AGRICULTURAL PERSONNEL
MANAGEMENT PROGRAM
NEWSLETTER

COMMISSION RATES KEY TO SUCCESSFUL FARM LABOR CONTRACTING

In the San Joaquin Valley, the predominant method used by farm labor contractors to charge grower customers is to charge for total wages plus a commission based on a percentage rate applied to that amount. A study by the University of California Agricultural Personnel Management Program in 1992 showed that commission rates in table and raisin grapes for 26 Valley FLCs averaged 33%; the minimum reported was 30%, the maximum was 37%.

A Fresno-based farm labor contractor recently met with local representatives (and me) to express his concern that returns to an FLC at a 30% commission rate in the grape industry are very low, or negative, using his own costs as an illustration. We'll look at those in a moment.

The veteran 20-year FLC says many contractors, particularly new ones, don't know their full costs of operation. "Overall, there's a definite need for business management education in the FLC industry. As it is now, many, after only a few years, go out of business; unable to pay the social security and unemployment taxes that are due."

In fact, the Internal Revenue Service, in 1994, formed a Fresno-based "Ag Design Team" of officers that is still working "to address the San Joaquin Valley's biggest compliance problem - an estimated $200 million in unpaid employment taxes from agricultural tax form 943."

And, turnover in farm labor contracting is indeed high. About 5 to 6 thousand federal FLC registrations are issued each year by the U.S. Labor Department in California, Arizona, Oregon, Washington, and Hawaii. About 1,500 - 25 to 30 % - are "initial" or new registrations, according to DOL officer Noemi Lucha in San Francisco.

Let's return to this FLC's costs and returns for a one-week period. A crew of 25 men work 8 hours a day for 6 days for $5.75 per hour. A crew boss is paid $70 a day. That's a week's payroll of $7,320. If he accepts a commission rate of 30%, he would have an "inclusive" commission of $2,196 to pay business costs over and above the wages due the workers.

Now the expenses as a percent of payroll. The social security tax (employer share) is 7.65%. His combined federal and state unemployment tax rate is the maximum (and common) 6.2%. Workers' compensation (for grapes) costs him 4.98%, liability insurance is 1%, and his payroll service costs 2% of payroll. Field sanitation is 1.02%, paper cups and ice .66%, cell phone/pager .68%, and pickup expense (at 33 cents/mile) is 2.22% of payroll.

Not included in his costs are office rent, advertising, business dues, tools, safety program, and he "overlooked" his costs of holding the California FLC license ($350 per year) and the surety bonding requirement. Also, he himself noted, the "transactional" costs involved in moving from one grower customer to another are ignored in his illustration.

In any event, the costs, in his case, total 26.41% or $1,933.21, leaving $262.79 profit for the week. The self-employment tax (15.3% of net income) reduces the effective income to $222.58. Based on a 48-hour work week, he would make $4.64 per hour - less than the workers -- and would, in this writer's opinion, sooner or later be out of business.

SOCIAL SECURITY ADMINISTRATION OUTREACH HEIGHTENS .... Employers filing 250 or more W-2s for a tax year must report the information on magnetic media. This year, the Social Security Administration (SSA) is returning W-2 reports filed on magnetic media without processing them if 50 percent or more of the 1997 W-2's are bad -- either the social security number (SSN) on the W-2 was never issued by the SSA, or the SSN is valid, but the name on the W-2 doesn't match the name on SSA's records. Jerry H. Satterberg, IRS "Ag Design Team" leader told me earlier this year, "On the Social Security mis-match issue, we recently met with a Regional Representative from San Francisco about W-2 mis-matches. Some of the largest offenders are in farming and farm labor contracting."

Employers over the threshold are encouraged by the SSA to use the agency's free and voluntary Enumeration Verification System (EVS). Employers using the EVS can request verification of SSN and name for any worker for whom a W-2 will be prepared -- a current employee, former employee, or new employee after a commitment to hire has been made. Telephone verification (800-772-1213), which the SSA seeks to expand, is limited to 5 new hires per call. Paper lists of up to 50 workers at a time may be submitted for verification at local SSA offices. Larger files may be submitted for verification on diskette. Employers can discontinue EVS participation at any time. The SSA and the INS also jointly operate a voluntary Employment Eligibility Confirmation Pilot Program in 5 States, one of which is California. For information, call (202) 514-2317.

This year, the SSA launched another outreach program to employers filing over 100 "bad" W-2s -- on either paper or magnetic media. One grower's letter said, in part, "our records indicate your company has had a large number of earnings items placed in suspense in recent years." It goes on to encourage use of SSA's EVS, and to work with the local SSA office "to improve the wage reporting process." A description of EVS was attached. The grower was concerned about penalties. The IRS may impose a penalty of $50 per W-2 for reporting an incorrect or missing SSN.

"These penalties are not currently being assessed," said Bill Brees, SSA's San Francisco Regional Magnetic Media Coordinator, "unless the IRS is doing some other kind of audit, in which case they will also look at the taxpayer ID issue; if they find errors, then they'll add that on." Penalties for failure to file correct W-2s are avoided only if an employer can show the failure was due to reasonable cause and not "willful neglect."

