Making It Legal:

In my practice, I’m finding that the IRS and Department of Labor are getting more aggressive about enforcing the proper classification of workers. Essentially, they want to be sure that you’re not hiring a worker as an “independent contractor” (thus avoiding the payment of employment taxes), yet treating him/her as an employee by micromanaging every aspect of how the work gets done. 

There are subtle nuances between an independent contractor and a part-time employee, largely centering around the issue of “control.” How much control do you have over how the work gets done, when and by whom? Getting on the wrong side of that balance could cost thousands of dollars in unpaid employment taxes, plus interest and penalties.

Bill Bischoff’s article in the Wall Street Journal online sets out some handy distinctions, in addition to suggesting you look at IRS Form SS-8, which lets you know the factors the IRS considers in making its determination.  For more on the issue of control, check out my article, “Walking The Employee-Independent Contractor Tightrope,” available at GreatBusinessLawTips.com.

Q: For how long are employee non-compete agreements normally valid?  If a person signs such an agreement, leaves the company for a period of time and then comes back to the company, is he/she still bound by such an agreement even if he did not sign it again?  Is such an agreement valid for customers with which the company is no longer doing business?  What if the agreement mentions any and all past and present customers?

A.: Frustratingly, there isn’t a hard-and-fast rule on how long these types of agreements are valid.  In some cases, courts have set outer limits on permissible time frames, but the reasonableness can depend on the length of employment with the company, the level of employment with the company and the geographic scope of the restriction (for example, are you prohibited from working anywhere in the U.S.? Or for a competing company within a 10-mile radius?).

Courts don’t like to see people prevented from supporting themselves, so they construe non-competition provisions (as in “You can’t work for a competing company”) more narrowly.  But as to soliciting customers, they tend to uphold those, for they are the lifeblood of the business. If the agreement says “you may not solicit any present or past customers,” then don’t do it.  A non-solicitation provision is not the same as a non-competition provision.  If the agreement doesn’t say anything about soliciting customers, the non-competition generally won’t be expanded to include customers.  However, sometimes a provision may be called “non-competition” (in the heading), but cover a range of issues, including the non-solicitation of clients.  That’s where consulting with a local employment attorney will be beneficial so that you can get a clear read on the language and the conduct it’s prohibiting.

As to the issue of leaving the company and then coming back, the non-competition provision is moot, as you’ve returned to the same company.  The company can’t be in competition with itself.  Unless the company has made non-competition an aspect of company policy (e.g., through an employment manual), you generally “start fresh” when you start (or restart) an employment relationship.  But again, as different states can vary on the issue (and the law changes frequently), check with an employment attorney who is familiar with this area and the recent court decisions on the subject.

“Faster than a rolling O.  Stronger than silent E“—that’s the pace at which information (and misinformation) flies around in cyberspace.

Even worse is when something written about you/your company comes back to slap you in the face like a coconut cream pie.

In his post, “Should Personal Blogs Be Allowed and Permitted by Employers,” Kirk Noel Narrows outlines the essential conundrum in letting employees blog:  You don’t want to be known as the self-preservationist ogre who stifled self-expression, but you must protect your company from damaging employee blogs.

He goes on to say:
Would it not be smarter from the very start to have clear policy procedures in place , including a signed non-disclosure document, clearly listing rules, proceedings and a time line after leaving the employer? Large corporations do this as a simple matter of routine. Should not this be your established pattern as well ?

I couldn’t agree more.  Far easier to set the boundaries at the beginning with a new hire than try to change horses midstream.

My colleague, Deborah Shapiro, Esq., reminded me of a recent change to New York State employment law.

In short, beginning October 26, 2009, New York employers must inform newly hired employees in writing, at the time of hiring, of their pay rate, regular payday and, if eligible for overtime, regular hourly rate and overtime rate.  In addition, the employer must obtain a written acknowledgement from employees that they received this notice.

