Roofers Forced to Change 1099 Sales to W2 | Top 50 Lawyer Explains

He said that in 30 years of legal practice, he's never seen one case that won when they investigated employee misclassification. That's right, the 1099 or independent contractor versus W2 or employee can of worms. Philip Siegel is an attorney with HPSS, one of the top 50 construction law firms in the United States. He's been practicing personally for many, many decades. He's the most experienced person I've spoken with about this new law, the FLSA act, that was effective March 11th. I real that I've done a few videos on this topic, but there are so many avenues we need to explore. So in this interview, we lay out everything from is there a way around this? What have you seen in the case history from over 30 years of practice? What have you seen in the last month, the first 30 days of this law coming into effect? And we get into the big questions of can you pay your team commission only if they're in sales and what implications do you need to be aware of?

Now you're going to want to pay.

Attention to the entire thing because what we also break down the threats of why and how an investigation might occur, as well as the consequences of those. In fact, Philip, being an attorney highlighted things that I didn't in my previous videos. So without further ado, let's get right to it.

Hey Philip, thank you so much for being here. We got connected from Dave Sullivan and you and I have had a chance to speak about this new law, FLSA, effective March 11th of this year. And you were one of the first people I spoke with. In fact, you're listed throughout all of our training center. So I really appreciate you being here and getting into this conversation. Before we kick things off, do you want to introduce yourself and a little bit of your background here for our folks?

Adam, I appreciate the opportunity. So my practice, I'm a primarily a labor and employment attorney in the construction industry. My firm, Hendrick, Phillips Salzman Siegel, we've been in business since 1981. We're our construction boutique law firm. We handle nothing but construction matters for our construction trade contractor clients. And in the labor and employment arena, you can imagine I'm dealing a lot right now with the misclassification issue, among other hot topics right now affecting the construction industry in the labor and employment arena.

Yeah. Awesome. So, Philip, let's jump right to it. You and I have talked. I think we're on the same page. I've done quite a few videos on this topic now, but let's just cut to the chase. Is there any way around this for people to maintain a 1099 sales staff and not make the switch to W2.

Yeah, Adam, that's a tough question to answer because in almost all instances where I've been asked to analyze these relationships, I really have yet to have the winner. And that's because the way that the Department of Labor has set up the rules, they have really turned the tables in terms of what was the rule under the Trump administration to where we are now under the Biden administration. When you consider all these factors at play, the typical roofing contractor engaging someone for sales or installers, as they're referred to, those tend to be on the losing side of things. Does that mean you can't have the winning case? Yeah, it's going to be rare, as I understand the industry. And then I would leave. The only other hope out there, Adam, is, you know, if some of the litigation that's been filed actually results in a court, you know, staying the enforcement of this Department of Labor new rule. But that's not yet happened in the rules. Now, as you've noted, have been in place and effective since March 11th.

Yeah. So have you ever seen, have you ever seen anyone win a case that had 10, 9, 1099 salespeople that were investigated in some respect? Have they ever won saying, hey, they. They actually qualify as independent contractors?

Yeah, my personal experience, Adam, the answer. I have yet to have that winning case. And it's because when you consider each of these factors that the totality of the circumstances as the analysis is applied, we're losing more often than not on each of the individual factors, which is a change. I mean, if we had this conversation a couple years ago, under the Trump rule, we were focusing on really only two key factors as opposed to the six. Now, in a totality of the circumstances analysis, we were dealing with the focus on two core factors, which made it a lot easier. The bar was set a lot lower to properly classify someone as an independent contractor. But with the new rule, that old one's been rescinded and, you know, the bar is significantly higher to do it. Right. And, you know, in all candor, I have not had the winning case. And that's because when you consider the factors, you know, we're on the losing end. And it's no defense to say, and it's what I often hear working with contractors across the country, the individual wants to be classified as an independent contractor. Well, you know, that's. I get that. But these are rights under the Fair Labor Standards act that cannot be waived. And if the Fact finder, judge, jury, arbitrator, auditor comes in and determines you've misclassified someone, the person's intentions or desires is not part of the analysis.

Yeah, and I too have never seen anyone win that has been investigated on 1099 versus W2 and 1, not once whether that was state, whether it was federal, or whether it was even from their own insurance company. So moving on, I know this law has been in effect now just over a month. What have you been seeing in the last month that's new compared to where we were at before?

