Independent Contractor Drivers

Last thread I found was in 2007, so I figured i’d start a new one.

For the sake of discussion, my business is in Illinois, as laws differ per state.

Currently, all my drivers are paid minimum wage because they are cross trained to take orders, clean, etc… However, we are reaching the point that I need just dedicated drivers who do nothing else but deliver as our delivery sales are growing and my cross trained employees are maxing us inside. This is a good problem for us to have because this is where the business can truly flourish on the bottom line. This allows me to create a profit sharing program later that I’ve been anxious to start working on for my management team as I feel they are underpaid and deserving of incentive for more. I need to get my cost structure perfected though before I can do such a program.

My commercialized competition nearby has paid some drivers as independent contractors and $7 instead of the min wage of $8.25. I know their labor is continually under 35%. I’m trying to figure out if this is one of the reasons. I’ve seen their financials. They do well over a million a year in sales with 23-25% food cost and 33 to 35% labor with NI of 10 to 15%…which is where I’m guiding my business model towards as our product is superior, but their cost structure is currently superior than mine…for now.

I offer free delivery (like them), so 100% of tips go to the driver. This tends to be bigger tips this way making my drivers happy. Some drivers don’t want to do anything else but be drivers. I don’t hire those types right now because I cross train. To hire those types, I would need to consider an Independent Contractor type situation, which I am familiarizing myself with now due to labor laws and ensuring that they do fall under that category. I have no desire in breaking the law.

I believe my competition says you can work any hours you want (required to be considered and Ind Contractor), but you don’t go onto the clock until you take a delivery and when you return, you are off the clock until the next delivery.

Anyone have any thoughts/experiences with this? I’m planning ahead as minimum wage is set to increase soon (politics) and I expect it will be $2.75 higher shortly which kills my current business model making my Labor cost skyrocket above 35% if I don’t increase my prices.

Thanks

Regardless of what your competition is currently getting away with, If a driver is delivering ONLY for you, he is NOT an independent contractor. But you can get away with it until you get audited, then…

So unless I allow him to delivery for another place at the same “hour” he is working deliveries for me, he can’t be an independent contractor?

One of the reasons your competition has lower labor cost is the volume they are doing.

Regarding the below minimum wage pay it seems more likely to me that they are declaring the drivers as tipped employees exempt from the minimum wage?

When the minimum wage goes up raise your prices. Every one else will be too.

Talk to your CPA about IC status. It is very unlikely that this can be done. Most common ways this blows up in your face:

  1. Workman’s Comp claim. Driver gets hurt. Claims was at work. Independent contractor status is disallowed. Your work-comp insurance does not pay because you were cheating by not listing this employee. You are now on the hook for everything.

  2. Unemployment claim. Driver looses job (might not even be with you… could be another job a year later) claims unemployment. State comes after you.

  3. Disgruntled former employee makes claim to state or IRS regarding employers share of FICA that you did not pay when they are billed for self employment tax. Status is disallowed and now you owe back taxes and penalties.

All in all, this is not something to mess around with. Key Tests for independent contractor status:

  1. Provides service for more than one customer.
  2. Negotiates fees for the service.
  3. Provides own tools (hot bags for instance).
  4. Sets own schedule and standards of service.
  5. Written agreement.

The only scenario I have seen that makes sense is that someone could set up a company providing delivery services to restaurants and negotiate rates, have several clients (restaurants they deliver for) they provide drivers to. Then the drivers would be employees of THAT company but the company would be a contractor to the restaurant.

Some interesting info here: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Self-Employed-or-Employee

Good info, thanks Bodegahwy

First congratulations! It sounds like you have some great “problems” to solve.

