familyownedbusinessblog

Washington's Domestic Partnership Law May Impact Your Business

Washington's Domestic Partnership Law, which went into effect on December 3, 2009, provides that for all purposes, registered domestic partners must be treated the same as married spouses, unless doing so would conflict with state law.  "Registered domestic partners" include same-sex domestic partners, and also opposite-sex domestic partners, provided one of them is at least 62 years old. 

 

This new law will have a significant affect on all businesses that provide employment benefits, especially benefits mandated under state and/or federal law, such as family medical leave, which conflict in some respects.  In practice, administering benefits in light of the conflicts between state and federal law can be complicated.  You can read more about this topic on Ater Wynne's Northwest Business Litigation blog, here.

 

Managers found independently liable for unpaid wages under the FLSA

Stacey Mark, partner at Ater Wynne, recently posted an article on our aterwynneblog.com about a Ninth Circuit decision that individuals may be liable for unpaid wages as "employers" under the Fair Labor Standards Act (FLSA). You can view that article here.

Reasonable Compensation

A common problem for family-owned corporations involves compensation.  The Tax Code allows the corporation to deduct "reasonable" compensation.  Pay too much, and the IRS might re-characterize the excessive compensation as a non-deductible dividend.  Pay too little and the IRS may assess penalties and interest for underpaying employment taxes. 

A common example: mom and dad own the business but their three sons run it.  Their daughter is listed as a corporate officer but does not provide services to the company.  She receives payments equal to her brothers, in order to avoid hurt feelings.  Since she provides no services, all of the payments are nondeductible, taxed at the corporate level (at corporate rates) and again taxed to daughter personally.

When considering how to compensate family members, keep in mind several things:

• Compensation is payment for the value of services rendered to the corporation.  If someone is not providing services, they should not receive compensation.  Those family members providing services should be paid the fair value of those services, not based upon ownership interests, relationships, or other factors unrelated to their service.
• Document compensation arrangements with written employment agreements signed at the beginning of a fiscal year (or that cover several years in advance).  The agreement should describe the services provided and the compensation (both in cash and benefits) paid for such services.
• When making changes to compensation arrangements of corporate officers or executives, document the reasons for the change and the new amount in the minutes of the Board, then update the written agreement.
• Avoid large year-end bonuses, especially those based on a percentage of corporate profits, which looks very similar to a dividend.  Instead, use larger salary amounts, and base bonuses on stated performance metrics and the recipient's salary.
• Consider electing S corporation status, which entirely eliminates the corporate-level income tax concerns.  Since taxes accrue and are paid only at the individual level, electing S corporation status eliminates the income tax distribution versus compensation issue (although it may still exist for employment tax purposes).

In our example above, since the sister does not work for the corporation and is not an owner, she cannot receive either compensation or distributions.  If the goal is to provide income to the sister, that will require she provide services to the corporation (perhaps as a Board member, if not as an employee) or become a shareholder entitled to dividends. 

Federal Minimum Wage Increases to $7.25

The federal minimum wage increases to $7.25 effective July 25, 2009.  For more information, go here.

Stay on top of your wage and hour obligations

One of the many frustrating aspects of owning a business is keeping up with all of the laws relating to employees.  If the deluge of class action litigation over the last few years tells us anything, it is that some of the most common -- and costly -- mistakes made by businesses are in the area of wage and hour compliance.  Many of these mistakes are easy to avoid by having standard operating procedures in place.

Topping the list of wage and hour pitfalls:

• Making unauthorized deductions from employees' pay.  Most state laws restrict the circumstances under which a business may deduct amounts from an employee's pay to (1) required withholding (taxes, FICA, FUTA and other amounts required by law, such as garnishments); (2) amounts the employee authorizes in writing for charitable contributions, insurance premiums, union dues, and other payments made to third parties for the employee's benefit; and (3) to repay the employer for a cash loan or advance on compensation, provided the employee has signed an authorization in advance.  In Oregon, it is NOT permissible to deduct for cash shortages, breakage, a negative vacation balance, lost equipment, failure to return company property, recovery of an unearned bonus or moving expenses, or even inadvertent overpayment of compensation.
• Final pay violations.  Employees who voluntarily terminate employment with at least 48 hours' notice must be paid on their final work day.  Employees who resign on less than 48 hours' notice must be paid within five business days or on the next regular pay day, whichever is earlier.  Employees terminated involuntarily must be paid by the end of the next business day.  Final pay must include all accrued wages through the last day of work, including vacation, sick pay, commissions, and any other compensation earrned as of the termination date. The final pay must be made available at the place of employment, unless the employee has requested otherwise (e.g., the employee signed up for direct deposit or asked that the check be mailed).
• Failure to provide meal and rest breaks.  Non-exempt employees who work more than six hours MUST take a meal break of at least 30 minutes during which the employee is relieved of all duties.  In addition, non-exempt employees MUST take a ten-minute rest break for each four-hour segment of work.  Employees may not skip or combine meal and rest periods. 
• Misclassification of employees as exempt from overtime.  Employees must be paid 1.5 times their regular hourly rate for each hour worked in excess of forty hours each week unless they qualify for exemption from overtime.  To be exempt, the employee must be paid a certain minimum salary each week and also satisfy a "duties" test.  Both federal and state law define who qualifies for exemption, often with no bright line, and sometimes with conflicting results.  In the event of a conflict, the employer must apply the law most beneficial to the employee. 

And these are just to name a few.  In addition to paying employees the wages due for any actionable wage and hour violation, employers may be liable for multiple statutory penalties, interest, attorney fees, plus administrative penalties imposed by the state.  Where multiple employees are affected, the damages can be in the tens of millions of dollars (for example, in 1999, Microsoft paid in excess of $92 million to settle a class action involving misclassification of workers as independent contractors -- another wage and hour nightmare).  On top of that, many wage and hour violations carry criminal penalties.

All of these problems can be avoided.  First, before you put procedures in place, make sure you have someone on staff who understands the law.  If you are wearing too many hats to take on human resources yourself, consider hiring a staff person (in the long run, it's cheaper than the alternative).  If your business is too small to justify hiring someone in this role, hiring a consultant or outsourcing is an option.  Whatever your needs, we're here to help.

For further information on wage and hour compliance, go here.

Misclassification of Independent Contractors

In an attempt to avoid some of the headaches associated with having employees, many businesses will hire workers as “independent contractors.”  The primary advantage to hiring an independent contractor is that the business does not have to pay or withhold for taxes, social security, or unemployment, or provide workers compensation coverage or fringe benefits.  The problem with this approach is that simply calling a worker an independent contractor does not make it so.  State and federal laws define the circumstances under which independent contractor status is available, and misclassification of workers can be extremely costly.

An independent contractor is the person or entity you hire to perform a service completely unrelated to your business. A classic example is the company you, a candy manufacturer, hire to put a new roof on your building. The roofer has an established independent business, multiple clients, its own workers, and the equipment needed to perform the work; it schedules the work at its convenience and it sends you a bill. Typically, you have no say in who the roofer hires as employees, what hours they work, or how the work is performed. You tell the roofer your desired result and (hopefully) it does what you ask and goes to the next job.  In contrast to the roofer, if your worker does not own and operate an independent business through which he/she is providing services to you and others on a regular basis, the worker is probably not an independent contractor.

Misclassifying employees as independent contractors can bankrupt a business. Both federal and state laws require employers to pay employees minimum wages and overtime, and maintain accurate records of hours worked by non-exempt employees. Exempt employees must receive a minimum weekly salary. These compensation requirements cannot be satisfied by stock or other forms of non-cash compensation that may be paid to independent contractors.  In addition to claims for unpaid wages, the failure to comply with minimum wage and overtime laws may subject a non-complying employer to claims for final pay violations and liability for non-payment of taxes, FICA, FUTA, benefit contributions, the value of lost benefits, plus penalties, interest, other damages, and/or attorney fees.  If a worker is injured on the job, he/she is free to assert a negligence claim against the employer, whereas an employee would have to rely solely on workers compensation.  An employee may also assert claims for harassment or discrimination, which are otherwise unavailable to an independent contractor. The failure to comply with statutory requirements applicable to employees could also invalidate post termination restrictions, such as non-compete and non-solicitation obligations.

Before classifying anyone who works for you as an independent contractor, check the law or call your lawyer. At Ater Wynne, we deal with this issue all the time and will be happy to help. For a more detailed overview on misclassification of independent contractors, go here.