The American Dream, An American Nightmare
A woman called the other day with a problem that may be instructive to other contractors around the country. She and her husband run a plumbing company that specializes in residential construction work. They were lucky enough to employ a crew that did quality work with high productivity.
So productive were they, the men calculated they could do much better for themselves working as independent subcontractors on a piece work basis. The employer offered to implement a piece work pay system, but the plumbers were filled with entrepreneurial lust and insisted on breaking off on their own. The owners had the option of hiring other plumbers to replace them, of course, but you all know how hard it is to find good people these days. They chose to continue working with their erstwhile employees.
So far this scenario depicts the American dream in action in this land of freedom and opportunity. The owners concede that the people they employ have every right to go into business for themselves, just as they have the choice of whether to continue employing them as independent subs.
Except now the American dream threatens to turn into a nightmare for both the contractor and the subs. The root of their problem is one that plagues the entire industry.
Overlooking OverheadThe amount of money the new subcontractors get paid for their work is substantially more than they were used to seeing in their former employee paychecks - reflecting the fact that they are now responsible for paying their own taxes, insurance and other overhead. Before they cut loose, the owners shared some financial data and warned the men about the harsh realities of running an independent business. But that's a hard message to get across in the giddy atmosphere of liberation. The plumbing company co-owner claims the new subcontractors are living the high life with their artificially bloated payments, buying luxury vehicles and the like. She is all but certain her former employees are neglecting to put enough aside to pay all the business bills that will come in as sure as the sun rises.
The subcontractors have every right to tell their former employer to mind her own business. But it's easy to understand why she is sticking her nose into it.
It's because of the gooey IRS rules governing relationships with independent contractors. The IRS looks at about 20 criteria to determine independence. If they don't like what they see, they might well decree the subs to be employees and hold the firm that hired them liable for unpaid taxes and business debts. Potential insurance liabilities also loom large if the subs don't keep up their premiums. The missus who told me this tale has studied the IRS rules and sees some areas of ambiguity. She is frightened that the
potential exists to wipe out her company. She also expressed concern about deteriorating personal appearance of the former employees, who are no longer bound by company grooming policies but still represent them to builders and owners.
Look Before You LeapI didn't have any great advice for the lady, except to refer her to a construction industry attorney whom I respect and thought might be of help. (May God forgive me for speaking well of a lawyer!) I don't know how her dilemma will play out, but if I were a betting man, I'd wager she and her husband are on a path that will lead to severing ties with the subs. In that case, the subs would lose a large chunk of their business, and the plumbing contractor would be hard pressed to find workers as good as them. Talk about a lose-lose situation.
A few months ago, I cut an instructional tape for the "Service Sense" series put out by Grandy & Associates for service technicians (800/432-7963). It was titled "The Pros & Cons of Going into Business for Yourself." The No. 1 reason I cited for going into business for oneself is the potential to earn much more money than you can working as an employee.
Money also ranked as No. 1 on the "con" side of the ledger. I warned that the actual take of most business owners is far less than they dreamed of making, and it often turns out to be less than they made working for someone else with far fewer headaches.
As Frank Blau has been preaching, the biggest problem in this industry stems from plumbers with big dreams and little business sense. Folks who don't understand the cost of doing business make life miserable for themselves and everyone else in the industry.
Going into business for oneself is the right of every American. But as with so many other things, just because we have the right to do something doesn't automatically make it the right thing to do.