Spring Time Projects
– Minimize Association Risk by Appropriately Classifying Workers vs Independent Contractors
April through June brings many new projects to your property,
but watch out for the legal bee stingers that could put your
property more at risk that you imagined.
Community Associations, at their heart, are simply a group of homeowners cooperating for a common goal. However, the state recognizes them as a business. And – like any business, there are many rules and regulations to follow in order to minimize various risks and liabilities.
With new national laws coming in 2014, as a result of the Affordable Care Act (ACA), Community Associations should be careful to avoid the trap for the employer healthcare shared responsibility penalty that will affect businesses. Vendor selection could also affect the association’s employment taxes and require workers compensation. Review these sections to analyze your association's risk:
Hiring the right Vendor for Spring time and Summer Projects
As a Board Member or Property Manager for a community association, you are probably all too familiar with requesting proposals for work and vetting that a vendor is insured, but sometimes, due to budget constraints, Associations like to consider the neighborhood kid who could be trained to lock and unlock the clubhouse, or a resident that might volunteer to change the lightbulbs or pull weeds for minor compensation but have you considered whether that worker is classified as an employee or as an independent contractor? If not, you should. Classification makes a big difference for Federal Income and Employment tax purposes. It could also affect your Association’s insurance policy requirements.
Using Common Law to Classify Workers
This area of law is complex, and there is no real “black and white” answer. So, make sure to contact your association attorney with any questions. In the meantime, we will quote the basics from CBIZ:
"Over the years the courts have developed what are called the "common law" rules used to classify workers. Under these common law rules, the distinction hinges upon the employer's degree of control over a worker, which is determined based on the facts and circumstances of each situation.
Using the common law rules as a guide, the IRS developed a "standardized" list of 20 factors it uses to make its classifications. Because the common law factors change over time, however, the IRS now focuses on three main categories to determine the degree of control an employer exercises over a worker — Behavioral Control, Financial Control, and the Relationship of the Parties.
Behavioral Control looks at facts showing whether the business has the right to direct or control how the worker performs the specific tasks they were hired to do. Factors considered include: instructions given, training received, and/or other means of behavioral control.
Financial Control looks at whether the business has a right to direct or control factors such as significant investment, unreimbursed expenses, services available to the relevant market, method of payment, and opportunity for profit or loss.
Relationship of the Parties looks at evidence to determine how the parties involved perceive their relationship. This includes: intent of parties/written contracts, employee benefits, discharge or termination, permanency, and regular business activity.
All three categories of control must be analyzed with the weighting of any individual category or factor determined on a facts and circumstances basis. In short, the factors are open to interpretation and past court cases on the issue have resulted in different outcomes, providing little guidance. Ultimately, there is no litmus test for exactly how many of these factors must be satisfied, nor are these factors uniformly applied. The key to successfully classifying workers correctly is to document and support your position factually.
The consequences of misclassifying employees as independent contractors have always been severe — additional payroll taxes, interest and steep penalties. The shared responsibility excise tax makes the consequences even more costly.” Read full article here.
Analyze Through Example
This example will attempt to bring light to multiple issues that could be faced. So, it is a little cheesy!
Assume that your Association has a neighborhood kid, named Happy, locking and unlocking the clubhouse. Happy gets paid a check from the association on a weekly basis for $35 per week. Happy’s job is to lock and unlock the clubhouse and turn on or off the lights based on a schedule determined by the Board of Directors. Sometimes, the Board also asks Happy to take out the trash and sweep up after a private party and the Board of Directors purchases trash bags, gloves, a vacuum and a mop for Happy to complete his tasks. Happy is a teenager, and sometimes rushes through his cleaning tasks or forgets to lock all the doors. So, the Board occasionally will review Happy’s work and then perform property walkthroughs with Happy to show Happy how they like to see the Clubhouse cleaned. The Board also creates a checklist for Happy to fill out to make sure that Happy has locked all doors and cleaned the place up.
The summer months are hot and wet and the Association has more weeds this year than ever before. Last year, the association’s weed budget was $500.00. This year, when the association tries to Bid out the work, local landscape companies have stated that in order to take care of the problem, it is going to significantly exceed the association’s budget costing $1,500.00.
The Board members really like Happy, and know that he will be out of school for the summer. So they ask Happy if he would like to make a little additional cash and pull all the weeds. Happy agrees, but after walking the property with the Board to get directions on what weeds to pull, Happy says that he’ll need 15 of his friends to help him in order to pull all the weeds before the Memorial Day weekend. Happy says he and his friends could do the job for $615.00. Happy says that he’ll need to buy gloves and tools for his friends. The Board Agrees to the price and purchase gloves and trash bags, but refuses to purchase weed pulling tools and spends $15.00 on Happy and his friends. Due to the budget Happy and each of his friends borrow weed pulling tools from their parents. The Board pays each kid $40.00 for the day of pulling weeds. One of the Board members, Sally, shows up on weed pulling day to supervise the Kids and bring them water. The Board is excited that they are only $115.00 over budget vs $1,000.00 for a professional and Happy and his friends pulled weeds and the property looks great.
Now, let’s apply “common law” to the scenario above:
1. Behavioral Control – Does the Board of Directors have the right to direct or control how Happy performs his job?
In the above scenario, yes, the Board is directing or controlling how Happy performs his work by supervising the process, creating checklists, and performing quality control checks on Happy’s work.
2. Financial Control – Does the Board have the right to direct or control the number of Happy’s friends that get paid? At what rate Happy pays each of his friends for the job? Or what tools and supplies Happy and his friends are reimbursed for?
The Board does control the number of Happy’s friends that are invited to pick weeds, and the rate that Happy pays his crew. Also, the Board purchases supplies for Happy and determines what expenses can be incurred and/or reimbursed.
3. Relationship of the Parties – How is the relationship perceived by Happy?
Happy enjoys his summer job and thinks of the Board members as an authority figure. He has received great on the job training that will help him throughout the rest of his life, he might even call some of the Board members “boss” on occasion, while smiling and joking around.
In this innocent scenario, it is likely that the IRS would assume that Happy and his friends were actually employees, not independent contractors. As such, the Association would be responsible for employee payroll taxes, withholdings, workers compensation insurance requirements, and penalties resulting in $20 to $100,000+ in cash outflow. If this scenario takes place in 2014, after the affordable care act goes into effect, the association could also be assessed a shared responsibility excise tax of up to $60,000 due to the fact that the Association employees more than 15 people.
For a Homeowner’s Association, using independent contractors can be an effective way to control costs of the association by reducing payroll taxes, association insurance requirements, and similar legalities. However, misclassification can be disastrous!
As your association bids projects this season, contact your local Zeato Property Management professional or association attorney to discuss whether your workers are classified appropriately.