On Tuesday, March 29, 2016, I was honored to be part of a great panel, graciously hosted by the German American Business Association, discussing the role of the independent contractor in the new economy.
American businesses face several challenges in implementing either an independent contractor (1099) or employee (W-2) in the United States. The panel deftly explored the benefits and risks of each model. (Hint: If you are a business owner in the US, you need to read this!) On the panel were the following experts:
- Robert Forsyth, Senior Associate, DLA Piper UK LLP, who represented the employer position, with an emphasis on international issues
- Darren Shafae, Founder, Papercheck, LLC, who explained why he moved to a W-2 model after a Department of Labor investigation
- Jennifer Vessels, CEO, Next Step, explained why she believes the 1099 model is right for her business
- Margo Hasselman, Partner at Renaker Hasselman LLP, representing the labor view
- Yours truly, Jenn LeBlanc, CEO Think Results, echoed Jennifer Vessels and stressed the importance of the W-2 model for millenials and women, especially working moms
Simone McCormick, Esq., CIPP/US, Partner at Murphy, Pearson, Bradley & Feeney, was our very capable moderator.
Challenges of the Independent Contractor Model
A strong message from the panel was that the 1099 vs w2 is a very tricky landscape to navigate. Darren Shafae spoke in detail about the difficult transition from a 1099 shop to a W-2 shop following a painful IRS investigation. His business is now once again doing well but it was not easy. The clear message was “when in doubt consult with an attorney,” as the mistakes can be very costly and detrimental to your business.
The basic issue is whether or not you as a business owner have misclassified your workers as 1099s when they really are being treated as W-2s. According to the IRS, there are several factors that are considered when deciding on whether someone is a W-2 or a 1099, including do you determine when, how and where they do their work? Do they have other clients? Do you provide them with job-related equipment or do they provide their own?
Important to note for the 1099 shops out there is that there are several government entities that can make decisions about your business including the IRS, the EDD, the California Labor Commission and more. Even worse, the EDD has a pattern of coming back to previous offenders since they already know your biz model, it’s easy pickings.
There have been several significant misclassification cases in US recently:
- Lowes
- FedEx
- Sacramento Bee
- Uber (this highly visible case goes to trial in June 2016, and is being carefully watched by many)
At risk for government entities is a significant amount of lost tax revenue. In 2009, employee misclassifications cost the federal government $2.7B, Simone noted. Improper misclassification of employees is considered fraud and subject to substantial fines and criminal charges. For example, California Labor Law states a willful misclassification has a $5-15K penalty per employee. The government also wants to protect employees from wage theft, such as unpaid overtime, sick time, double time, breaks, etc.
Additionally, every 1099 shop is at high risk of painful, expensive and distracting audits for misclassification. Sometimes these audits can cost the business. There are some who perceive that hiring 1099s gives you less liability, but the Simone, Margo and Robert all stressed that as an employer you are always liable.
Robert also reported that in many European countries, such as the Netherlands, independent contractors are growing rapidly and becoming more regulated, making the landscape even trickier in some countries.
Benefits of the Independent Contractor Model
Despite the risks, a recent Forbes article reported that 100% of job growth in the US over the past decade was through contractors and temps. That is astonishing. Even as a huge supporter of the free agent economy, I was stunned to read this.
The panel discussed the benefits of hiring 1099s, including:
- It can be less costly (25%-30% cheaper than W-2 workers)
- There is lots more flexibility
- Scalability is easier (clients don’t want to pay for the time a consultant sits on the bench)
- It creates the ability to hire a very specific expert skill set
- Some believe employee engagement is higher with independent contractors (I am one of those, given that employee engagement is reported to be at 31.5% – why pay for 100% of someone you only get 40% out of??)
- It allows for a leaner organization (clients want their money focused on results, not employee benefits!)
- It creates tremendous flexibility that is very valuable, especially for millennials, women and working moms, who are trying to balance a lot of responsibilities.
This last point is one of the reasons I founded ThinkResults over a decade ago. I wanted to create a working environment that allowed me and other colleagues to do really interesting, creative work with great clients and still be able to manage our family social responsibilities.
Women, whether moms or not, still do the vast majority of family and home care, with recent studies showing that on an average day, 83% of women do housework vs. 65% of men. Regardless of their paycheck size. And when “43% of highly qualified women with children are leaving careers or off-ramping for a period of time,” according to Sheryl Sandberg in Lean In, the typical corporate environment does not provide the kinds of flexible arrangements needed for women in their 20s/30s/40s. Beyond that point, she probably ain’t coming back to corporate typically once she leaves!. A 1099 world usually is structured to be more flexible, enabling more women to participate in the workforce and make an impact in the economy of their families and communities.
There is also one very important point about 1099s that Jennifer Vessels and I emphasized. A typical 1099 worker is a totally different mindset from the employee mindset. Many of the folks who are 1099s would never be willing to become W-2s. Millennials and women, especially working moms, in particular enjoy the flexibility and freedom of 1099 work model. They use the flexibility to travel between gigs, take care of children, parents, and sometimes even husbands. There are a world of options available to 1099 workers that are simply not yet possible in our current W-2 work models.
Solutions and Tips for Implementing Either Model
Of course, the 1099 model doesn’t work for everyone, you really have to have the right mindset. Many choose to work the W-2 model, since they need the (perceived) job security and benefits that comes with that such as health insurance benefits and retirement plans.
So what is a business owner to do? How do we navigate this landscape? First of all, if you are using the 1099 model to run your business, understand the boundaries clearly (see the IRS link above). Here are some of the highlights of the key criteria when evaluating misclassification cases:
- Does the worker have control over work and work environment?
- Are the results produced on their own or do they need direct supervision?
- Do they use/own their own equipment?
- Are they providing a specialized skill?
Very important point raised by the panel was that you are not protected or exempt from misclassification when hiring from agency. Some businesses have tried this and it has not worked out well (eg., the UC Berkeley janitorial services case).
As a final point, and one also echoed in the Forbes article above, one size does not fit all … we need both types of workers to keep the economy growing and all types of workers engaged. The challenge for us is how do we create a universal safety net so that medical and other benefits are not tied to only some workers, the W-2s , in our new and evolving gig economy?
Watch the full recording of the event.
I would love to hear your comments below. Feedback, reactions, ideas?? How can we make the gig economy work for all workers?
– Jenn LeBlanc
