Latest / HR Spot / Episode #70 - They’re a 1099 Contractor…Or Are They?

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Episode #70 - They’re a 1099 Contractor…Or Are They? · HR Spot

• 0:06
  SPEAKER_00: Hello everyone, it's Linda Michaels.
• 0:08
  SPEAKER_02: Welcome back to HR Spot.
• 0:11
  SPEAKER_02: And Gary, this is a really good one.
• 0:14
  SPEAKER_02: What are we going to talk about today?
• 0:16
  SPEAKER_01: I'm excited about this.
• 0:18
  SPEAKER_01: This is something that we have to talk about a lot.
• 0:22
  SPEAKER_02: Yes.
• 0:23
  SPEAKER_01: I have a feeling today's topic is going to make a few people a little uncomfortable after they we get through this and they kind of go, uh oh.
• 0:33
  SPEAKER_01: It's even better.
• 0:35
  SPEAKER_00: Right?
• 0:36
  SPEAKER_00: Yes.
• 0:38
  SPEAKER_00: So what are we going to talk about?
• 0:41
  SPEAKER_02: Uh how about they're a 1099 contractor?
• 0:48
  SPEAKER_02: Or are they?
• 0:50
  SPEAKER_01: Oh, they're not an employee, Linda?
• 0:53
  SPEAKER_02: Well, let's maybe uncover the expensive mistakes business owners don't realize they're making.
• 1:03
  SPEAKER_02: So we see this often where a business owner will tell us, like, oh, they're not an employee, they're a 1099 contractor.
• 1:14
  SPEAKER_02: And then you and I start asking questions.
• 1:17
  SPEAKER_02: Like, just one question.
• 1:19
  SPEAKER_02: Who determines their schedule?
• 1:21
  SPEAKER_02: The company.
• 1:24
  SPEAKER_02: And then what?
• 1:25
  SPEAKER_02: Who tells them how the work needs to be done?
• 1:29
  SPEAKER_01: The company.
• 1:32
  SPEAKER_02: And then do they work for the company every week?
• 1:38
  SPEAKER_02: On a schedule.
• 1:40
  SPEAKER_02: Do they perform the same type of work as employees?
• 1:46
  SPEAKER_01: Why, yes, they do, Linda.
• 1:48
  SPEAKER_01: They do just like our other employees.
• 1:50
  SPEAKER_01: Have they been doing it for two or three years?
• 1:54
  SPEAKER_01: Oh, this person's been doing it for about five years.
• 1:58
  SPEAKER_02: Oh my lord.
• 1:59
  SPEAKER_02: And then we hear, but they're a contractor.
• 2:02
  SPEAKER_02: They signed an independent contractor agreement.
• 2:05
  SPEAKER_02: We don't even get that usually, the independent contractor agreement.
• 2:09
  SPEAKER_02: No.
• 2:09
  SPEAKER_02: And that's when we usually have to say, we need to take a look at this a little bit closer, because calling someone an independent contractor doesn't necessarily make them one.
• 2:21
  SPEAKER_01: Yeah, especially when they turn in a time card every week or every two weeks, just like everybody else.
• 2:28
  SPEAKER_02: Or when they when they get paid holiday pay.
• 2:31
  SPEAKER_01: Yeah.
• 2:32
  SPEAKER_01: Not like they submit an invoice once a month, right?
• 2:36
  SPEAKER_01: Neither of the neither of these things are giving the uh sorry.
• 2:41
  SPEAKER_01: And neither does giving them a 1099 at the end of the year, that doesn't make them a contractor either, just because you give them that form.
• 2:51
  SPEAKER_02: Yeah, so we're gonna dive a little bit deeper.
• 2:55
  SPEAKER_02: You're calling them a 1099 contractor, or are they?
• 3:00
  SPEAKER_02: And more importantly, we're gonna talk about why getting this wrong can be very, very expensive.
• 3:05
  SPEAKER_01: Oh, it can be huge.
• 3:08
  SPEAKER_01: It could be huge.
• 3:10
  SPEAKER_01: So, why businesses, why do they use contractors and why do they set them up this way?
• 3:16
  SPEAKER_01: So, Linda, let's start with that obvious question.
• 3:20
  SPEAKER_01: Why do companies want to classify people as independent contractors?
• 3:24
  SPEAKER_01: What do you think?
• 3:25
  SPEAKER_02: Well, there are plenty of legitimate reasons to use independent contractors.
• 3:31
  SPEAKER_02: Right.
• 3:33
  SPEAKER_02: Legitimate.
• 3:35
  SPEAKER_02: Maybe you need some expertise for a particular project.
• 3:40
  SPEAKER_02: Uh, maybe you hire an outside marketing consultant or an IT professional or a CPA, a trainer, graphic designer, or other independent business.
• 3:52
  SPEAKER_02: There's absolutely nothing wrong with using contractors.
