This week's episode features the best moments through the first 20 podcasts. Topics include the popular sauce vs. crust debate, having your employees work on Thanksgiving, the interview with Jerry Sanders, legalities of running a fake promotion, Texas A&M licensing the 12th man to Seattle, and the first and last employee vs. independent contractor discussion. Thanks again to everyone who has made this podcast a success through the first 20 episodes.
Full Podcast Transcript
MATT: Hey everybody!
We have something a little bit different for you guys this week as Nasir and I weren’t able to synch up our schedules. Seeing as this is our 20th episode, we figured we could do a “best of the first twenty.”
We selected some of our favorite stories and questions as well as some audience favorites and we hope you guys enjoy it and continue to support the podcast.
But, before we get started here, I did want to give a little thanks to some people that have gotten us this far. Our producer extraordinaire, Chris, for all he does – he’s the jack of all trades of this podcast; our assistant, Jennifer, for helping us schedule and line up the guests; our guests themselves for making the show more interesting than two attorneys just talking to each other; and to our listeners who, if it wasn’t for our listeners, we wouldn’t even be here.
So, sit back and enjoy this “best of the first twenty” and, as always, keep it sound and keep it smart.
NASIR: Our first article here today. What have we got, Matt?
MATT: This is pretty interesting. It’s kind of confusing, too. It’s two companies that are disputing – Torchy’s Tacos and Texas Taco Company – but the dispute is over pizza. So, right off the bat, they chose awful names. It’s not surprising they’re now in a lawsuit against each other. But it essentially comes down to the trade secrets. Obviously, you know, in restaurants, we’re talking about the food that’s made or possibly even a certain recipe that is put together with some of the ingredients.
NASIR: Matt, you realize this is the second pizza article we’ve covered? I know you like pizza but we can’t keep doing this. Maybe down the line we can do a pizza-themed episode but this will be the last one for a while, I promise.
MATT: Yeah, I usually just scan articles and, when I see the word “pizza,” I just select it just because I enjoy talking about it. It’s been such a big part of my life – working for years in a pizza place.
NASIR: Well, hopefully, your experience can come into play in this.
This is dispute on the ingredients, the training manuals, and so forth. Frankly, what kind of ingredients go to a pizza? It’s pretty basic.
MATT: Well, yes and no, it depends if people make their own sauce. Places are typically going to make their own dough. Some of the bigger chains have frozen dough but I guess that too is also a recipe that’s brought down from corporate. The dough is big, the sauce can be big; other than that, the toppings are the toppings. You’re not going to get a bunch of variation there. I’m guessing it’s probably over the dough.
We’re already getting into my pizza love now.
In my opinion, the dough is the most important part of the pizza – the crust.
NASIR: Really? I think it’s the sauce. I mean, dough is important but, to me, if it’s a good sauce, it makes a big impact.
MATT: That’s one person’s opinion.
NASIR: Yeah, it’s the opinion.
MATT: There are some pictures on here, too. It looks like it’s some sort of stuffed pizza or pizza that’s got the crust on top as well. The two pictures look very similar – down to the plating, the cut, the plating style. They do look identical. This is pretty interesting because, if you look down later in the article, there is some sort of investigator involved, too.
NASIR: I think they hired a PI, right? They sent a PI in to investigate and they saw that they were using the exact same plating techniques and the exact same recipe. In fact, I’m reading here, they actually recorded the conversation. This must not have been in California because you can’t record somebody without both parties’ consent. I think this was in Texas, right?
MATT: Texas, yeah.
NASIR: Texas is different. It’s a one-party state where you only need one party’s consent to actually record a conversation.
And so, they recorded this conversation and one of the parties admits that the pizza recipes being used by this other restaurant were 100 to 90 percent of the original restaurant’s recipes and that about 30 or 40 percent of the other recipes were also theirs. That’s not too good for their lawsuit.
MATT: Right. We don’t have all the facts here but I’d also be interested to see, you know, you need to start from the beginning. This happened to me when I worked at a chain pizza place. Have everyone that worked there sign some sort of agreement saying they’re not going to steal any recipes. At least you have something in writing, something in place to prove that that person knew that they weren’t supposed to take information from the company.
