but it absolutely will, go a long way. And minimizing your penalty second time and third time offenders absolutely get hit way harder. and that's obviously shows an intent, all right.

00:32:21:15 - 00:32:49:24 Mission Control: And a willful, malicious intent to skirt the rules. unfortunately, it's not necessarily a significant savings in many instances where you can truly establish and connect with the investigator who's, you know, a person like, like all of us, and you can connect with them and say, hey, look, you know, this guy's responsible for 30 families, who work for him.

00:32:50:00 - 00:33:15:00 Mission Control: And he's, you know, really doing his best. Thought he was doing the right thing. Got some bad advice, right? I've a Facebook group. Yeah, right. Yeah. And it may help a little bit. They may knock a little off. but it's certainly not going to be a wash. I mean, I could see, like, I own a business. I started a business and what I thought I was going to have to know versus what I had to know was markedly different.

00:33:15:00 - 00:33:34:15 Mission Control: And, I mean, you think of all the things that you're trying to figure out on the go with a gun to your head to meet deadlines and all these different things. And I could see it being very easy to stumble into this situation without any malice, like without having any idea that you're violating laws. Right? So, I'm for the people, Mike Stearns, man of the people.

00:33:34:15 - 00:34:02:20 Mission Control: So shout out to all my contractors out there that are in this situation. Just didn't know it. I feel like that's a vast, vast majority of you guys. So that's why we're having this conversation. Yeah. I mean, unfortunately, ignorance of the law is a defense, which I found that out a couple different times. And the, you know, the, the, the precarious spot that contractors are put in is, you know, we're trying to I mean, let's be honest, like, you cannot follow the letter of the law and stay in business.

00:34:02:20 - 00:34:31:12 Mission Control: It just doesn't I mean, it's so expensive. You go broke, you go broke. I mean, if you paid every single tax and every I mean, you go broke. There's no possible way you could do it. But let's say that you have a violation. You you get, you know, you get investigated. You, you know, you go through all of this stuff, you're telling me that they would have no problem fining you out of existence?

00:34:31:12 - 00:35:05:09 Mission Control: Basically. Sure. Absolutely, absolutely. they they will tag these agencies down in the description, write your local congressperson and tell them you object to their existence to these agencies and yeah, no, it it I've seen it it absolutely can happen. if you get if you're just especially if you're just starting out, you know, some of the worst parts of my job are when it's usually a young person and he or she is, is, you know, wide eyed and going to change the world.

00:35:05:12 - 00:35:29:09 Mission Control: Oh, man. And it's they start their business and they truly are doing their best. And for whatever reason, a disgruntled worker, I don't want to call this, you know, them employees, but a disgruntled worker files a complaint. And, you know, these agencies come in and they want to look at all the books, and then you're getting audited by the IRS.

00:35:29:12 - 00:35:59:12 Mission Control: And these new business owners, you know, a couple of them I've seen 2 or 3 years in, they still haven't turned a profit. And for themselves and, you know, they're not taking a salary, even a $10,000 fine closed up shop. You see, that happened twice. Yeah. It's sad. Yeah. That's sad. Have you seen an instance where, you know, let's say like the Department of Labor gets called in and the books aren't necessarily up to snuff.

00:35:59:12 - 00:36:36:08 Mission Control: Right. And so they're trying to figure out I'll pull out all the numbers. Have you ever seen it where they call in the IRS? Because the books aren't good and they're trying to determine what's going on. So like, hey, we need to check the taxes and all of that stuff. Yeah. So does that happen? I it I've never seen it and I don't know that it happens above board, but I do I do know that when you get investigated by one of these agencies, your likelihood of being investigated by another one in the next five years is high.

00:36:36:10 - 00:37:07:13 Mission Control: and I, they, they have said they have issued memoranda, these agencies encouraging their field offices around the country to work closely with their sister agencies. And so it's definitely is becoming more of a thing. I've never seen it where they flat out admit to me and say, hey, your client, the books are terrible. We're calling the IRS.

00:37:07:15 - 00:37:30:09 Mission Control: I've never had that conversation. What I have had happen is a doll comes in, they're getting a wage. And our complaint, somebody saying I wasn't paid by all of my lunches or my meal breaks or, I should have been paid overtime and a wage an hour audit can be, very long. And it can be they want to look at everything.

00:37:30:09 - 00:37:58:29 Mission Control: Right. And what I have seen is we close out the wage and our investigation, we come to an agreement. Some money is paid. April that next year, increased audit from the IRS, a secondary audit and surprise, surprise hit with some violations. not deemed willful in that instance, thankfully. But I mean, the IRS, they still want their money.

00:37:59:02 - 00:38:24:04 Mission Control: they just don't want a penalty on top if you can prove that it was innocent. but if it happens again, I mean, you better believe they're they're coming for the whole kit and caboodle. So are you telling me. Yeah. So are you telling me that there's there are compliance things on? And I'll ask you this question a little bit differently in a second, but there are compliance issues with the relationship with 1099.