• 3:56
  SPEAKER_02: The problem comes when a company uses the contractor label for a working relationship that actually functions much more like employment.
• 4:09
  SPEAKER_02: And let's be candid, sometimes companies use contractors because it feels safer.
• 4:24
  SPEAKER_01: Potentially no benefits, ah, no PTO.
• 4:30
  SPEAKER_02: So they also don't have to contribute to unemployment insurance in the same way as an employee.
• 4:38
  SPEAKER_02: Workers' co-op obligations are also different depending on the circumstances, and companies sometimes believe they can avoid a lot of employment requirements by simply calling them a contractor.
• 4:51
  SPEAKER_01: So, really, what you're trying to tell me is it can look a lot cheaper.
• 4:58
  SPEAKER_02: Yes, but the classification is wrong.
• 5:04
  SPEAKER_02: What appeared to be cheaper can be much more expensive later.
• 5:10
  SPEAKER_01: Right, right.
• 5:12
  SPEAKER_01: Okay.
• 5:13
  SPEAKER_01: So but that employee really wants, I shouldn't say that, not employee, but that person really wants to be a contractor.
• 5:20
  SPEAKER_01: They don't want to be an employee.
• 5:22
  SPEAKER_01: So that's something I've heard, right?
• 5:25
  SPEAKER_01: Like that person doesn't want to be an employee.
• 5:27
  SPEAKER_01: But Linda, the person has to be a 1099.
• 5:31
  SPEAKER_01: What do you think?
• 5:32
  SPEAKER_02: Yeah, that happens all the time, right?
• 5:35
  SPEAKER_02: So, and one of the biggest misconceptions I want listeners to understand is worker classification generally isn't something the company and the worker can simply choose based on preference.
• 5:50
  SPEAKER_02: Someone may absolutely be, you know, they might prefer being paid as an independent contractor.
• 5:56
  SPEAKER_02: So they might tell you, I don't want taxes withheld.
• 6:00
  SPEAKER_02: I want the, I like the flexibility, I have an LLC, I want to deduct business expenses, I don't want to be an employee, but their preference doesn't determine whether the relationship legally qualifies as independent contracting.
• 6:17
  SPEAKER_01: So you're saying it's not really their choice, right?
• 6:20
  SPEAKER_01: That's kind of what I'm hearing.
• 6:22
  SPEAKER_01: So you can't just have someone sign something saying, I agree that I'm an independent contractor, can you?
• 6:30
  SPEAKER_01: And if you do, are you done?
• 6:34
  SPEAKER_02: A written agreement is important, but the agreement alone doesn't determine classification.
• 6:40
  SPEAKER_02: The actual working relationship matters, and that's where employer sometimes gets themselves into trouble.
• 6:47
  SPEAKER_01: Oof, that's rough for some of these people.
• 6:49
  SPEAKER_01: So there what I understand, right?
• 6:52
  SPEAKER_01: There isn't just one test, and this is where I think it gets confusing, or business owners don't look into it enough because I, you know, and in these days, this day and age, they'll Google 1099 versus W-2, or they'll, you know, if they're smarter, they'll put it into maybe AI, but that's not always 100% accountable either, right?
• 7:16
  SPEAKER_01: You have to look at a little bit more, and suddenly there are these different tests that pop up.
• 7:22
  SPEAKER_02: Exactly.
• 7:23
  SPEAKER_02: And we're not going to turn today's podcast into law school, but business owners need to know that there isn't necessarily one universal test that answers every classification question.
• 7:37
  SPEAKER_02: Different laws and government agencies may evaluate worker status differently.
• 7:43
  SPEAKER_02: For example, the IRS looks at the relationship for federal tax purposes.
• 7:48
  SPEAKER_02: Federal wage in our law has its own analysis.
• 7:52
  SPEAKER_02: States can have their own requirements, and some states apply a little bit stricter standards than others.
• 8:01
  SPEAKER_01: You mean like California?
• 8:05
  SPEAKER_01: Yeah.
• 8:06
  SPEAKER_01: Right?
• 8:06
  SPEAKER_01: Yeah.
• 8:07
  SPEAKER_01: So if someone tells you, here's the one question that determines whether somebody is a 1099.
• 8:15
  SPEAKER_01: Should you be skeptical?
• 8:17
  SPEAKER_02: Yes.
• 8:18
  SPEAKER_02: Be very skeptical.
• 8:20
  SPEAKER_02: Instead, employers need to look at the total relationship and the particular laws that apply.
• 8:28
  SPEAKER_01: Okay.
• 8:29
  SPEAKER_01: What are some what's the next one?
• 8:32
  SPEAKER_02: Let's cover five red flags.
• 8:35
  SPEAKER_01: Okay.
• 8:36
  SPEAKER_02: So we're gonna talk about something very practical.
• 8:39
  SPEAKER_02: So here are five situations where I would want a business owner to stop and think.
