Sunday, November 13, 2011

Annals of the war on employers 

California's government apparently believes that the best way to create jobs is to impose even more potential liability on employers.

Many employers think they can save money by classifying their workers as independent contractors. But doing so incorrectly can now cost even more—something the California plaintiffs’ bar is sure to take notice of. On October 9, 2011, California Governor Jerry Brown signed into law Senate Bill 459 (S.B. 459). This new law, which will add Sections 226.8 and 2753 to the California Labor Code, imposes liability on employers that willfully misclassify employees as independent contractors. Employers throughout California that use independent contractors may be affected by S.B. 459, which goes into effect January 1, 2012.

Few employers that I know of use independent contractors because "they think they can save money." In my experience, employers use 1099s because (i) the prospective employee wants to be treated that way for some reason, perhaps so they can work multiple jobs, or (ii) because it is a lot easy to get approval for "temporary" 1099 staff than supposedly permanent W-2 staff. As often as not, big companies have tough internal obstacles to hiring new "heads" because, as a practical matter, they are much harder to get rid of if the need for them goes away. (For starters, the W-2 employees do not view the company as having laid anybody off if only temps are cut.) Lower echelon managers evade those internal obstacles by hiring 1099 staff that they can terminate on a moment's notice. Putting even more potential liability on employers who blow the classification will cause them to raise the bureaucratic hurdles for hiring 1099s. This new law and the publicity it is receiving from big law firms will no doubt reduce the number of 1099 workers in California by some margin. Only some of those workers will become actual employees; the rest will be out of a job.

Liberals tend to assume that there is a fixed quantity of work that employers simply must have done, so regulations like this will not change behavior except in the ways that liberals want. As any executive knows, this is asinine. The far more likely response is that somebody like me will get a "client alert" that provokes a wholesale review of the potential legal problem. That, in turn, will put a spotlight on heretofore poorly understood staffing decisions, which new scrutiny almost always ends up in workforce reductions.


By Anonymous jhc, at Sun Nov 13, 06:53:00 PM:

I've worked as an independent software developer since '84. I do it by choice since it leaves me free to move easily. I'm not tied to a corporate pension, a corporate benefits plan, et messy cetera. I don't have to worry about stock re-evaluations when mergers or acquisitions happen, for example.

In one sense it's amazing this is happening in California, which I've always heard has many, many independent tech contractors. On the other hand, it is a state controlled by the Dems - so not too surprising that way, I suppose.

You didn't speculate on what's driving this. I don't know how California collects payroll taxes, but based on my experience in mid-America, the Californians may be hoping for less quarterly income and more bi-weekly income.

Nothing like a budget crunch to drive silly policy.  

By Anonymous Anonymous, at Sun Nov 13, 09:36:00 PM:

"Few employers that I know of use independent contractors because "they think they can save money."

Perhaps none that will admit it... Employers save a boatload of $$ by classifyting a worker as an independent contractor instead of an employee: No payroll taxes, no health premiums, or overtime pay; no paid leave time (vacation, sick, holiday) no pension contributions, no worries about FMLA, ADA, OSHA, COBRA, and no unemployment when their services are no longer needed. Sounds ideal, huh? Why else do you think it's easier to get approval to hire 1099 staff???

But just because it's easier or because an individual wants to be treated as such does not an independnet contractor make. If the any of the services can be controlled by an employer including what and how the services are performed, the person most likely ain't an IC. Give the person an office/equipment, include them on your firm directory, monitor their attendance, set their hours and by golly, you got yourself an employee. Just ask Microsoft who ended up paying $100M to the IRS in 1990s for offering all of the above and calling them temps. It was a game changer for a lot of companies/law firms who were using temp staff ala Microsoft way. The case gave birth to the multitude of temp staffing agencies who nowadays employ all those out of work attorneys who provide doc review services to the law firms/corporate clients. In my firm, we still use contract staff but 90% of them have an employer, and it ain't us (even if the hourly rate we're charged is higher to accomodate the taxes paid, etc).