00:38:24:04 - 00:38:51:15 Mission Control: So an independent and, an employer. But there are also compliance issues with W-2. So there are some laws and regulations that if you do switch everybody over to W-2, there are some state laws. And obviously we can't get into those because those are going to be, you know, based on the state that they're in. But you're saying that there are compliance, things that we need to be aware of, even if they're W-2.

00:38:51:16 - 00:39:22:03 Mission Control: Absolutely. And when you make somebody a W-2 and this is again, probably part of the problem you're seeing on your Facebook groups and message boards is that, making somebody's W-2 does not automatically put them into one category of W-2. You can be a W-2 exempt employee, meaning I work 45, 50, 60 hours a week, but I'm not getting overtime because I'm exempt from it.

00:39:22:06 - 00:40:03:02 Mission Control: or you can be nonexempt your typical hourly worker. So we did outside sales, right? So talk a little bit about that. We did. And so there are other exemptions under the, Fair Labor Standards Act. FLSA, that allow you to have two employees. So you're still taking care of on that front. but they're paid commissions, for instance, and they're not entitled to the minimum wage and overtime requirements that a typical W-2 employee is, with respect to the outside sales, you know, there are certain factors that need to be met.

00:40:03:04 - 00:40:32:06 Mission Control: the main one is outside, right? Don't give them an office. Don't give them a place to work. If you do now, they're not an outside salesperson. And guess what? They're entitled to a salary or their hourly rate. based on the minimum wage, depending on, you know, your agreement with them and what state you're operating in. And I don't know about you guys, but I, I clock, you know, sometimes 80, 90 hour weeks, from time to time.

00:40:32:09 - 00:40:54:17 Mission Control: And so if I were to discover that unbeknownst to me or my employer, that, I really am not an exempt employee, that overtime time and a half of an additional 40, especially with what you build, I.

00:40:54:20 - 00:41:21:02 Mission Control: I I'll take it I think I could I can take it, but yeah it it it is incredible though that you know, the fact that you your pants somebody a commission based on sales and because something is you would think trivial as we're getting them in office. Yeah. We're telling them we we want to see them from time to time.

00:41:21:02 - 00:41:53:11 Mission Control: They get to come to meetings, things like that. Now all of a sudden they're W-2, or not, they're not exempt. And you can't just pay them straight, commission. That's that's the reality. so that's why we were very careful with your outside sales team. because that exemption is important. I think, you know, if they're doing their job, they're going to want to keep their commission agreement because they're going to be making a lot more than minimum wage.

00:41:53:11 - 00:42:15:22 Mission Control: Yeah, but if they're not and if they're slackers or having, you know, a bad month, maybe they do make more money if they can just say, hey, I, I was working 70 hours. Yeah. And you know, I'm not a true outside salesperson. Corey Combs should have been paying me time and a half for every hour I worked over 40.

00:42:15:25 - 00:42:52:24 Mission Control: And, you know, that's a real, real concern. but I think the point is, just making somebody W-2 doesn't mean necessarily you have to track their hours and and start making them, you know, eligible for time and a half and minimum wage. There are exceptions as well. So so that's where, you know, when when you and I originally had the conversation, you know, I'm like, look, man, I don't want to have to deal with all of this W-2 stuff because, you know, my my payroll company was like, okay, you know, you got to track all their hours and you got to track this, and you got to track all this.

00:42:52:24 - 00:43:21:09 Mission Control: And then, you know, I'm like, look, I'm not doing that. So we went in and if you're listening to this, pay attention, okay? Because we're talking about the sales team, mostly because that seems to be the biggest issue. We're going to talk about labor here in a second. But for a sales team perspective, most of us we don't do traditionally inside sales, which means they're not in an office using the phone, calling people, doing sales in that we're going to people's houses or buildings or whatever.

00:43:21:16 - 00:43:44:21 Mission Control: That is their primary function. They're not working out of the office. So what we did, we classified them as W2 outside sales. I put together a bullpen in the office where we had a bunch of cubicles. None of them belong to anybody. If they need to come in or they need to park there to do some work, they can.

00:43:44:28 - 00:44:07:19 Mission Control: They're not required to because they work outside. And so that was one of the big things that we wanted to make sure. There's another misconception that you cannot have a W-2 employee that gets commission only, which is not true. Right? Right. There are certain classifications of W2 that you can pay commission only in this outside sales was one of those classifications.

00:44:07:19 - 00:44:33:10 Mission Control: That's correct. Yep, yep. And one of the you know, examples. These agencies love to give examples, and so that they can make their regulations clear. One of them is an outside sales person typically conducts their sales in customers homes. Right. I, I know for a fact that that's a lot of what your team does is they're they're going out and selling jobs and meeting with customers at their homes.