The biggest one, Adam, right off the top of my head, I'm doing as a labor and employment attorney in the construction industry on a national basis. I'm doing a lot of ocean defense work. I mean, I'm getting citations regularly, unfortunately. And there is no doubt that there has been a shift in terms of, or really, I would say an expansion of OSHA's compliance, safety and health officers investigation into this issue. When our client is being cited for what we articulate is a subcontractor's violation and with the documents that are being requested in these inspections that have opened up post March 11, undoubtedly the compliance officer is exploring whether these workers are properly classified as independent contractors. What I expect to happen, because in most of these instances so far, I know the citations have yet to be issued. This is all part of the investigation. These OSHA compliance officers have six months to issue the citation. But knowing what they're asking, I'm discussing with the client this potential exposure. And like we began, Adam, you know, when you go through those factors, our clients are being informed in that context. You know, you potentially are going to have back to back problems. The citation is going to be issued. You're next going to hear from the wage and hour auditor. And we're taking steps. In some cases, it's up to the client. It becomes a risk benefit, cost benefit analysis. Do they want to act proactively in transitioning these 1099 workers to employees?

Yeah, makes sense. And I see a lot of people doing that right now. In fact, I would personally recommend that people do that right now and get ahead of it because the fines are the fines and financial penalties are pretty big, which I'd like to touch on. But before we do, do you predict anything? I mean, I know that you can speak to your expertise, the law off the record, like what are your personal predictions of what the future of our landscape as roofer looks like with this new law in place?

So Adam, it's a great question. I will say that, you know, prior to this new rule and the Trump rule that was in place, there was at the state level a big push on this issue. And you had state task force agencies being created to focus on this issue. While I talk about my own personal experiences and everyone that I've been fortunate enough to handle, they've all been losers, I will say I haven't had a ton of them, you know, so, you know, how, you know, likely is it for someone to get caught, so to speak? And that's the. Every one of our clients that is operating with independent contractors is struggling with this issue. You know, Philip, if I move them all to employees, I'm going to be at a competitive disadvantage. Well, you've got a business decision to make and, you know, what's the likelihood of you getting caught? And so I, I will say that when there was a significant focus on this, really just before COVID I, while it was well publicized, it wasn't like we were dealing with the new issue where this was the focus of the government prosecution or audit. So people need to consider how likely am I to get caught. I talked to you about the OSHA context. There's one other one that I've seen have come up in the last month, and I don't think it's. I think it does tie to the new rule. These independent contractors, even the person that wanted to be classified as an independent contractor, they get hurt on one of these jobs. Now they're looking for your workers comp policy. And you want to say you're not an employee. Well, you know, that's not a function of what you say. It's a function of how the law applies and this new rule. So those are two areas where you're potentially going to get caught. You got to figure in the roofing industry, with your work being out there in the open, you know, there's a greater likelihood that, as opposed to the trade that works inside, that you'll have an inspector drive by and open inspection. Yeah, but you know, Adam, that, that's the rub. It's, you know, if you're going to get, if you're caught, in my experiences, it's, it's. We're doing it wrong and we'll have to make changes.

Yeah.

The question you'll have to deal with, your members have to figure out is how likely am I get caught and what are the consequences. You talk about. I talked about the workers comp. But it's also the back pay in terms of overtime. Any of these individuals work more than 40 hours the look back period is two years. If there's an argument you did it willfully, the government will tap on attack on a third year. Whatever wages are owed in a lot of these cases, they're automatically doubled. And you'll have potentially, you know, payroll tax liabilities and, you know, interest and, you know, attorney's fees potentially as well. And attorney's fees can be the biggest component of it. You know, you only, you may only have a client paying like 10,000 in back wages, but it may have cost 50,000 in attorney's fees to recover the 10 grand and you're on the hook for all of it.

Yeah.

That one disgruntled worker who regularly worked for more than 40 hours can be the person who rats you out. Yeah.

And that is a. So I want to get into that. What happens before we get into that? Actually, the, you mentioned that the wages, they can go back for two to three years and that's for minimum wage. Now, what about back taxes? Is my assumption correct? That's, isn't that seven years?

You know, I'm no tax expert, but the tax liability and the exposure for the tax liability may very well go back longer than the two year period.

Okay.

And the other thing I want to be compelled to note is when these claims are made against these companies, you know, you're typically not keeping payroll records of your independent contractors. If you are, that's another one in the lost column. You know, you, it's inconsistent to classify somebody as an independent contractor and then having them clock in and out. But that really comes back to bite you because not having those payroll records when the law determines this person is an employee. Now you've got the record keeping violation on top of the wage violation.

Yeah. Wow. So the threats, for someone to, to have the government look into them, we have injury, which obviously can be one piece. You've got an IRS audit, you have Department of Labor issue, you've got an injury. Unless I said that one already. And then we have. Anyone from the state could look into this. What other kind of triggers do you see that would say, hey, we're going to, we're going to give, give this a closer look.

