Lowe's recently paid out a $10 million dollar lawsuit because they were mis-classifying some of their independent contractors. A federal judge approved a settlement between Lowe’s and its home improvement contractors. The contractors claimed that they had been mis-classified as independent contractors instead of employees. According to the lawsuit:
The plaintiffs in this case are home improvement contractors comprised of both individuals and businesses. The complaint alleged that Lowe’s had the right to control, and did control, all aspects of installation jobs. The complaint also alleged that:
- Lowe’s Production Office managed each installation project
- Lowe’s set the fees to be earned by each home improvement contractor
- Lowe’s imposed a non-compete covenant on installers
What You Need To Know
The IRS has specific rules on how to treat payments made to certain types of workers. These rules are crucial to understand; in recent years, the IRS has been cracking down on employers who do not follow these rules. Before your painting business pays a worker, first examine the type of relationship that exists between you and the worker. The worker performing the services can be classified as one of the following:
Independent contractor - In the painting business, this is often referred to “sub-contracting” work out. A worker is usually an independent contractor if you have the right to control or direct only the RESULT of the work and not the means and methods of accomplishing the result.
For example, if you book a job with a client, but do not have a crew available to do the job, you could find another group of workers (or individual) to do the work for you. You would give the group of workers initial guidance per the contract you booked with the client. However the group of workers would determine HOW to accomplish the result and use their own means and methods (or own equipment and systems). In this instance, the group of workers would be independent contractors. You would not need to pay income, Social Security, and Medicare taxes on wages paid to independent contractors.
Common-law employees - Under common law, anyone who performs services for a business is an employee of that business if the employer has the right to control what will be done AND how it will done. So if you have a group of workers who you provide materials, equipment, oversight, and continual guidance throughout a job, the workers are employees. You effectively have behavioral and financial control over the workers, and thus they are employees. For employees, employers must withhold income, Social Security, and Medicare taxes on wages paid to employees.
Don't get in trouble on this. Consult a tax expert if you're not sure about your situation.
About the Author
Daniel Honan is a bookkeeper and tax accountant who is also a former painting business owner and military officer. With his painting and accounting experience, he is uniquely positioned to help painting contractors save time, money, and resources.