New FLSA Law Update for Roofing Industry (Correction + Deep Dive)

This is a critical update on the Fair Labor Standards act specifically to correct the previous video I did announcing the law and the implications it has on this industry. Listen, I said some things in that video that I need to correct, okay? So this video, I'm not only going to correct those, but I'm going to dive deep into sharing my screen and going through the federal public information and sharing with you what I've learned from. From consulting with numerous attorneys and for the owners and managers tuning in, I'm gonna dive deeper into the additional expenses that you can be mindful of as you transition from 1099 to W2. So I appreciate you sticking with me through this whole video. I'm gonna be covering a tremendous amount. This will be a longer video, but it will pay off. So let's get started. But hey, hey, hey. Before we do, remember, I'm not an attorney. I can't give you legal advice. And it's important that you navigate this law with your attorney in your. Got it. All right, let's get started. Okay, first things first, I want to air out the mistake that I made in the first video I see floating around the forums online that say, hey, economic reality is 90%. And I just need to clarify 90%. The numbers 9, 0% are not listed in the law. I shared that number to emphasize the point of this concept called economic reality. Meaning, is the person working for the company economically dependent? I regret sharing that specific number for two reasons. One, I shared it as an emphasis point, and when I filmed it, I said, hey, again, this is an emphasis point. And I've realized people have taken that incredibly literally. And again, that number specifically is not written in the law. However, there are intricate details that we are about to get into regarding the economic reality test. So we're going to start there. Stick around with me. I'm going to be going through a ton again, including the financial implications and a whole bunch more. So let's get started. I'm going to share my screen. Let's take a peek here. This is the actual Federal Register website that shows the new law and the final rules effective here March 11th. Now, you'll notice that they have listed what's called an economic reality test. And this economic reality test has actually been in place for decades. But it says, as used in this rule, the term independent contractor refers to workers who, as a matter of economic reality, are not economically dependent on an employer for work and earn business for themselves. Such workers play an important role in the economy. Yada, yada, yada. And then again, this goes back to the 40s, and what's changed in the law is the economic reality test. So where does it come to play that someone is economically dependent? Well, that's what the Department of Labor has published. So if you search economic reality test, I'm just going to show you how I found this. I said economic reality test. And the first thing that comes up here is the Department of Labor. So that's exactly what we're looking at right up here. Now, in this worksheet, we're going to see there are six factors in the economic reality test. So again, it's not the 90% that I shared before. I really regret sharing that, that specific number. That was a really powerful learning lesson for me. But what it does mean is these six things specifically that dictate whether they are not economically, whether or not they're economically dependent. Now, I shared that number to just simplify this concept because in my head, this just made. This made sense. But I need to stand corrected. And let's go through these one by one. So here's the six, and we are going to dive in to these six here right now. First, opportunity for profit or loss, depending upon a managerial skill. Now, this factor primarily looks at whether a worker can earn profits or suffer losses through their own independent effort and decision making. And I know that some people might argue, oh, well, they're on commission and it's profit sharing commission, and therefore they can lose as well as profit. Again, that's a very, very gray area because if they can earn profits or suffer losses based on their own independent effort, but one would argue what independent effort is because there are other people doing the installation, et cetera. This is a gray area test. But for most, the suffer losses component is where you're going to lose because it's again, at their own decision making. So their decision making, if there's any price considerations or if you won't build a job because it'll lose money, one could argue that there really isn't a chance for the salesperson to earn a profit or a loss. Okay. Now, by the way, the examples for these opportunity or losses can be listed down here. Some of these aren't relevant to the roofing space, but we'll get into a couple of those here just so you can see investments by the worker and the employer. So many folks say, hey, well, my team is investing. They're paying for the CRM. Maybe they're paying for their own direct mail letters, their own gas, et cetera. But this factor primarily looks at whether the Worker makes investments that are capital or entrepreneurial in nature. Investments that support the growth of a business, including increasing the number of clients, reducing costs, extending marketing, or increasing sales that weigh in favor of independent contractor status. Now, what's interesting is when I got into this, these investments here are looked at to say, do they primarily benefit the independent contractor, not both parties? So read through this part again, are they making these investments? One could argue, but I'm going to get into the could would how this will actually or how this could pan out if you were actually audited and in a situation where they're looking into this. So the worker investments do not need to be equal to the employers and should not be compared in dollar amounts or size. The focus should be on whether the worker makes similar types of investments as the employer or investments of the type that allow the worker to operate independently in the worker's industry or field. So again, allowing the worker to operate independently. Again, we're in a bit