NASIR: That’s true and Matt just named one of the basic elements of a trade secret – it’s that you have to make it a secret and it has to be held out as a secret. And so, ingredients in a sauce – which is the more important part of the pizza where the less important part would be the dough – is actually a common thing to consider a trade secret.
We have clients that manufacture candy, chocolates. It’s a very common thing. Even the supplements, there’s always that proprietary formula that even the FDA to a certain extent allows to be named nameless but, of course, that’s been an object of controversy because, a lot of time, that proprietary formula is filled with – god knows what – sugar and starch and et cetera.
I should say this – if you do want to have a trade secret, make sure you get that in writing and through some kind of confidentiality agreement but also understand what your trade secret actually is. It’s not necessarily that a pizza is with dough, cheese and tomato sauce. It’s a little bit more than that.
MATT: I think that’s great advice and that’s probably what should have happened at the beginning of this but it didn’t and now we’re the ones lucky enough to be discussing pizza.
MATT: Hopefully there’s more of this just so I can talk more about pizza every episode.
NASIR: We’ll see about that.
NASIR: Let’s get onto our next question.
MATT: This one comes from a marketing firm in San Francisco which may be Tyler’s firm disguised. Who knows? We’ll see their question.
“We were trying to close a deal before the end of the month. So, can I make my employees work on Thanksgiving?”
NASIR: Everyone’s talking about all the retailers making their employees work on Thanksgiving. Obviously, it’s not against the law, but the question is, “Under what circumstances can you do that?” Are they owed overtime or premium pay as some employees call it?
MATT: In California, I think it’s just kind of tough luck. If your employer wants you to come in on Thanksgiving, you’re going to have to come in and you’re not going to get overtime for it either and they can also give you the day off and not pay you for it – I mean, depending on how you’re classified. This is all California, of course, but I think the main thing here is just have your own policy with your company. If you want to give those days off, you can give them. Obviously, some companies – maybe the restaurant industry, for example, or a gas station – may have to have people working still on Thanksgiving and that’s something you have to do. But I think it’s making your employees happy by giving them Thanksgiving off if they don’t really have to be there. You’re probably going to lose some workers if you’re forcing them to be there on the holidays.
NASIR: Yeah, that’s absolutely right.
In California, there’s no requirement for any kind of holiday pay at all. But, if you put in your employment manual, for example, that certain days are a holiday, then you actually have to follow that employment manual. You want to make sure that, when you do form that, that’s contemplated as well.
GUEST: Also, something else to consider is whether or not you want your employees to hate you and start looking for employment elsewhere.
NASIR: That’s true.
GUEST: Believe it or not, that was not my question disguised as a marketing firm from San Francisco, but I’d be happy to take some of their talent when they want to leave. If any of their employees are listening, we’re actually giving our team all of Wednesday and part of Tuesday off in addition to the four-day weekend.
NASIR: Sign me up for that.
GUEST: Culture is king.
MATT: Culture is king. We talked about that in one of the previous episodes as well.
NASIR: No doubt. If you have happy employees, when they get terminated – you know, every once in a while, you’re going to have turnover – they’re going to be appreciative of the time that they spent with you. If not, they’re going to find a reason to get back at you with a lawsuit.
GUEST: And, to tie it in to your first question, they’re less likely to leave a negative Yelp review.
MATT: There you go!
NASIR: Oh, you know, that’s a great point because I don’t know how many times… RipoffReport.com is a common one, too. I’ve dealt with clients after we’ve terminated an employee, they’ve basically went off on RipoffReport and said some truths and some non-truths as well. And so, that’s definitely a good point.
NASIR: Today, we have a very special guest joining us to give his business perspective on some of the issues that we’re covering. He’s the former mayor of San Diego and also the former chief of police of San Diego and, as of September 2012, he is the president and CEO of the San Diego Regional Chamber of Commerce.
Welcome, Mr. Sanders!
MR. SANDERS: Thank you very much!
NASIR: Let’s get right into it. We’re very happy to have you on.
We’re just going to start covering some of the news.
What do we have, Matt?
MATT: All right, the first story we have this week was a recent survey that was put out. I believe it was by a manpower group. The way it was worded was, hiring process in San Diego, they were cautious. Employers were cautious for the first quarter of 2014. I think the exact numbers were 71 percent. They said they planned on maintaining their workforce with only 15 percent. It said they were going to hire, actually, 11 percent said they were going to reduce.
