Ridesharing: Who Cares Whether Drivers Are Employees or Independent Contractors?

Ridesharing companies like Uber and Lyft have been front and center in recent media stories and court decisions. All across the country, drivers have brought lawsuits arguing that they are employees of these companies, rather than independent contractors. If you own a business and think these stories have no relevance to you, think again.

What Are the Potential Consequences for Businesses?

All business owners who pay others for services should understand the difference between employees and independent contractors. That’s because a business that employs workers is required by law to do the following things:

  • Pay minimum wage and overtime;
  • Withhold federal and state taxes; and
  • Provide certain benefits such as mandatory meal and break periods.

Independent contractors are their own employers. They are responsible for the above items if they truly not the employee of the business who engages their services. When an employer calls a worker either an employee or an independent contractor, it has “classified” that employee for the purposes of law. Improperly classifying an employee as an independent contractor can have drastic consequences for a business.

The federal Fair Labor Standards Act allows the United States Department of Labor to go back at least two years in evaluating wage issues. The Internal Revenue Service can audit tax returns for three years and can assess civil penalties for payroll tax liabilities for 10 years. As you can imagine, settlements, back taxes, and penalties can add up quickly.

Additionally, if a worker injures a third party, the business may be sued for damages. For example, lawsuits have been brought against ridesharing companies after drivers were allegedly negligent in their driving. Most states allow injured parties to bring lawsuits for two or three years after an injury occurs. That is a long period of worry.

What Can You Do?

How can you reduce your potential liability? Don’t rely on contracts that call workers “independent contractors” unless they really are in control of their work. While most courts will consider what the parties considered the relationship to be when determining classification, many other factors are also considered. For example, courts typically look at who supplies necessary tools and equipment, who determines the methods of work, how work is evaluated, and how payment is made. The core issue is the extent to which the company controls or has the right to control the work and the way in which it is performed.

Don’t be surprised when the Internal Revenue Service, the Department of Labor, or a process server come knocking. Call today to make an appointment for a LIFT Start-Up Session, which includes employment structuring, financial, and tax systems you need for your business.

Asset Protection for the Small Business Owner

According to the U.S. Small Business Association, small businesses create almost two of every three jobs in the U.S. every year, and half of working Americans are either owners or employees of a small business.

The SBA advises entrepreneurs to seek counsel while in the initial phases of getting a business off the ground. As a small business owner, you are subject to the same laws and regulation as a large corporation, so it helps to have a Creative Business Lawyer® by your side as you begin your new venture to provide experienced legal advice on:

  • Operating agreement
  • Legal partnership agreement
  • Articles of Incorporation
  • Bylaws
  • Operations Manual
  • Funding your business
  • Insurance for yourself and your business
  • Tax strategies for your business (and your family)
  • How to set up your employee/independent contractor relationships
  • The best ways to protect and capitalize on your intellectual property

Failure to plan—especially for small business owners—can have disastrous consequences for both your family and your business. If you have chosen to combat economic conditions by creating your own small business, remember that going from being an employee to being “The Owner” brings with it many changes, not the least of which are changes in your estate plan.

Small business owners tend to be less liquid than traditional employees, putting much of their earnings back into the business for growth, which means estate planning for business owners requires a different strategy than for other families. A Creative Business Lawyer™ can help you develop strategies for protecting your business and your family for the long-term.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.

 

How to Create a Bulletproof Independent Contractor Agreement

One of the most common issues facing small businesses is how to govern relationships with independent contractors (ICs). Which is not really surprising, since many small businesses use ICs to perform critical work functions like website development, marketing, bookkeeping and other important functions that keep your business functioning and growing.

To protect your company’s future, you must have written agreements in place with each IC you hire – yes, even if it is your best buddy from college performing the work. Here are the key terms you want in your IC agreement:

  • Full description of the services being provided by the IC
  • Description of payment terms, including fixed fee or hourly, how and when payment is rendered
  • Description of how out-of-pocket expenses will be handled
  • Detail of what materials or equipment will be furnished by the company vs. what the IC will supply, including office space
  • Statement that agreement constitutes an IC relationship
  • Statement that the IC has the proper licenses and permits to perform the work you are contracting for
  • Statement that IC is responsible for paying their own state and federal income taxes
  • Statement that IC will not receive any benefits you provide employees
  • Statement that IC carries the necessary liability insurance
  • Set terms of the agreement
  • The terms by which the agreement can be terminated by you or the IC
  • The terms by which you and the IC will settle any disputes
  • If applicable, an ownership of intellectual property clause that the work or product you are contracting for belongs to you
  • Indemnification clause that states the IC indemnifies you for any violation of patent, trademark or intellectual property infringement by the IC

We can help you develop a written independent contractor agreement as well as other written agreements you should have in place that govern your relationships with employees, vendors and customers.

