Independent Contractor vs. Employee Status at Multi-Inspector Firms

[Dan Cullen]

We've been having a heck of a time trying to figure out if we need to convert our existing 1099 Independent Contractor over to Employee status. Our accountant, attorney, and insurance company are all advising us to make our inspectors W-2 Employees in order to avoid any issues with the IRS. Any owners or managers of multi-inspector firms willing to give your opinion on this matter? Thanks in advance.

[Jerry Peck]

We've been having a heck of a time trying to figure out if we need to convert our existing 1099 Independent Contractor over to Employee status. Our accountant, attorney, and insurance company are all advising us to make our inspectors W-2 Employees in order to avoid any issues with the IRS. Any owners or managers of multi-inspector firms willing to give your opinion on this matter? Thanks in advance.

Dan,

Are they an "Independent Contractor"?

Do they make their own schedule?

Do they work for themselves, other inspection companies, or strictly your company?

Do they come and go as they please, working when they want to and taking off when they want to?

If the answer to one or more of the above is "No.", they are not really an "Independent Contractor" are they?

Can they market to agents themselves and do their own inspections?

They IRS has (used to have anyway) a list of about 20 questions which tells you if they are actually "independent" or not, but the above will give you a pretty good idea if the IRS is going to consider them "independent" or an "employee".

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Dan,

These might also help.

http://www.erginc.com/pdfs/independent_contractors_20_questions.pdf

http://www.synergistech.com/20qs.shtml

http://art.mt.gov/artists/IRS_20pt_Checklist_%20Independent_Contractor.pdf

[Matt Fellman]

JP's pretty much got it covered. We've always had our inspectors be W2 employees. And, part of being an employee is signing our employment agreement which is mostly basic stuff about not stealing our trade secrets (reports, documents, etc.) but also contains a non-compete clause. Just curious, as independent contractors how do you keep from just being a training house and having inspectors take your clients and open their own shop?

[Jerry Peck]

Just curious, as independent contractors how do you keep from just being a training house and having inspectors take your clients and open their own shop?

... by treating them as employees and having control of their marketing, schedules, and signing a non-compete. :)

Okay, I don't know how Dan does it, but that is how most inspection companies do it who think they can treat the independent contractor inspectors as employees in those regards but not in all other regards and then issue 1099s to them.

There was a rather large inspection firm in South Florida which did that, and after suing a couple of inspectors who left to start their own companies for violating the non-compete agreement and other things, the inspectors contacted the IRS for clarification and ... not only did that large inspection firm lose those lawsuits but they also had to deal with the IRS for all the back taxes they did not collect. Ouch!

That is like the guy who grows pot in their house calling the cops because someone stole some of their plants ... Huh? That is dumb. Yeah, that has really happened ... Several times.

[Dan Cullen]

Dan,

Are they an "Independent Contractor"?

Do they make their own schedule? Yes, totally.

Do they work for themselves, other inspection companies, or strictly your company? Most of them have outside sources of income such as working for other inspectors; doing architectural work, etc.

Do they come and go as they please, working when they want to and taking off when they want to? Yes, absolutely.

If the answer to one or more of the above is "No.", they are not really an "Independent Contractor" are they?

Can they market to agents themselves and do their own inspections? Well....we wouldn't be too thrilled about that!

They IRS has (used to have anyway) a list of about 20 questions which tells you if they are actually "independent" or not, but the above will give you a pretty good idea if the IRS is going to consider them "independent" or an "employee".

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Dan,

These might also help.

http://www.erginc.com/pdfs/independent_contractors_20_questions.pdf

Synergistech :: 20 Eligibility Questions for True Independent Contractors (http://www.synergistech.com/20qs.shtml)

http://art.mt.gov/artists/IRS_20pt_Checklist_%20Independent_Contractor.pdf

Thanks loads JP!