This is a little bit lower than the national averages but I just found this interesting. I don’t know. Maybe it’s a lot of seasonal hires and they just decided to keep people on throughout the first quarter of 2014.
What did you think?
MR. SANDERS: We also do a survey and we do it on a monthly basis with Silvergate Bank. We use Competitive as research and call about 300 chamber members, small business members, and others. It was slightly more optimistic than that.
We had seen pretty cautious outlook through August through of this last one but we saw quite a few groups – about 35 percent – said that they thought that employment hours would actually jump during the first quarter which is good news. It’s been down pretty low but people are still pretty cautious. They’re seeing revenues go up but I think the biggest thing right now is really the Obamacare. What we have found is about 40 percent of the businesses feel like it’s going to harm them. About 30 percent just don’t know anything about it or how to navigate it. So, I think a lot of them are pretty cautious about hiring right now when they don’t know what the healthcare costs are going to do to their bottom line.
NASIR: Even our firm, Top Floor Legal, we received a survey like that and we’re out of time. It’s kind of hard to answer that question but we also know that there is a lot of news articles and a lot of talk about a lot of businesses leaving California. Even our firm is now going to be operating in Texas which we’ve heard the publicity regarding that issue. But don’t you think this publicity surrounding this issue kind of creates a self-fulfilling prophecy a little bit?
MR. SANDERS: Well, it does, but it’s also the regulation that creates that. I get an opportunity to go out and visit businesses all the time. What I’m finding is a lot of businesses say they’ll keep their headquarters here but they’re not going to expand any manufacturing here. They’ll be doing that in Arizona or Texas or they’ll outsource their call centers to other states where they can actually do that. Now, in fact, some of them are talking about outsourcing their accounting to other states simply because they cannot afford to be expanding to California and I think that’s starting to create a lot of caution with business because you just don’t know what new regulations will be put on a minute. It just gets more onerous all the time.
NASIR: Well, obviously, you have a lot of experience in the local government and that’s something that we’ve talked about in the past. What are some things that you’ve experienced with what local government can do – whether it’s city or county – to help businesses and also your role as the head of the Chamber of Commerce.
MR. SANDERS: The Chamber of Commerce has started to lead some efforts to speak to the business community on some issues that we think are important. That linkage fee issue, we’re opposing that. We’ll be leading a referendum drive to stop that. That fee increases the cost of all building except for residential and that means that’s passed down to small business. if you open a restaurant in one of these buildings, you’re going to be paying 500 to 900 percent increase in fees which we think is a job-killer.
We’re also working on a Barrio Logan community plan. That’s 42,000 jobs down in the waterfront and that new Barrio Logan plan would allow housing within a closer area to the shipyards and the tank farms and all of that. It also makes it harder for the suppliers to the shipyards to expand in that area. Those are things that we think are important.
We just hired new lobbyists to go up to Sacramento and work with us there so that we can start opposing some of the legislation if it’s a job killer or start to put some legislation in that starts to balance some of the things that have happened over a period of time. We’re hopeful that we can start making an impact and that’s what we intend on doing.
NASIR: Very cool.
Let’s get to our first listener’s question. I believe it’s an IT firm from Carlsbad.
MATT: “A competitor keeps stealing away my best employees. What sort of legal precautions can I take to make sure this doesn’t keep happening?”
NASIR: We’ve talked about this in the past. We’ve covered non-competes and how even though there is a way to get it in there through trade secrets and confidentiality agreements, California – like many other states – kind of frowns upon this because of the violations of public policy but we’ve also talked about how corporate culture and things like this matter much more in order to really keep your employees.
But, I’m sure, with your business background, Jerry, you have some insight on this as well.
MR. SANDERS: Well, I think employees are the most valuable asset of a company. What we’ve always found – at least in all the places I was at – was that, the more that you give them the freedom to do their job and the more that you allow them to have a say in what you’re doing, it really creates a better environment. Sometimes, it’s not necessarily the money, it’s not necessarily another location; it’s really how important they feel to the organization that they’re working with.
NASIR: Yes, that’s something that I’ve heard a lot from even my clients, especially with commission-based jobs. It’s not just about the commission and the money but also making them feel welcome at praising them at the right points. But, also, you know, employment benefit plans, stock options, that corporate culture I think plays a big role as well.
