Episode 9: Subcontractor or Employee? (with Kelly Stamy)
INTRO: This is Karalynn Cromeens and welcome to the Quit Getting Screwed Podcast, where we talk about everything related to contractors, construction, and information to help you run better businesses.
Karalynn: Hey guys, this is Karalynn Cromeens, and welcome to the Quit Getting Screwed Podcast, where we talk about all the things to stop your company from getting screwed in the construction industry. And today, we are covering a big topic that most people don’t realize how dangerous the situation is. Today, we’ll be talking about employees versus subcontractors and what can happen if you classify them the wrong way. The first thing I can tell you before we dive into this conversation is that it doesn’t matter what you call them. It matters what the law calls them. Today we have an expert on this topic to help all our clients with their employment issues. We are here to help you before someone gets sued in federal court or have employment issues. Today, we have Ms. Kelly Stamy, who is our resident expert on employment law. Good morning Ms. Kelly. How are you?
Kelly: Good morning. I’m doing well. Thanks for having me.
Karalynn: Thank you for being here and sharing your expertise because, I know some things, but I know you know a lot more on this topic. Before we dive into the subject matter, why don’t you tell everybody a little bit about yourself, how you got here, where you started – all the good stuff!
Kelly: Sure. I am a born and raised Houstonian. I’m a diehard Houston sports fanatic. I really love this city and the people who work and live here. I went to school here, college here, and then law school in downtown Houston. I graduated from law school in 2015, and then I started working at a small employment law firm that just specialized in all things employment—both sides of the spectrum. I understand and know the arguments that a plaintiff will make or an individual will make and how it goes both ways. I worked there for about three and a half years, and that’s where my knowledge base came from, and then I joined The Cromeens Law Firm in early 2019.
Karalynn: Cool. So, when you were in employment law, were you in court much? What kind of practice was there? What was your favorite case that you remember?
Kelly: It’s a unique case. It’s a one where a lot of people’s ears perk up when I talk about it, but I represented about 20 strippers in a wage and overtime lawsuit. I was in court just as much as every litigation case. This one happened to be arbitration, and employment arbitrations have some very different rules than construction governed arbitration. We had a stripper call our office and say that she was fired unfairly, and we have a script in our old office where we would ask every person who called, how were you paid? How many hours did you work? Because we would try to sniff these cases out. We found out that she was only paid tips, and our senior associate at the time did a quick Google search and found that across the country, every federal circuit, and almost every state, they were deemed to be employees owed minimum wage and overtime. And you know, some of these girls were working 70 hours in a workweek, and a huge amount of overtime could be gathered there. But the first hurdle was truly establishing that they were employees and not independent contractors. It was through that fight that I learned the most about these kinds of issues.
Karalynn: So, who determines what an employee is and what a subcontractor is?
Kelly: The court system or the government. It is a test that kind of varies as you move across the nation, but the results are typically the same. I’m going to preface with what we’re talking about today with this idea that there are two sets of laws you have to be worried about in every state that you’re in: that state’s particular laws and the federal law. So, when I talk about today, I’m talking about the federal-level law. Fortunately, if you are in the State of Texas, it does not have separate wage and hour laws. Everything we do here in the State of Texas matches with the federal laws. There are some states like New York, California, Minnesota that have a different test applied to your workers to determine which side of the spectrum they’re going to fall on. In the fifth circuit, which covers Texas, Louisiana, and Mississippi, there are five factors: degree of control, permanency of relationship, skills, and initiative, the extent of investment, and ability to control profit and loss. Courts like to pretend that all five factors matter, but the reality is that degree of control is the most important one. So, the amount of control you have over this worker is really what will determine if they’re eligible for minimum wage and overtime.
Karalynn: So, what does that mean in plain English? What are the facts that we look at to determine that?
Kelly: Right. Questions to think about: Are you telling them when to show up? Do they have a set work schedule with you? Are they working for only you, or are they allowed to just pick up a shift on Tuesday and they work for someone else Wednesday, Thursday, Friday? Do they have to wear your uniform? Do they have to wear a company shirt? Are you providing them with all the hard hats, boots, and safety goggles on a big construction job? Or do they have to bring all of that themselves? Did you train them? Do you need them just as much as they need you? That’s a great way to think about it because, let’s say, I know how to do a lot of things to fix my house, but I do not know how to do electrician work. So, I need someone who has to fill that void for me in this project. Yet, if I have an electrician company on the other hand and I am just pulling in guys that I help get licensed, they work for me every day, I tell them which job to go to, I tell them how to do their work, and how fast to do their work, that sort of thing.? They’re not buying materials on their own. That’s a bigger control piece that will lean you over towards an employee classification. The problem here is I can’t say that this category is always employee, or this category is always an independent contractor because it’s very fact-intensive, which is where a lot of the danger comes in.