• 8:46
  SPEAKER_02: Maybe we need to review this.
• 8:48
  SPEAKER_02: These aren't automatic conclusions by themselves, but the red flags that tell us the relationship deserves a closer look.
• 8:56
  SPEAKER_02: What is flag number one, Gary?
• 8:59
  SPEAKER_01: Flag number one.
• 9:01
  SPEAKER_01: You control how they work.
• 9:04
  SPEAKER_01: So give me an example of what that means.
• 9:07
  SPEAKER_01: You control how they work.
• 9:10
  SPEAKER_02: So let's say you hire someone and tell them you work Monday through Friday, 8 to 5.
• 9:17
  SPEAKER_02: You need to be in our office.
• 9:19
  SPEAKER_02: Here's how exactly you need to perform the job.
• 9:24
  SPEAKER_02: And you report to this manager, and you need permission to take time off.
• 9:29
  SPEAKER_02: I need you to attend our regular employee meetings, and we're going to train you exactly how we train our employees.
• 9:36
  SPEAKER_02: And at some point, I start asking, how independent is this person really?
• 9:42
  SPEAKER_01: Yeah, that's a huge one, right?
• 9:44
  SPEAKER_01: It says it right there in the title: independent contractor, not dependent contractor, right?
• 9:54
  SPEAKER_01: There's a difference between telling a contractor what the result you need compared to managing them and their time like an employee.
• 10:06
  SPEAKER_02: Yeah, exactly.
• 10:08
  SPEAKER_02: So if I hire an independent web designer, I can certainly say I need a new website by November 1st.
• 10:16
  SPEAKER_02: And here are the requirements.
• 10:18
  SPEAKER_02: That's different from managing that person's workday exactly as I would manage an employee's work day.
• 10:26
  SPEAKER_01: Okay.
• 10:27
  SPEAKER_01: So here's flag number two then.
• 10:29
  SPEAKER_01: They look exactly like your employees, and I don't mean physically look like, but this one should be pretty obvious, right?
• 10:38
  SPEAKER_01: They they look just like what everybody else is doing, right?
• 10:44
  SPEAKER_01: You would think it's obvious.
• 10:46
  SPEAKER_02: You think, but imagine you have two people essentially doing the same job, so they have the same responsibility, same manager, same schedule, same workplace, same expectations.
• 10:57
  SPEAKER_02: One is on payroll, the other receives a 1099.
• 11:00
  SPEAKER_02: My immediate question is then why?
• 11:04
  SPEAKER_02: There may be facts that support that distinction, but because that's how we hired them isn't enough.
• 11:14
  SPEAKER_01: Right.
• 11:15
  SPEAKER_01: I'm glad you brought that up because I was thinking about that earlier.
• 11:18
  SPEAKER_01: So along that lines, can you have a contractor working in your business and they do the same thing as what your business is designed for, like the employees?
• 11:38
  SPEAKER_01: Right?
• 11:38
  SPEAKER_01: I mean, it's like you mentioned, right?
• 11:40
  SPEAKER_01: If you get if you're a software company and you hire a CPA, that makes sense.
• 11:46
  SPEAKER_01: But if you're a software company and you have a contractor that's a software developer, just like everybody else, there should be some ding ding ding ding.
• 12:00
  SPEAKER_01: That's red flag number two, right?
• 12:03
  SPEAKER_01: Yes, right.
• 12:04
  SPEAKER_01: So, okay, flag number three.
• 12:06
  SPEAKER_01: This relationship just keeps going and going and going, and it's not gone.
• 12:17
  SPEAKER_02: Sounds like the energizer, Bunny, right?
• 12:19
  SPEAKER_02: Right, exactly.
• 12:22
  SPEAKER_02: So a contractor can certainly have a long-term relationship with a client, duration alone doesn't decide the classification, but an infinite ongoing relationship can be one factor worth examining.
• 12:36
  SPEAKER_01: Yeah, especially when they start becoming kind of embedded and start becoming part of the regular organization.
• 12:45
  SPEAKER_01: What if they're, you know, in that same thing?
• 12:47
  SPEAKER_01: What if they attend the holiday party and they get the free lunches?
• 12:52
  SPEAKER_01: And like you said earlier, they come into the office.
• 12:56
  SPEAKER_02: Yeah, exactly.
• 12:58
  SPEAKER_02: And we've all seen situations where somebody was brought in temporary, temporarily, but six months later they're still there.
• 13:05
  SPEAKER_02: And then a year goes by, then two years go by, they're in all the staff meetings, and they have a company email, they're part of everyday operations.
• 13:14
  SPEAKER_02: Everybody treats them like an employee, but payroll treats them like a contractor, and then that's worth revisiting the original decision.
• 13:24
  SPEAKER_01: That's a good one.
• 13:25
  SPEAKER_01: I know.
• 13:26
  SPEAKER_01: Okay, I'm gonna bring up California again, but back in the day working in California, like one of the companies that I worked with, um, and it was good on them, right?
