Small business needs help with Subcontracting vs Employee vs Referral Network

[windowcleaning92009]

Hi everybody!
I am the sole prop of a successful window cleaning business in California. I have an abundance of extra work. I have only one employee, myself. My wife helps with phone calls and admin part time. Currently when I have too much work to handle I hire other sole prop window cleaning owners to subcontract. I would like to hire employees, but after running the numbers I cannot afford to pay a decent wage and stay in business.

I have reviewed EDD's form DE 38, Employment Determination Guide, and my answers leaned towards subcontracting. The answers were as follows:
Questions 1-3: No, No, Yes
Questions 4-6: Yes, Yes, Yes
Questions 7-13: Yes, No, No, No, No, No, No

Before I send in a DE 1870, Determination of Employment Work Status, I would like to get some advice on if I can subcontract work lawfully under this arrangement.

Some of these facts may lend weight to approving subcontracting:
Clients are told up front when they schedule that we represent a network of great window cleaning companies, and which one will be dispatched.
Subcontractors carry their own insurance and are licensed.
Subcontractors wear their own companies t-shirt or uniform.
Payment is made directly to the subcontractor from the client.
A referral fee or percentage is then paid to me by the subcontractor at the end of the week or bi-monthly.

Essentially, I am acting as a referral service. Which brings up another question: Would it be better overall to setup a referral service type entity separately? Then that company refers work out to my company (myself), and other subcontractors or window cleaners within my "network"?

I've been watching Angies List, HomeAdvisor, and others set themselves up as a referral service. I'd like to do the same, only model the business to focus on what I know best: window cleaning. I have been hyper aware of the best window cleaners available in my part of California. I'd love to expand and find only the best window cleaners in the entire state and refer them to willing clients.

Any help is much appreciated! Thanks!

[vangogh]

A referral service isn't the same as a subcontracting. I'm not familiar with California law and form DE 38, but I wouldn't think you would need to file any forms to refer customers to another service provider. Generally when subcontracting, the main business, in this case you, collects the money. Instead of sending an employee to do the work, you pay a different company to do it. The concerns of the IRS or the state are that the other company is truly an independent business and not an employee who you want to define as a subcontractor to get out of paying employment taxes and insurance. I don't think they have the same concerns about a referral service. Again, I don't know California law, so take what I say with a grain of salt.

One thing you can do to sort this out is give the state a call. The state of California will know better than any of us. They're the ones who will ultimately decide anyway.

Hope something in there helps.

[turboguy]

I am pretty familiar with the rules the IRS uses to determine if someone is an independent contractor or an employee but California is a weird state when it comes to business regulations. I did take the time to look at that form and I don't see any reason they would consider the people you are subcontracting with to be employees.

Number 3 that you answered yes to has a sub note that says "A No answer to questions 4 – 6 indicates that the individual is not in a business for himself or herself and would, therefore, normally be an employee." The people you are subcontracting to do have their own business and would not be an employee

For questions 4-6 a Yes answer is indicative that they are sub contractors not employees.

For question 7 it also has a sub note that reads "(Note: If you contract with a temporary agency to provide you with a worker, the worker is normally an employee but may be an employee of the temporary agency. You may refer to the EDD Information Sheet: Temporary Services and Employee Leasing Industries [DE 231F] on the subject of temporary service and leasing employers.) What you are doing is similar to using a temp agency but using a competing firm instead. Actually what you are doing more indicates they are not employees than using a temp agency.

Basically you have no control over the people. You can't fire them. You don't furnish tools. You don't do anything that indicates control. You are subbing out work to an independent business that does that type of work and paying them by the job. I can't see any way they would be considered employees.

If you want to be safe call them and go over what you are doing and get their opinion. If they say they are employees then they have to be idiots but it would be the safe way of doing it.