of a gray area, so let's look at an example. A graphic designer provides design service for a commercial design firm. The firm provides software, computer office space and all the equipment and supplies for the worker. The company invests in marketing and finding clients and maintains central office. The worker occasionally uses their own preferred drafting tools. In this scenario, the worker's relatively minor investments in supplies is not capital in nature and does little to further a business beyond completing specific jobs. And again, this would indicate employee status. Now, for many roofing folks, again, providing software, yes, providing computer, maybe, maybe not office space, etc. But again, a graphic designer occasionally completes. This is the key thing. Occasionally complete specialty design projects for the same commercial design firm. The graphic designer purchases their own design software, computer drafting tools and rents their own space. The graphic designer also spends money to market their services. These types of investments support an independent business and are capital in nature. These facts indicate independent contractor status under the investment factor. Now, the one thing that you need to consider is, as I got into this with the attorneys, is that the capital investments need to benefit the individual and not the employer. So if they are investing in marketing, but they're marketing with your brand that says get a roof from so and so, as opposed to get get a roof from me. Hey, I'm Adam. I'm an independent salesperson that works for no one, those capital investments could be argued that they are in favor of the company and not the individual. Meaning you would likely not pass this little test. Now, next degree in permanence of the work relationship. This one's interesting. Essentially, what this means is imagine being a contractor, let's say you're in roofing because you are, and you end up with a job that you need to do concrete for some odd reason. Well, concrete is not an integral part or a permanent part. Excuse me, I am jumping ahead. Let's get back to this one. I'm mixing two of these and I want to dive into the their permanence of work relationship. The concrete example here, that person's not a permanent structure, they're in for one project, right? They're here to pour concrete. Hey, I somehow got this concrete job, come pour the concrete for me and I'm going to sub it out to you and you're done. So the degree of permanence is, is not there. They're not a permanent part of the business and they're not going to be continually pouring concrete for every single project. Meanwhile, the permanence of the work relationship, which this by the way, ties into another part of the law which we're going to get into, which is number five, the extent to which the work performed is an integral part of the employee's business. So the degree of permanence of the relationship, some people would argue, oh well, we do month to month or annual contracts and we renew at will. Well, people are going to argue you till you're blue in the face because the permanence of the work relationship, if they look at your entire sales force, they've been there for months or years and so forth. So again, one would argue that the permanence of the relationship that you're not hiring per project, like a concrete worker, to come pour concrete for one job, where you just so happen to have concrete that needed to be poured, which by the way, I realize is a ridiculous thing, which is why I'm using that analogy. So again, the permanence of the work relationship, whether or not on paper it's penned that it's month to month, it shows that the people in that role are permanent, have a permanence to the work relationship. Okay, now again, even if it says employed, it will. That's my understanding of what I gathered from the attorneys. Now next one, nature and degree of control. I get argued on this. People say, hey Adam, you know, the nature and degree of control, we don't control them. They don't have to come in for meetings, they're on their own. But here's the deal. When aspects of the working relationship. So relevant facts include whether the potential employer controls hiring, firing, scheduling, prices or pay rates, or look at this, supervises the performance of work, including via technological means. So even if you say, hey, they're 10 and benign, they set their own schedule. If you control hiring, firing, scheduling, and this is a big one, pricing or pay rates. So if you're controlling pricing on your roofs, if you're controlling pay, which you should be, and if you have a CRM, it says supervising the performance of the work, including via technological means. So if you're in there and you have some supervisory nature of the CRM, which you. It's virtually impossible to run a company without doing that. Then again, the nature and degree of control means that they would be classified as an employee. All right, next extent to which the work performed is an integral part of the employer's business. So again, back to that concrete example, because that kind of parlays into this as well, that someone. If you're a roofing company and you had one concrete job, they're not an integral part of the business to be a concrete pourer. But sales. Would you say that sales is an integral part of your business? Yeah, sales is a very integral part to a business. So I can't sub out independently a integral part of my business. Okay. So again, looks at whether the work is critical, necessary, or central to the. To the employee's business. Tell me how sales is not an integral part of the business. And if you can figure that one out, you win a prize. But the way I've looked at this, the way the attorneys that I've spoken with have looked at this, say, there's no way around this one. All right, next one is skill and initiative. Now I'm going to summarize this one simply. Okay, Meaning if someone, again, the primary factor looks at whether the worker uses their own specialized skills to perform the work and support or grow a business. So in other words, the concrete worker who comes to pour, they come with their own work, their own equipment, their own skill. You're just like, hey, man, I need that concrete poured. And