Okay, so all of those are big ones. The other two big ones are if you're doing work on a public project that's subject to the Davis Bacon act, or again, just any construction project that's highly visible, and the Department of Labor swoops down what purports to be just a wage and hour audit. What ends up happening is as part of the wage and hour audit. There's a request for documents, and the Department of Labor maintains subpoena power. So there's no escaping this. Among the documents they're asking for are the 1099s you issued. So they're exploring whether, you know, when they get those 1099, they're identifying the workers you classified, and they're going to potentially investigate and explore whether those people are properly classified as 1099. And that could just be a random audit just because you're on the project that's being audited. The other scenario is the immigration, the i9 audit. Now I'm starting. These are creeping back up on my radar. I was doing a lot of I9 defense audit. Defense, what's now probably two, three years ago, kind of disappeared for a little bit. But I'm getting this work back in the context of an i9 audit. That first shot across the bow, that form that says what documents you're to produce, they're also asking for the 1099s. They're trying to determine whether you're looking to evade I9 compliance obligations by classifying people as 10 to 99 workers rather than employees. So those are really. That covers really the gamut of where this has come to my desk.

That's. That's a big deal. That's a really big deal. Do you believe that IRS audits, tax audits, will begin to look into this in a deeper way than might have been done in the past?

Yeah, you know, that's. So the IRS is not. They've had. Interestingly, they have their own analysis that separate, somewhat consistent, but separate and different, not identical to the Department of Labor's rule that's just been published and became effective last month. The IRS rule has been in place. I don't hear what I can say, actually, unequivocally, I've not, in my almost 30 years of doing this, had a client called me and tell me this issue has come up in the context of a tax audit. You know, take that for what you think it's worth. But I will say I've been fortunate enough representing a lot of companies over the last 30 years and the firm as well. None of that's never once been brought to my attention. Rather, it's those areas already covered where it's come into. Or state unemployment audit. State unemployment insurance audit would be another context in which a state auditor is suggesting this without anybody else having raised the issue. And then, you know, we're arguing the case at the state level, which is, you Know, Adam, an important point, we're talking about the federal Department of Labor new rule. I mean, there are several states that I imagine your companies are working in that it's even tougher because they're working under what many of your members may know as the ABC rule, which is. Department of labor consciously chose not to go that route. But there are several states, California, New Jersey, Illinois, Massachusetts, among others, that basically if you're a roofing company and, and you're employing a roofer to do the work, you lose right there. That's the ABC test. But the Department of Labor didn't go that far. And it does Department of Labor rule. Although having these six factors in the totality of the circumstances analysis does give a nod to, you know, we'll look at anything else that potentially indicates an entrepreneurial opportunity. But that's just really a nod to what the Trump rule was. I think we're really operating under the six factors that make, you know, stack the cards against properly classifying someone as a 1099 worker, especially in the roofing and construction industry. Yeah.

So a lot of owners I've spoken with are concerned about making the switch. Going from 10 to W2 is a whole new territory for them. I know we're not here to talk about all the different steps that need to be taken. If you want, jump in a previous video I did. We'll put a link at the top of this video to bring you there. But a big question that comes up. Can I pay commission only if I have a W2 employee?

