Subcontractor or Employee?

Human Resources, Sales Management

Employment of a commissioned salesperson is often viewed as a subcontractor relationship because many employers only pay if sales are made, however based on the laws that cover labor relations in most cases salespeople are employees.  There are many reasons that a company might prefer to use subcontractors instead of hiring full time employees.  There are many laws that define how workers are classified.  It is important for a company to properly define its sales staff for several reasons.

Salespeople are typically employees rather than sub-contractors.  Is it better for a company that needs sales representatives to hire employees or to contract with subcontractors?  What are the benefits of using subcontractors?  Why could using employees be a good idea for a company?

Examples of Subcontractor Salespeople

There are several examples of salespeople that are usually legitimately classified as subcontractors.  Supplemental health insurance is an industry that is known for having salespeople that are classified as independent contractors or independent subcontractors.  The best known of the providers of supplemental insurance is the American Family Life Assurance Company of Columbus, Ohio, popularly known as AFLAC.  AFLAC is a company that hires salespeople to represent it but only as independent agents.  The website is clear about how agents are hired, using the freedom of being an independent agent as a draw for working for AFLAC by asking, “Work or family? You don’t have to choose with Aflac. As an Aflac independent insurance agent, you’re the boss, so balancing work and play is easier than ever before since you make your own work schedule. As an independent insurance agent representing Aflac, you get the support of a Fortune 500 company and industry leader, along with the ability to own your own business and enjoy a flexible work schedule” (American Family Life Assurance Company, 2012).

Although the independent agent is a subcontractor there is still some control the company exercises over its agents.  AFLAC requires a new agent undergo training and be familiar with the products offered by the company.  The company requires agents to attend sales meetings and although the schedule can be flexible there are certain requirements about the number of calls an agent should make each week.

Examples of Employee Salespeople

Most salespeople are actually classified as employees.  Automotive dealerships usually classify their salespeople as employees.  The reason that automotive dealerships typically use employees as salespeople is because most dealerships have salespeople report to the same location on a set schedule every week.

A typical advertisement for a employee salesperson reads, “Previous auto sales experience is NOT REQUIRED for this position. Those with experience in customer service, account executive, financial services, mortgage and restaurant industries have proven to be very successful when switching careers to Auto Sales. Qualified applicants should have a professional appearance, a high school degree (or equivalent) and a valid driver’s license with an acceptable driving record. Drug screening and background checks will be performed. High-energy, positive, out-going individuals with strong verbal communication skills WILL succeed at Nissan Infiniti Mazda of Elk Grove” (Automotive Retail Sales Careers , 2013).

Benefits of Classifying Salespeople as Subcontractors

There are numerous benefits to classifying salespeople as subcontractors for a company.  The first advantage comes when a company needs salespeople on a temporary or seasonal basis since hiring subcontractors allows a company to avoid paying an employee when they are not needed.  Subcontractors only expect to be paid for the time they actually work instead of an employee that expects to be paid “for hours that they are not necessarily needed and this can increase your costs if not managed well (Newman, 2011, p. 48).

Subcontractors do not typically qualify for benefits so a second benefit to hiring subcontractor salespeople is the reduced cost of benefits.  Benefits such as health care, unemployment insurance, tuition assistance, and others can cost an employer tens of thousands of dollars per year for each employee that can be avoided by the use of subcontractors.

Benefits of Classifying Salespeople as Employees

There are several major benefits to hiring employees to make up a company’s sales staff.  One major benefit is that employees are totally under the control of the company which mean that the company can choose to do background checks and determine who is hired as well as when and where they work (Atkinson, 2012, p. 24).

A large benefit to hiring employees as salespeople is that it is often the most compliant legal solution.  In many cases because of the nature of the business involved in a company can only have employees as salespeople because of the strict definition of a subcontractor.

Laws Concerning Classification of Salespeople

The laws surrounding employee classification are diverse because each industry and job has unique requirements.  Most laws concerning classification of employees are centered around the tax implications of such classifications. A recent decision in the classification of subcontractor versus employee admits that “although there is no “bright line” test for worker classification, there are certain recurring themes. The most prevalent factor emphasized by various regulatory agencies and the courts is one’s “right to control” the detail of the individual’s work performance. (Franklin, Kota, & Milane, 2012, p. 64).

