An interview with attorney D.S. Berenson about worker reclassification, lead paint laws, Do Not Mail registries, and more.

Source: REPLACEMENT CONTRACTOR Magazine
Publication date: 2009-09-10

By D.S. Berenson

D.S. Berenson is an attorney specializing in the home improvement industry and is a frequent speaker on legal topics at industry forums. His firm, Johanson Berenson LLP, in Washington, D.C., has represented many home improvement companies on a variety of issues over the years.

Replacement Contractor: During the last few years, laws were passed at the state level in Illinois, New Jersey, and Pennsylvania specifying the ways in which general contractors such as home improvement contractors can employ subcontractors. What should contractors in these states be aware of in defining their relationship with subcontractors to avoid audits or having to pay fines and back taxes?

D.S. Berenson: Without sounding glib, the most important thing is to be aware of the issue. The risk of a reclassification audit has huge ramifications for companies. It can apply to your workers' comp, unemployment, payroll withholding. It also takes into account whether that subcontractor, reclassified as a W-2 employee, is now eligible for overtime, sick pay, vacation pay, and other backdated benefits. Once you run that risk of having your 1099 subcontractor reclassified as a W-2 employee, you can get hit in a dozen different categories. So a former subcontractor can come to you and say: I should've been able to get overtime, 401(k), vacation, and on and on.

RC: So, in addition to fines and back taxes for either the state or federal government, there's also the risk of civil action?

DSB: Exactly. Say it's determined that the 1099 worker, whether a salesperson or an installer, should have been a W-2 employee. Now you have 1-800-sue-you type attorneys getting involved. We're running about five to six reclassification projects a month for our clients. Some are federal and state audits, some are private litigation. So there's a huge risk of a class action attorney coming in and saying all these people are employees, therefore you owe them all these benefits and overtime.

RC: What should contractors do to shield themselves from this kind of audit and from potential class action suits?

DSB: The first thing is to get an understanding of the specifics of the law in whatever state or states you're doing business. Every state is approaching the 1099 relationship a little differently. So you'll want to know the particulars of the state law as well as federal law governing subcontractor relationships. Look at the laws, how many workers you have that are 1099, how you're using them, and how important they are to your business. Then determine whether you can - or even want to - restructure that relationship in a way that defends against reclassification.

RC: Once you've studied the laws and have determined that you want to continue using 1099 workers, where do you go from there?

DSB: Come up with a list of protocols. Think of each one of them as a brick in the defensive wall you're building. First of all, you must have a written agreement. The worker must be hired as an entity, and paid as an entity. If we are speaking about an installer, then that worker would need to be independently licensed in those jurisdictions that provide licensing for contactors. You need to show that they are operating entities as going concerns. I like to show a copy of a tax return page establishing that the worker is filing state and federal taxes under a business name and a business I.D. The list of protocols we recommend goes on and on, depending on state and product lines. And if you don't implement the protocols, they're of no value to you. In the event of an audit, you need to be able to show files that indicate how you're treating 1099 installers and salespeople. If all you have are bits and pieces here and there, you're going to have a heck of a time overcoming that audit.

RC: What's the alternative?

DSB: The alternative would be to have an employee-based salesforce and W-2 installers. And there are benefits to that, but there are also costs, especially payroll costs. It can be a substantial burden. Now I am complying with OSHA, minimum wage, unemployment, overtime, all the things that go along with having a W-2 employee. And what if I can't afford to switch the whole workforce over to W-2? I may end up scaling back. But no one looks at it from this point of view. They are just looking at it from a legislative point of view.

RC: How likely is it that other states will pass similar legislation? Why?

DSB: There is legislation pending in about a dozen states right now. If the economy doesn't turn, the majority of the states will have legislation like this making it difficult to structure and maintain a 1099 relationship.

RC: On another topic: As we move toward 2010 and the implementation of new rules governing lead paint removal, what should contractors know in order to comply and to avoid a citation and fine?

DSB: I think so many contactors are just struggling to maintain their levels of business while they hope things will start to turn. As a result, the majority are unaware of what's coming down the pike on April 22, or they simply may not be able to devote any attention to the issue. The new lead-paint regulations could very well be a sea change for your company in the way you price and process jobs. And it's coming from the federal government and it's going to be here.

RC: What should people do to be prepared?

