In our experience, many owners initially consider hiring salespersons as independent contractors rather than employees.
At first blush, there appear to be many “benefits” to independent contractor status:
- It appears to be cheaper for the company. No workers comp, no vacation, no medical benefits and no employer’s social security tax.
- Initially it gets more cash in the hands of the salesperson, however, in the longer run, the salesperson has extra costs and extra taxes.
- It is easier to administer.
- A true independent contractor is not covered by wage and hour laws that require minimum hourly wages, overtime, etc.
- An independent contractor arrangement implies less commitment by the company. It does not feel as “permanent” as bringing on a new employee and there are no hassles if there is a termination.
In spite of these “benefits”, we recommend that you classify salespersons as employees rather than as independent contractors and treat them as full-fledged members of the company team.
There are three primary reasons:
- Building a sales team requires control of the process and the salesperson.
- Most owners want the salesperson to make the right presentation to the customer.
- A review of the independent contractor status of a salesperson creates costs, hassles and a big waste of time, even if you win. If a worker is found to be misclassified, the liability for prior years’ taxes and penalties can be crushing.
Lets’ discuss each reason
1.
Building a sales team requires control of the sales process.
If your goal is to build a sales team, whether it be one, two or more persons, you need to think through how to hire, onboard, train, develop and manage these salespeople.
Do you want your sales people to be “freelancers” and “sub-contractors” or do you want them to be dedicated representatives of the company?
If they are employees, salespersons have a legal obligation to avoid acting in a manner that’s contrary to the company’s interests. They have an obligation to be loyal, to maintain the company’s confidential and proprietary information (including customer names) and not to compete with you so long as they are employees.
You will want them to have company business cards and, perhaps, company shirts or blazers. You may want them to use their own cars and may want to reimburse them or provide an expense allowance.
Building a sales team requires you to control, at least to some degree, the salesperson’s schedule.
You will need meetings for onboarding, training seminars, regular sales meetings and individual coaching sessions with each salesperson.
All of the above favor classification or the salesperson as an employee.
2.
The salesperson needs to make the right customer presentation
The salesperson is the primary face-to-face contact with your prospects and customers.
The salesperson establishes the customer’s expectations concerning your company and the services you provide. It is the salesperson who transmits the company’s values: understanding of the customer’s needs, trust, competence, caring, thoroughness, timeliness and attention to detail.
The salesperson’s performance in front of your customer needs to project your vision and your company’s delivery of its products and services. You want to be sure the salesperson knows the company’s culture and reflects it to the customer. If the salesperson is going to explain the company and its values to the customer, he must first learn what they are. Then the presentation will be stronger if the salesperson believes he is part of the company team.
Customers typically prefer to deal with a company employee whose commitment will be backed up by the company rather than deal with an independent sales rep.
We have ridden along on sales calls with independent contractor sales people who refer to the company in the third party, as “they”. For example, when asked how quickly service responds, the independent contractor’s response is; “they provide service within 24 hours”. A much stronger response would be; “we provide service within 24 hours and, if you have any problems, call me personally.”
Being a field salesperson is a lonely job. A good salesperson spends more time in front of customers and prospects than he spends in contact with the office or his manager. The salesperson needs as much real and emotional connection to the company as you can engineer. He needs to know that the company has his back and that he must, in turn, be responsible in his actions.
The salesperson’s attitude toward the company can’t help but be affected by whether he is an employee or an independent contractor.
After all, the very title “independent contractor” shouts out that you want him to be independent and think of his business and himself first. Remember, an independent contractor is synonymous with “sub-contractor” or “freelancer”.
If you want your salesperson to forcefully present your company to customers, you probably need to make that salesperson an employee.
Independent contractor status might be appropriate in some cases. For example, if the salesperson is providing introductions to specific prospects. Consider the following scenario:
An independent person, Salesperson “X”, contacts Company A saying “I have extensive contacts with some general contractors who need a fire alarm contractor for some new jobs. I can bring those jobs to you, but I want to earn a commission as an independent contractor to maximize my income,”
In this case, you might want to develop and sign an independent contractor agreement and have X bring in the sales.
Make sure that company personnel develop rapport directly with the customer and be sure the company has a real understanding of the customer and its requirements.
In effect, you would be paying X a commission that amounts to a finder’s fee for bringing you a customer relationship that you and your employees develop.
3.