• 13:37
  SPEAKER_01: We had a strict rule.
• 13:38
  SPEAKER_01: It's you were a contractor, you could only work 18 months, period.
• 13:44
  SPEAKER_01: That's it.
• 13:44
  SPEAKER_01: You could take a year off and then you could come back, but when you came back the second time, you couldn't work as a contractor more than six six months, and then after that, no more as a contractor.
• 13:57
  SPEAKER_01: They were pretty they held they held it tight because they knew they knew the ramifications and the potential risk.
• 14:06
  SPEAKER_01: So ooh, now talking about risk.
• 14:10
  SPEAKER_01: So flag number four.
• 14:13
  SPEAKER_01: They're economically dependent on your company.
• 14:17
  SPEAKER_01: So what tell me, what do you mean by economically dependent?
• 14:22
  SPEAKER_01: What does that really mean in business terms?
• 14:26
  SPEAKER_02: So one of the concepts that can matter under federal wage in our analysis is whether the worker is genuinely in business for themselves or is economically dependent on the employer for work.
• 14:41
  SPEAKER_02: So a true independent business often has characteristics of actually operating as a business.
• 14:48
  SPEAKER_02: They may market their services, they negotiate engagements, they work with multiple clients, they make business investments, they have an opportunity for profit or loss based on a managerial skill.
• 15:02
  SPEAKER_02: And again, no single fact necessarily decides the issue, but compare that with someone who essentially says, I work for this company full-time, they give me my work, they control the relationship.
• 15:15
  SPEAKER_02: I don't really operate as an independent business, those are very different situations.
• 15:22
  SPEAKER_01: So if I'm a contractor, quote unquote, I'd only have one client and I client loosely, but I have one client, I work 30 to 40 to 50 hours a week, but I only work for one.
• 15:42
  SPEAKER_01: That's what you're telling me, right?
• 15:44
  SPEAKER_02: Very questionable.
• 15:46
  SPEAKER_01: Okay, all right.
• 15:48
  SPEAKER_01: So the last one here red flag, red flag number five.
• 15:52
  SPEAKER_01: Your main justification is they signed a contractor agreement.
• 15:59
  SPEAKER_01: So you're you're putting all your risk into this basket of they signed the agreement.
• 16:07
  SPEAKER_01: So we've already touched on this one, but let's dig a little deeper, Linda.
• 16:11
  SPEAKER_02: Yeah, it's definitely worth repeating because a contractor agreement is not a magic document.
• 16:18
  SPEAKER_02: You can't take someone who functions as an employee and put independent contractor agreement across the top of the document, have them sign it, and assume the classification issue disappears.
• 16:30
  SPEAKER_02: The contract should reflect the actual relationship and the reality of the relationship matters.
• 16:39
  SPEAKER_01: Okay.
• 16:40
  SPEAKER_01: So can you just touch on the risk for a second?
• 16:45
  SPEAKER_01: Just for a second.
• 16:46
  SPEAKER_01: What if you have someone that's an employee that says I want to move to a contractor?
• 16:54
  SPEAKER_01: 1099 contractor position or classification.
• 17:00
  SPEAKER_01: How does that look?
• 17:02
  SPEAKER_02: Literally would have to change the whole dynamic of the relationship.
• 17:09
  SPEAKER_02: They can't look like an employee just because they want to go to a contractor, that has to look completely different.
• 17:16
  SPEAKER_01: Is it risky?
• 17:18
  SPEAKER_02: Very.
• 17:19
  SPEAKER_01: Yeah, does it throw red flags out to the government?
• 17:22
  SPEAKER_01: Always.
• 17:23
  SPEAKER_01: Right?
• 17:24
  SPEAKER_01: And I'll throw the the addition too, right?
• 17:27
  SPEAKER_01: If you are in a habit of taking contractors and moving them to employees, and also taking employees and moving them to a contractor, and you do this once or twice going both directions, I think that's setting up some serious red flags.
• 17:46
  SPEAKER_01: You're not just giving that one red flag, you're kind of shooting out flares like, look at me, look at me, look what I'm doing.
• 17:54
  SPEAKER_01: I think that's uh that's pretty risky.
• 17:57
  SPEAKER_01: Yes, I don't like it.
• 17:59
  SPEAKER_01: All right, let's play a game.
• 18:00
  SPEAKER_01: You know how I like games.
• 18:01
  SPEAKER_01: All right, let's play.
• 18:03
  SPEAKER_01: Is it a contractor or is it an employee?
• 18:07
  SPEAKER_01: Can we go through some scenarios?
• 18:10
  SPEAKER_01: Absolutely.
• 18:11
  SPEAKER_02: Let's play the contractor or employee game.
• 18:15
  SPEAKER_02: And before somebody emails us, these are simplified examples.