The requirement to inform employees about pay rates and paydays is not new.  But the requirement to provide this information in writing and obtain an acknowledgement is.

This is not an issue that necessarily gets front-page coverage, so how do you find out information like this?  Will you become your own full-time researcher?  (Answer: Unless you want your business to fold, it’s probably not a good idea).  Employment laws change regularly–with the stimulus package and the federal government’s attempts to assist the U.S. work force, perhaps even more so.  A good way to stay on top of all this vital information (which can ensnare you in its net SO easily) is to hire someone who knows it and handles it on a daily basis.  In other words, an employment attorney.  You can learn more about how to choose the right one for your business with my program, How to Choose and Use Attorneys, available through GreatBusinessLawResources.com.

If last week’s post about awkward work situations wasn’t enough, firing an employee probably has to top the discomfort charts. It may be justified (the employee was cooking the books) or necessary (sales are down 40 percent because of the economy, so you need to downsize) . . . but it’s rarely a task that business owners face with glee.

There are ways, though, of making the situation a smidge less dread-inspiring.  Have a look at my article, “How to Say Goodbye to an Employee” on the E-Myth Blog to learn the top five steps to navigating this successfully.

“Been there, lived it,” you say.  Crazy co-workers, back-stabbing co-workers, co-workers who babble on all day and won’t SHUT UP enough to let you focus and do your job, co-workers who seem to wear every sensitivity on their sleeve (as well as those who trample over you like a bull in a china shop).

You’ve known the nightmares . . . which may have been part of what catapulted you into entrepreneurship.  But now you’re the boss, and you’re finding out that managing people is often like herding cats.

Awkward work situations seem to follow us around–perhaps they’re part of the human condition.  But how can you manage them?  In Entrepreneur magazine, Chris Pentilla outlines 10 scenarios that can keep you up at night, ranging from the “oh, no you di’int (a la Rosie Perez) to the nail-biting, including:

• The office romance
• TMI: Did I really need to know about your STD test?
• The vengeful, laid-off employee
• The annoying wedding planner
• The drunk on the job
• The secret thief (where did those legal pads go?)

Like cheating on taxes, playing fast and loose with Fair Labor Standards Act employee classifications can land you in a world of hot water. Do you know the distinction/difference between “exempt” and “non-exempt” employees as it relates to their duties and the paying of overtime?

Q: I want to lessen my payroll by finding ways to lower the amount of overtime I pay people. The question has come up about converting someone from an hourly employee to a yearly salaried one. It’s my understanding that there are strict limits on who can be a salaried/exempt employee vs. someone who works on an hourly basis. I’d prefer to pay someone more via a salary, but less than it would cost me to pay overtime. 

A: The exempt/non-exempt distinction is not one you want to play around with.  Violations of wage and hour laws are one of the top reasons employers get sued–and the penalties can be stiff. 

The issue is not whether the employee will be paid a salary (instead of hourly) for work done–it’s the nature of the work the employee is doing that affects the pay structure. The U.S. Department of Labor specifically designates certain classes of workers as exempt, including executives, administrative personnel, outside salespeople, highly skilled computer-related employees and licensed professionals, such as doctors, lawyers, architects, engineers and certified public accountants, among others. In addition, managers who hire and fire employees and who spend less than half their time performing the same duties as their employees are typically also exempt employees. In general, the more responsibility and independence or discretion an employee has, the more likely the employee is to be considered exempt.

If the concern is slashing payroll/overtime costs, you may be better served by looking into outsourcing certain functions (e.g., for janitorial services) by hiring a separate company, rather than trying to reclassify an employee and run the risk of violating the Fair Labor Standards Act.

Your employees can become your next competitors if you don’t handle the relationship carefully . . . and by “carefully,” I mean having non-solicitation agreements and other understandings (in writing!) with your employees.

But some folks are “old-school,” or don’t want to spend the money.  As a result, their employees are considered working “at-will” and free to leave at any time.  From the perspective of the soon-to-be entrepreneur, can you take your employer’s clients?