00:44:33:12 - 00:44:55:15 Mission Control: that is for businesses, by the way, that doesn't work. Yes. Works as well. Yep. Yep. Absolutely. And you know, I think that no one factor is determinative in any of these tests, which is a fancy way of saying that, these agencies will do what they want and they will, work with you if they want to.

00:44:55:19 - 00:45:33:21 Mission Control: But if they want to screw you, they can, because they can rely on this. No one factor is determinative. some of them even say there is no magic test. That's the official legal term that they use, no magic test, which in reality means if they want to get you, they're going to get you. And if for and that applies whether they're 1099 W2 or whether they're W2, but should be paid something different than straight commission, which in some states that's really hard to do.

00:45:33:24 - 00:45:58:22 Mission Control: you know, for instance, for instance, New York State, that'd be pretty difficult to do, in giving somebody a W2 status here in New York carries with it, a lot of other benefits to the employees, that, you know, where you're operating may not necessarily, come into play. It does not. So I, I love Florida.

00:45:58:24 - 00:46:17:20 Mission Control: Yeah. So you could just pay them for commission. You don't have to worry about vacation pay and paid family leave and all all that sort of stuff. in New York there is a commission to sales person exemption under the New York labor law. but, you know, it's it's not the same as as it is down in Florida for you.

00:46:17:22 - 00:46:38:08 Mission Control: So that's why everybody's different, and that's why you cannot take a cookie cutter response or fact, of the law and apply it to your business without talking to somebody who knows what they're doing. You just can't. So let's say I'm a small contractor listening to this, and I'm in Pawtucket, Rhode Island, and this was so eye opening and I really want to do the right thing.

00:46:38:08 - 00:46:56:23 Mission Control: But the problem is, is like, we're not making a ton of money. We still got positions that we need to hire. And I just can't seem to make this a priority because there's other things that are essential and vital to my business operating and growing, that have to be pursued. Like when is the right time? And like, what does a roadmap look like to compliance?

00:46:56:23 - 00:47:34:28 Mission Control: And better understand this because you guys are expensive. Yeah, yeah. That's right. And the answer is today. Right. Sooner rather than later. There is no time, better than the present. Why risk, going another day and having another thousand or $2,000 per day? Fine. Adding up? I, I look at it as, yeah, you can pay me or somebody like me, you know, $1000 or $1500 to do an audit, a sweep and check out how things are looking and what your risk is.

00:47:35:01 - 00:47:58:20 Mission Control: And that's that sucks. And nobody wants to do that. Or you can pay somebody like me 30 grand to defend you. Yeah. And that's, you know, the initial retainer far less well see what I mean? So, you know, is there a chance that you don't pay me or somebody like me at all and you never get audited or investigated?

00:47:58:25 - 00:48:28:27 Mission Control: Absolutely, absolutely. And for some businesses, maybe that $1,500 savings and I'm just throwing out numbers. Maybe that's worth it. I know for somebody like, like yourself, it's not even close. I know you're going to rather dish out a couple of grand to get it squared away rather than get whacked on the back end, because given your size and the amount of revenue you're doing, it's not only what you're paying me, but it's what you're potentially paying these regulators.

00:48:29:03 - 00:48:47:24 Mission Control: What's your peace of mind worth to you? Yeah, that's a that's a great point. I mean, the more you grow, the larger you are. The bigger target you have on your back. And somebody told me that a while ago. And it's so true because, you know, even though you do the right thing, you try to take care of your employees or your independent contractors and all of that stuff.

00:48:47:27 - 00:49:12:22 Mission Control: Things happen. Relationships sour. You know, when money's involved, people get weird. And so, you know, I give you a scenario, in our agreement, we have a we have a commission agreement where you, our sales team has to meet certain margins in order for them to be able to, recover their full commission. So the less that that job hits margin, the less commission they make.

00:49:12:25 - 00:49:38:28 Mission Control: Well, every single time when you have to dock the commission, there's always a conversation about it like, oh, what happened? You know who screwed me? This, that and the other. And I'm very transparent with our panel so I can show them, like, hey, this is where you screwed up, right? and this is maybe why it's a good idea to get compliant, because I've always provided my team with the estimating tools, right?

00:49:38:28 - 00:49:59:05 Mission Control: The pricing, the tools, the platforms, everything to do their job. And so their argument is like, hey, I'm using the tools that you provided me. Your tools are defective, right? That's always arguments, never their fault. Right? It's always something that I did. And you have enough of those conversations and you have enough of that conflict. The relationship starts to sour.

00:49:59:05 - 00:50:24:20 Mission Control: And that's and in the case of the, the person that I paid out a, an obscene amount of money, which I lay in bed at night sometimes still thinking about it, pissed off okay, because I was 100% on the right. there's a really good argument if you're going to operate like that, to make sure you're compliant, because you need to be able to stand firm in your position without letting your sales team run over you.