MR SNADERS: I think that’s right. On the police department, I know that we included rank and file in every decision we made when we went to different styles of communicating and policing and the rank and file had a large stake in making sure that it worked and I think that’s one of the things that helped us maintain the officers that we had.
MATT: That’s some great insight there.
We’ll get into our last article here. I thought this was something that would be good for someone that’s a big part of San Diego. It’s an article about a prediction of craft beer sales and they predict that it’s going to double by the year 2020. I think they said maybe right now it’s about a 7 percent market share and it’s expected to increase to about a 15 percent market share. Coming from someone as myself that’s a big craft beer fan, I know it’s very important to San Diego and the local economy.
What’s your take on the importance of having all these craft brews that have popped up in San Diego?
MR. SANDERS: It goes far beyond the beer – although the beer is a central point. You know, the breweries that have come into town that have started up – and I think we’re at about 78 breweries right now which is a huge concentration – they also draw a lot of tourism into San Diego. You have people coming down from LA and Orange County and around the country on a regular basis to do craft beer tours, to learn about the techniques, to actually sample from a lot of these brewhouses. The tourism dollars along with what the craft brewers make is about a $600-million-dollar part of the economy in San Diego and it’s growing rapidly.
The other thing I think is important is the job multiplier. It’s about 5.2 jobs for every one job that’s created in a craft brewer. That’s the largest job multiplier that we can find in the city of San Diego at the moment.
NASIR: That’s very interesting. Why do you think these microbreweries have popped up in San Diego? Why is there such a concentration here?
MR. SANDERS: Well, I think there are several reasons. I think that we have some pioneers in it. We have Karl Strauss and we have Ballast Point, we have Stone – all of them have been in it for a long time. Even the Coronado Brewing Company comes in.
And then, just the entrepreneurial spirit in San Diego has been a huge part of that and you really get a lot of people who are entrepreneurs who decide they’re going to do this and the organizations help each other out so that the brewers really work together. Craft Brewers Guild has been instrumental in helping various new brewers start. they give them the advice, they help them out in every way, and the rest of the brewers welcome them.
Also, the presence of White Labs in San Diego is huge. They provide the yeast for a lot of North America and having them right in San Diego means they’ve got a ready source here. White Labs is an absolutely incredible place. They create about 500 different strains of yeast and it’s an important part of the brewing process.
MATT: This one comes from a marketing firm in Los Angeles. This is a good one.
“One of our clients is holding a social media content and giveaway a ‘prize’ to the winner. What if they don’t actually give a prize away? Are we in trouble for that?”
NASIR: You know, when we did a contest as a firm last spring or summer it was, I believe, it was a social media thing and it did really well. We were giving a prize away. I think it was an iPad Mini.
But people were telling us they were reluctant to even participate. They were like, “Well, you guys aren’t really going to give a prize away, right?” As if almost that’s a common thing to happen. I was wondering, “Do people actually do that? That’s really wrong and unfair.”
MATT: Yeah, I remember talking to people. I’ve talked to multiple people who say, “Yeah, I’ve done exactly what they’re saying. I hold this contest, I give away a prize, and they don’t actually give anything away.” Well, that’s fraudulent, isn’t it? Or it’s at least misrepresentation.
NASIR: Also, it seems counterproductive because I assume they’re doing it for marketing and media reasons like we did but, also, you get some media attention just from the prize winner also promoting your stuff, too. For example, the person that won the prize took a picture of herself with the iPad Mini and posted it on her Facebook page. That was awesome.
MATT: Yeah, it was a little bit questionable because your wife won and she was posting it. She was holding up a box that may or may not have had an iPad Mini in it. But, no, we did actually post the person who won the contest holding the iPad Mini which I think is the correct way to go about it.
NASIR: If I’m recalling, she held up the actual device, too.
NASIR: That’s funny.
MATT: I saw her a couple of weeks ago and she commented about it. It is real. We can prove.
For this company or the person who’s doing this, the worst thing is to run this promotion to try to get attention and then someone finds out that you’re not even giving away a prize and then it’s completely the other way of what you wanted to achieve.