Karalynn: If somebody came to you and said, “here’s what my people do, and here’s their responsibility.” From those details, you could tell them whether they would most likely be an employee or a subcontractor under the law, right?
Kelly: Correct. I think we have to be careful with the terms used because I think there are three categories, especially in the construction field. We have employees, independent contractors, and then we have subcontractors. And so, if you’re engaged in a subcontractor relationship with a contract, and there are payment terms in there, then that’s really what’s going to govern. But where we start getting sticky is when we have an individual doing business as a company name. You then left with thinking, “Am I dealing with the individual? Or am I dealing with a company?” If they’re representing themselves as a company, they’re going to scooch over into that subcontractor bucket. And we’re going to be less worried about how you’re paying them, versus if they’re just a straight employee coming to you only using their name. That is when you’ll have to do kind of a bigger analysis of how you should pay them.
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Karalynn: But still, the big thing is the level of control. The more control you have, the more likely you are to be an employee. And if someone is an employee, then you need to pay them overtime and withhold taxes. Correct?
Kelly: That is correct.
Karalynn: The big danger in misclassifying your employees is first figuring out if you owe overtime. For a true subcontractor, who has a contract amount, it doesn’t matter how many hours they worked, but for somebody who is actually an employee who you have control over, regardless of how you think they should be paid, if they’re working overtime, you need to pay them overtime?
Kelly: Correct, and regardless of what that worker or individual chose, and especially in Texas, you can pretty much make a contract for almost anything. As we know, our subcontractor clients have seen that it feels unfair, but it’s still a legal contract clause, but this is different. And not even if I wanted with all of my heart to be an independent contractor, to be a 1099, I would give up my overtime rights. I’m fine with that. The courts and the law have said, you can’t pass go. Do not collect your $200. You know, you have to be paid overtime. You don’t have a choice.
Karalynn: It doesn’t matter what you sign or what you say that if they have control, you really are an employee. Regardless. If you want to give them a 1099, then you have to pay them overtime. And so, I guess, what is the danger of classifying somebody as an independent contractor or subcontractor when they’re actually an employee?
Kelly: Well, that is a great question. And it’s because the damages are going to be huge. So if we look at, if it was just one individual, what that individual could be entitled to is every cent…
Karalynn: Okay, hang on, let me stop you there. So, if you misclassify them and they call an attorney, and they figure it out, you’re going to owe them the overtime that they didn’t pay. Right?
Kelly: Correct. And it could be even more than that because if you paid someone a straight hourly rate and they weren’t getting paid overtime for hours over 40, you will owe the overtime. There are dangers here. If you pay your worker a day rate, the law considers that day rate only for eight hours in that day. And because of math calculations, what that does is then it shoots up what the regular hourly rate is going to be, and then shoots up the overtime. And now the damages just start to skyrocket, depending on what payment scheme you had for this person that was misclassified. So, it could be even more than just this halftime overtime rate you failed to pay them.
Karalynn: So, the main thing is that if you classify somebody incorrectly and they’re working for you for a number of years, they can go back for that whole time period and seek the overtime you should have been paying them.
Kelly: Yes, they definitely get two years from the date, and it’s measured from the date they filed the lawsuit. So, if they wait, and in those last two years from the day they filed their lawsuit, they never worked from you, you’re fine. So, it’s measured from the date the lawsuit is filed, and if you have been penalized for this before it, they find out that you just disregarded the attorney’s advice to pay correctly, that you did research and just ignored it. If any of those facts start to come out, we can extend back to that third year. So now you’re looking to the last three years. It’s called willful. It’s the willfulness, and you’ve just kind of been, “I know what I should do, and I’m refusing to do it.” This is something that, again, if you’re defending against one of these, it becomes expensive to fight against that, right? Because now you need to prove there’s a presumption that we can go back that third year, and it’s going to be on this employer now to prove they didn’t know any better. What happens in a settlement is that sometimes we end up splitting the difference and looking back two and a half years to avoid that fight to determine the more expensive and least expensive routes. At the end of the day, you’re paying previous employees and your attorney, and it can get very expensive.
Karalynn: You bring up an interesting point. Once one employee files this overtime claim against you, is that it? Is that just that one employee? What happens in the court system?
Kelly: It’s called a collective action. It’s different from the class actions you see on TV, which get advertised for possible cancer exposure and things like that. The notice will go out to every employee or, wrongfully classified, an independent contractor who does the same or similar job as this person who kicked it all off – the first plaintiff. And they have an option to join in and band together. And you go from one person to now being allowed to send notice out to 40, 50, 60, however many people. And then they can opt-in within the next 60 days. And now you’re fighting however many people have chosen to join.
Karalynn: So, it goes from one employee to the fact that now I have to open all my books and records for how many years back for all the people I’ve employed in that same range?