DSB: The contractor must be registered with the EPA. People need to be trained in how to test jobs for lead paint. Crew leaders must be certified by the EPA to conduct lead-safe work practices on the job and workers need to be trained in how to do it. Then there's the question that no one's discussing: How do I explain this to the customer, and what sort of contractual documents do I need to provide? What if the customer doesn't know how old the home is? What if I test and there is no lead paint? How long do I keep the records?

RC: How seriously do you think the government will enforce safe lead-removal rules at the contractor level?

DSB: I don't think you'll be seeing much enforcement for at least a year or two. But a lot will depend on where you and your company are on the radar screen. The EPA has been doing surprise audits on the lead-paint pamphlet distribution requirement, which is already in effect. If you get hit with that, it's much more likely that your company will be looked at as part of a broader enforcement action.

The bigger concern is if the press makes an issue of it or groups start suing over it. Then you're going to encounter the homeowner who says: "Aren't you supposed to talk to me about unsafe lead practices?" And if they don't like the work your company did, they could file a complaint. Or pick up the phone and call 1-800-sue-you lawyers.

RC: This year, 19 states have considered legislation setting up a Do Not Mail directory similar to the Do Not Call registries that enabled consumers to place themselves outside the reach of telemarketers. Do you think states will eventually pass a law setting up a Do Not Mail directory covering commercial mail? Do you foresee a federal Do Not Mail registry at some point?

DSB: I think it's highly unlikely. The forces lobbying against it are very strong. And there is a question of First Amendment rights. Unlike telemarketing, you're not bothering anybody with mail. A consumer doesn't have to open the mail. And that really overcomes any concerns about the consumer's right not to receive it. In effect, I should have the right to correspond with whomever I want.

RC: As more home improvement companies are attempting to canvass neighborhoods for leads, more municipalities are enacting restrictions to discourage or prevent this. What should companies do to be on legal safe ground as they send canvassing teams out into new neighborhoods?

DSB: The problem is that there is no good answer to this. And there is lot of misunderstanding about it. In 2002 the Supreme Court voted overwhelmingly on a canvassing case: the Watchtower Bible and Tract Society of NY Inc. vs. The Village of Stratton. A lot of people didn't get what that case said. The court said that, under the First Amendment, municipalities can't unduly restrict the right of organizations to canvass for political, religious, or charitable purposes. It didn't say that it was OK for commercial canvassers to go door to door to sell a commercial product. So the Do Not Knock laws — which are growing — may or may not be constitutional. But in regard to our industry, they probably are. You are reasonably allowed to restrict someone from canvassing, and that includes requiring a license, registration, and fees. People want to know who's coming into their neighborhoods.

RC: What can home improvement companies that canvass do about it?

DSB: Number one — so that you don't have to repeatedly go through registration — maintain a stable group of canvassers who are limited to a particular area. Two, look for loopholes in local canvassing laws. Some say, for instance, that if you're a manufacturer representing your own product, you don't have to have a license. Companies with a franchise - say Owens Corning basements - may be able to argue that they're directly connected to a manufacturer. Many laws are poorly written and vague. But if you sue, they'll probably just have a clearer, more defined law in place sooner or later.

RC: Last year Pennsylvania passed its Home Improvement Consumer Protection Act, which became law as of July 1, 2009. It requires all contractors doing $5,000 or more worth of work a year to register with the state, to have a registration number visible on their vehicles and paperwork, to indicate whether or not they are insured, and for contractors to have a signed contract for work of more than $500 in value. In your view, does such a law help or hurt legitimate home improvement companies?

DSB: I think it helps legitimate contactors by weeding out those players who cause problems and create a negative reputation with the public. Right now the Pennsylvania law is purely benign. There's no exam. You just have to show that you're a valid operating entity. Unfortunately, once these things get placed in the revenue stream, they change. Suddenly there are background checks, examinations, and it's all more complex. This is where clients call us to handle their registration.

One complaint I do have about the Pennsylvania law is that it specifies that contractors who sue homeowners may not charge legal fees. So if I sue you for $5,000, I'm also going to pay a few grand in legal fees, even if I win. That's going to have a chilling effect on contractors who are looking to secure their legal rights under this law.

RC: Some states, such as California, are fairly stringent in regulating contractor activity. Others have few to no regulations. Do you see a trend toward increased regulation of home improvement companies at the state level? Why?

DSB: The short answer is that there will always be more regulation. Two years ago it was New Jersey. You look at states like Ohio and scratch your head and wonder why they don't have a home improvement act — they've been working on it for years. We will be seeing more and more of this.

This article is for informational purposes only and should not be construed as legal advice.