The IRS has lenghty smell test in a Rev. Ruling to determine who should get a 1099 or not, (and which I note has been in place since Reagan was President); ironically, Microsoft now has an app checklist designed to save others from its 1099 pain. But here's a simple test to keep in mind next time you think it's easier to 1099 someone: If the worker is called in only to fix a computer, she's probably an independent contractor. If she is running budget reports using the same computer, she is probably an employee.

The Federal government loses BILLIONS of dollars every year chasing after taxpayers who haven't seen fit to pay their share of payroll and income taxes that weren't withheld/paid, and employers who think they can play the "name" and not pay theirs.  

By Blogger TigerHawk, at Sun Nov 13, 10:56:00 PM:

Independent workers have to pay their own "self employment" tax, meaning both sides of the Social Security tax, so in principle there is no loss of tax revenue. Usually (and in Microsoft's case) the difference is in benefits of one sort or another. Microsoft (as I recall) wanted to give stock options to all its employees, and abused the distinction between the 1099s and actual employees to avoid granting so many options. Regardless, the point obtains. Adding new state liability on the the existing federal rule will provoke even more internal compliance review and, at the margin, will definitely cost jobs.

Look, most regulation has some or another justification, but it also carries a cost. Often the theoretical benefit is specific and the cost is diffuse. What is clear is that piling on new rules in this case will reduce effective employment in California. Whether or not that is worth the burden depends on what one values. Just do not make the mistake of thinking that it comes without cost and consequence.  

By Anonymous Anonymous, at Mon Nov 14, 09:58:00 AM:

TH - in principal does not mean in reality. In reality, there is a large loss of tax revenue. In addition, it is really not that hard to distinguish between IC and employees. Do you tell them when, where and how to do the work? If yes, you very likely have an employee. Pretty simple. Also, as noted above, there are some user friendly programs to help answer the more difficult questions.

Finally, I note that it requires willful misclassification. That's quite a bit higher than negligence, so I suspect it will hit fewer companies that you seem to believe (and yes, I am a lawyer).

P.S. I'm not the same anon as above.  

By Blogger Stack Trace, at Mon Nov 14, 11:12:00 AM:

~12 year Microsoft veteran here. TH has it right on #2, at least for MSFT. MSFT mostly uses contractors for agile hiring / firing, and for quickly staffing up groups. Generally, our technical bar for hiring is pretty high. It has to be for obvious reasons, but also we're driven into this because legally, it's relatively difficult to fire someone, even a dud. It takes about 3 years of solid rotten reviews to fire someone, and in that time, we've wasted not salary + benefits on them, but they have likely dragged down their entire team.

Contractors let us get people in the door quickly, and let us see the quality of their skills by actually doing work, rather than relying solely on interviewing. If a contractor is a dud, then the contract is not renewed, simple as that. If they're good, the contract is renewed (to the legal and self-imposed limits), and if they're really good and they want to, we'll generally set up an interview for a full-time position.

It works pretty well. There is a huge job market for contractors in the Seattle/Redmond area; if you have a decent skill-set, even as a novice, you can generally get your foot in the door with one of the contracting agencies, and with decent work, turn that into N years of experience on a resume.

Due to legal conflicts long ago, Microsoft was forced to put in very strict requirements about how long a contractor could work. Once that limit was reached, Microsoft cannot give them contract work for 100 days, precisely so there is no possibility of confusing them with full-time employees in the eyes of the law. That's unfortunate; it makes life hard for a lot of contractors. What do you do for 100 days? Switch to some random project, and then maybe at the end of that, try to get back to the first MSFT group you were working with? It's also bad for MSFT, because we can't rely on the same degree of continuity. All of this was forced, due to a handful of litigious contractors, about 11 years ago.  

By Anonymous Anonymous, at Wed Nov 16, 12:35:00 PM:

The really incredible thing is that, to liberals, this California effort is regarded as a "victory", a "solution". The lost jobs are hardly worth mentioning, and the causal relationship between the regulatory action and the obvious predictable result TH cites, job losses, will be denied as overly simplistic. To liberals, there is very little relationship between the dramatic expansion of the regulatory state and our economic travails. But, then, lets not forget that Ayn Rand is an idiot too (to those self-same libs anyway).  

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