00:50:24:22 - 00:50:53:12 Mission Control: If you have an agreement like that in place. Right. And just to clarify, I mean, you you mentioned that you provide all the tools and you provide the training. That is one of the reasons why we opted for, okay, let's make these folks W-2 because guess what? They are these agencies are going to designate them as such based on probably solely that fact right there, that you provide that sort that stuff for them and you direct them on how they get things done.

00:50:53:14 - 00:51:29:05 Mission Control: Now, it doesn't mean that there a straight W-2 that has to get, you know, all the benefits that come with it. They can still be straight commission. they're just W-2 rather than 1099. and yeah, I mean, I think that's that's absolutely right. And some, some companies may be comfortable with, that risk and some companies may be so stubborn that in the case that you're referencing with the gentleman who worked for you, they may say, no, we're not paying him a dime.

00:51:29:05 - 00:51:55:10 Mission Control: Let him call, let him file a complaint. And you know, he would have. Yeah. And and what would have happened is your other employees would or workers would have been found to be W-2. The amount that you paid this gentleman, you would have paid ten times that. Sure. To the doll. Please don't file a complaint. Still. Okay. So where do they delineate.

00:51:55:10 - 00:52:15:27 Mission Control: So. Okay, I I'm sorry. I've got a sales. I've got a sales team. They're operating within confines of my roofing company. We have standard operating procedures. We have these tools. Is it the fact that he requires them to use this versus. Here's a link. You can use this measurement software if you so choose. Here's, here's a software that we use.

00:52:15:27 - 00:55:35:11 Mission Control: This is why we use it. This is how it makes your life easier. But you don't have to use it, right? Right. Is it giving them the option versus mandating them to use it that becomes a problem? Or is it just having it in place at all and giving them access?

00:55:35:13 - 00:55:48:21 Mission Control: Does the same thing. The same thing go for sales training? Like if there's Adam Barnes when he does a lot of YouTube training on sales. Right? So if I send my team a link because I find this very helpful, that's how I learned it. So I send them a link. There's not, we're not coming into the classroom.

00:55:48:21 - 00:56:07:08 Mission Control: We're not going into the conference room and meeting about it. But like this might help you with could that be perceived as the same thing? It could be, but it's far less likely. Yep. Yep. Absolutely. there is a difference. And, you know, like I said, it's it's going to be fact dependent and how the interviews go. None of this is determinative, by the way.

00:56:07:08 - 00:56:33:26 Mission Control: Yeah. Okay. Really. And so I'm telling it to I've had 2 or 3 in my career that were absolutely identical and totally different results, because they were two different investigators and have to be open and upfront about that with my clients who are facing these scenarios, which sucks for us because it's like, hey, listen, there are really no hard and fast guidelines here.

00:56:33:26 - 00:56:54:20 Mission Control: Like, you got to pay me anyway, right? Right. Yeah. That sucks. It does suck. That sucks. And, you know, it's I mean, I don't know any that's like me selling our SEO. Like they're like, well, when can I expect this? When the guys, like, that's all I can guarantee is will do the same for you. As we done for every other client, your results are going to be drastically different.

00:56:54:23 - 00:57:12:17 Mission Control: And it might take six months. It might take 18 months. We'll get there. I don't know what the roadmap looks like. Yeah. That's why the attorney advertising you always see prior results do not guarantee future outcomes. Yeah. Because it's it's the truth. And it's, I can give you percentages and tell you what I think is likely to happen.

00:57:12:17 - 00:57:30:21 Mission Control: And the the further in we get with an investigation, we can read the tea leaves and say, hey, look, this is not for us. Yeah, I'd like to take it off a subtle. Yeah. Oh, or it could go the other way and we could say, yeah, this is going really well. Let's hold out as long as we can.

00:57:30:21 - 00:57:57:16 Mission Control: Yeah. And and you know, do we can. But if you caught what I said, you know, the fact that there are going to be employee interviews, I think that's critical to, to at least highlight is that at the end of the day, if you have people loyal to you and you are treating people decent, that will go a long way in protecting you because these regulators and investigators will be talking to your employees.

00:57:57:16 - 00:58:16:29 Mission Control: If there's a complaint and it's going to go a long way if you can treat them right. and, you know, so that's my pitch to kind of just be and it's a selfish motive, right? It's yeah. Not truly altruistic. I'm not paying them more and treating them well because I'm a nice guy. I'm doing it because it's ultimately going to insulate me on the back end.

00:58:16:29 - 00:58:43:04 Mission Control: If things do go south, do the right thing. Six core value at the end. So so I'm going to put this into, I guess maybe a little bit of a, a neat package for so contractors can understand, you can have 1099 salespeople. You can if it happens it works. But it's really going to be sort of a free for all.

