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Straight Talk for the Recruiting Profession


Jeff's On Call!, The Business of Recruiting

Using 1099 Recruiters? You Might As Well Invite the IRS to Your Audit


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JeffOnCall_new

Jeff,

Thank you for your contribution to my success! Your articles regarding fee schedules are ones I wish I had read many years ago.

I have a question concerning engaging recruiters. I am interested in increasing my recruiter support. I am interested in individuals who are experienced who would like to represent my company as agents or representatives, but be compensated as 1099 associates or as employees who are 100% commission. I envision them being able to use the company resources, i.e. database, business cards, email, researcher, etc without signature authority on new clients. Some would having the flexibility to work when they want to work, in some instances part-time, others more along the traditional recruiter model of what the job takes. They will enter client and contact information into our CRM system for new clients as well as when contacting contacts in our database.

Which is the appropriate employee designation? And is there an agreement that protects my company, which includes a non-solicitation clause that would protect my company’s interests in the event an individual would choose to start or decide to return to his/her own independent business?

Thank you in advance.

Sophia Kling

Says Jeff: Don’t Do It!

Hi Sophia,

Good to hear from you, and great to know we’re contributing to your success!

This is my 31st year writing for The Fordyce Letter, and warning our readers about playing recruiter roulette with independent contractors.  Since the law hasn’t changed, neither has my answer. However, both have gotten tougher.

The sidewalks of Placement Place are littered with the bones of those who heard but didn’t heed.

Please hear this, loud and clear:

NO!

Before we go any further,

  1. Go to www.placementlaw.com.
  2. Click the Placement Manager’s Law Quiz button in the middle of the bottom row.
  3. Take the PMLQ.
  4. Click the Answers to Placement Law Quizzes button at the end of the bottom row.
  5. Grade yourself.

Now that you’ve got a better understanding of how placement law works, let’s go on with answering why no.

It’s a long answer, but hangin’ on every word may save many from a hangin’.

Recently, someone called me and said, “I know how you feel about paying account executives as independent contractors, but . . .” I stopped him right there and gave him a free consult, because how I feel has nothing to do with it.

IRSIn fact, if my feelings could keep the IRS from cleaning your clock, I’d really bare my soul.

What’s a little embarrassment when I could save you hundreds of thousands of dollars for everything from payroll withholding to mandatory payments? I’d suffer humiliation any day to save you from having minimum wage and supercharged overtime computed based on the average hourly rate.

I’d confess on a couch in a minute if it could help you avoid equal pay mandates. And to save you back taxes, penalties, collection orders to your clients, and uniformed keepers in your business, I’d cry at a convention.

1099 Roulette

But my job is to separate feelings from facts. The fact is that issuing a 1099 (IRS Form 1099 to a recruiter is like sending an invitation to the IRS that says:

HERE. AUDIT ME. TAKE MY BUSINESS. THEN ZAP ME PERSONALLY. DON’T WORRY ABOUT CORPORATE SHELLS, BANKRUPTCY OR ANYTHING ELSE. I’LL PAY MY “FAIR SHARE” OF THE TAXES, PENALTIES AND INTEREST. I KNOW YOU’RE VERY BUSY REDUCING THE GOVERNMENT DEFICIT, SO I’VE USED A 1099 FOR EASY INPUTTING INTO THE WORLD’S LARGEST COMPUTER.

Speaking of feelings, people who know the law get a kick out of the 1099 nonsense.

They find it comical that so many other

wise intelligent accountants never read the laws, regs, decisions and interpretations. They think it’s humorous that lawyers who don’t have them in their offices prepare illegal contracts from outdated, inapplicable, untested online forms and dusty books.

But ‘Everyone’ Does It

They chuckle when owners try to cram the duties of a recruiter into one of the federal Fair Labor Standards Act overtime exemptions. (More on this in a minute.) They giggle when they hear the old “Real estate agents do it so it must be legal” line. Laugh when owners tell them, “The consultant insisted on it.” And it’s all they can do to keep their sides from splitting when they hear, “How do all my competitors get away with doing it?”

department of labor

They compose themselves quickly when you ask for help, though. The honest ones will tell you there’s nothing they can do.

