HorizonTV Featuring ProRemodeler: Watch Episodes On Demand At HorizonTV

From 1099 to W-2

If your backlog is bumping up against a labor shortage, converting subcontractors to payroll employees might make sense. Here’s what that process entails.

March 08, 2018
photo of carpenter toolbelt on a roof


Backlog is a nice thing to have, up to a point. With signed contracts on the books you can scale your operation and productive capacity to the volume you know is there in three months, six months, nine months or a year. And in large-scale design-driven remodels, clients often don’t mind waiting.

But backlog can also backfire. “When you look closer to why construction businesses fail, an excessive backlog is one of the most common reasons,” notes blogger David Druml, president and founder of Direct Surety, a contract surety bond provider (“Too Much Backlog & Overextended Resources – What Should You Do?). “The lack of qualified manpower can significantly impact production, as well as profitability. When schedules are not met profits will generally decline.” 

This holds especially true in short-cycle construction jobs, such as roofing, siding, or window replacement, where the homeowner’s decision to go with a particular contractor is likely driven by need rather than want (the siding is falling apart, the roof is leaking, or the windows are drafty and hard to operate). If the homeowner is inclined to sign with your company, but you give them a start date three or four months down the road, they may say forget it, we need someone sooner. Or it could be that as the start date on your contract approached, no installers are available to do the work because they’re all committed to assignments from other companies (your competitors). Now you’ve got a deposit, an agreement, an angry homeowner, and a disgruntled salesperson. 

Employees Vs. Subs

The business model at a home improvement companies differs when it comes to whether the company installs with subcontractors or employees. Which works better is the subject of an ongoing industry debate that will likely never be resolved, because companies will organize themselves in the most financially advantageous way, and the one that works best for the market. 

The advantage in using subcontractors is that it’s generally less expensive (you’re not paying benefits, workman’s compensation, and taxes), you know the actual cost (it’s fixed in a written agreement), and the work will be done quickly (because the installers have other jobs waiting). Many good companies install this way.

The case for employees goes as follows: They’re yours and yours alone (no more scramble to find someone to do the work), and because they’re employees, you can legally supervise their work (as opposed to simply contracting with them to do it), and direct them in a way that generates referrals and builds brand awareness for your company. 

A case could be made either way. But if you need people to install when you need them, employee installers may be the way to go. Which is why some home improvement companies in the last few years have considered turning their subcontractors into employees by putting them on the payroll. 

From 1099 to W-2

Let’s say you have two great crews you want to bring on as full-time employees. Assuming they like the idea, how do you go about doing that? 

Let’s start with definitions, because terms like “employee” and “independent contractor” are legally defined by what those workers actually do. “An independent contractor is a self-employed person hired to handle a particular job or project,” notes Grace Ferguson at Work.Chron.com (“How to Convert Contract Rate to Employee”). “Independent contractors are not salaried employees, are normally excluded from company benefits, and are required to deduct and pay their own taxes.” So one big consequence of moving a subcontractor onto payroll is that you’re now responsible for deducting and paying their federal, state and local taxes as well as Social Security and Medicare.
Another defining distinction is that you as the employer “have the right to control how a worker behaves — how to dress, for example, or specific customer interaction protocol — when they're an employee and not an independent contractor,” notes Business Insider senior tech reporter Biz Carson (“There's one major reason startups are switching their workers from contractors to employees, and it's not lawsuits”). So, for example, you may want installers to wear your company’s uniform, consult with the homeowner daily to address questions, make notes on those conversations to add to the job file, and solicit customer satisfaction surveys. You can’t legally require subs to do anything like that. They’re job is to nail on a roof or set windows or hang siding, period. Employees, on the other hand are on the clock ... your clock. Put what you want them to do in their job description and have them sign off on it. 

Piece Rate Or Hourly? 

But what if you’re paying the installers you want to convert to employees a piece rate, i.e., by the opening for windows, or by the square for roofing or siding? What if, once they come on as employees, those ten openings that used to take a day now take two, or that 20 square shingle roof you know they can install in a day is now taking double that because you’re paying them by the hour? And not only that, but also paying for health insurance, workman’s compensation, and other benefits?

That’s a management issue. You need a project manager on the job to ensure that company quality and efficiency standards are met. In theory, your new employees should work just as quickly and efficiently on your payroll as they did when you were cutting them a check as a subcontractor.

But converting subcontractor installers into employees doesn’t necessarily mean doing away with piece rate. Paying employees piece rate is common in construction. Mike Thal, an attorney at construction law firm Land & Klain, P.C., points out that “piece-based compensation is attractive because it can benefit both the worker and the employer.” (“Piece Work: Pay Your Employees by the Task — Legally”) “The worker has the opportunity to increase their income in return for extraordinary productivity; meanwhile the employer can more accurately tie labor costs to output and capacity (e.g., slabs poured, roofs completed, sinks installed, houses built) and tie budgeted labor costs to what is actually paid out.” But, as Thal and others note, paying piece rate makes it yet more essential for you, the employer, to maintain accurate daily and weekly time records to prove that you’re meeting federal and state minimum wage and overtime standards. An hourly wage with on-site management may be the better model.

Plan On It

Moving to employee installation is a big step that will take planning and coordination. Don’t try to wing it. Get an employment attorney and tax specialist involved, and put a plan on paper before you make your move. Expect it to take a year to transition. 

Be sure to take the following steps:

  • Create job descriptions for your new employees. You’re paying benefits and workers compensation, so spell out what you expect in return.  
  • Define the basis for their pay. Will it be an hourly rate or a piece rate?
  • Have employees sign an employment agreement. You’ll want your attorney and an HR consultant to help with this.
  • Modify your accounting system. Have your bookkeeper set up a system for deducting local, state, and federal taxes, as well as FICA and Medicare. 
  • Set up a training program. This should set installation standards and familiarize your new employees with how your company interacts with customers.

Few would argue that maintaining installation crews is less expensive than hiring subcontractors. But you’re not doing this to save money, you’re doing this to ensure you have the manpower you need to install the jobs you’re selling so that an ever-expanding backlog doesn’t put you out of business. You probably will need to adjust your pricing to accurately reflect those enhanced labor costs. That likely won’t go over well with the sales team, at least not at first. So as a final step, schedule some sales training or re-training so reps understand and can explain why quick installation at supervised and documented quality levels is well worth what you’re charging.

About the Author

About the Author

Philadelphia-based writer Jim Cory is a senior contributing editor to Professional Remodeler who specializes in covering the remodeling and home improvement industry. Reach him at coryjim@earthlink.net.

Add new comment

Overlay Init