they show up, they do their thing. But in the roofing world, even if they're an independent contractor, if the, the, the, the fact that a worker does not use specialized skills or the worker relies on the employer to provide training from the job indicates that they're an employee. So one would very reasonably argue that even if they're a salesperson, if they come in, if you provide training on your systems and procedures, if you provide training on your CRM, if you provide training on how you do things in any way, they are not bringing their own skill and initiative. They can Bring a foundation, but you are providing other training and skills that they need, which again, makes them an employee. So between all of these six and the fact, which again, I regret saying, the 90%, the language states that if they're economically dependent. Now, that could be argued, and we could say that all of these could be argued one way or another. I think that these laws were written heavily in favor of. These folks would be classified in the roofing stance as employees. Now, I want to share a couple things. I've spoken with three separate attorneys in detail regarding this law, as well as studying it myself. Not one of them said there's even a remote possibility that you could be 1099. I know that there are folks that say, hey, well, If I'm a 30, excuse me, if I screw up the number 3058, direct seller status. Again, this language, from my understanding, still applies. Again, all of those attorneys were like, yeah, there's no way around this. However, there are two people that I know specifically. One who did roughly 60, technically $55 million in revenue the previous year. Large sales team, another one. And I don't know their total revenue, but I believe they had about 100 sales reps and both of their New York, fancy, expensive attorneys said, Your fine is 1099. I have no idea why. Which brings me to the next point I want to hit, which is the people that think they're okay and the keyboard commandos that are going on the Internet and they're like, oh, you know what, we're good. We're good. Because. And they think that they can outsmart this law. Well, my team rents the CRM and my team does this, and I don't tell them where to go, and they bring their own equipment, and I don't pay for anything. But I just want to bring up the actual threats. Okay? So number one is if there is an occurrence that could, could. Could trigger this to then have someone look into you, which, for the record, this is very, very important. I to this day know no one who has been investigated on a state, federal, or workers comp level. And one. Okay, so if they've been investigated for employee misclassification, not one person I know has won. In fact, when I was in the business, when we had 1099 people, we had someone quit. They ended up working for someone else. They quit again. They filed for unemployment. The state contacted me. I answered everything as the attorney advised us to. We had the contract. They had their own llc. They had their own insurance. We had their own business credit file. They invoiced us for everything. Everything that like all the boxes we needed to check in, the state said because you gave the marketing material, told them what they could sell and, and controlled. I don't, I don't remember if it was pricing or not, but I do remember for certain, because this was years ago, was that since we gave them marketing material and told them what they could control, that they were considered an employee by the state, but they weren't going to further investigate it because the guy quit previously. So again, just because the market material and telling them what they could sell. Well, man, I can't have him sell a pool when I'm a roofing guy. So every single person I've talked to has lost. So let's talk about these threats. Number one threat. You can have an investigation from the state, okay, you can have investigation from the feds, from the irs. It is my theory, by the way, clearly my theory. With the staffing up that, that we've seen in our current presidency of the IRS to unprecedented records that why would they not look into this stuff more than they have before? One would just have to think, okay, we have insurance investigations again through let's say auditable policies. And in fact, I just talked to someone who ended up getting investigated and their workers comp. The insurance company said, hey, that was employee misclassification. You're trying to dodge wages. They ended up with an auditable policy and owed buku bucks. And then the next thing is a lawsuit or an injury and this could be common. And I'm missing one more disgruntled employees. So remember the whistleblower office of the IRS. Let's pull this up. The whistleblower office of the IRS will pay 15 to 30% of the proceeds collected. So if I'm a disgruntled employee and I'm mad at you because I believe I was treated as deserving X, Y and Z, I can then go to the whistleblower office and blow the whistle. Same with your competitors. So again, state investigation, federal investigation, insurance investigation. If someone falls off a roof, if someone is driving your truck with a magnet or representing you while you're out in any way, shape or form, if they're deemed to have injured someone while they're on the job, you likely will get sued via subrogation. So then the. One of the first things that attorneys, personal injury lawyers will look at is employee misclassification. So that's another thing that it can come up. And then again, whistleblowing from a disgruntled person or competitor, employee, employee or 1099 or competitor. So we have the whistleblower office. Okay. So now we've covered the six factors that you need to consider. We've covered how this stuff could get brought up to you, meaning the threats that you could face. What I, what I want to talk about is the fines. Now, what's really wild on these fines is we've got fines on a state and federal level. So you'll owe back taxes as well as interest on the back taxes on the federal level. On the state level, you'll owe interest and back taxes. Okay, And I failed to mention that you can be fined on the federal level and the state level. My understanding is they can go back up to seven years. Now, what