Recruiters are not very compassionate when they discover the bonanza in income and benefits they’ve been building. Government auditors don’t charge recruiters to use their incredible investigation and prosecution resources. They’re happy to help, since cracking open the hard drives and file cabinets multiplies the number of violations.

It’s impossible to reconstruct most of the records, so the “taxpayer” (owner) is virtually defenseless.

One Audit After Another

Just when one auditor leaves (from a three-week long “field audit” in your home-office) another arrives from another government agency to warm the seat for a while.

Yes – they have their network of informants, just like recruiters do.

Without more, the IRS alone will immediately assess:

  • A virtually certain maximum of 25% of the federal tax owed for the failure to file a return and pay tax on the recruiter’s wages. (These are really two separate violations and each is worth 25%, although they can’t be assessed together.  Oh happy day.)
  • Interest on all unpaid taxes at the going rate.

But there’s more – lots more. The IRS won’t stop at just computing the amount on the 1099, because the U.S. Department of Labor and state enforcement agencies are busy assessing all those equal pay, minimum wage and overtime provisions. This multiplies the compensation due (and therefore your taxes, the withholding, etc.).

Recruiters Are Employees

If you still don’t believe that recruiters are employees (no matter what you call them or what they sign) send a Form SS-8 to the IRS. It requests a ruling. And since it usually springs an audit, you’d better be right.

This reply is nasty but necessary. So as Grandma Allen would say, “Better a quick pain.” But like Grandma Allen, I’ll also reward you with a homemade goodie before you leave.

Let’s move on to the genesis of the problem. It’s the classification issue. Actually, the misclassification of the job of a recruiter working for someone else. That job — the duties (activities) performed – are non-exempt under the Fair Labor Standards Act (29 USC 206, et seq.).

So the federal and state wage-and-hour audits, back pay, penalties and interest awards can be devastating for this maneuver. Then the government compliance agencies can investigate anything “like or related to a claim.” Meaning everyone else’s compensation. So it’s really not clever to avoid the FLSA.

“Averaging out minimum wage” is a contradiction in terms. You can’t. The FLSA was enacted to prevent any work being performed at any time by any “non-exempt” employee (like a recruiter working a desk) for less than the hourly rate. Not some work hours for less, and other work hours for more:

THE HOURLY RATE IS NOT THE MINIMUM WAGE.

We will cover this next.

If you think it’s just a semantic difference, you’d better call your state labor department (anonymously). Otherwise, you’ll be in for a shock when one of its auditors calls you for an appointment in your office. He won’t be looking for a job.

How the Hourly Rate Is Computed

Let’s say a recruiter leaves and claims 56 hours (the industry average) was worked every week. The weekly or bi-weekly base rate (fixed amount — salary, draw, or whatever else you call it) is divided by 40 to obtain a “straight time” hourly rate (“base rate”).

 Now, About the Supercharged Overtime You Will Owe

The overtime is computed at time and a half (excess of 8 per day or 40 per week) or double-time (weekends and holidays). So if the recruiter gets an $800 a week draw, the hourly rate is $20, and the overtime rate is $30 (time and a half) or $40 (double-time).

Here Is Where You Get Nailed

There are no time cards, sheets, printouts, or other records to substantiate the number of hours. You will think this makes it their word against yours. If so, you’d better call your state labor department again (anonymously).

The employer has the burden of proving hours weren’t worked. Was your ex really aggressive? Yes. You’ll find this out when the claim is easily filed at no expense to your ex (who can easily represent himself because the state or federal government employees fall all over themselves to help).