Yeah. And that's a question I get a lot as well. In the first place, I begin to look at, well, the, the analysis begins, okay, we're taking a 1099 worker. They're going to end up on our payroll. The first question we're asking ourselves from a wage and hour issue is, okay, do I have minimum wage, payroll and overtime obligations for this new employee? In other words, are they going to qualify for one of the exemptions from the record keeping, minimum wage and overtime requirements? Sometimes these are commonly referred to as white collar exemptions. You've got the administrative exemption, the executive exemption, the highly compensated exemption, and then there's the outside sales exemption. In the last six weeks or so, I've been fielding these phone calls. That outside sales exemption seems to be one these companies are grabbing onto. Again, we're taking the 1099 salesperson and we're making them an employee, but we're paying them commissions only we're not having to require payroll record keeping. We're not requiring minimum wage and we're not paying overtime. But to qualify for that outside sales exemption, the individual's primary duty needs to be the sales. They need to be regularly occurring outside the employee's place of business. And if the person is working at home, that person's home qualifies as the employee's place of business. So it's more about the individual, the outside salesperson who's making like a door to door sale at the customer's residence. That's the type of work that would fit within the outside sales exemption. If we're not in the outside sales exemption, then the next common place we're typically looking, you know, every case is, you know, fact dependent. But you know, if the, how much money is the individual being paid in terms of a salary for? There's no salary requirement for the outside sales exemption. But for the administrative executive and the highly compensated, there is a salary level test and a salary basis test and then the job duties test. And you know, maybe with, if we had an independent contractor that was an estimator, you know, maybe, you know, typically I'm exploring with the client, do they fit within the administrative exemption? If the 1099 worker. Listen, I again, I don't mean to be disrespectful to anybody, but the common company doing it wrong is hired a crew leader and that crew leader has a crew of workers. Well, if you classify the crew leader wrong, you classified them all wrong. But do we have an argument that that crew leader falls in the executive exemption because they're going to be supervising the work of two or more full time employees and they'll maybe have a say in hiring and firing and they still have to meet that salary level requirement. But then that may be an opportunity to fit that crew leader within the exemption. Otherwise you are having to record the hours worked, you're having to make sure these people are paid minimum wage and they're getting time and a half when they work more than 40 hours. And then in those instances, you know, it's a tough switch. But we're working with the client primarily. You know, Adam, I'm focused on the morale and how, you know, how can we make it so the individuals understand they're not going to be making less money. We're going through that analysis, you know, but I have the companies that tell me, I mean, I've been doing and keep talking about this because I'm representing the roofing contractors across the country. You know, Philip, if I do that, they'll stop working and they'll Go down the street and work for. I can't do anything about that, but I understand it. And you know, that's going to go back to I want to make sure the person that's calling me is making an informed decision on what they're doing, that if they're going to keep things the way they are. When I've told them if you get caught, you're losing, that they know what the consequences are.

Yeah.

And they're on their way one way or the other. Yeah. For those that insist on the independent contractor relationship, even in the losing case, like I suggested, they all are, we are working to try to get, you know, put something out there to help us. And you know, that typically is the contract and have making sure. And these are two important points for your listeners. Making sure that contract includes a couple important provisions. One, that the company is free to work for others, the independent contractor. And number two, the independent contractor is free to refuse work. Free to refuse work from the employer. And those are two provisions sometimes we see missing and we add them and that helps. But it's not going to win the case if this person is otherwise losing on all the other factors.

Yeah. Knowing when you, when you start off saying I don't know anyone that's won a case, it's hard for me to believe that those two clauses are going to make the world of a difference.

They don't, but they might, depending on the context, you might be able to do away with it and hope it doesn't come back another time or you're negotiating, you know, outside of that third year or outside of the doubling of the back way, just the liquidated damages. Yeah. But no, if you're going to lose on all the other factors, your substance is going to control over form. Yeah.

So you mentioned working with your clients on the culture when people are making the switch and losing people. It came up today, by the way, with our members inside the Roofing and Solar Reform alliance and this one gentleman asked, you know, how do we, how do we handle retention? Are people going to leave? And the answer is yes, as an employee. Excuse me. The answer is yes, some people could leave because they always will with change. But the truth is the independent contractor is paying 15.3% for Social Security, Medicare and as soon as you make the switch and then they're an employee. Employee, the company is now paying the 7.65% for Social Security, Medicare. So their comp plan will have to adjust.

And.

And then you have to factor in the additional expenses of having an employee with the very minimum of workers comp. And so comp plans will be lower. However, when it comes to communicating to the salesforce says hey there is going to go down the street. I would just pose a question. If it is without a shadow of a doubt not the legal way to operate, why would you want an op? Why would you want to work for a company who's not operating legally? What else are they not doing? That's the question that I bring up.

There's that and I'll offer your viewership another tidbit here. Now this cuts both ways but you know there is the option available to have agreements in place that make it more difficult for the worker to go down the street to work for a competitor. Think about a non compete or non solicitation agreement. Now those agreements, you know, may put one in the loss column in terms of, you know, how is that more indicative of an employer employee relationship or an employer independent contractor? You know, I can argue in both, you know, both sides of that you've got legitimate business interests and you may have a true independent contractor that hits on all of those factors. And you would want potentially a non solicitation agreement at least where they're not able to solicit their customers. The non competition. You know, that's going to be a little more harder to overcome whether you're facing when you're faced with this misclassification issue. But you know there are some tools out there that can lessen the likelihood of that happening. But it's you know, again it's also double edged sword.

Yeah. So Phil, correct me if I'm wrong, I'm sharing my screen here. This is the Department of Labor website on the wage and hour division showing the exemption here for outside sales employees under the new fsl. So I'm just going to scroll down here.