Call our office to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit, so we can advise you on the proper use of written agreements to keep your company protected through effective risk management.

How Overtime Rules Overhaul May Impact Small Businesses

On March 13, President Obama signed a presidential memorandum that directs the U.S. Department of Labor to propose new rules governing overtime exemption regulations for white collar workers under the Fair Labor Standards Act (FLSA).

The Presidential Memorandum instructs the Secretary of Labor to update the FLSA regulations for workers who qualify for overtime protection, stating that these exemptions “have not kept up with our modern economy. Because these regulations are outdated, millions of Americans lack the protections of overtime and even the right to the minimum wage.”

The salary threshold for overtime pay eligibility has been at $455/week since 2004, making the annual threshold $23,600 for the white collar exemption.  The “primary duty” test that determines whether workers are managers was also last revised in 2004.

Labor Secretary Tom Perez said that new rules governing overtime exemptions are due for an update because “quite literally somebody can work 1 percent of their time on management issues, 99 percent stacking the shelves and doing other work that has nothing to do with management, and you’re considered a manager, and you are no longer entitled to overtime.”

The three areas that are likely to be the focus of new regulation include:

Change to minimum salary level.  The new regulations will likely change the minimum salary level for overtime exempt employees, and may tie those increases to inflation indexes as well as mandate an annual cost of living adjustment.

Change to duties test.  It is likely that the DOL will either remove or make significant changes to the duties test, particularly the “concurrent duties” section of the executive exemption test that provides an exemption for managers performing the same duties as the employees they manage.

Change to computer professional exemption.  The 2004 overtime regulation updates included a separate computer professional exemption; with the significant changes in the technology field in the past decade, the DOL is likely to readdress the qualification standards for meeting this exemption.

The effect on small businesses won’t be known until the DOL makes its recommendations, but the new rules could make millions of employees eligible for overtime pay by setting a new standard for the white collar exemption.  Business groups are arguing that this move would eventually hurt workers and the economy, since employers will likely scale back hours to avoid paying overtime.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.  Normally, this session is $1,250, but if you mention this article and we still have room on our calendar this month, we will waive that fee.

 

$150,000 Risk: Know the Difference Between an Employee and an Independent Contractor

The IRS and State Governments have both stepped up their enforcement action against business owners who misclassify employees as independent contractors. One friend of ours was just fined $150,000 for Worker’s Comp Fraud stemming from a misclassification of employees as Independent Contractors.  Knowing this, it is imperative for you to know the difference when it comes to your hiring practices.

In general, these are the three characteristics in determining employment status:

Behavioral control – whether a business directs or has control over how the work is done, either through providing instruction, training or by other means of controlling how a person performs work.

Financial control – whether a business directs or has control over the financial and business aspects of a worker’s job.

Relationship type – how a worker and the business owner perceive the working relationship.

According to the Small Business Administration, a worker is likely to be classified as an employee if he or she:

  • Has specific duties that are dictated by the employer
  • Is performing work that is controlled by the employer
  • Has received training from the employer for the work being performed
  • Works only for one employer

A worker that can be classified as an independent contractor will be one that:

  • Operates under a separate business name
  • Invoices for his or her work
  • Has his or her own equipment
  • Determines his or her own hours
  • Maintains separate business records and financial accounts
  • Has his or her own employees
  • Performs work that is temporary
  • Has a written contract

Employers face stiff financial penalties for misclassification of workers, including fines, interest and penalties.  If the misclassification is found to be willful, there can be even harsher penalties.

To have us take a look at your employment practices, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.

New SBA Rule Provides Added Protection for Subcontractors

A new Small Business Administration rule implementing part of the Small Business Jobs Act of 2010 provides more protection for subcontractors in their dealings with primary contractors, according to a Washington Post report.

The rule, which goes into effect in mid-August, requires a prime contractor to notify the contracting agency if it decides not to use a small business subcontractor named in its proposal.  Prime contractors must also notify the agency if they make late payments or reduce payments to small business subcontractors.

The SBA said that subcontractors were not being paid on time and were often used to help prepare bids and then dropped when the contract was awarded, calling the tactic a “bait and switch” technique employed by prime contractors.

The SBA hopes that the new rule will encourage small businesses that have become wary of acting as subcontractors on large projects to reconsider because of the new protections put in place.  The rule also contains a provision that allows government officials to factor in how prime contractors treat their subs when bidding for other work.

If you’re a small or mid-size business owner, call us today to schedule your comprehensive LIFT™ (legal, insurance, financial and tax) Foundation Audit.