Your Lawyer Is Not the Smartest Guy In the Courtroom

 

There is no way to offset commissions against overtime. Base rate is base rate, commissions are commissions. And overtime has not been paid. That means waiting time penalties on top of the supercharged higher rate. Most states allow for claims going back three years. Let’s see — 56 hours per week (industry average) means 16 hours overtime X 156 weeks = 2,496 hours X $30 = $74,880. Double time and waiting time penalties are added bonuses.

“Averaging out overtime” is also a contradiction in terms. It’s not one and a half times (or double-time) the minimum wage. It’s one and a half times (or double-time) the base rate.

Recruiters don’t qualify under the four overtime exemptions to the FLSA (“Executive”, “Administrative”, “Professional” and “Outside Sales”). We’re waiting to see the business card that reads “Executive Administrative Professional Outside Sales Recruiter.” But once you get past the titles, the job of a recruiter doesn’t even remotely qualify. Some goofy administrative ruling, legal opinion or supposed “law” won’t wiggle you out of this one.

Unless the other recruiter is truly in business for himself, forget it. That means separate everything – including corporation (advisable but not mandatory), business name, business license, business location, business cards, business letterhead, business phones, business website, business e-mail address, business, business, business. Not yours.

That’s why the answer’s a “NO!” Not a “No.” May it save more readers than our increasingly intrusive, aggressive, effective enforcers can ever nail.

Now for my homemade goodie in memory of Grandma Allen. The absolutely imperative document you must have signed before you split a placement fee with anyone but yourself.  It’s our famous Recruiter Split-Fee Agreement. To get it free before I stop being sentimental,

Say, “I solemnly promise never to do a split fee deal with anyone unless I have a written, enforceable SFA.”

  •  Go to www.placementlaw.com.
  •  Click the red JEFF’S ON CALL! button.
  •  Type Recruiter Split Fee Agreement in the Subject field.
  •  Click Send.

I’ll reply with the SFA.

Thanks so much for asking, Sophia. We saved a lot of placers just now.

Jeff

More than thirty-five years ago, Jeffrey G. Allen, J.D., C.P.C. turned a decade of recruiting and human resources management into the legal specialty of placement law. Since 1975, Jeff has collected more placement fees, litigated more trade secrets cases, and assisted more placement practitioners than anyone else. From individuals to multinational corporations in every phase of staffing, his name is synonymous with competent legal representation. Jeff holds four certifications in placement and is the author of 24 popular books in the career field, including bestsellers How to Turn an Interview into a Job, The Complete Q&A Job Interview Book and the revolutionary Instant Interviews. As the world?s leading placement lawyer, Jeff?s experience includes: Thirty-five years of law practice specializing in representation of staffing businesses and practitioners; Author of ?The Allen Law?--the only placement information trade secrets law in the United States; Expert witness on employment and placement matters; Recruiter and staffing service office manager; Human resources manager for major employers; Certified Personnel Consultant, Certified Placement Counselor, Certified Employment Specialist and Certified Search Specialist designations; Cofounder of the national Certified Search Specialist program; Special Advisor to the American Employment Association; General Counsel to the California Association of Personnel Consultants (honorary lifetime membership conferred); Founder and Director of the National Placement Law Center; Recipient of the Staffing Industry Lifetime Achievement Award; Advisor to national, regional and state trade associations on legal, ethics and legislative matters; Author of The Placement Strategy Handbook, Placement Management, The National Placement Law Center Fee Collection Guide and The Best of Jeff Allen, published by Search Research Institute exclusively for the staffing industry; and Producer of the EMPLAW Audio Series on employment law matters. Email him at jeff@placementlaw.com.
  • NB

    Probably the most important article on Fordyce- EVER! Another miserable consequence to this problem is that with the high turnover in the industry- The problem and the liability could quickly morph into a bankruptcy blob. It’s an unfortunate question- How to grow when you can’t pay on commission only or pay on a 1099. We’ve succeeded in taking everything off of the recruiter / AE desk that can be outsourced or delegated to an admin. In short, we earn more with half of the recruiters and a rock-star admin team. And, we’re following the rules, (regardless of our opinions).