D.S. Berenson presented at the 2012 Remodeling Leadership Conference and is a frequent contributor to REMODELING magazine. He is the Washington, D.C., managing partner of Berenson LLP, a national law firm specializing in the representation of contractors and the home improvement industry.

REMODELING: What are the top three legal issues facing remodeling company owners?

D.S. Berenson: 1099 reclassification, sales and marketing compliance, and insurance failure.

RM: What’s the issue with 1099s (i.e., a worker who contracts out his or her services to another business)?

DSB: The states and federal government have been on a concerted act against the contracting industry for about three years now in an effort to reduce if not eliminate the use of 1099 labor within our industry.

This is the result of a mix of policies that consider 1099 labor a huge source of missing tax revenue — revenue much sought after by cash-strapped states — coupled with the belief in some political sectors that 1009 workers are taken advantage of by unscrupulous employers who deny them benefits.

We’ve seen an increasing number of contractors large and small subject to reclassification audits by the Department of Labor, the IRS, and state tax and labor agencies. Hundreds of contractors have been audited or sued over 1099 reclassification issues over the past three years.

You need to know how this applies to your business in the state you’re operating in and the risks and rewards of maintaining a 1099 relationship and how to do it if you want to do it.

RM: What do you mean when you talk about sales and marketing compliance?

DSB: There’s an epidemic failure within the industry to understand what’s really happening on the street in regard to liability exposure. The vast majority of sales and marketing techniques are holdovers from the 1970s, many of which are illegal and may cause your business to fail if you don’t make changes.

Take Penguin Windows, which went from being a $55 million company to bankruptcy in less than a year all because of marketing. The marketing techniques given to them by industry consultants were illegal, unethical, or a combination of both. The company was audited by the Washington State attorney general’s office and then by the State of Oregon, and it was sued. A PR nightmare ensued, and Penguin had no option but to file for bankruptcy.

[This kind of thing] is not the exception but the rule. But no one listens. That’s the epidemic failure I’m talking about.

Here’s another example. A trade publication — not REMODELING — recently partnered with NAPAC [the National Association of Professionally Accredited Contractors] to do a survey in which it asked readers to send in samples of their advertising and contracts to see if they are compliant with state law. My firm did the free contract review. Of the 70 readers who responded, guess how many violated state or federal law: 69. That’s a big issue.

RM: And how is insurance failing the remodeling industry?

DSB: This stuff can be dry as toast, but the stories are not. For example, one Midwestern remodeler’s policy didn’t cover his independent contractor’s car. While the sales manager was driving to a lead, he hit two bicyclists. No policy coverage applied because of the manager's 1099 status. That remodeler almost lost his entire business.

This is a serious problem. Since 9-11 the insurance industry has been getting killed. They send out riders excluding coverage in a policy and no one reads them. [If you do read them], you quickly find out you’re not covered for mold or leaks or for defective work. You sit back and say, “What’s the point of having an insurance policy?” if you’re a roofing contractor, let’s say, and you’re not covered for defective work? Why are you paying for a policy? It may be dry, but it’s serious.

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