Q:  We’ve been working for a company for more than a decade and have finally reached the point where we want to set up our own shop in the same industry. Most of the client relationships are with us, as the owner is very hands-off and many people don’t like him. We have no employment contracts. One of our concerns was transferring clients, specifically when is the earliest we could advisably do that? We’ve been moving forward with our plans, but we’ve realized that it would be far more practical for ourselves and for the clients, who otherwise could feel at sea, to be able to speak with them in advance.  How can we do so?

A:  While I appreciate your concerns about leaving clients “at sea,” employees do have a duty of loyalty to their employers in that you should not solicit clients, take files, etc., while still on the job (you can take your contact database), nor should you use “company property” (company phones, computers or make the announcement at a client  meeting or during your workday).

Best (safest) way to handle it is to get your ducks in a row, leave Friday afternoon, and contact everyone after you’ve left.  Do not use your work e-mail for these kinds of conversations. The longer the time delay between leaving your job and contacting the clients, the stronger your defense to a lawsuit that you took clients on company time.

Another way would be to contact clients on your own time (again, from your homes and not during workdays or hours) to let clients know you’re leaving and that you’ll be back in touch in a week or so to let them know where you’ve landed.  Two problems with that approach:  1. The client may want more information than it’s appropriate to give at that time . . . so if you’re concerned about their being “at sea,” that could leave them even more worried about how and when their needs will be handled; 2. There is a meaningful risk that if any of the clients lets the owner know (even inadvertently) that you’re leaving before you tell him, this could be bad for you and give the owner something to hang his hat on in litigation–whether or not you have an employment agreement).

A few more things to consider:

• Will your clients really be “at sea”–are they that fragile?–if they are notified after you leave?  It’s really so much cleaner if you can wait.

• Check the client agreements to make sure that there are no non-solicitation or exclusivity provisions in their contracts–for example, that if they are solicited by another agency (or by former employees of the agency), they’ll give the owner prior notice.

• Depending on the clients’ feelings of loyalty to the owner–if you tell them before you tell him, they might be put off in the sense of your not acting totally aboveboard and with integrity.  More of a character issue and their feeling of trust working with you going forward than a legal issue.

You may have plenty of opportunities to get it (legally) right . . . but not as many to hear me speak on the subject! 

For those of you near Brooklyn, N.Y., on July 15, stop by the Brooklyn Creative League, where I’ll be talking about everything you need to know about business law in 90 minutes.  (Well, not quite . . . but close!)  In this entertaining and lively session, I’ll provide entrepreneurs with an overview of the most common legal issues they will face as they start and build their businesses.  I’ll touch on:

• How to choose the right form of business
• Working with business partners
• What to look out for in your commercial leases
• How clear contracts make for happy clients/customers
• Intellectual property: what to protect and how to protect it
• Choosing the right attorney/advisory team

RSVP: Contact the Brooklyn Creative League at info@BrooklynCreativeLeague.com or (718) 576-2104.

Date:  Wednesday, July 15, 2009
Time:  9:30 to 11 a.m.
Location: Brooklyn Creative League, 540 President Street (between 3rd and 4th avenues)
(Take N/R Subway to Union Street)
Price:  Free for members; $10 non-members

I’m not saying that people don’t deserve a living wage, but when you add that to the cost of employee taxes, benefits, insurance and all of the risks that companies take on by hiring staff, it’s no surprise that in this economy, small business owners are thinking twice about it.

Here’s a short list of what you can expect to pay/file/provide:

1. Withhold Federal income tax from the employee’s salary.
2. Withhold Social Security and Medicare taxes (know as FICA–Federal Insurance Contributions Act).
3. Pay an amount equal to 1 + 2, above.
4. Pay federal unemployment insurance (from the Federal Unemployment Tax Act/FUTA)
5. Pay state unemployment insurance.
6. Pay state disability insurance.