The Internal Revenue Service takes the classification of employees very seriously because the classification changes the way taxes are paid.  The position of the IRS is very clear but the line continues to be blurred by employers.  According to the rules the IRS takes the “position as outlined in IRS Publication 15A is that: Anyone who performs a service for you is your employee “if you can control what will be done and how it will be done.” The general rule is that an individual is an independent contractor if you, the person for whom special the services are performed, have the right to control direct only the result of the work and not the means and methods of accomplishing the result. Areas that government will determine the appropriate classification of employee or subcontractor is based upon are financial control, behavioral control, and the type of relationship of the parties. Remember, the government wants to know if you are calling them a subcontractor instead of an employee for the sole purpose of avoiding paying employee-related taxes” (Atkinson, 2012, p. 25).

Discussion Based on Article

A dealership that was involved in selling used cars classified its salespeople as independent contractors and then was investigated by the Internal Revenue Service and eventually went to court regarding how their salespeople were classified.

The dealership lost the case in District Court and was instructed to classify salespeople as employees but on appeal The Court of Appeals overturned the decision and upheld the dealership’s right to classify salespeople as independent contractors.

The case was based on Section 530 of the Revenue Act of 1978.

Fiore, N. J. (1996). Independent dealership’s used car salesmen were independent contractors under “significant segment” industry practice. The Tax Adviser, 27(10), 650-650. Retrieved from http://search.proquest.com/docview/194136845?accountid=32521

Conclusion

There are benefits to having employees as salespeople for a company and there are benefits to using subcontractors as well.  Employee salespeople are under the direct control of the company so that the schedule and method they use to sell the company’s product are approved and directed by the company.  Having employees allows a company to completely control the sales process.

Having subcontractors serve as the sales staff of a company can have great benefits for the company.  Since subcontractors are usually only paid when they produce the company is not required to pay for downtime as they would have to for employees.  Because subcontractors do not qualify for benefits from the company there is no impact on group health insurance or other benefits that usually cost the company thousands of dollars.

It is apparent that each type of salesperson, employee or subcontractor, has benefits that will appeal to companies in unique situations.  It is important that each company analyze the benefits of each type of salesperson and decide which is best for them.

 

References

American Family Life Assurance Company. (2012). Become an agent. Retrieved April 19, 2013, from AFLAC Web site: http://www.aflac.com/agents/flexibility/default.aspx

Atkinson, W. (2012). Employees VS Subs. Qualified Remodeler , pp. 24-26.

Automotive Retail Sales Careers . (2013, Aprril). Automotive Retail Sales Careers. Retrieved April 20, 2013, from http://automotiveretailsalescareers.com/jobs/

Fiore, N. J. (1996). Independent dealership’s used car salesmen were independent contractors under “significant segment” industry practice. The Tax Adviser, 27(10), 650-650. Retrieved from http://search.proquest.com/docview/194136845?accountid=32521

Franklin, R. T., Kota, M., & Milane, R. M. (2012, March). Independent contractor or employee. GP Solo , pp. 64-65.

Newman, P. (2011, June). Are You Hiring a Subcontractor or an Employee? Pavement , p. 48.

 

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Staffing Issues Pt 1

Human Resources

The Family and Medical Leave Act has had a huge impact on staffing decisions in American business. The act was meant to give those with medical issues additional time to handle those medical needs as well as care for family members that required additional assistance. The act was put in place in 1993 with good intentions by lawmakers to protect the jobs of workers with legitimate health and family issues (Reilly, Minnick, & Baack, 2012, p. 86). The actual result of the act has been muddied with abusers of the law.

Larger employers are now burdened with workers who have discovered that once qualified for FMLA time they are often given wide leeway by employers regarding taking time off work. When scheduling workers some companies are forced to schedule “an extra 15% of workers on weekdays and an extra 33% of workers on weekends” (Leah, 2008, n.p.). Because FMLA time is not required to be prearranged workers often take sudden weekends off or leave early on Fridays. Extra staffing costs companies large amounts of money just to be sure they have sufficient workers to cover for other workers who decide not to work a shift and write it off to FMLA.

Although there are many legitimate users of FMLA time the act allows for widespread abuse. At least “10 to 12% of people who take FLMA are not doing it legitimately, according to Jim Brown, senior vice president of FMLAsource, an affiliate of ComPsych” (Leah, 2008, n.p.).

Another issue that faces companies regarding staffing is the increased cost of Social Security premiums. When deciding if a new employee can be hired companies must not only count the cost of the wages paid to the employee but also the cost of employer contributions to the Social Security fund. Governmental requirements such as Social Security have a huge impact on the employer’s ability to adequately staff.

Leah, C. S. (2008). I’m on FMLA leave: Benefits pros offer their peers advice on combating FMLA abuse. Employee Benefit News, , n/a. Retrieved from http://search.proquest.com/docview/214866517?accountid=32521
Reilly, M., Minnick, C., & Baack, D. (2011) The Five Functions of Effective Management. Bridgepoint Education: San Diego.