00:58:43:04 - 00:59:19:20 Mission Control: Meaning if you're in a state where there's no contractor licensing, then this truly independent person at some point is probably going to look at you and say, why am I working for this person when I can duplicate exactly what they're doing, leave and do this on my own. I just need to find a crew. Because why should I stay working for this guy when I'm still taking, you know, all the upfront work of generating my own leads, using my own tools and technology.

00:59:19:23 - 00:59:37:15 Mission Control: finding out how to do everything on the front end, right? The contract, the homeowner do all that stuff. Well, what do I need this company for, right? Or not leave and just do it on the side. Take your lead in selling to the other company. Oh, like what happened to me? What are the other reasons why I decided to go to W2?

00:59:37:16 - 01:00:05:29 Mission Control: Even though your, you know, you're bound by a contractor's license in the state of Florida. What? It didn't stop was this other individual, who. By the way, I spent a lot of time developing. They went and, started undercutting me with their buddy who opened up a contracting business. And you can't stop that if they're truly independent.

01:00:06:01 - 01:00:36:20 Mission Control: Now, if they're W2, there can be repercussions for that. and so for me, the control, because really it comes down to and I don't want to use the word control in like, like a negative, you know, connotation, but control, meaning I can get everybody doing the same thing, rowing in the same direction, setting up standards and making sure that we're all following the same paths so that we run a more streamlined company.

01:00:36:22 - 01:00:54:24 Mission Control: It's much, much harder to do that on a full, independent basis, because now you have different people with different personalities, different ideas of how things should get done, and you kind of have to let them do it, or you're violating the rules to have that right. You do. Okay. That's perfect. I really like that. Okay, that that's a good explanation.

01:00:54:27 - 01:01:22:01 Mission Control: And, you know, I think when people are selling, selling your leads or undercutting you, regardless of whether they're an independent contractor or a W-2 employee, you know, that sucks. And it's going to happen. and that's just sort of the cost of doing business. I mean, the lawyer in me wants to say, well, even an independent contractor, we could have a non-disclosure, confidentiality agreement.

01:01:22:06 - 01:01:52:25 Mission Control: Maybe they violating a trade secret law, by misappropriating your trade secrets. But the truth is that getting a court to rule in your favor on that, it's going to take 2 or 3 years and a lot of money, a lot of money and legal fees. And at the end of the day, if you are successful in proving that your sales records were true trade secrets, which is not guaranteed.

01:01:52:27 - 01:02:17:01 Mission Control: And even if the court awards you damages for that misappropriation, right, the amount of sales that were, is taken from underneath you, so to speak. You have to recover that judgment and good luck because pretty 1099, right. Yeah, yeah, yeah. Exactly. And you you might be sitting here watching this episode thinking my sales team would never do that to me.

01:02:17:03 - 01:02:33:27 Mission Control: I got on my left. You thought the same thing. He invested a lot in this particular individual. From what I understand, you may have maybe even sent him on a honeymoon. Paid for as I don't know sure that this guy was like, yeah, the names in the comments. I'm kidding. It won't be there. Yeah. Yeah. And if you think you.

01:02:33:28 - 01:02:54:17 Mission Control: But what what is the saying? if tall fences make good neighbors, they do. Yeah. And yeah, it's the truth. I mean, you can trust people all you want and be, you know, friendly. But like you said, when it comes to money, people get weird. You know, at the end of the day, what I've learned is, you know, the the the the larger you grow as a company, the more people you have working for you.

01:02:54:19 - 01:03:34:26 Mission Control: and anybody that knows me knows that I've really tried. I treat my people really, really, really well. I train them really, really well. I want to set them up for success. And like you said, it's not necessarily altruistic. The more successful they are, the more successful I am. So it's a mutually beneficial situation. But what I've learned is, is over the years, people will is as soon as things aren't going exactly right for them, they're going to look for reasons why your, maybe not the right person and how you're screwing them or whatever, and they stop looking at their behavior and what they're doing, and then all of a sudden, when

01:03:34:26 - 01:03:54:01 Mission Control: there's an opportunity for them to look out for themselves, they will do I fault them for that? Maybe. Maybe not. But it does happen. And at the end of the day, I learned that I just need to protect myself across the board. Period. Nobody. Yeah, I don't I don't know that that we need to go all the way there, but, trust but verify.

01:03:54:03 - 01:04:23:17 Mission Control: How about that? Yeah, I also yeah. Right. Right. Trust no one. Yeah. I'm going to send that clip to my therapist. Trust nobody is going to want to talk about that. So let's talk a little bit about what tell me about how it roots back to 1989. The fuck out of here. unresolved childhood trauma. Yeah. so let's talk a little bit about how these agencies enforce these guidelines.

01:04:23:20 - 01:04:52:18 Mission Control: Sure. So, they're going to, if a complaint is issued, they will, assign an investigator. That investigator reaches out and says, we've got a we've received a complaint. You know, depending on the type of complaint it is, typically have between 10 and 30 days to respond. that's when you call your lawyer. he or she reaches out to the investigator and says, hey, I'm just getting up to speed.