Optional, but sometimes provided:

1. Health insurance coverage (medical, dental, vision, prescription)
2. Paid vacation days
3. Paid sick days
4. Paid personal days
5. Fringe benefits

Then you have all of the personnel and “is the employee a fit?” issues to consider when actually making that hire. For more information on that topic, have a look at the article I wrote recently for The EMyth Insider, “How to Hire Employees Safely.” Don’t forget to click on the link to get your free copy of my special report, Top 10 Reasons Employees Get Fired.

You’ve reached a point where you’re ready to tear your hair out. You’re pulled in 17 different directions and, try as you might, you haven’t found a way to manufacture the 28-hour day. Much as it’s daunting, you’re staring down an inescapable fact: In order to grow your business, you . . . need . . . staff. But what kind? In-house or outsource? Full-time or part-time? Hourly or project-based?

Part of that decision you’ll base on the cost. Here are some of the pros and cons of the different options, nicely outlined by Linda Coleman at BizTaxTalk.com (Note: She looks at it from the perspective of the worker choosing how to be hired):

Employee:
Pros: Always at your beck and call/dedicated work force

Cons: You pay for the privilege with employment taxes, benefits and increased risk of employment liabilities (discrimination suits, employee theft, time for supervision and training)

W-2 “Consultant” (someone hired out to you by a broker or third-party service):
Pros: Can get full-time staff without the need to offer benefits (the broker may do so); mitigates the risk of IRS penalties for choosing the wrong employment category

Cons: You pay a higher fee to the employment broker who provides you with the employee; cost could be prohibitive<

1099 Sole Proprietor:
Pros: You only pay for what you need when you need it; no need to account for employment taxes/withholding or benefits

Cons: Big risk that the IRS (and state tax authorities) will consider your 1099 proprietor an employee and thus subject you to penalties and interest for late taxes–even if you have an agreement stating that the worker is an independent contractor (the IRS will disregard form over substance)

Independent Contractor (B2B):
Pros: By hiring a corporation or LLC to provide the services you need, you can avoid getting caught in the employee/contractor “net”; no need to account for employment taxes/withholding or benefits

Cons: Independent contractors are independent businesses with their own client base; service may not be immediate.

Like this is news? But it seems that some employees just don’t get it (no pun intended). A recent 2^nd Circuit case, Patane v. Clark and Fordham University, held that even viewing porn in one’s office (a somewhat private place) is a no-no. In Patane, Professor Clark watched hard-core S/M tapes on the VCR in his office, left tapes scattered on the floor and had new purchases shipped to the office. His poor secretary, Patane, could see the smut through the glass partition of the office, on the floor when she entered his office, and when opening his mail (which was part of her job). The final straw was when Clark started to use her computer for porn access. The court held that “the mere presence of pornography in a workplace can alter the status of the environment for women . . . and is relevant to assessing the hostility” of the workplace.

If you have any questions about whether porn is legally permitted at work, let’s make it as simple as . . . green eggs and ham.  Here’s my initial stab at a no-porn company policy:

We want no porn behind closed doors
We want no porn left on your floors
Don’t put it on an iPod
Or camera with a tripod
We are not a company of boors

Do not surf porn for play
At any time of the work day
To your co-workers do not avail
To your friends do not e-mail
Or lose your job you certainly may

Steps to take when facing the presence of porn at work:

• Don’t put up with it.  Reaffirm the anti-harrassment policies to all employees.  Be vocal and visible in your enforcement of the policy.
• Prevent it from coming into the workplace.
• Keep an ear open for office gossip about who’s displaying it (”Did you see the pictures on Jim’s computer! What was that, a ZZZ-cup?”)
• Install appropriate firewalls and filters to prevent pornography access on workplace computers
• Lead by example.

Remember that when you have an awkward work environment, you’re not just at risk of a lawsuit. Porn is a huge contributor to loss of employee productivity . . . which means a less efficient (and profit-making) business for you.