• 18:21
  SPEAKER_02: Real classification decisions require looking in all the facts and the law.
• 18:25
  SPEAKER_02: So we had to put that little disclaimer in there.
• 18:27
  SPEAKER_01: Yeah.
• 18:28
  SPEAKER_01: And since we're doing disclaimers, we're not legal counsel, right?
• 18:34
  SPEAKER_01: Although, although I slept at a holiday in last night, I'm not playing a legal, I'm not playing an attorney today.
• 18:42
  SPEAKER_01: Okay, so scenario number one: a company hires a photographer for its annual conference.
• 18:49
  SPEAKER_01: The photographer runs their own business, advertises to the public, has many, many clients, uses their own equipment, negotiates a fee, photographs the event, and then delivers the photos and moves on.
• 19:02
  SPEAKER_01: Are we a contractor or are we an employee?
• 19:07
  SPEAKER_02: That certainly sounds much more consistent with an independent business relationship.
• 19:13
  SPEAKER_02: So I would say a contractor.
• 19:15
  SPEAKER_02: Got it.
• 19:16
  SPEAKER_02: What's the next one?
• 19:18
  SPEAKER_01: All right.
• 19:19
  SPEAKER_01: A company has a bookkeeper working 40 hours a week.
• 19:23
  SPEAKER_01: The company determines hours, provides the work, supervises the individual, requires attendance at employee meetings, and the individual has worked exclusively exclusively for the company for three years.
• 19:38
  SPEAKER_01: But wait, there's more.
• 19:40
  SPEAKER_01: There's an independent contractor agreement.
• 19:43
  SPEAKER_02: Linda, what say the well, what you just described, excuse me, what you just described is an employee, right?
• 19:53
  SPEAKER_02: So I'm definitely gonna review that classification immediately because there's risk there.
• 19:59
  SPEAKER_01: You mean you wouldn't wait till the beginning of the year so you can start a new financial year?
• 20:03
  SPEAKER_01: No.
• 20:04
  SPEAKER_01: No, no, don't wait.
• 20:08
  SPEAKER_01: Okay, the next one.
• 20:11
  SPEAKER_01: A marketing consultant owns an agency, works with seven companies, negotiates contracts, determines how the services are performed, hires their own staff, and invoices the company monthly.
• 20:26
  SPEAKER_02: Well, that sounds to me like it could be much more of an independent business.
• 20:32
  SPEAKER_02: So therefore, independent contractor.
• 20:35
  SPEAKER_01: What makes you think independent business and not an employee on that one?
• 20:40
  SPEAKER_02: Well, because if you if you listen to what you said, they work for seven companies, right?
• 20:48
  SPEAKER_02: So they're not embedded in any particular one.
• 20:52
  SPEAKER_02: They negotiate all the contracts, they determine how the services are performed, they have their own crew and they invoice the company monthly.
• 21:02
  SPEAKER_02: If the relationship goes on for many, many, many years, I don't maybe we need to look at it.
• 21:09
  SPEAKER_01: What if they lose a couple companies now?
• 21:11
  SPEAKER_01: They're only down to like two companies they work with.
• 21:14
  SPEAKER_01: Does that make it a little harder?
• 21:17
  SPEAKER_02: Absolutely.
• 21:18
  SPEAKER_01: Okay.
• 21:20
  SPEAKER_01: So here's the last one.
• 21:22
  SPEAKER_01: All right.
• 21:24
  SPEAKER_01: Last one.
• 21:25
  SPEAKER_01: A business owner says, I don't know exactly what she does, but my previous accountant told me paying her as a$10.99 contractor was much, much easier.
• 21:40
  SPEAKER_00: What do you think?
• 21:46
  SPEAKER_00: I'm gonna read it again.
• 21:47
  SPEAKER_00: Let's see, last one.
• 21:51
  SPEAKER_02: We need to make an appointment.
• 21:53
  SPEAKER_01: Yeah.
• 21:54
  SPEAKER_01: With the CPA or the county or the employer.
• 21:58
  SPEAKER_01: The employer.
• 22:00
  SPEAKER_01: Okay, I think I would too, right?
• 22:03
  SPEAKER_01: If they don't know what the person does, okay, so maybe that could be it, right?
• 22:07
  SPEAKER_01: Like, hey, I just gave them something, they're they do it on their own.
• 22:11
  SPEAKER_01: But the fact that the previous accountant just told me to do it, you really don't know what the person does.
• 22:17
  SPEAKER_01: How long have they been doing it?
• 22:19
  SPEAKER_01: Who gave them the equipment to use, or what have you, right?
• 22:22
  unknown: Yep.
• 22:24
  SPEAKER_01: Okay, make an appointment, everybody.
• 22:26
  SPEAKER_01: And I kind of figured you'd say that, Linda.
• 22:28
  SPEAKER_01: And I'm glad you did.
• 22:30
  SPEAKER_01: All right, let's go on.
• 22:33
  SPEAKER_01: What can happen?
• 22:34
  SPEAKER_01: Oh, this is the big one.
• 22:36
  SPEAKER_01: What can happen if you get it wrong?
• 22:40
  SPEAKER_01: So let's talk about it for a second.
• 22:44
  SPEAKER_01: Why owners should really care about this topic?
• 22:47
  SPEAKER_01: Why does it impact their business?
• 22:50
  SPEAKER_01: Because, you know, people out there might be listening and might be thinking, well, we've done it this way for years, or this is what I was told to do, or the person before me set it up this way, right?
• 23:01
  SPEAKER_01: And no one's complained.
• 23:02
  SPEAKER_01: No one's, you know, everyone's happy with it.
• 23:06
  SPEAKER_01: Besides making an appointment with us, what do you what do you think?
• 23:10
  SPEAKER_01: What could go wrong?
• 23:11
  SPEAKER_01: What could happen?
• 23:12
  SPEAKER_02: Well, that's where companies go complacent, right?
• 23:15
  SPEAKER_02: So misclassification can potentially create exposure involving things like unpaid minimum wage, overtime, peril taxes, unemployment insurance, workers' comp, benefits, penalties, interest, and state-specific wage and our requirements.
• 23:37
  SPEAKER_02: And exactly what's at issue depends on the facts and the applicable laws there.
• 23:46
  SPEAKER_01: You just named almost 10 different things that could really be impacted there, right?
• 23:51
  SPEAKER_01: That's not one, not just two, that's almost 10 things, and I'm sure there's more, right?
• 23:59
  SPEAKER_01: And one worker could potentially lead to questions about other workers or quote unquote other independent contractors too, right?
• 24:08
  SPEAKER_02: Absolutely.
• 24:09
  SPEAKER_02: So imagine one contractor relationship is challenged, then somebody asks, Do you have anyone else working under this arrangement?
• 24:18
  SPEAKER_02: And suddenly you're not looking at one person's classification, you're looking at 10 or 20 or 50.
• 24:25
  SPEAKER_02: And that's why this isn't something I recommend ignoring just because nobody has complained yet.
• 24:32
  SPEAKER_01: Right.
• 24:32
  SPEAKER_01: And it kind of goes back to what we're saying before, right?
• 24:35
  SPEAKER_01: It's if you find one, or if someone else finds one, or if they make a complaint or whatever, that puts you on the map.
• 24:44
  SPEAKER_01: That's sending out a flare saying, look at me, right?
• 24:48
  SPEAKER_01: If they uncover one, they're gonna ask the question of, well, what other ones do you have that are similar?
• 24:54
  SPEAKER_01: Let's take a look at those.
• 24:56
  SPEAKER_01: You don't want to be on anybody's radar, you don't want to be on the map, you don't want to be on the schedule of the docket or anything like that, right?
• 25:03
  SPEAKER_01: So, all right, thanks for pointing those out.
• 25:05
  SPEAKER_01: So, next, we've always done it this way.
• 25:09
  SPEAKER_01: Problem.
• 25:09
  SPEAKER_01: What do you think?
• 25:10
  SPEAKER_01: What and I I think this one's really interesting, right?
• 25:15
  SPEAKER_01: Because we hear this phrase, and in business we hear it too.
• 25:19
  SPEAKER_01: Well, that's just the way we've always done it, and that's in HR, it's just horrible because it's ever changing, the landscape is changing, and sometimes it goes back, sometimes it goes forward and then goes back again.
• 25:34
  SPEAKER_01: Things change all the time, but I just I can't stand it.
• 25:38
  SPEAKER_01: We've always done it this way.
• 25:41
  SPEAKER_01: What was your what do you what do you say?
• 25:43
  SPEAKER_02: So my response is always that tells me how long you've been doing it, and it doesn't tell me whether it's correct.
• 25:53
  SPEAKER_01: That's a good distinction, Linda, right?
• 25:56
  SPEAKER_01: You're talking apples and oranges, right?
• 25:59
  SPEAKER_02: Yeah, I mean, we we know companies grow, jobs change, relationships change, laws change, and maybe someone legitimately started as an outside consultant, but three years later the role has evolved, and now they're essentially embedded in the company.
• 26:16
  SPEAKER_02: And that's why classification isn't always just one and done decision, it's something businesses should periodically review.
• 26:25
  SPEAKER_01: Yeah, I you're right.
• 26:26
  SPEAKER_01: They should review it.
• 26:27
  SPEAKER_01: And it's, you know, with that, once they review it, or maybe before they before they review it, what should a business owner do if they have contractors?
• 26:39
  SPEAKER_01: So I think again, you know, someone listening right now, they may have one or two or three people classified as a contractor.
• 26:51
  SPEAKER_01: And now we're bringing this up, they're starting to think about it for a second, and they start to sweat a little bit, they're getting a little hot and uncomfortable, and they think, uh oh.
