Employee or Contractor? Which One Makes the Most Sense For AV Companies
Posted by Gabe Solomon on Oct 11, 2016 7:01:00 AM
AV freelancers have long been a part of executing projects in the AV industry. Yet even with their longstanding role in the AV industry, there’s still a lot of confusion surrounding how to properly pay AV freelancers.
Many AV companies take the route of paying freelancers as employees to steer clear of any potential legal issues that may stem from misclassification, and many AV companies who do reduce their employment costs by properly classifying freelancers as contractors haven’t conquered the administrative burdens of compiling paperwork and insurance quickly and efficiently.
To demystify the common misunderstandings surrounding freelancer classifications, we sat down with 15 year AV industry expert Wallace Johnson to find out when and how AV companies should classify crew members as contractors, how they can do it efficiently and how they can save money instantly.
1. You’ve worked in the industry for over 15 years, do you think there are still a lot of misconceptions about contracting crew members vs hiring them?
Absolutely. Even more so now than I think ever before in my years of working in the industry. The laws may have been out there but it’s become a hot topic issue mainly because there’s a misallocation of government revenue if they’re not properly classified as employees vs contractors.
2. Freelancers have long been a part of the AV crewing industry, why do companies commonly avoid categorizing contracted crew members as contractors?
I believe this is done mainly to avoid the risk and complication of trying to work with them as a contractor. There are certain things the freelancer must do to be properly classified and if they don’t comply then the company may be exposed to unknown risks. To avoid the risk, companies feel they have no choice but to make them a part-time employee or process them through a PEO.
3. Is the perception that it’s easier to bring contractors on as payrolled employees?
Definitely. It’s less to worry about on a contract to contract basis. Once they’re a payrolled employee they go into your pay periods, you’re not waiting on invoices, they’re at a fixed rate so you don’t have to manage various pay rules -- so in the end you have a greater amount of control over certain administrative activities that happen.
4. What concerns do employers have surrounding classifying crew members as contractors?
It strictly comes down to the audit process and the penalties involved. The guidelines are so gray and poorly interpreted for our industry that the answer is -- I’d rather be safe and pay the payroll taxes, worker’s comp insurance, and additional expenses of making them an employee than having the penalty of misclassifying them as an independent contractor.
5. What are some of the general benefits of working with contractors?
W2 employees are great to have because they truly represent your company culture, core values and are the backbone of your business. Where freelancers come in and benefit is they bring a diverse and highly experienced skill set on a project basis where they can deliver value in ways that your full-time or part-time staff can’t or are unavailable to do so.
6. What challenges do employers face when working with contracted crew members?
Administrative effort. Verification of company details and insurances, executed agreements per project and tracking invoices take a lot of time and if not properly done can be costly.
7. Are there financial incentives on the employer’s end/the freelancers end when contracting?
The financial incentive for the employers are that they save money and risk in taxes, benefits and insurances they have to put on an individual if they were an employee versus contractor. Not having that fixed rate of an employee could give you a competitive advantage because you have the ability to negotiate your cost on a project versus having the fixed cost of an employee.
On the contractor’s side there’s definitely advantages as well. While their taxes maybe higher, contractor's get to set their rate for the services they're providing on a specific project. If they go into the system as a part timer with an employer they’re rate is fixed for all projects. It also allows them to write-off their business related expenses and equipment that they use on projects and often don’t get to charge for such as their laptop, cell phone, and other items in their work box. Working at a higher rate and having the ability to determine how much you bring home allows you to work less and make more than you would in an employment environment. Finally, they are free to say yes and no to the projects they choose. As an employee, you don’t get that luxury.
8. How much can be saved and where do these savings come from?
What companies are paying in payroll taxes, worker’s comp insurance, FICA, FUTA SUTA they’re probably paying the individual’s rate plus somewhere along the lines of 30%. Also too, just in a part-time employee environment, overtime hours start to kick in after 8 hours where typically a contractor environment is a 10 hour day. So on a full week of work on a project you’re looking at 10 hrs of overtime at a time and a half rate for a week long project or just once you go over 40 hours.