Bodegawhy has made most of the great points concerning liability. I would add one more thought. It seems like if someone is really an independent contractor, they would be responsible for their own insurance - properly insured as an delivery driver. However, if the IC did not keep themselves properly insured, it would probably put you on the hook. I have done contract work as a software developer for the past 5 years, and I have to keep my own liability insurance and the companies I contract with periodically ask to see proof of insurance to cover their own. I have to think that there is an analogous requirement for this type of situation. I don’t like this risk as I don’t trust drivers to keep their insurance up to date and wouldn’t want to spend the time auditing insurance policies all of the time. I think the independent contractor route is a really risky idea and I would never want to do that.

Again, as has already been brought up the next level up from IC status is to pay drivers as tipped employees if your state has a tipped employee wage. I am in Michigan and we do, but I do not know about Illinois. This is not my preference either, but I could be talked into this LONG before going the IC route. This way, the drivers are clearly your employees and you should not have any issues properly insuring them or paying the proper taxes, but you still get to pay a lower wage. We had a recent post on this, but I think it was lost in TT server upgrade, so I will repeat that there are two major downsides to this approach. First, you have to collect tip information from all of your drivers to ensure that the wage you pay them and their tips meet or exceed the minimum wage, and you will probably have to report this information somewhere - maybe someone can chime in on the reporting requirements. I am not a big fan of obligating myself to anymore paperwork than I have to. The second issue is that state laws (varies by state) may state that if you are going to pay someone as only a driver, then this is all they are obligated to do. I personally do not want these lines between my employees or between me and them. I want everyone on my team to view themselves as part of the team first. So, this isn’t my preference either, but it isn’t a horrible option either.

A couple thoughts of how you might structure a model and still pay your employees…first, you will raise prices to offset the labor, and everyone else around you will too. September 1st we had a minimum wage increase here in Michigan and we raised our prices and ALL of competitors did as well. Very few people have even blinked.

Have you considered a delivery charge? Is it normal in your area to deliver for free? Since Dominos succumbed and allowed a delivery charge, I don’t know if there is anyone in my area who still delivers for free and of course even if they do, it is built into the model somewhere. I have grown to appreciate the delivery charge, mostly because I think it helps customers and us to be clear about how we feel it costs for the delivery service versus how much it costs for the actual product.

Maybe you could expand the cross training concept a little further…As a manager, I once had a staff where I had four very experienced and good assistant managers. Other stores tried to raid my employees, and my owner said I could keep them if they were happy, and I could still turn in the numbers he wanted…so what I did is give each of them the option of 3 days of driving every two weeks. They each made a dollar or so less an hour than they probably could have made, but they MORE than made up for it on their driving days. Sometimes it made for me having expensive drivers, but usually it meant I could cut my regular drivers more quickly because the assistants were way faster. Additionally, when the assistant were running shifts they were so much better at instructing drivers and routing because they had been there themselves. In this way, I aligned the people making the most money with the people who took on the most responsibility - a goal I think you are looking to accomplish.

Good luck!

Reporting tips to the IRS is a requirement, not an option, reguardless of the hourly wage. Also the tips should be calculated in the employees paycheck to be taxed on top of… Don’t get me wrong, I don’t care if you aren’t reporting the stuff, but someone out there will, and when they find out, you will be in for a surprise.

I understand that reporting tips as income is a requirement, but I don’t believe it is my requirement as the employer. Every store and every owner I have worked for in the past, we never collected tip information from our drivers, but instead we left that responsibility up to the individuals. Am I incorrect in understanding my obligation?

Even if we did or do collect tip information from the the drivers, we have no way to vouch for it’s validity. Credit Card tips would be the only place where we have record of actual tips. It is still a self reporting system.

Good point on the insurance. Another thought: with regard to insurance, it does not matter whether you are actually responsible or not when it comes to a lawsuit. If there is a bad accident, you can count on being named in the suit even if the driver was an IC (legit or not) and you will certainly be “on the hook” to prove you are not responsible and the would cost you 20-40K in legal costs even if you “win”.