Kelly: Three years. The courts will automatically force you to turn over information for three years because if you violated everything possible, the max would be three years. So we start by looking back for the whole three years.
Karalynn: So, the court requires you to turn over all these employees for the last three years. And then they get sent a letter that says, “Hey, you can sue me if you want.”
Kelly: Yeah, it’s actually worse than that, and it will be a letter. It will be an email. It will be a telephone text. This is moving just as fast as social media these days. Technology allows for quicker and possibly higher numbered groups because everyone checks their cell phone, not everyone checks their mail. This is just garbage from a law firm. I’m not going to open it. Being able to have access to emails and phone and text available now makes that the likelihood just way higher.
Karalynn: That people will join in.
Karalynn: So, are there penalties and interests along with overtime, or would you just owe the overtime? What is the actual exposure?
Kelly: So, it gets even worse. There is an almost automatic doubling of the overtime owed to the employees. And that’s because the law looks at this as such a horrific act that this employer has done. Which when I have dealt with it, it feels pretty unfair because a lot of my clients have said, “I was just trying to do what the employee wanted.” Unfortunately, that is not a defense. It seems like the only way that you can show or prevent this doubling of the damages is by saying, “Hey, I called the US Department of Labor. I explained to them what my question was. They gave me this written letter back, and I followed it to the T.” And that hardly ever happens and is pretty much the only way you get out of it. So now, let’s say you owed an employee $5,000 in overtime without question; it becomes 10. And then it becomes the attorney’s fees that were on the other side. And so now what you’re at $15,000 – $20,000 when the damages were only $5,000. So, as you can see, it’s very punishing.
Karalynn: And that’s just for an employee. You can multiply that by how many people decided to join your class and how long you’ve been doing this. So, it really just becomes a legal landmine.
Kelly: Correct. Like I said, how we found the strippers is not the reason she called our office at all. But a good employment law firm knows these questions, especially since there are only five. They give to a receptionist or a legal assistant to just screen all the calls. I have found in two cases that I currently have are exactly why this overtime case got sniffed out. This is because the employee got upset at something or hurt on a job or whatever the situation may be. And they went to an employment attorney who sniffed it out. And now there’s a bigger problem on our hands because the employee was unhappy about something else.
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Karalynn: And just for clarification, the employee, the one that’s suing you, is not paying any out-of-pocket attorney’s fees generally, are they?
Kelly: Never. I have never seen that it; it is done on a contingency basis, and that’s because, for these workers, this is free found money. They were fine with what they were getting paid by you, and now all of a sudden, they’re being told, oh, you’re owed money. In addition, you’re owed a doubling of that amount of money, plus it’ll cover your attorney’s fees.
Karalynn: Well, and the attorney gets a cut of the whole recovery. So, the bigger the pot, the more that the attorney’s going to make.
Kelly: Correct. I have in both of my current wage and overtime cases I’m handling right now, I approached the attorneys immediately and said, “Hey, let’s just settle this plaintiff right now. Here are his timecards. Here’s the amount he’s owed.” And neither of them at the beginning wanted to settle. They wanted to wait till they could see how big the pot was going to be.
Karalynn: And in your two current cases, without saying the client’s name, but what type of client are they, and what do they do for a living?
Kelly: One is an electrical subcontractor, and the other is an interior and drywall subcontractor.
Karalynn: Yes, and because I happen to know the same people too, it’s important to mention their business started out as a mom and pop. Then, suddenly they started growing, and they did not truly understand what they needed. When you first start out, you don’t know that you need to do these things or that you can’t just give everybody a 1099. And now they’re in these open, huge liabilities that could cost them hundreds of thousands of dollars. There are dangers out there. So, what can you do to protect yourself? If somebody’s like that electrical contractor you’re representing right now would have come to us and said, you know, “Hey, I have all these employees now, and I have some guys that are licensed. Some guys that are not, what do I need to do?” Kelly, how could we have helped them?
Kelly: What’s interesting about that one is they had different levels of electricians. For example, unlicensed, licensed of different degrees, and master electricians, so we were able to keep the class small, at the bottom level, since it was still going to be a potential 50-to-60 individual class. So, if they had come to us on the front end, we could talk through each level, job description, and job duties and compare it to how they were paid. We could decide if they needed to be employees and paid overtime. There are some exemptions available under the FLSA, and that’s another danger too for everyone to keep in mind. This affects not only your workers but also people in the office that are paid a salary. There is still potential for overtime exposure there as well. So, it’s kind of a full overhaul here where you have to consider what your workforce entails and if they need to be paid overtime. What is your internal looking like? It’s important to make sure you’re complying with all the exemptions necessary there. From there, we’d be able to know that you’re in compliance from bottom to top essentially.