At this time, the first 3 digits of the SSN must be a number in the following ranges: 001-587, 589-649, and 700 - 728. SSNs whose first 3 digits are outside these ranges are invalid and an SSA office should be visited to resolve the matter. A valid SSN has 9 digits. The first 3 digits are referred to as the area, the next 2 as the group, and the last 4 as the serial. No SSNs with a 000 area number, 00 group number, or 0000 serial number have been issued.

Although INS Form I-9 "Employment Eligibility Verification" states "Employers cannot specify which document(s) they will accept from an employee," that doesn't preclude a company policy of asking all new hires to show their social security card (after Form I-9 is completed). Brees pointed out "employers are even allowed to photocopy the social security card, as long as they don't use a color copier." Copying social security cards may help reduce reporting errors. Employees without a social security card should apply for a replacement (Form SS-5).

Employers deciding to work with the SSA will discover workers for which there appears to be incorrect information. At that point, the SSA will not instruct employers on what to do. One approach is for the employer to notify workers still on the payroll of the situation, in confidence, and ask to see their social security card. Company errors will be clear (misspellings, names in wrong sequence, transposition of digits). Corrections can be sent to the SSA.

If information on the social security card matches that on the W-2, or an employee can't produce a social security card, the employer may want to advise her or him to visit the local SSA office to resolve the matter, and get a letter or "receipt" indicating a replacement or new card has been applied for. The employer may want to specify that the receipt or letter must be presented to the employer within a prescribed time (10 Federal working days, for example), and may decide to advise the worker that failure to follow these instructions may subject him to discipline up to and including termination for suspected false statements in employment documentation. From then on, the employer may decide to use SSA's EVS to verify social security accounts of all new hires.

The SSA limits "outreach" to employers; the agency doesn't contact affected employees directly. In communication with employees, employers may want to provide, perhaps as a "paycheck stuffer," the SSA brochure "Social Security - Your Taxes ... What They're Paying For And Where The Money Goes." The English Version is SSA Publication No. 05-10010 (January 1998); the Spanish version is Publication No. 05-10910 (February 1997). Request batches of brochures on 1-800-772-1213.

SSA district managers receive periodic "batches" of employer names who have received SSA letters. District managers are to call these employers "to see if they need any help" in working on the problem, such as use of the EVS.

An electronic (e-mail) forum called ag-hrnet is available from the University of California Cooperative Extension for discussion of agricultural human resource management issues and principles, compliance with employment-related regulations, and new or proposed employment laws. I regularly post short articles on it. To "subscribe" to this free service, send an e-mail message to: Listproc@ucdavis.edu. Leave the subject line blank; in the main body of the message write: subscribe ag-hrnet yourfirstname yourlastname (or unsubscribe ag-hrnet to leave the list). Though not always necessary, you may want to add a pair of dashes, "--" (no quotes) at the beginning of the next line in the message to make sure listproc disregards any signature that is part of your message template.

In Targeted Industry Partnership Program (TIPP) inspections for the year ended June 30, 1996, one of the leading violations among FLCs was absence of a written injury and illness prevention program (IIPP). For a one-page Cal/OSHA "accepted" English and Spanish IIPP with supporting forms, and a "TIPP Partial Preparation Guide," official "inspection protocol," and sample pay stub, send $4, payable to "County of Fresno," to Steve Sutter, UCCE, 1720 S. Maple Ave., Fresno, CA 93702.

Become a driver instructor? ... Farm labor vehicle (FLV) drivers (with a Class B CDL) in California interested in an essentially free one-week course conducted by the California Department of Education to certify FLV driver trainers early next year should call (916) 322-4879. Certified FLV driver instructors may charge trainees fees for their required continuing education hours.

NOW THIS, FROM THE INS

Martin also said, "If the correction is to Form I-9 section 1, the employee should initial the correction. If the new information contradicts Form I-9 section 2 information, such as the name or SSN of the employee as shown on previously presented documentation, the employer may request to see acceptable Form I-9 documentation showing the correct information in order to ensure accuracy." This, he said, "will protect the employee as well as the employer by ensuring that INS or other federal officers authorized to inspect Form I-9 will receive up-to-date and accurate information regarding the employee."

If the employer requires the employee to complete a new Form I-9 to continue employment, the employer should "retain the original form for the designated period as evidence of compliance with the verification requirements at the time of hire," advised Martin. Employers must retain completed Forms I-9 for 3 years after the person begins work or 1 year after the date employment ends, whichever is later.

Learning of a change to an employee's Social Security information does not by itself put the employer on notice the employee is presently not work authorized, Martin said. "One fact of general application is that names may change for a variety of reasons, but SSNs do not change (although they may be recorded erroneously on forms). For this reason, a claimed change of SSN is arguably a situation that raises more of a red flag than a claimed change of name."

Martin cautions all situations should be reviewed with common sense. A change to an SSN that merely corrects a transcription error, such as recording one or two digits erroneously, would be an unlikely indicator of fraud on the part of the employee, but if the employee reports what is clearly an entirely different SSN than the one he or she previously used, something is wrong. Similarly, receipt of information showing that an employee has been working under a completely different name than his or her actual name reasonably raises questions about an employee's identity that are not raised by change of a last name due to marriage, correction of a middle initial, reconciliation of an incorrectly or differently recorded ethnic name, or other legitimate corrections."