The Independent Contractor[IC]/underground economy is a huge issue for California small business. On the one hand we hear from small businesses that the state and IRS audit them and nitpick to find ways to reclassify independent contractors as employees. Small Business California is working with one of our members who had an attorney and Human Resource person develop their contract for ICs and still the state insist these people are employees. It also should be noted that our member is following standard industry practice.
However there are numerous situations where the employer is clearly breaking the law. Charles Welsh who is a member came to us awhile back as many of his competitors were paying their employees under the table. We reported this to Christine Baker head of the Department of Industrial Relations who turned it over to Renee Bacchini her Special Assistant. See below results of their investigations. Looking at the reasons for citations none of these are nitpicking in my opinion. These people are competing with people like Charles who is playing by the rules and is clearly at a competitive disadvantage.
What do you see in your industry?
Scott Hauge
President
Small Business California
2311 Taraval Street
San Francisco, CA 94116
shauge@cal-insure.com
415-680-2188
Hello Charles,
I hope your fall is going well too.
Please see below from the inspections conducted statewide in the salon industry. Our enforcement is to level the playing field, educate the employers and bring them into compliance if there are violations found. It is not within our jurisdiction to regulate how much they charge. There is high competition in this industry, it’s possible for the businesses to try to remain competitive with their rates in order to stay in business. Again, that is beyond what we enforce. We conducted 74 inspections throughout these counties and brought them into compliance with state labor law. Of the 74 salons inspected, 64 were found out of compliance.
Here are the results of the salon industry inspections during the week of April 16 – 20, 2012 in the following geographic areas:
SF/Alameda/Marin/Contra Costa/Sonoma/Napa counties; Tehama/Shasta/Placer/Sutter counties, and Santa Clara and Monterey counties.
Number of inspections……. 74
Citations issued .....……...… 64
WC amount….…………....….. $ 399,283.59 / 50 citations
Cash Pay 226 cites………….. $ 67,250.00 / 11
Minimum Wage Cites…….. $ 3,360.00 / 2
Overtime Cites……..……….. $ 350.00 / 1
Total Penalty Assessments $470,244.00
Please let me know if you have further questions.
Renée Bacchini
Special Assistant to the Director
Department of Industrial Relations
1515 Clay Street, 17th Floor
Oakland, CA 94610
510.286.1106 o
415.859.6005 m
510.622.3265 f
From: Charles Welsh [mailto:cvwelsh@mac.com]
Sent: Wednesday, October 10, 2012 5:48 PM
To: Bacchini, Renee@DIR
Subject: Re: Question on Independent Contractor Contact
Hello Renee,
Hope you are having a great fall!
Can you please share what the results were of the audit? It appears that most of the under the table, non-compliant "bad players" are still doing business at their low price point, I was wondering what the results were of the hair salon audit.
Many thanks!
Regards,
Charles
On Jul 24, 2012, at 4:37 PM, "Bacchini, Renee@DIR"
Hello Charles,
I found out DLSE BOFE Division went out and found quite a bit of non-compliance. Unfortunately it doesn’t necessarily close them down. I don’t know that we can publicize names of businesses, but overall results. Also, it had to be compelling enough for someone to write about it.
Renée Bacchini
Special Assistant to the Director
Department of Industrial Relations
1515 Clay Street, 17th Floor
Oakland, CA 94610
510.286.1106 o
415.859.6005 m
510.622.3265 f
From: Charles Welsh [mailto:cvwelsh@mac.com]
Sent: Monday, July 23, 2012 7:56 AM
To: Bacchini, Renee@DIR
Subject: Re: Question on Independent Contractor Contact
Hi Renee,
Hope you had a great weekend. I was wondering what the outcome was of your enforcement action. Also, do you think publicizing results might help garner more compliance?
Regards,
Charles
Sent from my iPhone
On Jun 13, 2012, at 11:12 AM, "Bacchini, Renee@DIR"
Hello Charles,
I checked in with our BOFE Division. This has been assigned and they are currently planning strategic enforcement.
Please let me know if you have further questions.
Renée Bacchini
Special Assistant to the Director
Department of Industrial Relations
1515 Clay Street, 17th Floor
Oakland, CA 94610
510.286.1106 o
415.859.6005 m
510.622.3265 f
From: Charles Welsh [mailto:cvwelsh@mac.com]
Sent: Tuesday, June 12, 2012 9:40 AM
To: Bacchini, Renee@DIR
Cc: Scott Hauge; Baker, Christine@DIR
Subject: Re: Question on Independent Contractor Contact
Hi Renee,
Hope your year is going well. Was driving down "Underground Economy Row" and thought of you. Sure hope that the State can do some meaningful enforcement on this. These businesses who hire employees and mis-classify them as "contractors" can cut hair for about half the price of legitimate businesses.
Regards,
Charles
On Jan 30, 2012, at 9:55 AM, Bacchini, Renee@DIR wrote:
Hello Charles,
Thanks so much for bringing this to our attention. This is interesting information. We will take a look and I will be in touch.
Kind regards,
Renée Bacchini
Special Assistant to the Director
Department of Industrial Relations
1515 Clay Street, Room 901
Oakland CA 94610
510.286.1106 o
415.859.6005 m
510.622.3265 f
From: Charles Welsh [mailto:cvwelsh@mac.com]
Sent: Sunday, January 29, 2012 6:41 PM
To: Bacchini, Renee@DIR
Cc: Scott Hauge
Subject: Re: Question on Independent Contractor Contact
Hello Renée,
It is a pleasure to meet you. I appreciate your interest in helping us to address the rampant mis-classification of workers we see in the Bay Area salon industry. I am a franchised hair salon owner with two locations in San Jose, CA. I've been operating since 2002 and working with Scott to help address the misclassification of salon workers in the Bay area.
What first alerted me to this problem, was the large number of salons with price points for haircuts that are ridiculously lower than virtually any other place in the country. For example, even in super-cheap cost-of-living places in the Midwest, you can't get a haircut for under $12 or so. Yet there are huge numbers of $6.99 - $9.99 salons throughout the bay area. Of course because a haircut service is pure labor -- no technology improves productivity to make it cheaper. So how could it be that one of the most expensive places to live in the country has the cheapest haircuts? Something didn't seem right.
Next, in our salon business, we began having job applicants come to us -- people who had been working at those cheap haircut places. Many of them would try to convince us to pay them all cash under the table. We told the applicants that we don't do that -- they were puzzled since they said this was common practice elsewhere.
Finally, when I sold one of my locations a few years ago, it was bought by an independent salon owner. He took over my old staff, my old location, put up his own price board, schedule, and simply made the employees sign agreements saying they agreed to split the cash take 50 - 50 (which he would pay them every two weeks) and they proclaimed that they were independent contractors. (No chair rental, no risk, all control of the business his, a regular payroll schedule, the works.) He told me he'd done this two times before with other salons he had bought and had made good money doing so. That's when I realized that people -- business owners, accountants, and lawyers are, on a massive scale, reconfiguring the beauty industry in California by misclassifying their workers.
To share with you the scope of the problem in San Jose, here are all the super cheap salons within just a mile radius of one small section of San Jose. These are all commercial storefront businesses-- not people working out of their home. I created this in January '10 by walking the mile radius and stopping in every salon and asking the owners and employees questions. Then I took all the information, mapped it in Google Maps. Every one of these ~25 salons has multiple chairs and multiple employees (not just a sole proprietor). It appears that most of these have misclassified their employees as "contractors". And as I mentioned earlier -- look at those prices -- on the left side of the map -- you won't find these kind prices even in the low-cost-of-living areas of the US. It is amazing how little one can charge when one chooses to misclassify workers, doesn't follow labor laws, doesn't buy insurance, and doesn't pay taxes.
http://g.co/maps/v5jc3
On a related note -- I recently found an article of an IRS audit that was done. While the audit and article occurred in the Midwest, the issues we face here are the same. The article does an outstanding job of illuminating:
a. the way professionals including accountants and lawyers give new owners bad advice about setting up workers as "independent contractors" ("Just have them sign a contract, then they are contractors.")
b. the method these businesses use to operate -- and why even the owners think everything is legitimate ("My attorney/accountant told me this was the way to do it.")
c. how when businesses that use these practices are put under scrutiny, they are found to be clearly in violation of the law
d. some crystal clear criteria that serve as a bright line between IC's and employee businesses.
http://www.nailsmag.com/article/916/youre-being-audited-one-salon-owners-harrowing-irs-journey
If we had a few well-publicized investigations in our region with significant penalties, there would be much more compliance.
