Playing by the Law: 1099s vs. Employees

by Chris Arlen on January 7, 2011

Print Friendly and PDF

The beginning of 2011 finds me a little more ornery than normal. May be old age, or an unusually cold winter. Either way here’s a touchy topic and an ornery response.

Suppliers hiring employees as 1099s

I’ve heard an increasing number of service suppliers complain about the black hats in their industry who hire workers as independent contractors (1099s) when they’re really employees. As 1099s, the supplier avoids lots of costs, such as insurances, payroll taxes, overtime pay, and other costs that true 1099s are responsible for on their own. That is if the workers were truly 1099s. That’s the swap black hat suppliers make; employees for 1099s.

As a result, black hat pricing can be significantly lower than suppliers with employees – providing the dark side unfair pricing advantages for new business.

The improper (read illegal) use of 1099 workers instead of employees has likely increased during the Great Recession. Black hats may have become more opportunistic seeing more price sensitive customers out there. Customers may have become more blind towards suppliers’ practices now their survival is on the line.

Most of the instances I’ve heard of suppliers illegally using 1099s are in the janitorial industry. The practice gets even cloudier when a contractor subcontracts a portion of their work and their subcontractor has switched their employees to 1099s. How much responsibility does a prime contractor have for checking on their subcontractors’ hiring practices?

Mistaking employees for 1099s?

IMHO (In My Honest Opinion) there’s no reason to confuse the proper employment status of an employee for a 1099.

The IRS doesn’t think so either. Check out theirĀ  Employee vs. Independent Contractor. If you want them to check for you who’s an employee and who’s an independent contractor they will, you betcha.

Who suffers anyway?

More than many of us might believe. Try: the industry’s reputation, market pricing, white hat suppliers, workers and customers.

Poor industry reputation lowers service to commodity level

When a black hat explodes the fallout taints that service industry, sometimes even harming outsourcing in general. Remember Walmart and the undocumented worker scandal (Feds: Wal-Mart Knew About Illegals)?

Bad PR for an industry has the effect of lowering it in the eyes of customers and their buyers. And when buyers have a lower opinion of an industry, it’s easier for them to commoditize it. Once that’s done, squeezing costs out of a commodity is easier than gaining the best value from a strategic service.

Market pricing

Black hat pricing is artificially low. It deludes customers into thinking they’re paying the appropriate price – and that incorrect price now becomes established as the low water mark for service.

Hard to correctly price service relative to that lowball. Legitimate suppliers’ pricing can now appear inordinately high. Customers may wrongly think “what’s going on here, are these suppliers trying to gouge me?”

White hat suppliers

When a customer has their service disrupted because a black hat supplier is caught, the word goes out among that customer’s peers. That broad brush catches all suppliers and makes them look less than trustworthy, regardless of their innocence.

Workers

Service workers work hard. If you’ve cleaned thousands of square feet per hour, night after night, month after month, for years you’ll know. When hired as 1099s, workers don’t get overtime, are responsible for their own insurances and paying taxes (and other business tasks as well). They’re locked out of the protections we take for granted as employees.

Customers

Bad PR also splashes onto the customer who hired the black hat suppliers (again, the Walmart experience).

What can the good guys do about the black hats?

As promised, here’s the ornery response. If you’re one of the good guys (worker or supplier or customer) tell the IRS about the black hats.

Yup, point the finger. The IRS finger that is.

You can do it anonymously, using IRS form 3949A. You don’t need to identify yourself. The exact language on the IRS form says:

“6. Enter your name, street address, city, state, zip code and a telephone number where you can be contacted. Indicate time of day you may be contacted if appropriate. This Information is not Required to Process Your Report.

The IRS form highlights that last sentence in bold and in a larger font. They really want you to know they’d rather hear from you, than not.

In the end

I don’t think there are large numbers of black hat suppliers, but there are a few. The lawful consequences may help (may) level the playing field for the good guy suppliers, and in turn better protect workers, customers, and the reputation of outsourced facility services.

Good luck in selling and serving with a clear concience.

~~~~~~~~~~~~~~~~~~
Chris Arlen
President
Revenue-IQ

If you enjoyed this article, get email updates (it's free).


(We respect your privacy.)

{ 7 comments… read them below or add one }

Leave a Comment

Previous post:

Next post: