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Ep. 96 | Knowing the Difference Between An Employee and an Independent Contractor

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On this episode of The Mobile Home Park Lawyer, Ferd discusses what the differences are between employees and independent contractors. Ferd highlights exactly what sets them apart, as well as how to legally distinguish them.

 

HIGHLIGHTS:

0:00 – Intro
0:57 – Liability, unemployment insurance and taxes are the key distinctions between employees and independent contractors
1:59 – Most MHP owners prefer independent contractors over employees
2:42 – Is an independent contractor truly independent? They’ll have an LLC, workers comp, shirts, and trucks with their name on it
3:29 – They’ll want to get paid per job rather than per hour
3:47 – They’ll have other clients
5:09 – They’ll have their own business license and work at an off-site location
5:28 – They’ll have their own schedule
6:18 – Employees have more oversight
6:27 – Most employees will be full-time but not always
7:05 – If it feels like an employee relationship, you should probably get workers’ comp
8:00 – Your workers’ comp policy will be audited regularly
9:09 – You can fire an employee at any time
10:30 – Employees are people who are part of your regular operation
11:58 – It doesn’t matter what you call someone, it matters more how they work

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation. Ferd Niemann here again with another episode of The Mobile Home Park Lawyer Podcast. Today, we’re going to be talking about employees versus independent contractors. And I know a lot of people that say, well, I’m not an employee, I’m an independent contractor or vice versa. And really it’s not the title or even a written job description. It’s really the practice that matters. And you may wonder why this matters. I mean, key things among all would be liability, if something goes wrong, you know, you’re probably in a better place. Independent contractor has his own, his or her own responsibility. And it’s not your problem. Whereas an employee, typically the employer’s going to have some level of responsibility.

Other key items to worry about with employees versus general contractors or independent contractors is who has to carry unemployment insurance and general liability insurance. And then if someone is terminated, then is their unemployment benefits available.

Another key distinction is whether or not the employer does or is required to withhold taxes or pay FICA, social security, Medicaid, which is 15.3%. Typically it’s 7.65 for the employer, 7.65 from the employee. Well if you’re an independent contractor, you’re supposed to pay all 15.3 yourself. When you’re a 1099 employee at the end of year, you get a 1099 instead of a W2.

So ultimately what I have found is most mobile home park owners or most business owners in general, don’t want employees. Because employees, sometimes they’re a pain. I’m appreciative of my employees, but you know, I sometimes joke that, I used to be a people person but then people ruined it for me. And if you’re in the landlord business long enough, you’ll have tenants and you’ll have employees that will ruin it for you.

But in all seriousness people don’t like having employees because they don’t want to have to deal with withholdings. They don’t have to pay unemployment tax and they don’t want to have liability. The reality is, you may have an employee and not recognize it. So key things to think about. I mean, in general, does it pass the, you know, the smell test, you know, independent contractors, are they truly independent? So an independent contractor is, let’s talk about like a labor or maintenance person or somebody doing the mowing or somebody that’s putting in your skirt and building your decks.

A true independent contractor is probably going to, you know, have a truck with their name on it, have a shirt with their name on it. It’s probably going to own their own LLC. It’s probably going to carry their own workers’ comp, general liability insurance.

In fact, true independent contractors in most states that they have, you know, payroll of at least two other people and, or have a certain payroll threshold say $40,000 a year, they’re required by law to cover their own workers’ comp and GL policies now. Don’t quote me on those amounts. It’s going to be state-by-state basis, talk to your insurance provider. But a true independent contractor, they’re going to use it on equipment. They’re going to basically get paid per job, like upcharge it at $1500 per deck. They’re not going to be charging you by the hour.

Now, some independent factors like plumbers, electricians do charge by the hour, but as far as regular construction-related, it’s probably a per job. Another thing, a true independent contractor is going to have other clients. I mean, I had a guy he’s like, I’m an independent contractor. I insist. But honestly I held worker’s comp on the guy for six years because he didn’t work for other people, you know, gave him 40, 45 hours a week for years. And he had his own LLC and he thought he was an independent contractor, but we gave him specific tasks every day. Look, paint unit number nine, paint unit number 10, just the master bedroom and paint it blue, fix the shingles on unit number five, mow the grass in the whole park and things like that.

Like level of autonomy is probably the key variable. An independent contractor, you’re not their boss. You just hire them to do a job. And if they want to, and for example, painting, you know, I used to paint and when I paint a room, I edge first and with the brush and then I roll the walls. Some people do the opposite, roll the walls first and then edge around the corners. Ultimately, it probably didn’t matter that much, but you know, my old boss my dad made me do the edging first. So that’s how I was supervised. So the fact that he was having that much oversight on me, it showed that I was not that autonomous. So, you know, this was in the household, but I would have been more employee and less independent contractor.

A lot of independent contractors will or should have their own business license, either under their own name or under some sort of LLC or corporation. And typically they’re going to work at an offsite location. You know, like I’m going to work at the mobile home park. I’m not going to like office and Ferds’ headquarters, things like that. And within reason they have their own schedule. I mean, like we’ve got this painting crew that they’re truly independent contractors. They have their own GL worker’s comp and they schedule us in like, Hey, I need you to paint 10 mobile homes. They’re like, well, I’m booked out three weeks. You know, I’ll get to them then.

And sometimes they show up three weeks and two days later, and I can’t really get mad. I don’t fire them. They’re not my employee. They just say it rained. Okay, no big deal. But that’s more like an independent contractor. Employees are paid regularly, whether it’s once a week, once a month, twice a month, whatever, it’s basically same cycle. Now, if they’re paid on an hourly rate, you know, 35 hours or 40 hours versus 42, the next week, they might get paid a different amount. It don’t have to be necessarily a salary or exempt, but they’re paid regularly. Not by the job.