• 27:03
  SPEAKER_01: Um no, what should they do next?
• 27:09
  SPEAKER_02: First, don't panic, right?
• 27:12
  SPEAKER_02: Second, don't ignore it, and third, don't immediately make changes without understanding what you're dealing with.
• 27:20
  SPEAKER_02: So start by reviewing each relationship.
• 27:24
  SPEAKER_02: Ask, what does this person actually do?
• 27:27
  SPEAKER_02: Who controls the work that's performed?
• 27:30
  SPEAKER_02: How permanent is the relationship?
• 27:33
  SPEAKER_02: Is the individual genuinely operating as an independent business?
• 27:39
  SPEAKER_02: What opportunities do they have for profit or loss?
• 27:43
  SPEAKER_02: What investments have they made?
• 27:45
  SPEAKER_02: And what does the agreement say?
• 27:47
  SPEAKER_02: And most importantly, what do the federal and state laws apply in this situation?
• 27:55
  SPEAKER_01: Right.
• 27:56
  SPEAKER_01: So you're trying to tell me, don't just look at a title or just look at a signed agreement.
• 28:03
  SPEAKER_02: Yeah, exactly.
• 28:05
  SPEAKER_02: So we want to look at the reality.
• 28:07
  SPEAKER_02: And if the classification isn't defensible, get guidance on how to correct it appropriately.
• 28:14
  SPEAKER_02: And sometimes that may mean transitioning somebody to W-2.
• 28:19
  SPEAKER_02: And but you you think you want to think through payroll, compensation, benefits, policies, taxes, communication timing, and any other potential historical exposure before you simply flip a switch.
• 28:37
  SPEAKER_01: Right, right.
• 28:39
  SPEAKER_01: Okay.
• 28:40
  SPEAKER_01: All right, so let's move on to the next one.
• 28:43
  SPEAKER_01: Go for it.
• 28:46
  SPEAKER_02: One more important warning for multi-state employers.
• 28:51
  SPEAKER_02: Ouch.
• 28:51
  SPEAKER_02: Okay, another warning, warning, warning, warning, Will Robinson.
• 28:55
  SPEAKER_02: There is one more thing I want to emphasize because we work with businesses that have employees and contractors across multiple states.
• 29:05
  SPEAKER_02: So don't assume the rules that work in one state necessarily work everywhere else, California.
• 29:14
  SPEAKER_02: Oh, did I say that out loud?
• 29:16
  SPEAKER_02: I didn't hear anything except for California.
• 29:20
  SPEAKER_01: All right, so yeah, you know, I I couldn't agree more.
• 29:24
  SPEAKER_01: And especially now that so many companies have people working remotely all over the country, and that's a whole nother that's a whole nother topic for another episode, right?
• 29:35
  SPEAKER_01: But you you have you hire someone, right?
• 29:38
  SPEAKER_01: And all of a sudden you hire someone in California for some unknown insanity lapse, right?
• 29:47
  SPEAKER_01: Like, why did you hire someone in California?
• 29:50
  SPEAKER_01: But what's next then?
• 29:53
  SPEAKER_02: Yeah.
• 29:54
  SPEAKER_02: So you might be headquartered in Arizona, but you have somebody in California, like Gary said, or another state with a different worker classification standard.
• 30:05
  SPEAKER_02: So where the worker actually performs the work can matter.
• 30:10
  SPEAKER_02: So when you're reviewing the contractor relationship, don't ask where's our company located.
• 30:16
  SPEAKER_02: Ask where are these people working that can make a significant difference.
• 30:21
  SPEAKER_01: Kind of like real estate, right?
• 30:23
  SPEAKER_01: Location, location, location.
• 30:25
  SPEAKER_01: Where is this person working?
• 30:27
  SPEAKER_01: Okay, all right.
• 30:28
  SPEAKER_01: So in closing, let's talk about the contractor test for business owners.
• 30:32
  SPEAKER_01: So, Linda, give everyone one or more, one takeaway before we end this.
• 30:42
  SPEAKER_02: Okay, so I would say don't classify the person based on what you want the relationship to be.
• 30:49
  SPEAKER_02: Look at the re you know what the relationship actually is.
• 30:54
  SPEAKER_02: So if someone is truly running an independent business and providing services to your company, great.
• 31:01
  SPEAKER_02: Independent contractors can be an incredibly valuable resource.
• 31:06
  SPEAKER_02: But if you're managing somebody like an employee, treating them like an employee, integrating them into your company like an employee, and the only thing making them a contractor is how you pay them, we need to take another look.
• 31:22
  SPEAKER_01: Yeah, and and and they wanted to be a 1099.
• 31:26
  SPEAKER_01: That's not that's not a legitimate reason to make them a 1099.
• 31:31
  SPEAKER_01: That's not the answer.
• 31:32
  SPEAKER_02: Nope.
