by Adam Hergenrother Vermont has historically been considered an excellent place for entrepreneurs to start a business.As recently as the summer of 2013, Vermont was named the second most entrepreneurial state in the nation by CNN Money.While we may be a very entrepreneurial state, we fall far short of being a business-friendly one.
In 2014, Forbes named Vermont one of the 10 worst states to do business in, ranking 43rd. Business costs are 13 percent above the national average and the state's job outlook is projected to be the third worst in the country over the next five years.So while Vermont has a culture of entrepreneurship, it fails to provide a corporate environment in which businesses can thrive – creating jobs and growing the local economy. Starting a business in Vermont may be relatively easy, but keeping one open, running, profitable, and thriving is another story, a story riddled with angry protagonists and questionable agendas.
I began my career in real estate as a Realtor, serving as an independent contractor under an established local brokerage.In that capacity, establishing my business required a lot of upfront legal and insurance costs. I had no illusions or expectations that the real estate franchise employing me as an independent contractor would pay my insurance costs, nor did I expect them to be responsible for my employees as the business grew. I was the owner of my team and employer to my staff, commitments I welcomed and took very seriously. Being an entrepreneur and business owner is a choice that comes with risks, rewards, and responsibilities. Individuals cannot, and should not, enter into this lightly. From the inception of my business, I completely understood my obligations and the vital importance of maintaining them. I still do to this day.
Since my start as a Realtor, I have established and grown the Keller Williams Realty office throughout Vermont, increased my own statewide real estate team, added additional teams around New England, and most recently, have created and grown a development and construction company. Entrepreneurship and small business ownership is not for everyone; it requires an ability to take calculated risks, as well as drive and grit. Why question the intelligence of independent contractors by assuming they don't know how to operate their own businesses? The path they chose comes with certain indelible responsibilities, including insurance coverage.
The IRS defines an independent contractor (such as subcontractors, doctors, lawyers, accountants, etc.) as someone who offers their services to the general public. The accepted rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, and not the process. Simply put, an independent contractor is someone hired to perform specified work, but a client can neither dictate, nor control, how the work will be done. This definition and its interpretation serve to maintain the separation of independent contractors from the people that contract their services.
However, in an effort to protect small businesses and independent contractors, the State of Vermont has once again misjudged the effect their good intentions will have on business and jobs. The State has created a far more rigid interpretation of what constitutes an independent contractor, categorizing many (and some would argue all) as statutory employees of those businesses or individuals who have enlisted their services.This interpretation of the Vermont Statute has created a very precarious situation, not only for the businesses and individuals enlisting them, but also for the independent contractors themselves.
With the Vermont legislators’ interpretation of the statute, a huge burden of responsibility and obligation is passed along to the business enlisting the subcontractors’ services, which includes worker’s compensation coverage. The effect can be detrimental to the independent contractor providing the services, who may not have the financial capacity to absorb the rising costs of worker’s compensation insurance coverage. Thus, many businesses have elected not to use these smaller “mom & pop” subcontractors. While the intent of the legislature’s interpretation of the statute was to protect these small businesses, it has actually had the opposite effect. Businesses and individuals are only contracting the larger companies who have the capacity to carry this expensive coverage while small independent contractors are no longer able to get a steady flow of work.
Vermont legislators' limited thinking and approach to business regulations is seriously detrimental to the economic stability and growth of the State. Wouldn’t it be more constructive to first get the informed opinions of business owners, the people who drive the economy, and carefully listen to their concerns and ideas? Decision-making from behind a desk, without any substantial knowledge of the impact on individuals and businesses, is unproductive and potentially harmful.
Worker's compensation insurance along with the burden this classification puts on employers is unjust and unnecessary. In an effort to comply with state statutes, our company has decided to no longer contract with any subcontractor who does not carry a worker's compensation policy for their company, nor can they take the owner's exclusion. Typically, to save money, if a subcontractor of a small operation employs 2 or 3 people, he will cover those individuals and take the owner's exclusion. However, because that owner then becomes a statutory employee of my company, I am liable and must pay for his/her worker's compensation insurance without any of the benefits of having said employee on staff (e.g., dictating how they perform their work, dress code, tax deductions). I believe that everyone should be covered by worker's compensation insurance and be protected in the event they get hurt while at work. The question becomes who is responsible to pay for coverage? Who is getting penalized? And why has the state adopted a stricter independent contractor definition than the federal government? Certainly, it can't be because they are trying to help small businesses survive.
This issue is not limited to construction companies; other industries that engage with independent contractors face the same penalties, responsibility, and liability. Once again, Vermont has taken legislative steps to protect small businesses, putting the burden of taxes, insurance, and legal expenses in the lap of larger companies. When larger businesses must absorb these costs and exposures, and the burden becomes too great, the first logical step will be to cut jobs.
I am not arguing against worker's compensation insurance, but rather the definition of independent contractor.Independent contractors are often such because they do not want to be employees. They enjoy the freedom, creativity, and responsibility of entrepreneurship. It is the reason I work for myself. Yet, I do not expect anyone else to pay my insurance, or take on the liability that comes with owning a business.
Let us take a hard and practical look at the independent contractor and employee definitions at the State level and bring them into alignment with the federal definitions. Let independent contractors run their businesses, and I'll run mine, and we'll each pay for our own insurance along the way.
Adam Hergenrother is a Partner of Campaign for Vermont, a born and raised Vermonter, and CEO of Hergenrother Realty Group, which includes KW Vermont, The Adam Hergenrother Team, Universal Properties Network, BlackRock Construction, Hergenrother Capital, Mind Spark, and Hergenrother Capital. A serial entrepreneur, Adam is passionate about building businesses, personal growth, and developing leaders in Vermont and beyond.