Some suggestions that I think would be effective to pursue this might include:
a. Choose regional areas to target (San Jose, San Francisco, Sacramento all come to mind)
b. Select 3-5 businesses in each locality to audit.
c. Throw the proverbial book at the offenders
d. Publicize the result in papers and through professional organizations (Bureau of Cosmetology, in our case)
e. Send case outcomes to Attorneys and Accountants, remind of clear requirements for contractor status to ensure they are not mis-advising their clients.
I hope some of this is helpful. There are many others in my franchise who could share their stories with you, as well. If you are interested in talking with them, let me know and I'll introduce you, to them. Do call or write if I can be of additional assistance - and thank you so very much for helping us to get better industry compliance with the law. Without your help, I fear we are likely to see our industry taken over by under-the-table operators.
Regards,
Charles
On Jan 26, 2012, at 1:33 PM, Bacchini, Renee@DIR wrote:
Thank you for the introduction Scott. Charles, please feel free to send me information that you have.
Renée Bacchini
Special Assistant to the Director
Department of Industrial Relations
1515 Clay Street, Room 901
Oakland CA 94610
510.286.1106 o
415.859.6005 m
510.622.3265 f
From: Scott Hauge [mailto:shauge@CAL-INSURE.com]
Sent: Thursday, January 26, 2012 1:03 PM
To: Bacchini, Renee@DIR
Cc: Charles Welsh
Subject: RE: Question on Independent Contractor Contact
Charles meet Renee. She works with Christine at DIR. She is Christines point person on the underground economy.
You may want to send her information that you have discovered with hair salons and some ideas you have to deal with this.
Scott
From: Bacchini, Renee@DIR [mailto:RBacchini@dir.ca.gov]
Sent: Thursday, January 26, 2012 8:17 AM
To: Scott Hauge; Baker, Christine@DIR
Subject: RE: Question on Independent Contractor Contact
Mr. Hauge,
I will be available this afternoon. Is there a good time to call you?
I heard you speak at the legislative hearing in December. I look forward to working with you.
Renée Bacchini
Special Assistant to the Director
Department of Industrial Relations
1515 Clay Street, Room 901
Oakland CA 94610
510.286.1106 o
415.859.6005 m
510.622.3265 f
From: Scott Hauge [mailto:shauge@CAL-INSURE.com]
Sent: Thursday, January 26, 2012 8:14 AM
To: Baker, Christine@DIR
Cc: Bacchini, Renee@DIR
Subject: RE: Question on Independent Contractor Contact
Ms Bacchini, I would like to talk to you to see how Small Business California can work with you.
Thank you in advance for talking to Denise.
Scott Hauge
President
Small Business California
2311 Taraval Street
San Francisco, CA 94116
shauge@cal-insure.com
415-680-2109
From: Baker, Christine@DIR [mailto:CBaker@dir.ca.gov]
Sent: Thursday, January 26, 2012 8:08 AM
To: Scott Hauge
Cc: Bacchini, Renee@DIR
Subject: RE: Question on Independent Contractor Contact
Hi Scott,
We just signed an MOU with DOL. I am asking Renee Bachinni to contact Denise.
From: Scott Hauge [mailto:shauge@CAL-INSURE.com]
Sent: Thursday, January 26, 2012 7:34 AM
To: Baker, Christine@DIR
Subject: FW: Question on Independent Contractor Contact
Who do I tell her to contact
From: Denise Collins [mailto:dcollins@auntanns.com]
Sent: Wednesday, January 25, 2012 5:17 PM
To: Scott Hauge
Subject: Question on Independent Contractor Contact
Hi Scott..