Yeah, this is actually this. Yeah, this covers all of them. That outside if you deserve. Is that a hyperlink right there? Because the outside sales it does have its own page devoted to it and if you scroll down they'll hit the key factors there. Well there they are. If you scroll back. Well that's it broken down some is right there. That second bullet point was the one I talked about customarily and regularly engaged away from the employer's face business. Just noting that if they're working remotely out of their home that it's like the company's office. Yeah, but. Well go ahead. I mean Adam, this is where I in talking with companies over the last month I'm they're reporting to Me. Oh, that's where these people would fit. And okay, run with it. So.

So if I'm understanding this right, the outside sales exemption would apply. We, we talked about this before. I filmed the updates for our training program. I linked to your. Excuse me, I'm connecting folks with you. You've connected with some of our people already. The outside sales exemption is one thing, but they not only have to say, hey, that, that fits me, but it has to actually fit them. The job description has to fit the outside sales exemption. And then we also have the layer of the state because the state could be different than the, than the Fed. So now we're looking at federal regulation. Can you touch on one. Anything I misspoke about so we can correct the record and then to any, any special implications that people need to keep in mind on a state level, which is different, obviously, state by state.

Yeah. So on the first one, you hit on an important point. That job description. You know, one of my presentations, you go to my firm website, you can see I put this one up there. Top 10 employment mistakes made by construction trade contractors. Not having a job description is on that list and for a number of different reasons. But in the context of our discussion here today, you want to make sure. And this goes, Adam, beyond just the people, the 1099 workers we're talking about today, we're talking about any of your employees, to the extent they're classified as exempt from overtime, you want to make sure that that job description contains job duties consistent with the exemption under which you're fitting them. So to bring it back to what we're talking about here today, the outside salesperson's job description needs to be clear that, you know, sales is the primary duty and these sales occur at the customer's place of business. And you know that that would fit, you know, be consistent with what qualifies for the exemption in the first place. Yeah.

So on the state level, what do we need to factor in state by state?

So on the state level, unless bull. And I would say the majority of the states fall back on what is the federal rule, there are the few exceptions to the rule, and those are the states that. Look at this ABC test I mentioned, you know, I don't have the litany of states in front of me, but I know California is right there at the top. I know Illinois recently put something through. I mentioned, I just read something about Massachusetts, Pennsylvania, maybe Washington. We can explore that. Or you can go to these state Department of Labor websites and figure it out. But the way that the landscape is today it's really down to these states are either in the federal defaulting to the federal rule or they're into that ABC test. And the ABC test here we spent this time talking about how the Department of Labor's rules raised the hurdle in terms of properly classifying someone as an independent contractor. Well, the ABC test and this was the fear, I mean there was a. When the Department of Labor put out its proposed rule back in the fall, there was concern that the Department of Labor would take on the ABC test and there's even been proposed legislation outside of the context in which we're discussing that tags on the ABC test and for political reasons. But in any event, the ABC test raises the hurdle even higher. And it's because that one factor I mentioned kind of in passing during this call, it's if the worker is actually engaged in the business of the employer, that's a, that you lose right there. So the roofing company that is employing installers under the ABC test, you're losing. It's just being mindful of if you're in a state that is that ABC rule and if you are, if the cards are stacked even higher against you and you're also more, you know, I would logically think there's a greater likelihood of getting caught because you've got to worry about state auditor. Top of the federal auditors.

Yeah, yeah, yeah. In the state. The state. I, I've, well that's a whole other can of worms. I, I've talked to more contractors that have issues on a state level and that's what escalates things and, and kickstarts the process for many as it did for me when I was a contractor as a state, state thing. So Phil, thank you so much for being here. We covered a tremendous amount of ground and I know that we've been still only scratch the tip of the iceberg. Who's a good fit to work with you? If a contractor is tuning in and says he might need some help, can you just define like the type of contractors you like to work with and who's a good fit? And then we'll link to all your, your website, phone number, all that we'll put right in the description below.

Really appreciate them. So I would describe our bread and butter client is a sophisticated trade contractor, one that's not working out of the back of their truck. They're involved in association work that when I say sophisticated, typically it's a family owned business. I'm dealing with the owners of the company or you know, extremely high level management, and I'm available to those companies. These labor and employment issues, you know, whether it's a classification issue, an OSHA citation issue, one of your members is contemplating a termination and wants to run through whether it's, you know, time and proper to proceed. You know, you know, those are the kind of things I handle. And then my firm, any typical construction dispute, you know, disputed back charges, delayish claim issues, just trying to get people paid, Adam. You know, typical construction issues, that's what our firm does. We do it around the country.

Awesome. Philip, thanks again for being here.

Yeah, hey, my pleasure. Thanks for having me. Be safe out there.