Challenges to independent contractors status
If you decide to pursue independent contractor status for one or more salespersons, be aware that independent contractor status may be challenged by the worker, by various state agencies, by the IRS or by the US Department of Labor. The challenge can be initiated by a current or former (perhaps disgruntled) employee seeking back compensation and benefits. Alternatively, an unrelated labor action might trigger review of how you compensate sales people.
In the event of a challenge, you must be prepared to defend the decision to treat this worker as an independent contractor rather than as an employee. Also the decision for a particular employee may affect others, including former employees.
Note: Having a signed independent contractor agreement and paying on a form 1099 are not necessarily determinative of the salesperson’s independent contractor status.
Bear in mind that the mission of most government labor agencies is to protect workers and ensure them a just day’s pay and economic justice through robust enforcement of labor laws.
As an owner, the successful justification of independent contractor status is your responsibility.
Justification can be quite complicated. Requirements vary in different jurisdictions. It is quite possible for a person to be an independent contractor under one law (say tax law or state law) and an employee under another law (the Fair Labor Standards Act). Each state has its own specific laws and regulations and the laws of your state(s) and the Federal tax and labor laws are what you should become familiar with.
If you want to classify a worker as an independent contractor, or if your classification decision is challenged, we strongly recommend that you immediately seek legal advice from an attorney experienced in the employment laws of your particular state(s).
As one example of the laws and positioning of the state agencies, below are some excerpts from the State of California Department of Industrial Relations, Independent contractor versus employee (emphasis added by LVI):
State agency position on independent contractors:
“Employers oftentimes improperly classify their employees as independent contractors so that they, the employer, do not have to pay payroll taxes, the minimum wage or overtime, comply with other wage and hour law requirements, such as providing meal periods and rest breaks, or reimburse their workers for business expenses incurred in performing their jobs…”
“In handling a matter where employment status is an issue, that is, employee or independent contractor, DLSE [Department of Labor Standards Enforcement] starts with the presumption that the worker is an employee… This is a rebuttable presumption, however, and the actual determination of whether a worker is an employee or independent contractor depends upon a number of factors, all of which must be considered, and none of which is controlling by itself…”
The website goes on to list 11 factors to be considered depending on the issues involved. It then continues:
“Other points to remember in determining whether a worker is an employee or independent contractor are that the existence of a written agreement purporting to establish an independent contractor relationship is not determinative…, and the fact that a worker is issued a 1099 form rather than a W-2 form is also not determinative with respect to independent contractor status…”
To consider this issue further, begin with The IRS’ list of common law rules from its website:
IRS’ Common Law Rules
Facts that provide evidence of the degree of control and independence fall into three categories:
1. Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
2. Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
3. Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?
Then proceed to do some research into both the IRS and your state(s) employment regulations.
Links to the websites of the IRS and the States of California and Colorado are below:
IRS: Independent Contractor Self Employed or Employee
US Department of labor, Fair Labor Standards Act:
US Department of labor, Misclassification Facts:
State of California: FAQ Independent contractor
State of Colorado: Independent Contractors
For your state regulations do a Google search for the term “independent contractor vs employee in [your state, e.g. Alabama]”.
CONCLUSION:
When hiring a salesperson, consider first what you are trying to accomplish. If you want to build a sales team and you want your representative in the field to be the best possible presenter of your company, you almost certainly want to choose to hire the person as an employee.
Yes, we know it is more expensive and a hassle to incorporate the person into the company’s benefit programs. However, the impact on the salesperson’s attitude and sense of belonging will pay big dividends. Besides, if you lose a challenge to independent contractor status, all the cost benefits will be more than wiped out.
At Larrabee Ventures we offer a service to help you navigate the challenges that come with growing your business. Growth Coaching is a service that may help.
If you have any questions, please call.
Larrabee Ventures, Inc. (LVI)
LVI is staffed by highly experienced alarm professionals.
William Larrabee (“Bill”) has started three alarm companies from scratch, been president of five different alarm companies, and worked through crisis situations in numerous companies, either as an on-site executive or paid financial advisor. Bill knows the alarm business.
Michael Carter (“Mike”) has been a sales manager and vice president of sales and marketing for five of the largest alarm companies in the US. He also has ten years of experience driving sales and marketing programs as a consultant and coach. Michael knows sales, marketing, and sales management for alarm companies. For more information about LVI please visit our website: Larrabee Ventures.com.
Together we will answer your questions and help you get your business out of the fog and back on the open road.