Karalynn: And so, you can go through and based on their description of their employees, or the people that are working for him (subcontractors), you can decide what they need to do and then you can help set them up with how to do it correctly.
Kelly: That’s correct.
Karalynn: Okay, and you brought up another interesting point that we haven’t touched on yet. So, if I have somebody working in the office and they’re working overtime, but I just pay them a salary, aren’t they just covered by their salary, and they wouldn’t have any overtime claims?
Kelly: Unfortunately, no. Salaried individuals can still get overtime unless they fit into one of the named exceptions under federal law. In order to fit into that exemption, you have to meet two tests. The first one is the salary test, and then the second one is a job duties test based on every exemption has kind of a different test for that. So, if they’re paid salary, that’s great, but you’re only halfway there. If you’re paying a receptionist her salary and she’s working 45 or 50 hours a week, I can’t make an argument to fit her into one of these categories based on what she does on a day-to-day basis. And then she is going to be entitled to overtime.
Karalynn: That brings up a great question. The normal process is people come to see you, and we go through this process correcting things. How do you handle that? Does that mean you offer to pay them what you should have paid them already just to tell them here’s the change in pay? Because if you don’t fix what you’ve already paid them, you’re opening yourself up to liability. So potential liability that they’ll realize there’s a change and wonder why. Then, they’ll find somebody that will sniff it out. So realistically, what should you do?
Kelly: This is definitely something that you need to fill out on a case-by-case basis. You know your employees the best. It could be very simple if you’re looking at the workforce saying, “Hey, we need to switch you over from a 1099 to a W2…” And that won’t necessarily trigger as much because to them it’s this idea that we’re going to be giving you so much more over time. They’ve been working with us for such a long time, etc. You can package it in certain ways that it’s not going to flip off that light bulb. For people in the house, it can be, “Hey, we have a budget change, and I looked at your salary, and that breaks down to a 40-hour work week, an hourly rate of this much, but because you’re working so much, I want to really help you out, and I want to make sure you’re fairly compensated. And so now you’re going to start getting overtime. I suggest packaging it as a raise as opposed to you admitting you made a mistake. Then, hopefully, you’re not raising any red flags. If red flags are raised, you are definitely protecting yourself better doing it this way than just holding your breath and hoping it doesn’t happen and getting popped on the backend.
Karalynn: So, it’s better to fix it when you realize you have your issue than to not fix it at all and just see if anything happens.
Kelly: Absolutely. Every day you do it right, it takes off a potential day of damages that someone can come after you for.
Karalynn: Well, this has been all such great information. How can people get ahold of you if they want to contact you directly and have you look through their things and help you save them from a legal landmine and not lose hundreds of thousands of dollars?
Kelly: Exactly. We really look at some of our cases, and I’ve had to tell a client who thought I wasn’t fighting hard enough against one of these claims. That I’m not going to pick a fight that I’m going to lose for you guys, so it’s good for you to contact me, having the experience that I do in this area, to either fix it or get you out as inexpensive as possible. Please give us a call at The Cromeens Law Firm – 713. 715.7334. My name is Kelly, and make sure to ask for me, and we can do an hour consultation where we will talk about your business and tailor a plan for you. We have hourly rates for the work that I complete as well as several things that we can provide your business at a flat rate, which makes it easy for your budget and you can plan ahead. You can also follow us on Instagram, Facebook, LinkedIn. In June, we are going to have a big employment law focus. So, I really encourage you tune into our webinar and social channels. This is a very vast area of law that I’m sure will lead to many questions. By logging on to our socials, you will have access to educational videos, webinars, and blogs that are going to really give you concrete information. The best thing is to get on the phone with an attorney because mistakes can be made, and a small mistake is a big consequence in these situations. It’s best to make sure you’re covered from start to finish.
Karalynn: I appreciate it so much, Kelly. Thank you for being here. Everyone, you are not alone in this. I know it seems overwhelming and dangerous, and it is, but we can help you get through this. This is what we do all day, every day. We don’t want you to get burned, because we’ve seen so many people get burned, but you need to pick up the phone and call so we can help you on the front end. Well, thanks so much, Kelly. I’m sure we’ll have you on again. See you next time.
Kelly: Yes, ma’am.
OUTRO: Thanks for listening to this episode of Quit Getting Screwed. I hope you found it helpful! If you like what you hear, please like us and follow our podcast. If you want further information, you can find us at subcontractorinstitute.com. We’re also on Facebook, LinkedIn & Instagram, and the book is available on Amazon. Tune in two weeks from now for a new episode. Thank you.
This has been a transcript from Karalynn Cromeens’ contractor education podcast, Quit Getting Screwed, in association with The Subcontractor institute. To hire Karalynn to help you and your business, please visit our construction law firm’s website.