Employees typically have more oversight. Whether it is training or really just supervision and direction. Typically employees are full-time, don’t have to be, you know, versus the independent contractor, they’re more set time. You know, I have a legal assistant, she works 21 hours a week. It’s part-time, but it’s the same 21 hours a week. And sometimes it’s plus or minus. I have other employees that work the same 45 hours a week. I have independent contractors that work as much work as we get them in the weather. And the weather allows. So sometimes it’s 40, sometimes it is 50, sometimes it is 60, but they get paid by the hour. Some of them are probably employees and if it’s gray, here’s the phrase that pays as a Colonel Eckart you say in law school, the most important thing to learn is, if it’s gray, if it feels like it might be an employee, you should probably have workers’ compensation and liability coverage on that employee/contractor, because you can get stung badly. And workers’ comp is not that expensive. We typically will have it to our management company because it’s cheaper, more efficient to have it at one entity. And then that entity pays for the labor, for all the other LLCs and then just gets reimbursed. But all the employees and independent contractors work for Guston property management.

Now, if I hire a professional vendor that I have a copy of their workers’ comp and their GL policy, like I just did $50,000 asphalt work at one of our parks, that guy was legit, had his own stuff, had his own paperwork. The land LLC for that property paid him the $50,000 directly, did not need to go through my management company.

And unlike most audits in life, your worker’s comp policy will get audited on an annual basis. And if you claim you only had two workers making 10,000, your premiums will be a lot less than if you have three workers making 30,000 each. The reality is you get audited and you are going to charge up or chargeback the subsequent years. I don’t know all the ins and outs of worker’s comp insurance, but what I gathered from the rate that I pay is, it’s a function of really two things, wage earned and job duties. So if my painter slash maintenance guy makes 50,000 and my bookkeeper makes 50,000, well, the wage is the same, but the job duties are different and the contractor’s going to be at higher risk of injury. So the premium for that insurance is going to be higher.

Now, if I have a different contract with the same job duties, and he only works half time, he makes 25,000 a year. Well, then the premium be less because in theory, he will have half as likely of getting hurt. Cause he’s half as likely to be working. That’s essentially how they do it. But it’s important to have workers’ comp general liability insurance and other things that make it clear that your employee is you can just fire them, you know, at any time rather than like individual jobs, like if I hear the painter and say, paint 10 mobile homes, and I’ll pay you 4,000, I can’t very easily fire them after 8, unless there’s some of that provision in the contract. Cause they’ve got a right to paint 10 and I cannot hire them for the next chunk of 10, versus an employee I can fire them if I don’t like their haircut. Now that’s an at-will state like Missouri, I can say I don’t like red shirts. I don’t like hair, guess I am firing you. Other states, you know, they have more workers’ rights. You’ve got to know your state laws.

I used to work at Jackson county government and we had a merit commission, it wasn’t quite the union, but if you made it six months, you were off probation, and then you had rights and I could not fire you. Now, you can never fire somebody for protective status, like, because they’re white, black, or purple or, you know, Christian, Jewish, Muslim, you can’t do that. That’s obvious. But at one point I could right now go fire all my staff because I decided to retire and I don’t need staff anymore. And they can’t really do anything about it.

That would be hard to case to prove that I did fire them in for some discriminatory reasoning. Cause it wouldn’t be the case. In general, just employees or people that are pretty regular operation providing regular time and service under your purview, under your control.

I had an independent contractor at one time and he was kind of gray. What it was, is he an independent country, is he an employee? I ended up firing him because he was incompetent, frankly. And he filed for employment. Now he did have other jobs and he was an independent contractor. Now what was gray was, he used my lawn mower because he didn’t have his lawnmower. So he used my tools. So the division of unemployment security wanted to stick me with part of his bill post-employment.

So I opposed it. And part of what I posed it with was, he proposed to me at the outset, a written independent contractor agreement that he got off a rocket lawyer and it said, look, I’m my own boss. I set my own hours. I get paid $200 per mo, blah, blah, blah. And then ultimately I was able to win that unemployment dispute because of that written agreement. And I think partially because he proposed it and I had like email trail, like, he’s like, look, I’m not your, you’re not my boss. I run my own company. I’m like, okay, great dude. Now he also did some skirting for me, some basic maintenance, miscellaneous stuff.

So ultimately what you title people, Oh, you are an independent contractor, doesn’t matter. It’s how it works out in practice. So if your goal is to not have employees, then you need to give your independent contractors, autonomy and follow some of the strategies and methods I’ve set forth here today.

If you think they’re an employee, you need to make sure you have worker’s comp insurance and general liability insurance, which frankly is not that expensive. Now, if you get into more expensive trades, like tree-trimming, roofing, heavy equipment, or construction, you know, your bill will be cheaper if you have your guys’ classify it as a maintenance, if you have them classified as construction, general contractor insurance would be higher. So you got to work with the insurance company to get the classifications right. And you got to try to be fairly accurate with your estimated budget. But other than that, it’s not that complicated until it is. And you know, if the guy’s independent contractor, but he’s driving your parked truck and he’s driving home Depot to get some more wood, what happens if he runs over the paperboy, whilst in your truck, he starts to look like an employee. Last time I checked you don’t let the average rougher, painter or a plumber drive your truck.

So then you get down to other liability protection measures like does the person driving your truck licensed? Do they have a valid driver’s license? Do they have insurance? If not, does your insurance going to cover them? So I typically ask my insurance guy, all these questions before I start making decisions too much on things like let people drive my truck or let people use my lawnmower, etc. So in the end, the key is to understand what you got and what you got is based on how you implement your business, not by the title on somebody’s business card. Till next time, stay safe. God bless.

 

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