“I liken it to a single dad deciding whether he wants a nanny or a wife,” says Jorve Corp. vice president Dale Burlingame, about why sellers choose independence or a commitment to one company. “It depends on what kind of nurturing environment that seller wants.” Burlingame suggests that a seller’s employment standing sometimes reflects how a company treats its customers, too. “There are two kinds of contractor: those who lie awake at night trying to figure out how they’re going to save money and win on price — they usually prefer independent [sellers]; and a smaller number of contractors who are looking at how they can improve their businesses.” The latter, Burlingame believes, are more likely to hire sellers as full-timers. The compensation that Jorve Corp.’s salespeople receive is partly based on the customer satisfaction ratings they receive on the jobs they sell.
Burlingame’s comments might sound self-serving, but they represent a point of view about full-timers that’s shared by other contractors. For example, George Faerber, who owns Indianapolis window replacement contractor Bee Window, wants everyone in his company “to take ownership in the customer and make sure the job is done right,” and he doubts he would get that kind of dedication from his 17 sellers if they were 1099s instead of full-time employees.
LURKING TAX ASSESSORS Faerber classifies his salespeople under section 3508 of the IRS Tax Code, which has been on the books for around 15 years and allows two categories of employers — real estate agencies and contractors — to treat agents and salespeople, respectively, as non-employees for tax purposes, as long as that associate signs an agreement binding him to that employer. “It can save a company a point, a point and a half per seller” in overhead costs, says industry consultant Dave Yoho, who is an advocate of contractors taking advantage of 3508, one of 20 “safe harbors” within the IRS Code that help reduce companies’ tax liabilities. Yoho notes that, under this classification, contractors can often afford to pay sellers slightly higher commission rates.
Yoho is the first to admit, though, that many states are ignorant about this provision. “They don’t know what they don’t know,” he says. In fact, some states don’t acknowledge 3508, and will go after companies for back taxes if a seller is negligent, regardless of his de facto employment status. D.S. Berenson, an attorney based in the District of Columbia whose firm represents several home improvement companies, says that California and a number of other states are “very employee-oriented” in their zeal to reclassify workers so the states can recapture withholding taxes and penalties from companies. Patrick Joyce, a spokesman for the California Employment Development Department in Sacramento, disputes this characterization, and says that although his state has had about a half-dozen reclassification cases in recent years, it isn’t targeting home improvement companies.
McCourt of Statewide/Penguin says that replacement contractors of a certain size have become “moving targets” for aggressive tax assessors. And that might be doubly true in his state, which in July 2006 implemented a new targeted audit system “that’s not as random as it was before,” and focuses on companies that have a lot of 1099s, says Hillary Young, a spokeswoman for the Washington Employment Security Department in Olympia.
Though 3508 is a blessing for a company’s cash flow, it can also be a curse when sellers are left to handle their own tax payments. “Salespeople are always broke, and [3508] puts more cash in their pockets, but they usually don’t manage their money too well,” says Dugan, which probably explains why his company, despite treating its sellers as 3508 workers, continues to withhold all but their Social Security taxes, and pays into unemployment insurance and workers’ comp, too.
RETENTION A CONCERN There are measures contractors can take to protect themselves in the event of an audit (see “Paper Trail,” page 53). But when determining whether full-time salespeople are right for your operations, you should look beyond tax issues, proponents say.
Burlingame of Jorve Corp. notes that contractors hiring sellers as employees must recognize that they are making a financial commitment to a person whose productivity will wane during slow selling periods. On the positive side, he says that these contractors usually enjoy more “team synergy,” which is less likely to exist with independent reps “who tend to do more side work.” That team spirit, Faerber adds, shouldn’t be underestimated, especially when sales turnover is an occupational hazard. “We just lost an experienced seller. I think the pressure of the job was the reason,” he says. “Because they have to be in people’s homes to close, they work a lot of nights and weekends. And, for salespeople who have children, they begin asking themselves about the amount of time they’re putting in on the job.”
Birner admits that the absence of benefits “handicaps” the company’s ability to find and keep qualified salespeople, which is particularly critical when business is booming. “We like to see customers the day after they call us, but I have leads booked out a week and a half because we don’t have enough sellers,” Birner says. Consequently, Amazing Siding is giving serious thought to reverting to full-time sales reps. —John Caulfield is a freelance writer and editor based in New Jersey.