Thursday, October 13, 2011

Loan outs versus "Employer Of Record"

Joe Harkins made some great observations about the Mill and its coerced usage of an "Employer of Record", especially noting the similarity to the use of a loan-out company. But, there's a huge difference!!!

Employees (often very high earners like actors, writers, directors, dp's) elect to form a loan-out so that they can set up a pension plan and take a tax deduction for the contribution they make to that plan. People making over $300,000 per year realize a tax savings (even though they have to pay the employer share of payroll taxes) because the contribution to the pension plan saves $20,000 to $30,000 on their federal tax.

At the Mill, employees aren't given the choice! They are required to go through an "Employer of Record", which essentially says two contradictory things:
1. you are an independent contractor. and your own employer. so you have to pay "employer" share of payroll taxes. that's an added cost to you. Around $10,000 per year.
2. and you are also an employee. Of who? or should I say, of what???

For purposes of unemployment insurance, workers compensation, labor law (National Labor Relations Act), income tax, employee status depends on such things as:
do you work at home or at a designated workplace?
are you told what time to report to work?
are you told what time to take lunch?
are you told when you can leave?
are there rules regarding dress-code, sexual harassment of co-workers, smoking, eating at your workstation, making personal phone calls, checking your facebook page.
are you supplied with a computer or other tools of the trade or do you provide your own?
do you exercise independent judgment about your work product or work under the direction and control of a "supervisor"?

If you are, indeed, an independent contractor, then the "Employer of Record" is almost legal. Except for the part that forces you to pay by a payroll deduction, the employer shares of payroll taxes. Usually that's done at the end of the year when you file your tax return.

And, if you are an employee, then the whole thing is a thinly-veiled attempt to fool you, and the regulatory authorities into calling you an independent contractor.

and, as I said above, you get absolutely none of the benefits of a loan-out, just the addeded expense and headaches.

The real concern is, in the "race to the bottom", this practice will spread like wildfire, when other employers discover that they suffer a 10% price disadvantage relative to those competitors playing this game. Eventually, everyone will be an independent contractor.

And when that day comes, we'll be here to help turn that around.


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