Hiring employees? What every contractor should know.
By Mike Leavene, Chief of Investigations
Contractors should be familiar with all rules and laws relevant to hiring employees and know the license status of those employees hired as “1099” workers. “1099” employees are independent contractors and must be licensed with the Arizona Registrar of Contractors (ROC).
Licensed contractors are required by law to comply with statutes and rules governing workers’ compensation and unemployment insurance. They also are required to pay income taxes, withholding taxes or any tax imposed by title 42, chapter 5, and articles 1 and 4, incurred in the operation of the licensed business. Failure of a licensed contractor to comply with these requirements or with any safety or labor laws or codes of the Federal government, state or political subdivisions of the state, may result in discipline of the contractor’s license and/or criminal charges in state and/or federal court.
Some licensed contractors have the misconception that they can hire employees and avoid the above rules and laws by carrying those personnel as “1099” employees. Unfortunately for these licensed contractors, they have now placed their contractor licenses in jeopardy for aiding and abetting unlicensed activities.
Through its enforcement activities and dialogue with the contracting community, ROC Investigations has learned that some licensed contractors are utilizing the majority of their personnel as “1099” employees. It is alleged that this is amounting to substantial savings in insurance costs, payroll taxes, and other employee costs. Because of this savings, these contractors are able to underbid other licensed contractors by as much as 25 percent.
These illegal practices result in lost jobs for contractors that obey the law. In one particular incident at a new subdivision project, a contractor allegedly outbid a legitimate contractor by $500 per home. Contractors operating legitimately cannot compete with these contractors who operate illegally. This practice is alleged to be present in many of the construction trades, such as painters, framers and roofers, and is reported to be prominent in new, large subdivisions currently under construction.
The U.S. Internal Revenue Service essentially determines the definition of an employee versus an independent contractor in any field. The Federal government has listed 20 factors that determine if an individual is a contractor; anything contrary would make them an employee. If a majority of the guidelines are met, that person is an independent contractor.
They are contractors if they:
1. Are not trained by the hiring company.
2. Set their own hours.
3. Are not required to follow specific instructions to do the job.
4. Determine where they work.
5. Control their own assistants.
6. Are not required to give regular progress reports.
7. Don’t have to do the work themselves.
8. Do work not essential to the continuation of the hiring company.
9. Are paid by the job, not by the hour or the week.
10. Don’t have a continuing relationship with the hiring company.
11. Control the order and sequence in which they work.
12. Work for more than one company at one time.
13. Furnish their own tools.
14. Have significant investments in their own workplace equipment.
15. Pay their own business and travel expenses.
16. Have a risk of loss.
17. Have enough time to work for other companies.
18. Cannot be fired as long as they meet contract terms.
19. Are responsible to complete the job and cannot quit without liability.
20. Make their services available to others.
Some governing statutes:
§32-1122. Qualifications for license
Before a contractor license is issued, A.R.S. §32-1122(B)(1)(i), requires each contractor applying for a new license or renewing a license, disclose proof that the applicant has complied with the statutes or rules governing workers’ compensation insurance. This can be accomplished by submitting a copy of certificate or insurance statement displaying the policy number and effective date.
§32-1154. Grounds for suspension or revocation of license
A.R.S. §32-1154(4), Failure to comply with the statutes or rules governing social security, workers’ compensation or unemployment insurance.
A.R.S. §32-1154(5), Failure to pay income taxes, withholding taxes or any tax imposed by title 42, chapter 5, articles 1 and 4 and incurred in the operation of the licensed business.
A.R.S. §32-1154(12), Failure of a contractor to comply with any safety or labor laws or codes of the federal government, state or political subdivisions of the state.
As you are hiring employees, please remember: A person or company working under the 1099 provision is an independent contractor and must be licensed by the Registrar of Contractors. If you know of any violations of these provisions, please report it to the ROC. (link)