Is this a labor law violation in Calif?

Question

I'm thinking about getting an owner/builder worker's comp insurance policy so that I can engage a few guys to do a condo remodel for me. I want them covered with workers comp to avoid any liability lawsuit if anyone gets injured.

I don't want to do the payroll thing (FICA, FUCA, SS, Medicare, unemployment, etc. etc.). I will just notify them in writing that they are responsible for their own taxes, and pay them weekly, and then at the end of the job (which will only take 3-4 weeks) I will 1099 them.

Is this acceptable or would I be violating some labor, payroll or employment law?

Thanks in advance for any assistance,
Alfred

J Scott · Answer

Like I suggested in the other thread you started on this topic, I don't see any good reason why you should either be hiring full-time employees or should be providing WC insurance for your contractors.  Both of these decisions add additional overhead, cost and complexity that I don't think is necessary, unless you plan to start rehabbing full-time (and even then, it's probably not worth it unless you can keep your contractors working full-time, which is much harder).

Instead, I would recommend just hiring contractors that already have liability and WC insurance on their own (there are many of them), and let them cover the cost of insuring themselves.  Worst case, find a GC, and have him do the work.  A GC will only charge 10-15% markup if you negotiate well (and offer to do most of the management), which is still less expensive than you paying for the WC insurance.

Just my $.02...

Alfred Bell · Answer

J,
So you are an investor doing rehabs. Do you have a contractor's license with all the insurance for your workers, or do you hire a licensed contractor to do your rehabs? You appear to be out there doing it and have a lot of experience so you must have a pretty good system set up.

Are you 100% certain of this? You may be right but I'm not sure if hiring a GC with all the insurance and a crew would actually be less expensive than me hiring guys who are experienced but would work for a lot less and paying for a WC policy to cover them. My understanding is that a GC has all those business expenses and then marksup in order to get a decent profit. In other words a GC might charge me 8k to do a roof, when I could hire an experienced roofer who will do it for $4,500 and all I have to do is pay the WC on the salary I pay him.

Alfred Bell · Answer

Good article Scott, thanks. I have an IC info letter, an IC agreement, and an agreement that they have to that they will handle their own taxes (so I can 1099 them). I will take out a "owner/builder" workers comp insurance policy. I spoke with a WC rep at State Fund this morning. As long as I keep perfect payroll records and notify the insurer weekly of what each worker was paid and what their classification was (painter, carpenter, dry waller, etc.) and how many hours they worked in each classification, that takes care of everything. I can bring in as many workers as I want (all I need to do is put in a weekly report for them). At the end of the project the insurer does an audit to make sure everything is correct and then bills me (I either add to my original deposit or they refund me a portion of my deposit back if my insurance bill is less). Of course this is still an added expense and will raise my costs and lower my margin... but protection from liability is the senior consideration. What is tricky for me is that now I am still working on finding some way of calculating this out so I see what the additional expense will be. (Example: if I pay a painter let's say $24/hour... I'll have to pay WC $20 for every $100 I pay the painter; if I pay a tile guy $24/hour I have to pay $11.93 for every $100 I pay him).

So it looks like I can avoid all the hassles of having employees, yet still cover my ass (and theirs) with WC insurance in case any of them get injured and are determined to be my employees. I'm hoping I can roll with this as the solution to get this project done. After this project I will work out a better system (maybe partner with a licensed/bonded/insured GC and give him a profit share or something).

Does my solution for this project make sense to you?

Thanks for your interest and advice.

J Scott · Answer

As long as you treat them as independent contractors, the IRS won't have any issues with this.  But, I don't know what the workman's comp insurance requirements are in terms of employees vs independent contractors.

Btw, for more about how to ensure the IRS classifies your contractors as such, check this out:

http://www.biggerpockets.com/renewsblog/2010/05/26/are-you-sure-your-independent-contractors-really-are/