NASIR: That’s horrible, right? That’d be the most embarrassing thing. It’s still dishonest. And so, you mentioned fraud, that’s definitely an issue, but I think it’s even more than that. You risk getting in trouble with the FTC as well because, the FTC, they’re the ones that also have all the regulations and guidelines for conducting any kind of sweepstakes and contests and things like that. And so, that’s definitely a big no-no.
But the question here is the person asking the question isn’t the one that’s holding the contest. It’s one of their clients. And so, that makes it tougher. But I would say it depends upon how involved they are in the actual contest since it’s one of their clients and they’re a marketing firm, I assume that they may even be conducting it. So, there may be some liability there. But, also, why would you want a client like that? It’d be tough to have that.
MATT: And how much is this prize? Whatever the prize is, how much is it going to cost anyways? It can’t be more than a couple of hundred dollars, I would think, whatever it is. It’s just not worth it. It’s not worth it to do something like this but I guess you could also go the route that they did in I believe it was a Saved by the Bell episode where they hold a raffle and basically the plan was to get all this money and then they would pick out some numbers and it would be rigged and one of his friends – Zach Morris’s friends – would win but then, of course, it backfired and they ended up having to give this huge prize to somebody else and it was a whole mess. That was the episode.
NASIR: I’m surprised we didn’t think of an Office episode for this. I even watched The Office again just to prepare for the show just in case it came up.
MATT: Oh, we can relate it – the golden ticket episode!
NASIR: Oh, that’s true. The golden ticket episode where Michael Scott dresses up as Willy Wonka and the 20 percent off coupons ends up going all to the biggest client of Dunder Mifflin and they end up losing money out of it.
MATT: That’s actually one of my favorite episodes. When Jim’s on the phone and he’s like, “Oh, the biggest client!” because I think it’s five separate ten-percent-offs then Michael finds out that they got the first one. He’s like, “Oh, you got the golden ticket.” He goes to accounting. “How much would be ten percent of our biggest client.” He’s like, “Well, that’s going to be a big hit.” He’s like, “Oh, you found five ten-percent-off! Is there anything on there that says you can’t use them all at once? Nope? All right!”
NASIR: Limit one per customer.
MATT: It ends up working out for them. I guess that’s our advice here – run a golden ticket promotion.
NASIR: Before we go to the next question or article, I think there is something that a marketing firm can do, at least. It may be too late for this but you need to also have an indemnification clause.
What that will do, if it’s drafted properly, if somehow your client is sued or gets in trouble because of this whole issue and you didn’t have any control over it, you still may get sued or wrapped up into this litigation and all these legal issues. This indemnification clause in your contract – again, if drafted properly by an attorney – will make it so that your client will pay for your legal services or also pay for any of the liability that you may incur because of their actions. I think this is fair in this case because you can’t control whether your client gives them the prize and you’re not going to do it. That’s not appropriate either. So, that may be an additional protection. Otherwise, I would just fire the client. I think that’s very appropriate and, sometimes, you’ve got to do that when you’re in the service industry and we’ve had to do that in the past as well.
MATT: Right, that’s writing this in, that’s the approach to take because they’re not the ones actually doing the misrepresentation.
MATT: I did mention the Super Bowl at the beginning of this podcast. For anyone that paid attention to the two weeks leading up to it, it was kind of hard not to at least hear about it at one point or at least during the season. If you’re familiar with Seattle, they’re all about this 12th Man thing.
I’ll explain this to you, Nasir.
There’s eleven players on the field for one team.
NASIR: No, I get it.
MATT: So, the 12th Man is the crowd. I actually didn’t know about this until this year when I saw this recently popping up – probably because Seattle was becoming a very hot topic. I mean, they’ve been relevant but they obviously just won the Super Bowl. That’s huge. It had 700,000 fans at a victory parade yesterday. This is prime time to bring it up.
The 12th Man – the phrase is actually owned by Texas A&M – the college football team. They license out usage of this “12th Man” to Seattle. I think the initial deal was Seattle was using it and Texas A&M said they were infringing on their trademark so they paid them $100,000 and then $5,000 a year annual licensing fee which seems pretty low considering how much money NFL teams make. But I guess they renewed that deal for another five years. It’s through 2016. Now, the question is, this is a lot more popular. They’re using it all over the place. Texas A&M has a couple of options now.
