With the raise in the exempt salary threshold expected to go into effect July 1, my wife's employer just notified her that they intend to reclassify her from an exempt employee to an independent contractor.

I don't understand how they can do this. It's a small business (clothing boutique), with only two full-time exempt employees (my wife and one other).

From what I'm reading, it's legally sketchy to reclassify a long-time employee as a contractor. She's been there 5 years. Her boss says she can't afford to pay her the threshold minimum wage to continue classifying her as "exempt".

I don't understand why her boss wouldn't just continue to pay her current salary and tell her not to work more than 40 hours.

If her boss reclassifies her as contractor, but doesn't pay her more, doesn't that mean she'd be taking a big pay cut? My wife would then be responsible for all the social security taxes and any other self-employment taxes.

Have any of you been through this? What the pitfalls?


Goddam gubmit is gonna cost her her job.

I'm an independent contractor, 1099 only. I write off everything remotely connected to my work - computers, cell phone bill, home Internet, home office, mileage and on and on. It can be great. You can wash out a ton of income that way. It's only a problem if you want to get a loan and need to show your tax returns to qualify.

I think you are correct in your thoughts.

My old manager and I took a job as outside contractors for about a month and a half for a powersports dealer. We were there to straighten up the inventory, set up processes, basically make it run smoother. (Edit: we were able to set our own hours/days)

At the conclusion of our time there the comptroller offered us the option of becoming “employees” instead of contractors. The tax savings with Social Security alone was worth it and if we got called back (almost happened last year) we would still be on the books.

This message has been edited. Last edited by: shovelhead,

Your wife is probably not in a job where she can be classified as an independent contractor. For one thing, her hours will likely be scheduled. FedEx Ground tried to set up every delivery driver as an independent contractor but required the IC to wear a uniform, start at a set time, run the assigned route as set up by them, etc.

The court ruled that those requirements make the person an employee. Today FedEx gets around this by requiring the contractor to have multiple employees so that the contractor assigns routes, start times, uniforms, etc.

Do some research - DON'T take my word for it. BTW: I avoid using FedEx every chance I get. The Independent Contractor thing is BS. JMHO.

https://www.irs.gov/businesses...employed-or-employee

If your wife's employer is filed against they will have to pay hefty fines. The state unemployment office usually clamps down harder than IRS because they are losing unemployment tax revenue. Your wife also may be incorrectly classified as exempt.

Your wife will be taking a pay cut of about 12% to 13% by having to pay employers' SS & Medicare taxes. Also, her employer may not have required Workers Comp insurance.

I was audited about ten years ago regarding whether people who worked for my construction firm were my subcontractors (as I said) or were in fact my employees.

My initial fine from the IRS was about $297,000…

I had to jump through hoops to prove that they were in fact subcontractors (I was guilty until I was able to prove my innocence). Basically the proof was that I had no control when they showed up, how long they chose to work on any particular day and how I paid them, which was by the job, not by the hour.

In the end I ended up paying about $24,000 for a series of bookkeeping errors and fired my CPA for some shitty advise which got me into the mess in the first place. I was subsequently audited two more times in the following five years but came out clean.

So if your wife is paid hourly and is given specific hours to work she is clearly an employee.

Sounds like she may need to start looking for another job regardless if the business financials are that thin. Clothing boutiques are often short term operations. 5 years is actually a surprising run.

quote:

Originally posted by AITG:
Your wife is probably not in a job where she can be classified as an independent contractor. For one thing, her hours will likely be scheduled. FedEx Ground tried to set up every delivery driver as an independent contractor but required the IC to wear a uniform, start at a set time, run the assigned route as set up by them, etc.

The court ruled that those requirements make the person an employee. Today FedEx gets around this by requiring the contractor to have multiple employees so that the contractor assigns routes, start times, uniforms, etc.

Do some research - DON'T take my word for it. BTW: I avoid using FedEx every chance I get. The Independent Contractor thing is BS. JMHO.

Honestly, I believe your thinking is a bit misguided here. That 'business decision' by FedEx is an extremely smart one, and makes it nearly impossible for the Teamsters to unionize their delivery workforce. They've got SIGNIFICANT competitive advantage vs UPS now that everyone got a HUGE (30%?!) pay increase over there! Amazon is basically operating their delivery service on the exact same model, as unionization is EXTREMELY detrimental to the bottom line and runs counter to their profit motive! Just sayin'...

Does she receive benefits, like health insurance or other benefits from this employer?

Because this move is usually done to eliminate that, she will be on her own to provide her own health coverage after she is reclassified.

I practice in this area of law, and, without rendering an opinion, it is almost certain that your wife is not legally a subcontractor, and that the employer is taking a pretty big risk in reclassifying her.