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JP's pretty much got it covered. We've always had our inspectors be W2 employees. And, part of being an employee is signing our employment agreement which is mostly basic stuff about not stealing our trade secrets (reports, documents, etc.) but also contains a non-compete clause. Just curious, as independent contractors how do you keep from just being a training house and having inspectors take your clients and open their own shop?


Thanks Matt.....we treat 'em good. They get a 60/40 split and we give them extra helpings of love and attention. Why would they want to go elsewhere?

I'm a child of the 60's and you know what they said back then: "If you love something let it go; if it comes back to you then it was meant to be."

Seriously though, we also have a little home inspector training school that we run so we always have talent on tap of one of our inspectors decides to strike out on his/her own. We really try to make them offers that they can't refuse; one day at a time!

[David Brauner]

Hi - this is David Brauner, Senior Broker at OREP.org E&O insurance. Another consideration is insurance. Make sure any ICs you use are covered under your E&O policy. Broad coverage policies (yes, such as OREP's Admitted policy) include ICs as well as inspector/employees at no extra charge. Ask your agent about your policy. With some policies you have to pay extra for the coverage and, like with pest, commercial and other "add on" coverages, there may be NO coverage if you don't select and pay for it. Broad policies that do not charge extra for these items keep you protected without the hassle of adding the coverage midterm (and paying extra) or worse, forgetting to add the coverage and running into a problem later.

[Marc M]

Thanks loads JP!

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Thanks Matt.....we treat 'em good. They get a 60/40 split and we give them extra helpings of love and attention. Why would they want to go elsewhere?

I'm a child of the 60's and you know what they said back then: "If you love something let it go; if it comes back to you then it was meant to be."

Seriously though, we also have a little home inspector training school that we run so we always have talent on tap of one of our inspectors decides to strike out on his/her own. We really try to make them offers that they can't refuse; one day at a time!

Wow 60/40...were 70/30. I'm firing everyone and starting over :)

[Lisa Endza]

It isn't just the IRS that you have to be worried about. Your state might have its own formula of determining whether a sub-contractor is really an employee. States like you to pay unemployment on everyone working for you. In Colorado, if you are not incorporated or licensed, you are deemed to be an employee.

"At Will" Employment Agreement with Non-Compete Clause - InterNACHI (http://www.nachi.org/employmentagreement.htm)

[Rick Bunzel]

In Washington State we were interviewed by the License and Industry to determine whether my new part time inspector was an employee or a sub-contractor. We passed the test for independent contractor.

He provide his own tools
He carries his own inspection licensed
He has his own company
He pays his own insurance
He pays for his vehicle and mileage
He is allowed to market outside of the counties in which I do business to.
We "hire" him for each job.
He can set his schedule of when he is available.

I thought the state was going to be more stringent by requiring an interview to determine status but after it was completed they really weren't much different than the IRS


//Rick

[Jerry Peck]

He is allowed to market outside of the counties in which I do business to.

Rick,

Glad you got that past them. My understanding is that in most cases that would indicate that he is an employee while in the area you do not permit him to market as a true subcontractor is permitted to work anywhere his license permits him to work.

Glad that was accepted.

[Bill Anglin]

I got a question.
So if you have independent contractors, do they represent your company or their own? If they have their own business and make their own schedule, do they wear your company logo on their shirt to the inspection and put the report together on your software? Is the business name at the top of report yours or theirs? Can you set policy such as no smoking cigarettes or must be clean shaven? I'm considering becoming multi inspector but I really have no idea on the best way to go about it.

[Dan Cullen]

I got a question.
So if you have independent contractors, do they represent your company or their own? If they have their own business and make their own schedule, do they wear your company logo on their shirt to the inspection and put the report together on your software? Is the business name at the top of report yours or theirs? Can you set policy such as no smoking cigarettes or must be clean shaven? I'm considering becoming multi inspector but I really have no idea on the best way to go about it.

You're more than welcome to give me a call Bill if you'd like to discuss what it's been like to grow from one moron (me) to a 12 or 13 person company.

773-771-6466