01:04:52:18 - 01:05:13:12 Mission Control: Can we get a little bit more time? They're going to ask for documents and records, depending on, the type of investigation, there most likely will be interviews of your workers. you yourself, as the business owner, will have to submit for that. Let's say your records aren't really great and you don't have a fine point on everything.

01:05:13:12 - 01:05:45:07 Mission Control: Does that go against the investigation or the contractor that goes across the contract there? Yeah, I just clarify this one to make sure. So there's, you know, give you an example, right. There's a presumption, that if certain records are not being kept, it's because they're being faulted. So if you're saying, I swear we give these guys a lunch break, it's just not in the records they're going to presume that you don't actually give them the meal break and that.

01:05:45:07 - 01:06:11:17 Mission Control: So there's no innocent until proven guilty on this. No. In fact, in New York, for example, there's what's called, you know, and this term is just incredibly ironic. The term of the statute, the name of the statute is the New York State, Fair Play Act, Construction Fair Play Act. And it you know, from my perspective as a business attorney, it's not fair at all.

01:06:11:17 - 01:06:40:25 Mission Control: But that's what it's called. And what it means is, in the construction industry, your workers are presumed to be employees. They are not presumed to be, independent contractors. They're not even presumed to be nothing at all. And it's going to be up to, either the investigator to prove one or you to prove the other. No. You start out at they're presumed to be employees, and it's up to you to tell us otherwise.

01:06:40:25 - 01:07:08:05 Mission Control: And that includes your sales team. Sure. Okay. Absolutely, absolutely. And, you know, I think that the, where people will get caught up with that is, you know, they're not technically listed in, in the statute as being covered by it, but in practice, two absolutely are. I mean, if you are out there selling shingles, guess what? You're going to be covered by that law in New York State.

01:07:08:06 - 01:07:32:15 Mission Control: And you as the employer. This is the other piece. Once the complaint is filed and once the investigation is ongoing, they're no longer just looking at your sales guys, right? They're looking at everybody. Yeah, they're looking at your labor. They're looking at your office staff. They're I literally have heard people that have 1099 project managers. And I laugh like, how do you even justify that?

01:07:32:15 - 01:07:57:22 Mission Control: Yeah. Like there's no justification for having an an admin person that works in the office as a 1099. Like you're clearly just trying to pay them and not pay taxes on them. Yeah. Most instances I think that's right. I mean, the only time I could maybe see that would be if it's truly, for like big projects and this person is truly coming in for one project, you'll you've never seen her before, and you'll never see her again.

01:07:57:28 - 01:08:23:22 Mission Control: She has a separate business entity she controls. And, you know, not only the result, but how she does her job. Then maybe that's just a consultant, though. That's not going to be an Ironman, right? Right. Yeah. And so, you know, it's it's problematic. And I know New York is not the only state to have these fair play act, type of statutes on the books, where you are presumed to be employees.

01:08:23:24 - 01:08:52:14 Mission Control: It also applies in the transportation industry. I mean, there it's and it's growing. That's the other piece. Is that I've been doing this for, you know, ten, 11 years. And even in that short amount of time, relatively short amount of time, I have seen the trend and it is going more and more employee friendly. when I was in law school, the it was starting to go that way, but it was still kind of business friendly.

01:08:52:16 - 01:09:19:13 Mission Control: It's not anymore. And it's going in the direction pretty precipitously of throw employee, which I'm all for employees. Sure. I'm all for employee rights. but you know, the pendulum is swinging. I think personally, a little too far, in that direction. Okay. So before we get into that, because we're going to talk about there's some rulings that have come recently and there's some some different guidelines and things like that they're going to have and we'll talk about that.

01:09:19:13 - 01:09:40:06 Mission Control: But so let's get back to how these agencies are for us. So they, they they do an investigation. They go in and they talk to your employees, they look through your records. There's no presumption of innocence. There's actually an uphill battle that we have to do in the construction industry, which we have to prove otherwise, that they're not employees.

01:09:40:06 - 01:10:07:07 Mission Control: And that's a big distinction, guys. We have to prove they're not employees. Okay? Right. That depends on the state. Yes. Yeah okay. Yeah okay. Yeah. Depends on the state. But I would imagine that with those in the books on a federal level, they're still going to be looking through that lens. Absolutely. Yeah. Yeah. A it's just codified in a law in New York state and other states.

01:10:07:09 - 01:10:48:02 Mission Control: but that is absolutely it. You are on the defensive. Once you get that call or receive that letter from these investigators. and, you know, there's a settlement discussion period pretty early on, because it's about the money, right? Right. Hey, you know, here's what we're seeing. What do you want to talk about? and, you know, then they issue after their investigation is over, they issue their decision, and it's, usually in writing and we'll set forth, you know, the number of violations, the nature of the violations, anything that was not substantiated will be at least listed.