NASIR: Yeah, I think one of the reasons why it was a low price was that, I don’t know if Seattle even knew how popular this 12th Man concept was going to get. Second, there was a lot of limitations on the actual use. And so, now, when you own a trademark and you’re licensing it out, you have the choice to restrict how you want it so long as they’re willing to agree to it.
And so, they had regional limitations. They could only use it in Alaska, Hawaii, Idaho, Montana, Oregon, Utah, and Washington – pretty much the Pacific Northwest and that’s it. I noticed, too, when people were covering the story, they didn’t contemplate the internet even though this was done in 2006, but they didn’t contemplate social media in the same way, so they had to figure out compliance of the licensing agreement because of Twitter and Facebook of the actual use of this mark.
MATT: I found that pretty interesting, too. I think Seattle was running these social media – I don’t know if it was Seattle – there was social media out there with nearly 1.5 million likes on Facebook and 431,000 followers on Twitter, 350,000 on Instagram – all related to this 12th Man.
If I was Texas A&M, I would just raise that price. Like I said, NFL teams make so much money that they’ll probably just pay it then they can keep those restrictions. Like you said, there are geographic limitations on there in that they can’t sell merchandise with the words “12th Man” on it even though I’m sure there’ tons of other companies that are not Seattle Seahawks that are selling merchandise with that on there.
NASIR: Yeah, absolutely, and this show you the value of a trademark in its true form. On one hand, Texas A&M, a very large football franchise from the college perspective, but they were able to restrict an NFL team from using their mark and that’s a pretty big deal. But notice that the only way that you can actually have value with your trademark is to enforce it in the sense that, if Washington would have just gone ahead and used it, it could actually hurt the Texas A&M’s right to its own trademark if it were to allow that. By actually filing a lawsuit and so forth, they were actually able to give a message to everyone. I mean, 12th Man is not a unique concept to Texas A&M. frankly, it could be used in every football game, in every football team franchise, or any other sport that requires eleven people. Are there any other sports with eleven?
MATT: Yeah, I think there’s some form of rugby. Well, soccer, I believe has eleven per side. I believe there’s some form of rugby that has eleven. But you’re exactly right and that’s how this started. Seattle was using it. Texas A&M came after them, saying that they’re infringing on it, and then it got involved in a lawsuit and they did this licensing deal.
It’s pretty weird in sports. You were just hitting 12th Man – 6th Man in basketball. I know everyone uses that.
I don’t know if you knew about this but, Pat Riley, when he was coaching with the Lakers, he trademarked the phrase “threepeat” – winning three straight championships. When teams did that later on, if they were producing merchandise or using that, they were actually infringing on their trademark. It’s pretty weird.
MATT: This is actually something that someone just asked me yesterday here in San Diego. It’s a question that I get…
NASIR: Oh, gosh, this question? We get this, like, every day, right? But we’ve got to cover it.
MATT: It’s a top five asked question that I get.
“When is someone an employee versus when are they an independent contractor?”
I was asked to summarize this in a sentence or two which is basically impossible.
MATT: What I always say first is it’s all about control. That’s the most important part. Different agencies have different tests. I don’t know what the IRS test is up to now, but I know it was, like, 17 factors at one point or something around there.
NASIR: I think IRS has ten. I think so. But the problem is, when lawyers analyze this, it doesn’t really matter because you have the state of California that has a different analysis. You have the Workers’ Compensation Board has a different analysis. We really have to combine it all and I think, if you combine all of the factors, if you want to be thorough, there’s probably 20, 25 different aspects of it. It’s not something you can just check off either, too. Some factors are more important than others.
MATT: How do you go about answering this? Because it’s very difficult to answer it.
NASIR: We’ve done it in a couple of ways, if you recall, sometimes, we had that factor list that we could just go through one by one. Sometimes, they’re looking for an opinion letter. And so, we’ll do it that way.
Whenever someone asks me that question, especially if it’s specific, I hold myself to answer right away because it’s a question which we have to be very careful in how we answer because, let’s understand the consequences, right? if you misclassify an employee as an independent contractor, then you have all these issues with payroll taxes, benefits to labor law violations of overtime, lunchbreaks, and also vicarious liability which means, as an employer, you’re generally responsible for what they do, if they’re in the scope of employment.