This is a link about the IRS/DOL effort to work together to prevent independent contractor mis-classification.
Here’s the announcement: http://www.dol.gov/whd/workers/MOU/irs.pdf
Do you know Who would be the reporting agency in California.. I'm looking for the California Underground Task Force Personnel so I can discuss a couple hundred agencies that are using independent contractors .
Denise Collins
Aunt Ann's In House Staffing
Aunt Ann's Homecare
www.auntanns.com
650 757-2000
Staffing homes since 1958
Please LIKE us on Facebook!
________________________________________
From: Tom Breedlove [mailto:Tom.Breedlove@mybreedlove.com]
Sent: Wednesday, January 25, 2012 4:07 PM
To: Denise Collins
Subject: RE: Counselor's Corner
Hi Denise,
Here’s the announcement: http://www.dol.gov/whd/workers/MOU/irs.pdf
I hope that helps.
Best,
Tom
Breedlove & Associates
phone 888-273-3356
fax 512-347-9331
website www.myBreedlove.com
Payroll & Tax Service for Household Employers
From: Denise Collins [mailto:dcollins@auntanns.com]
Sent: Wednesday, January 25, 2012 4:36 PM
To: Client Service
Cc: Tom Breedlove
Subject: RE: Counselor's Corner
Hi Tom... Where can I find a IRS and DOL reference about the following? Who could I contact?
WARNING: The IRS and the Department of Labor have recently announced a collaborative effort to aggressively enforce worker misclassification,
which costs taxpayers billions of dollars in lost tax revenue.
The household employment industry has been listed as one of the primary targets for this enforcement initiative.
Denise Collins
Aunt Ann's In House Staffing
Aunt Ann's Homecare
www.auntanns.com
650 757-2000
Staffing homes since 1958
Please LIKE us on Facebook!
________________________________________
From: Tom Breedlove [mailto:tom@breedlove-online.ccsend.com] On Behalf Of Tom Breedlove
Sent: Wednesday, January 25, 2012 12:25 PM
To: Denise Collins
Subject: Counselor's Corner
Counselor's Corner
JANUARY 2012
"You guys are the most efficient
and responsive people
I have ever met in my life."
- MARTA GARCIA ABADIA, Palo Alto, CA
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As families work to prepare their 2011 tax returns, many will be looking to itemize their childcare expenses in order to maximize their tax breaks. Qualified childcare expenses include 1) gross wages paid to the caregiver, 2) employer taxes on those wages, and 3) any fees paid to your agency.
If you get requests for your agency's tax ID (they may call it "FEIN" or "EIN"), we strongly recommend that you make sure your agency's tax ID is not linked to the caregiver's wages or the employer taxes. The client -- not your agency -- is the employer so their tax ID should be associated with those expenses.
Your agency tax ID should be linked only to the fees you received from the family during the tax year (this includes fees for perm and temp placements).
If you or your families have any questions about tax breaks, visit our Expert Advice section or call us at 888-BREEDLOVE (273-3356).
FORM W-2, GOOD. FORM 1099, BAD.
By early February, your caregivers should be receiving Form W-2s from the family(ies) they work for (we've mailed them to every employee -- and posted electronic copies online -- on behalf of our clients, but the deadline for employers is to have them postmarked by January 31).
If your caregivers get 1099s from their families, it's a problem for both parties. First, the caregivers have to pay an additional 7.65% in taxes (independent contractors must pay both the employee and employer portions of Social Security & Medicare taxes "FICA"). Second, by issuing a Form 1099, the families are subject to worker misclassification charges, which is considered felony tax evasion.
WARNING: The IRS and the Department of Labor have recently announced a collaborative effort to aggressively enforce worker misclassification, which costs taxpayers billions of dollars in lost tax revenue. The household employment industry has been listed as one of the primary targets for this enforcement initiative.
If you or your families have any questions about worker classification, visit our Expert Advice section or give us a call at 888-BREEDLOVE (273-3356).
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