01:10:48:04 - 01:11:18:10 Mission Control: And then the penalty. And then there's usually a period, sometimes ten, sometimes up to 30 days for you to appeal and say, we want to talk. And the appeal usually looks like, you know, a settlement. Yeah. I had I mean, that's right. So, you know, OSHA, for example, you know, the maximum award per violation or fine per violation, it's 14,000 and change.

01:11:18:10 - 01:11:44:24 Mission Control: It's a weird number. and, you know, say that you get and that's just for one violation. So, you know, if you have 30, that's hundreds of thousands. But say you have just one violation for that maximum amount. it's 14,000. You got ten days to talk to them. What I would do is call them up and say, hey, look, you know, we we get it, we're going to make some changes.

01:11:44:27 - 01:12:09:06 Mission Control: We don't have $14,000 to put up. would you take five? And they say, nope, we'll take eight. And we say, deal. First I could do a 66, 66. Yeah. Okay. And $0.66. And then it's tapered. It goes away. I mean it doesn't go away. It's still notice a violation in that instance. But, the investigation is at least over.

01:12:09:09 - 01:12:31:14 Mission Control: is there a double like, like a, kind of a comp, comparable, like double jeopardy type thing there? Yeah, more or less. Right. So when you enter into a final order or a settlement agreement with one of these agencies, it is, it does release. They are releasing you from liability for that violation from all other agencies as well?

01:12:31:15 - 01:13:15:09 Mission Control: No, only those one. Great. Yeah, sure. That was to try. It's very clear in those agreements that, this is only a release for the items that, we're, we're fighting for and it's not a release for things that we don't know about yet, even if they occurred in the past. So private parties, you and I get into a settlement agreement together to typically literally nine out of ten times the release language is I'm releasing you from any potential lawsuit I may have had against you from the beginning of the world, period till the day we sign, right?

01:13:15:10 - 01:13:34:15 Mission Control: It doesn't matter what it is, right? Yeah. That's not what the government enters into with you when you sign these things. It's. We're releasing you from these violations, and we've caught you for. Correct. Let's say I'm a contractor and I have a very large appetite for risk. And I'm going to roll the dice and I'm going to everyone's going to be a 1099.

01:13:34:17 - 01:13:49:22 Mission Control: And, you know, I'm two, three years in and I get notified to get that letter. And so I should. And, why don't I just close up my business, open under a new name and, you know, let that ride with the other company? That's a great question. I mean, it's just that this is a corporate veil. Protect.

01:13:49:22 - 01:14:12:00 Mission Control: You know, it absolutely would get pierced. And if you were to, you know, file for bankruptcy or, you know, dissolve that corporation. it there could be an ad, what's called an adversary proceeding brought in that bankruptcy where you say, hey, I'm bankrupt. I, you know, I stop all stop all direct debt. I have no money. Help me.

01:14:12:00 - 01:14:36:13 Mission Control: I'm poor. Yeah. And you know, this creditor, in this case, it would be a potential creditor. One of these agencies can file an adversary proceeding against you in the bankruptcy and say, yeah, that's all fine and well, but we think this was a fraudulent bankruptcy and or a fraudulent dissolution. And because of the violations. Right. Okay. Yep. Yep.

01:14:36:13 - 01:15:03:25 Mission Control: And that's typically not going to happen unless and until they find out that you've opened up shop down the street with a new name, if you really are just going under and saying, I, we don't have any assets, we don't have any money. This is bankrupting us. Truly, though, to let you let you slide. I mean, they're not going to go after you personally for a judgment unless, you know, it's a really egregious violation.

01:15:03:27 - 01:15:29:00 Mission Control: And you're a sole proprietor or a DBA, which you should not be. Right? Yeah. Because you have no corporate veil at that point, right? Yeah. Yeah. In that case, maybe they would. But, if you're an LLC or an Inc. and you really do dissolve over it, it's probably going to go away. but when you reopen under a new name, that's coming back up for sure.

01:15:29:00 - 01:15:53:24 Mission Control: So, Jim's roofing, I go bankrupt after this, notification of this potential. Fine. And then I open up Jim's roofing and exteriors three days later. That's a problem. That's a problem. That is a problem. And for, you know, depending on the amount at issue, if it's a, you know, potential five, $10,000 violation, maybe it goes away. But if it's anything significant, I mean, they have endless resources, right?

01:15:53:24 - 01:16:13:24 Mission Control: Their lawyers are already paid for. And it's with taxpayer money, your money that you paid in taxes. Yeah. What if you don't pay? Is there a debtor prison? No, there's no debtor prisons. But, you know, they can certainly get a judgment and they can certainly enforce that judgment by doing things like IRS liens, UCC liens, IRS things.

