Murray Gross, CEO of U.S. Home Systems
Murray Gross, CEO of U.S. Home Systems

Windowizards' two-dozen salespeople entered 2007 with a new designation: full-time employees. The window replacement contractor, headquartered in Bristol, Pa., made the switch to full-timers from independent reps — better known as 1099 employees (which refers to the income statement that companies send to these reps and to the IRS) — because its new sales manager, Chris Warren, a nine-year Pella Window veteran, worried about Windowizards' ability to lure qualified sellers if it didn't offer them benefits.

The immediate fallout was minimal — only two sellers left when told the company would withhold taxes from their paychecks. But Windowizards' other reps weren't necessarily thrilled with the change, even with benefits that include heath care and other goodies such as damage repair for the cars they lease from the company. David Goodman, a principal with Windowizards, thinks it might take some sellers a year to get fully acclimated.

TRADE-OFF Many replacement contractors and their sales teams favor an independent employment arrangement that allows sellers to choose which companies they work for. The primary advantage is that companies save money in taxes and benefits. The downside is that they run the risk of state officials questioning just how independent a seller actually is and pursuing them for back taxes for income or unemployment insurance. A number of states are becoming increasingly aggressive about reclassifying sellers as full-time employees, even ignoring safe harbors written into the Internal Revenue Code.

“I assume, going forward, that states will make their rules much tougher,” Goodman says. Lewistown, Texas-based U.S. Home Systems spent more than a year wrestling with the state of California over a ruling about the classification of one of its sellers. CEO Murray Gross urges contractors not to cavalierly hire sellers as 1099s.

The state of Washington has also stepped up efforts to collect back taxes from businesses. As a result, three years ago, Statewide Windows, based in Mukilteo, Wash. — which recently changed its name to Penguin Windows — converted all of its 100 salespeople to full-timers. “We're not willing to take the risk anymore,” says Statewide/Penguin's director of operations Vaughn McCord.

A MARRIAGE Regardless of the potential headaches, a substantial number of contractors use independent salespeople. Gross observes that this seems particularly true among siding and window installers. For the privilege of being able to choose which companies they sell for, 1099 salespeople are responsible for paying federal, state, Social Security, and Medicare taxes themselves, and aren't entitled to benefits. Under such arrangements, the employer has little control over an independent seller's comings and goings. “It goes back to the Tin Men world, which a lot of companies never left,” says Rick Dugan, owner of America's Best Home Remodelers in Golden, Colo., whose 12 sellers all are full-time employees.

Dugan says most of his competitors prefer 1099s, which he calls “accidents waiting to happen” because of their penchant for tax delinquency. Still, this kind of employment setup has its advocates. Over the past 15 years, Amazing Siding has toggled between 1099s and full-timers. Four years ago, its Houston branch replaced any full-time seller who either left or retired, with a 1099 seller. That move was intended, says general manager Bob Birner, to control health care costs, and because many of its salespeople at the time were 55 years or older. “We were able to reduce overhead and get a bit younger at the same time,” Birner says. Only Amazing Siding's sales manager, who is also the most senior seller on its six-person team, retained his full-time status.

Even though they are allowed by statute to work for as many companies as they choose to, Amazing Siding's salespeople work for that company exclusively, Birner says, because “we keep them busy and don't give them a reason to work for someone else.” Despite its reps' independence, Amazing Siding maintains job descriptions for 1099s, which, Birner says, require them to accept set appointments “that are given to them for free”; to dress appropriately; and to drive a car that's “presentable” — free of political bumper stickers. They must give customers accurate quotes and try to close the sale.

Birner and several other contractors see little difference in the productivity of 1099s versus full-time sellers. What's different, though, is how companies manage those sellers. Cleveland-based Stanek Window has “always” hired salespeople as full-time employees, says general manager Sven Kramer, because “as a manufacturer that sells directly to the homeowner, we want to control the process. With our salespeople as employees, we have complete control over where and when we send them.”

Stanek Window has nine sellers in its Cleveland office, seven in Clearwater, Fla., and five in Milwaukee, Wis., and each office's sales manager meets with his team as often as three times a week to assess productivity. Stanek Window and Statewide/Penguin are among the contractors that hire full-time sellers on a probationary period — usually around 90 days — during which they draw a salary “so they can survive,” quips Kramer, before they are unleashed to earn sales commissions on their own. The general consensus is that turnover among salespeople is highest in the first year, regardless of a seller's employment status, but that after that period full-time employees tend to stick around longer than independents. Seattle-based Jorve Corp.'s 16 sellers, all full-timers, have an average tenure of seven years with the company; two have been there for a decade or more.