With our POS system the tip reporting is easy. It is part of the driver check-out screen and is also part of the wage summary report we use for payroll. as far as the state and IRS are concerned it is no additional reporting at all since it is just another part the reports we do anyway. i.e. there is no additional report.

Drivers are tipped employees, so you are only on the legal hook for minimum wage of tipped employees for your state. I do not suggest you pay that low amount though. Because I read it here that “if you pay peanuts, you’ll only get monkeys”
Then someone else replied, “sometimes you pay bigger peanuts, you get bigger monkeys” (Authors of these quotes, please take credit for them)

My tipped employees get $4.50/Hour,
if for some weird reason they do not make at least $8/Hour, we make up the difference.

We are counter service only , the cashiers typically average more than $12/hour. Before anyone starts barking about low wages, that rate is way above average for my geographic location

What is you average labor cost running at? Mine is typically hovering between 10% 14%, and have seen it as low as 4.2% on some days (big carryout/catering orders do that for me)

I’d ask your lawyer/accountant exactly what your legal obligations are.

Are you reporting and withholding taxes on credit card tips, at least? If not, you will be in for a big surprise at some point in the future.

Gotrocks… those labor numbers are remarkable. Most of us are between 2.5X and 3X those percentages. Typical for a delco is between 25% and 35% labor. My guess is that you are not including any labor cost for “management”?

My labor cost for kitchen (includes counter) is about 15%. Drivers around 8%. GM is the rest. Total is over 30%. If I went in there 50 hours a week (replacing the GM and part of another AM) I could get it down to maybe 21-22% not counting my “pay”. I can’t see how anyone would get near the numbers you mention… Please enlighten us.

Thanks registered guest. I will look into it further and ask more questions. I am going through an audit right now, so I am losing my ability to be surprised, however not looking to intentionally do anything improper.

I can maintain such low labor costs only due to our massive volume of BBQ meats, Pizza accounts for less than 10% of our total sales. We are primarily a BBQ joint that also offers pizza. I am just as passionate with our pizza as our BBQ, and i’m trying to get sales of each equal. I’d actually like to see our pizza get bigger than our BBQ because it is way less labor intensive on my part.
Pizza was part of my original business plan when we made the move from only catering, to a restaurant that also caters. I’ve yet to do any advertising with our pizza, word of mouth is doing just fine because we are already established
I set up my place so the cooking line is more assembly than cooking, I knew the area had a “less than desirable” labor force, so I made every effort to minimize the positions that required skilled labor. All the other pizza shops around here use the same products, If they are using fresh sausage, it is from Fontininni, (SP?) only one other place hand stretches their dough, the rest either use a press, a sheeter, or use pre-made frozen skins. Heck many of the sheeter users get frozen dough made by Riches. So it all tastes basically the same.

Sadly, the GM is me. And I do that from the kitchen (we are an open kitchen, so that makes it easier to watch the FOH)
I tried having a GM in the past, and I cannot seem to get the correct fit for my operation. My GM did a bunch of damage to our operation that I just recently recovered from after a year.
I think my favorite was when he decided to rewrite my menu, and never bothered to consult with me about it, so I then had a printed menu that did not match my POS, and he took it upon himself to price the menu to what he thought was doable without considering yields, labor involved, or anything else. He also implemented a new website that had misspellings throughout the entire thing, and declared that we do “Memphis Style BBQ” on this website when I am more of a Texas style than anything else.
Anyone know what “Azhu Sauce” is? Either did I! He told me it is what I serve with our smoked prime-rib dinner, so I said “I think you mean Au Jus” Enough of my rant about the last person who was supposed to be my GM.
I just had an offer for my Biz out of the blue, and I am thinking about accepting it and doing something else for a while. A wealthy family sent their kid to a culinary school, and he is not happy trying to work his way up the totem pole, so they want to purchase an established place for him to destroy (oops, I meant for him to run profitably)

If you decide not to sell, ask him if he wants to live in Steamboat Springs, Colorado!