• 31:33
  SPEAKER_02: Neither is well, they have an LLC or they sign the agreement, or my accountant told me to do it.
• 31:40
  SPEAKER_02: Everyone in our industry does it, or my personal favorite is we've always done it this way.
• 31:46
  SPEAKER_01: God, I hate that one.
• 31:48
  SPEAKER_01: So so it sounds like the message, really, that you're trying to tell people, right?
• 31:53
  SPEAKER_01: Is if you're not sure, I mean, like you've done all the research and you've qualified what they actually do.
• 32:00
  SPEAKER_01: If you're not sure, review it before someone else reviews it for you.
• 32:06
  SPEAKER_01: And I don't mean like if we're gonna review it, I mean like don't let the quote unquote employee contractor review it with a legal counsel or a government agency or something.
• 32:18
  SPEAKER_02: Yeah, exactly.
• 32:19
  SPEAKER_02: Because correcting a classification issue proactively is usually a much better conversation than dealing with it after a worker or an attorney or a tax agency or the labor department or any other government entity raises that question.
• 32:36
  SPEAKER_02: So if you're listening today and you're suddenly wondering whether your independent contractors really qualify as independent contractors, that's probably a good reason to take a closer look.
• 32:48
  SPEAKER_02: So we help businesses evaluate their workforce structure, identify potential HR and compliance risks, and develop practical solutions before these issues become bigger and bigger and more expensive problems.
• 33:04
  SPEAKER_01: Yeah, you know, and and maybe next time someone says, Don't worry, they're a 1099, you'll kind of ask another question.
• 33:15
  SPEAKER_01: And that should send off that flare red flag in your head and thinking, well, maybe I should find out more.
• 33:22
  SPEAKER_01: Right?
• 33:23
  SPEAKER_02: And we'll question, are they really an independent contractor?
• 33:28
  SPEAKER_01: Right?
• 33:29
  SPEAKER_01: There you go.
• 33:30
  SPEAKER_02: Didn't we just do this last week, Gary, with with a person?
• 33:35
  SPEAKER_01: Uh yeah, and I, you know, and I and again, like you said the very beginning, we get this question, and sometimes it's not even a question, right?
• 33:43
  SPEAKER_01: It's uh or a question that's related that they don't think about, right?
• 33:49
  SPEAKER_01: Like I month or so ago, oh, can I have an independent contractor manage some people on our team?
• 33:59
  SPEAKER_01: Right?
• 34:00
  SPEAKER_01: And it's like, no, that's not a good idea.
• 34:03
  SPEAKER_01: I'm glad you asked, but here's here's the risk.
• 34:07
  SPEAKER_01: Okay, but they've been here for a while, so they know the team, they can manage the team, right?
• 34:11
  SPEAKER_01: Still no.
• 34:12
  SPEAKER_01: Uh, I mean they can, but that's the risk, right?
• 34:16
  SPEAKER_01: So yeah, that's it's a it's a risky one for sure.
• 34:21
  SPEAKER_01: And I this comes up all the time, or if you know, running a payroll or looking at audits, and you're like, Well, who is this person that keeps showing up?
• 34:29
  SPEAKER_01: But I don't I never met him, they're not an employee, I don't see them in payroll, but I see their name on the emails and all these other things.
• 34:35
  SPEAKER_01: Oh, they got shirts, and oh, they got a lunch, and oh, they got a bonus, so they got wait a second, are they timeout?
• 34:45
  SPEAKER_01: Pause the clock for a second.
• 34:48
  SPEAKER_01: Are they a 1099 or are they on an employee, Linda?
• 34:52
  SPEAKER_01: Right?
• 34:53
  SPEAKER_01: Yep, all right.
• 34:55
  SPEAKER_02: Well, well, thanks for joining us on another fantastic episode on Ahr Spot.
• 35:02
  SPEAKER_02: Uh, call us or email us, Linda at Gary at azhrhub.com or visit our website azhrhub.com.
• 35:12
  SPEAKER_02: Set up time to meet with us.
• 35:14
  SPEAKER_02: We're happy to help guide you through this fun topic.
• 35:19
  SPEAKER_02: So appreciate your wisdom today, Gary.
• 35:23
  SPEAKER_01: No, thank you, Linda.
• 35:25
  SPEAKER_01: I appreciate your win wisdom and guidance.
• 35:27
  SPEAKER_01: And yeah, this is something that people really need to pay attention to.
• 35:33
  SPEAKER_01: Not just this is the way we've always done it.
• 35:35
  SPEAKER_01: Killing me.
• 35:37
  SPEAKER_02: Stop doing that.
• 35:39
  SPEAKER_01: Yeah.
• 35:40
  SPEAKER_01: All right, thank you, Linda.
• 35:42
  SPEAKER_00: Appreciate it.
• 35:43
  SPEAKER_00: All right.
• 35:44
  SPEAKER_00: Till next time.