In addition, she will be responsible for all of the "self employment taxes" that are otherwise paid 50% by the employer, so unless the "subcontractor" role comes with a significant pay increase, she is going to be losing money.

Her employers should have a talk with a good accountant or business lawyer, because they are walking into a minefield.

This case has nothing to do with avoiding paying benefits. He’s trying to avoid paying minimum wage and overtime. Salaried, aka exempt, employees aren’t required to be payed minimum wage or overtime. Assuming Round Rock is in Texas, Texas follows the federal minimum wage which is set to increase from $7.25/hour to $10.50/hour on July 1, 2024.

There are rules that govern whether or not an employee is exempt. There are also rules that govern whether or not a person is an employee or an independent contractor.

Seems the guy is trying to keep the wife employed, but his business, like a lot of businesses, can’t just pass that increase on. Not following the rules is not going to end well, but it sounds like he’s in a damned if you do, damned if you don’t situation.

I am often offered the choice of W2 vs Corp to Corp/1099.

When I run the actual numbers it is about a 20% difference between the two. I need to be paid 20% more for the numbers to be even at the end of the year.

If she is not getting a 15% to 20% raise she is taking a pay cut.

On top of that it is most likely illegal.

One call to the state office of employment will stop it quickly and possibly put them out of business.

The threshold for exempt/non-exempt is going up on July 1st.

To be classified as "exempt" you must meet the EAP requirements and earn at least:
$43,888 per year July 1st 2024
$58,656 per year) on Jan. 1, 2025.

Exempt employees are not due overtime pay.

My wife doesn't get any health insurance benefits through her job. The only perc is paid vacation. Her boss 100% sets her hours/direction/output. She's clearly an employee.

The problem is that she makes around $40k, but does a ton of overtime during the year. The boutique has many special events held on weekends and evenings that put her way over 40 hours.

Her boss can't afford to raise her pay to >$58k, and likely can't afford to pay 1.5x as overtime.

She likes the job, and it's not all about the money. But I don't want her to get screwed over. I know the government's argument is that employers are taking advantage of exempt salary workers, and I'm sure that's the case in some situations. But this new rule is definitely going to cost people their jobs.


I just don't want her to get screwed over because her boss tries to end-around some rule.

That's exactly the kind of move someone who has no understanding of the law and/or is getting shitty advice will make to try to dodge things. As others have said, the risk the owner is taking on is not small.

The risk will stay with him however, not the misclassified employee. Actually quite the opposite - as an owner you run the risk of the screwed employees going whistleblower on owner and being made whole+.

That's just the IRS related risk. She obviously is impacted by net loss of ultimate take-home.

quote:

Originally posted by fwbulldog:
The threshold for exempt/non-exempt is going up on July 1st.

To be classified as "exempt" you must meet the EAP requirements and earn at least:
$43,888 per year July 1st 2024
$58,656 per year) on Jan. 1, 2025.

Exempt employees are not due overtime pay.

My wife doesn't get any health insurance benefits through her job. The only perc is paid vacation. Her boss 100% sets her hours/direction/output. She's clearly an employee.

The problem is that she makes around $40k, but does a ton of overtime during the year. The boutique has many special events held on weekends and evenings that put her way over 40 hours.

Her boss can't afford to raise her pay to >$58k, and likely can't afford to pay 1.5x as overtime.

She likes the job, and it's not all about the money.

It's not all about money but, at some point, she can't work for free. As a contractor, is she going to get paid by the hour? What I'm afraid of is she is going to get screwed on pay.

Chances are, they're going to pay her what they're paying now and keep the social security portion they've been paying. How about the paid vacation, will they roll that in as part of her new pay?

To break ever, they have to pay her more. 20% more is about right. If she has set hours, cannot come in whenever she feels, she is not eligible to be a contractor.

First, she should understand that she may have to go to another job in the near future, if her boss really cannot pay more. Second, she should ask for a pay increase to compensate for what she loses by not being an employee.
She could stay there for a while, then ask the state for advice on this, and they would investigate. Either the boss would have to pay more plus a fine, or the business folds.

Your wife has no moral responsibility to bail out the business owner. Sure, the government is putting the owner in an impossible financial position. But that is the owner's burden of being in business.

However, your wife's time is worth what it is worth. Presuming the 20% differential is correct (and I have no reason to doubt it), she would take a big pay cut to keep the same job, and that is not acceptable. She in effect is absorbing the owner's new costs rather than the owner.

At $40k for a more than 40 hr job she seems to me to be underpaid already. It sounds like she is a key contributor to the business, and makes sacrifices like working weekends and evenings. All with no health insurance even.

Were she my relative, I'd recommend finding a new job.

quote:

Were she my relative, I'd recommend finding a new job.

I agree. Move on.

fwbulldog, no email is your profile. Shoot me one and we can chat. This is in my wheelhouse.

-Rob