But a contractor has less liability in general. If they do something wrong on the job, you may or may not be responsible and it kind of depends upon the circumstances. The consequences are pretty grave.
MATT: Yeah, and the thing is, even when someone asks us this, even if they give us a pretty detailed explanation of the relationship, even then it’s still difficult to answer one way or the other. You’re not going to know all the facts unless you actually sit down with them. Obviously, with our clients themselves, we sit down with them, go over everything, we make sure we’re advising them in the right way. I’m just talking about the people that casually ask. Then, they’ll just bring it up, too – very casually. “So, when is someone an employee and when is someone an independent contractor?”
NASIR: Isn’t it weird how it’s always an afterthought? It’s like, “Okay, I have all these employees that I’ve classified as independent contractors, right?”
I think the problem is there’s such a trend in all these industries – like, real estate agents, everyone tries to get them as ICs; hair salons, everyone tries to get them ICs – and everyone just sees, “Oh, yeah, I’m an independent contractor.” People see what other people do and they think it’s fine.
But what’s crazy is, let’s say that you terminate the contract, so to speak, of an independent contractor and that contractor goes to the unemployment office and they say, “Oh, I’m here to collect on employment,” and they’ll tell them, “You’re not an employee.” They’ll say, “Yes, I am! I did this, this, and that.” That office may actually report the employer or give note to the ex-independent contractor to go to a lawyer and say, “Hey, I think I’ve been misclassified.” It happens all the time.
MATT: It’s a tricky situation. Like I said, it’s not something you can easily answer.
The ramifications of the misclassification are so severe – or they can be – that business owners really need to get this squared away because it’s something that could be fine at the beginning – or at least you think it’s fine – and then it’s going to rear its ugly head down the road. It’s better to attack it at the beginning than have it come pop up later and then you’re sitting there in a bad position.
Another thing I just thought of in terms of the independent contractors’ side, the actual contractor themselves – and the reason I thought of this is because I do a lot of tax work – is they get their 1099, there’s typically no withholdings taken from the amount they’re paid. So, there’s no taxes taken out.
As an independent contractor, you have to pay both sides of those payroll taxes. Self-employment, you’re paying both sides when you’re filing your taxes. You calculate your tax out and then you have this additional huge percent – you know, not huge, but it’s like 15.3 or whatever it is, something around there and it changes – that they aren’t expecting to pay and that’s how people end up owing money to the IRS and to the state. They don’t even think about that.
A good decision for the business would be to let them know – hopefully in an agreement – saying, “You, the contractor, are responsible for paying all your taxes. We’re not withholding anything,” blah blah blah. But, even then, the contractor, if they’re not well-versed in taxes – which a lot of people aren’t – then they’re going to have a nice little surprise here come April 15th or October 15th when they file for extension.
NASIR: Yeah, I don’t want to drag this question out longer, but you’re absolutely right that, for whatever reason, employees want to be independent contractor status because they get a bigger check every two weeks or month – whenever they get paid. And so, that’s part of the problem as well.
Even these taxi cab drivers in the previous article, they want to be independent contractors, a lot of them, but it may not be in their best interest.
MATT: This is just coming down to people not even knowing about withholdings and tax. That’s this whole other subject. We’ll get into that in another episode – exclusively tax issues that no one wants to listen to.
NASIR: I’m so glad we covered this issue only because I don’t want to ever cover it again – this question at least – because we get this so often.
NASIR: Hold on, time out, my cat keeps meowing. I’ve got to figure it out. Give her food or something. Sorry!
Chris is going to have a fun time editing this one.
MATT: Yeah, I’m writing down the things – the little blips we’re having here. I’ll put them in the email.
NASIR: Maybe he can bleep some of this in to make it a little more humorous, but don’t put too much of it.
I think, at that time, we’re set to be the highest in the nation – unless something changes.
My cat’s meowing. Just one second. I don’t know what she wants. One second. Not again.
All right. Are we still on here?
MATT: Yeah, I could actually here that one – that was pretty funny.
NASIR: Yeah, my cat’s being fed now, so I think she’ll be happy for the next couple of hours.
MATT: I think what you should do is just feed your cat before the show from now on.
NASIR: Well, you would think, but I thought I did, but she was sleeping, and she woke up. So, what can I do?