I have pulled up and every state is different. Colorado, for example, is one of the strictest states that it says a $5,000 fine per classified employee for the first minute classification and then a second or subsequent classification can be a fine up to $25,000. So you'll get state fines. You could have federal fines. You can have state taxes and federal taxes and interest on those back taxes up to seven years. So these, this is a really big deal. Okay, now, by the way, drop in the comments. I'm sure there's stuff I'm missing. We've done deep dives. In fact, I brought on two attorneys into the Roofing and Sold Reform alliance to present to our group. They had an entire presentation in a slide deck. They went through all of these laws. They answered our questions. And I have another attorney that I spoke with who's in one of the top 50 construction law firms in the United States that I talked with. And I'm now passing people over to him to speak with as they navigate these laws. And they've all come up with the same conclusion. And again, I realize there's things in this video I'm likely missing because I'm trying to gather a ton of information in as digestible of a package as possible. So comment below if there's stuff that I've missed. Okay, so we corrected the law. We talked about what happens with the economic reality test breakdown. We've corrected the 90% rule and we've gone into the threats that you can face. So now what we're going to do is just take a look at the additional expenses so sales reps and owners pay attention to this. This covers now Social Security. Independent contractors are paying. So if you're 1099, you are paying 15.3% in Social Security and Medicare. Okay, here's the numbers right from the IRS website and it says the current tax rate for Social Security is 6.2% and for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.5% for the employee, which is a 2.9% total. What ends up happening, by the way, is if you're an independent contractor, you pay the employee and employer amount, which totals at 15.3%. If you are an independent contractor, you need to understand that if you get switched to a W2, you will likely see a comp plan adjustment, meaning it will go down. But 7.65% of that is taxes you were already paying. Now, owners, managers, your company will be taking on the 7.65% of Social Security and Medicare for the employee. In addition to that, you can use free resources like Gusto. Gusto can give you, state by state, a breakdown. Annual wage Sales rep makes 150,000 and they click calculate and you're going to see the breakdown roughly right here. So if the person makes 150, they're actually going to cost you 161. But that's not all. What we need to add in is state and employment insurance, which is sui. That's going to vary state by state. And we're also going to need to add in workers comp insurance. Now, in the pitch. Excuse me, in the Roofing and Solar Reform alliance, formerly known as the pitch row movement, we had a member share their breakdown of how they were able to negotiate the lowest possible rates for workers comp by understanding the classifications. So they could then not only write their job description to match that classification, but then hold their salespeople accountable to those standards, which again, save them tens of thousands of dollars on workers comp. This is the kind of thing that we do in the Roofing and Solar Reform alliance, bringing folks in and sharing information like this so that worksheet is available to exclusively to our members. Now. Now, of course, it's important that by doing this we're upholding the spirit of that classification, making sure that our team is again, not getting on the roof with tools, et cetera, which the guidelines and the training of the organizations that are doing this are saying very strictly is what you can and cannot do on the roof, what you can and cannot bring on the roof, et cetera. And it's saved them a bunch of money. So your additional costs are Medicare and Social Security, your state unemployment and your workers comp. Now, it's important to note that some states have additional expenses. Like in Colorado there's like a family planning law, so we're paying into that. So again, you'll have to look into this by state, but once you figure that part out, you'll have a really clear idea of what these employees cost you. I've recently, within 48 hours of this law coming into place, I have updated my recruiting training where I break down my pay plans. That's called how to build you'd dream team. And I break all this down, including the factors to consider for minimum wage requirements as well as commissions tiers to start at and getting deeper into these expenses now, that should cover it. We've covered a tremendous amount of ground on this video and I just want to say first, thank you for challenging me. I had a few people reach out asking specifically my name. Jacob just this morning says, man, you know, people really turn to you and I see this 90% number coming up. So I appreciate the opportunity to set the record straight. My intention, just so you know, was to simplify this rule in the easiest way to digest possible. And I learned a valuable lesson to not do that and be very careful about what I put out. So help me. Thank you for helping me get better and thank you for joining me as we broke down all of these implications. If I missed anything, please drop it in the comments section below. And if you want to become one of us and join us in the trenches to navigate things like this law, the new Louisiana law that just passed, and more, I'd love to. I'd love to tour you around and maybe the Roofing and Solar form alliance is right for you. So click the link in the description to learn more. You get access, by the way, to my complete sales system and training, weekly support through ongoing training sessions, daily support through our private app, and a whole bunch more, including the ultimate endorsement. Hey, thanks again for joining me on this video. I'm going to punch you over to the first one right after this. If you didn't watch it, you can hop into that and hopefully this helps you navigate this loft, whether you're an owner, manager or sales rep. Appreciate you. See you on the next one.