As a contractor even if they are charging a higher rate just in the deductions of taxes and insurance companies generally save a minimum 10-15% cost of that contractor.
9. Are there any disincentives to working with contractors?
If you have the right resources and systems to manage the administrative side working with Independent Contractors can be awesome! Because contractors want consistent work I have found that many go above and beyond to create exceptional experiences for your end client. They know how easy it is for them to not get calls from a company and how small the industry is. So they work to impress and make things amazing for the companies that hire them.
10. Clearly there are a lot of advantages to working with contractors -- when is it best to contract rather than hire a crew member?
You should continue to contract the contractor if you’re using them for project based work and can work around the lack of control in automatically assigning them where you need them and when. If you find that a contractor is becoming a resource you need on a daily basis and not just a project basis, you should consider budgeting for that position and hiring them as someone helping you daily as a core member of your operational team. If they accept the full-time position, you will have more control over what projects they are assigned to instead of hoping they’ll accept the project when you need them.
11. What are the differences in the onboarding process of payrolled vs contracted workers?
It’s extremely different. To hire them you probably may need to get executive approval on a budget, post a position, interview a certain number of candidates and go through a number of other HR protocols to add someone to your employment team. If they are a contractor, you are only giving them an overview and outlining expectations of what you need for the specific project completely eliminating the need of the internal processes of hiring an employee.
12. What do employers need to know to correctly categorize & hire contractors?
The key things employers need to know.. If a contractor has a W-9 and they’re set up as a true company as an LLC or an Inc., that’s important because they’re establishing themselves as a company. Number two, having the proper insurance and coverage levels (General Liability & Workers Comp) to cover themselves as a company is extremely important. Number three, having a written contract with them for each project is important. It’s outlining the terms and conditions, the agreement you and the contractor are making on that specific project. The fact they have the right to choose what project they work on, the fact that they have the right to choose if they’re going to work with you or even a competitor -- those are the things that, from categorization standpoint, help identify them as an independent contractor.
13. Are reactions from payrolled employees a concern/consideration?
Its very important that your full-time employees are comfortable with the contractors you are hiring. They are with you all the time, but they are in the trenches with the contractor so it’s better for the business if the contractors and full-time employees get along.
But as long as you’re carefully selecting the contractors you think will best fit in with your team, I think you can avoid a lot of potential issues. You generally want to qualify them and get an understanding of their personality, work style and skill set before you integrate them into the rest of your team.
14. What payment and taxation differences exist between contractors and internal crew members?
Its simple. Payrolled employees, companies pay payroll taxes. Contractors, companies do not pay payroll taxes. That is the responsibility of the contractor and so the company or hiring client is not obligated to pay that on behalf of the individual.
15. Do employers need to hire a hiring manager with experience working with contractors?
It definitely makes sense and helps limits some of the challenges of working with contractors. I’d say this function should definitely go through a procurement department or through an HR depart in terms of adding a contractor to their resource database. Managing all of the requirements and paperwork trail that that it entails, along with keeping up with insurance information and writing, collecting and filing the project contracts. It definitely takes a person's dedicated focus to manage these details.
16. How can the transition to working with contractors be made easier?
Making use of a freelance management system can automate and streamline many of the pain points when it comes to working with contractors and take a huge burden and risk off of your operation. Along with just the typical functions of working with contractors these systems can give you great insight into utilization, cost and performance of your contractor workforce. This type of functionality lets organizations focus on what they do best in delivering spectacular events, but makes them smarter about how they are delivering with their outside workforce.
To automate the administrative and verification process of working with contractors takes a huge burden off an operation. Companies that make use of this type of system can streamline a lot of the typical pain points of working with contractors.
Topics: Contracting AV Techs, Working with Contractors, AV Industry Pro Sessions