01:16:13:24 - 01:16:35:20 Mission Control: Yeah, they can, you know, if you have equipment, they can seize that equipment. you know, any tools, things like that, if it's going towards satisfying the judgment, they if they follow all the steps, they can absolutely seize that and, and sell it at an auction. And, you know, they have to do that in a commercially reasonable way.

01:16:35:24 - 01:16:56:27 Mission Control: But, you know, if you've got a $100,000 excavator, they can seize it, sell for 18 grand, and you still owe the difference if it's if it's deemed commercially reasonable and they want to get their judgment. Yeah. You can get pennies on the dollar for your stuff. And which leads into a whole bunch of other issues. If you lease that thing, don't own it.

01:16:56:27 - 01:17:19:01 Mission Control: And, you know, it's it's messy. It can get real messy. really quickly. thankfully, there are no debtors prison stuff. So you're not going to go to jail for this, folks. Wow. all right, so it seems like that's really not I mean, if you're if you're a smaller company, this might be a risk that's worth taking.

01:17:19:01 - 01:17:34:26 Mission Control: Possibly. Sure. Right. Sure. if you're, you know, if you're doing a little bit more, you have, you know, more than four, more than four or 5 or 6 people working for you. It might not be something that you want to. What you want to take on is basically what you're saying. Yeah, I think that's right. Okay. I think that's right.

01:17:34:26 - 01:18:09:12 Mission Control: And it depends on the revenue that you're doing. Yeah. but you know, I think the other pieces is what is your ultimate goal? Is your ultimate goal with the business to build something and grow it and pass it down to you know, your kids or something. Right? That's a whole different ballgame than somebody who's trying to create a business, operate it for 2 or 3, four years and then sell it to a group or whoever, that those are two totally different goals.

01:18:09:12 - 01:18:33:18 Mission Control: And that's why, again, these cookie cutter answers are not helpful and can be very dangerous because the person who wants to have this thing last forever and pass it on to his grandkids, that guy or girl has a very different, very different set of goals than somebody who's trying to get in and get out and and make a quick buck on the sale.

01:18:33:20 - 01:18:58:27 Mission Control: yeah, that's wrong with that. That's a great point. I mean, you know, pe you know, private equity, you guys all know it's a really hot topic in roofing specifically right now. And, you know, this is a good thing to talk about, actually, because, I know a few companies that have been acquired, some larger companies have been acquired, and, and one of the and I know some that has been turned down.

01:18:58:27 - 01:19:21:09 Mission Control: And one of the objections is, noncompliance with some of these laws because these big PE groups know that it, look at that period. They have deep pockets, and they know that these government entities and these attorneys like to go after people with deep pockets, because that means that they're going to justify their existence with these large fines.

01:19:21:09 - 01:19:48:25 Mission Control: And so even if your goal is to liquidate your company within a few years, you still need to think about your marketable ability with noncompliance of these laws. Yep. Absolutely. And you know, if I've got if I'm a P group and I've got two potential acquisitions and they're all things being equal the same, except one is compliant and one's not, I'm going with the compliant one.

01:19:48:27 - 01:20:11:03 Mission Control: Right. That's easy. Yeah. And you know, you you can't explain I mean you could try, but it's not going to be super persuasive to a PE group. When you say but this is the reality of it. There's no other way to make money. everybody does it. Those things all may be true. Guess what? They don't care. P groups not buying.

01:20:11:07 - 01:20:34:18 Mission Control: Yeah, they're just not buying your business. And again, if you're not interested in selling, then none of that means anything to you. What do you care? Yeah. If you are those are considerations that need to be taken into account. Because if you're trying to sell your business, you know, one of the first things they're going to look at is what are your potential liabilities and where are you at with compliance.

01:20:34:21 - 01:20:55:02 Mission Control: And so, you know, there could be, could be a little bit of a loss leader to convert everyone. sure. But in the long run, if your goal is to sell, maybe it's actually a really, really smart investment. But while we're talking about that, I'm sorry. I'm sorry. We're going to say something as an, as a small part to coming on.

01:20:55:05 - 01:21:14:07 Mission Control: I think that's all the time that we have for today. Okay, great. Okay. Time flies when you're having fun. Yeah. I mean, I've learned a lot. Hopefully you folks have as well. Corey, I appreciate you coming in. Yeah. James. I'm great. I couldn't be more grateful for you sharing your time. I'm sure I'll get an invoice for it.

01:21:14:10 - 01:21:35:05 Mission Control: if somebody if somebody in the audience did want to, have you counsel them, how would they go about reaching you? Yeah. You can reach me at, my, my email address, which is j o c o and n o r at Phillips litle.com. So that's, we'll put it on the screen. Yeah. Two hours and Phillips little is lightly.

01:21:35:07 - 01:21:56:25 Mission Control: Or you can call me at, [phone] three. Be happy to help. Thanks. Thanks a bunch, guys. Truly grateful. And thank you to the folks at home. And thank you to roofer. And we go