Monthly Archive: February 2015

Affordable Care Act and Employees/Contractors

FROM THE NY TIMES …

If you work for a living, do you know who your boss is? And if you run a business, do you know who’s on your payroll?

These are simple questions. But you may not have the same answers as the Internal Revenue Service.

The I.R.S. is emphasizing the distinction between employees and self-employed independent contractors this year, tax specialists warn. That makes it important for workers and critical for businesses that use their services to make sure to get the classification right. If you flub the answers, it could be costly.

In a sense, this is a semantic exercise: If someone is doing a certain kind of work for a specific amount of pay, the label you put on it might not seem to matter much. But which is which and who is who helps determine the obligations that each party in the relationship has to the other and to the I.R.S.

The law requires businesses with 50 or more full-time employees to provide them with health insurance that meets certain criteria deemed to make it affordable. Ian Shane, a tax lawyer at the New York firm Golenbock Eiseman Assor Bell & Peskoe, suggested that the desire to avoid the expense of providing coverage and the paperwork involved in demonstrating compliance provides an incentive for small businesses to find a way to classify some workers as contractors.

“If I have 60 employees, maybe I want 11 of them to be self-employed,” he said.

But wishing doesn’t make it so. If the I.R.S. decides that even one of those 11 is an employee, then the business must provide insurance.

The agency, which said in an emailed response to a question that it “regularly addresses worker classification issues as part of its employment tax examination program,” has a form, the SS-8, that workers and companies can use to try to place someone in the right category. Even with that, Mr. Shane said, it’s no easy feat.

“It’s a question of facts and circumstances and weighing all the things” together, he said. “No one or few things are definitive. In some respects it’s not that hard, and on another level it’s terribly hard.”

What it boils down to is that workers who decide how they perform their duties — executing them on their own schedule, at their own premises, with their own equipment and for clients of their own choosing — are more likely to be judged contractors. It also helps if the company that hires them treats other workers more like employees, offering steady work, paying benefits and providing work space, highlighting the contrast with how it treats people it considers contractors.

The I.R.S. is not the only regulatory authority that makes lists or needs to be satisfied. Jack Mozloom, a spokesman for the National Federation of Independent Business, pointed out that some states have their own criteria for classifying workers and that they are often at odds with or more stringent than the I.R.S.’s.

“It’s a state-by-state issue,” he said. “Some states have definitions of ‘independent contractor’ that are not consistent with federal law.”

“There’s a lot of paperwork” for prospective hirers, he said, “and no consistency.”

Connecticut, New Jersey and New York tend to have especially strict requirements, Mr. Mozloom said. They and others, like California, Illinois, Massachusetts, Oregon and Washington, can be difficult places to be self-employed, he said.

Workers are more likely to be deemed employees in such states. And a business that wants to use a contractor from one of them is more likely to be on the hook for payroll taxes and perhaps health coverage, he said, even if the business is elsewhere. After the job, the worker may file an unemployment claim, possibly meaning a higher unemployment tax rate for the business.

“If you’re a licensed contractor in one state, and a potential client in another state must consider you an employee, that can be a problem,” Mr. Mozloom said.

Gary Cuozzo, owner of the ISG Software Group in Wallingford, Conn., found state authorities so determined to reclassify his contractors as employees that he decided to outsource hiring to a third-party staffing agency, even though he estimates that it costs him 20 to 30 percent more than to engage a worker directly. That figure is rising, too, he said, because the agency he uses just raised its rates 2.5 percent to cover the expense of complying with the A.C.A. mandate.

“It’s getting harder to use somebody as a subcontractor,” Mr. Cuozzo said. “Everything has gotten so complicated that I only hire through an agency now. I got fed up dealing with it, and now with the Obamacare stuff, the whole thing has gotten grayer and more difficult.”

The employer mandate makes it more urgent to get the employee-contractor classification right, said Mr. Saviano of Ernst & Young, because a small mistake can have large repercussions. If a company has 49 full-time employees, the employer mandate doesn’t apply. With 50 or more, it applies to everyone. If the I.R.S. finds that enough workers at a company are employees, not contractors, he said, then stiff penalties apply, and they are based on the entire payroll, not just the number of misclassified employees.

The prospect of providing health coverage and other expensive benefits means that companies often prefer to consider workers contractors. For workers, those same factors often make it better to be classified as employees, but not necessarily. In general, someone with higher earnings and big potential tax write-offs — for example, a surgeon who attends many conferences in exotic locations — benefits from contractor status, Mr. Shane said.

If you would rather be considered a contractor by the I.R.S. when a company engages your services, a contract calling you that probably won’t help much, he added. But a clause entitling you to work for other businesses would be useful.

“You need more than one customer,” Mr. Shane said. “A true independent contractor has numerous clients and takes risks. The more risk you take, the more you’re self-employed.” In any case, he said, the I.R.S. is more inclined to penalize the business, not the worker, when the agency disputes a claim that a worker is independent.

That possibility, and the heightened jeopardy that businesses face as the employer mandate takes effect, means that companies must take pains to make sure that workers are given the right status, Mr. Saviano said, and they have to continually confirm that they made the right call and that the designation is still accurate.

“If there are material changes in worker responsibility and how the worker does his job, they need to be flagged,” he said. “Whenever it comes down to facts and circumstances, you need to have the right controls in place. These are difficult issues.”

Non-compete

Reprinted from Legal Tech News

There is no question that the legal technology industry is getting more competitive. As more middle-market service providers get absorbed by larger, cash-rich and venture-capital-infused players, many seasoned legal technology sales professionals will exit from the space.
This has caused vendors to fight more aggressively than in years past for top business development professionals and revenue-generating consultants—which also means more strictly enforcing non-compete agreements. Some service providers are even contesting project manager hires because of non-compete issues. In this fierce climate of non-compete enforcement, coupled with the general lack of understanding of or appreciation for the dreaded non-compete, legal technology professionals should examine their current and future employment obligations and legal constraints.

Here is a non-compete checklist if you are considering 
a change of employment.

1. Did you sign a non-compete, a non-solicitation agreement, or both?
If you are not in sales, often the answer is, “I’m not sure.” Your non-compete agreement is sometimes part of your employment agreement that covers the full gamut of terms.A non-compete should not be confused with a non-solicitation. The distinction is that a non-compete prohibits you from working for a direct competitor, while a non-solicit prohibits you from soliciting clients or employees of your former employer to join you at your new place of employment.

Non-solicits are often buried as a clause within your employment agreement, while non-competes are usually a separate document. This is not always the case, but it is worth noting. It is essential that you read (and highly recommended that you have an attorney read) any employment agreement or document you plan to sign before accepting a position.

2. Do you have a copy of your non-compete?
Shockingly, the answer is “no,” more than 50 percent of the time. When you accept a new position you should have digital and paper copies of your non-compete. Save them. Send a copy to your attorney, your agent or a family member you trust.
The worst situation for any candidate is having an offer in-hand and then being unable to produce a copy of your current non-compete, causing an offer to be rescinded. Candidates often choose to delay making a job move, or decide not to explore opportunities, because they either do not know if they have a non-compete or do not have a copy. More employers are now asking that revenue-generating legal professionals provide a copy of their non-compete at the time they submit a resume as part of their employment consideration.

3. What are the geographic and temporal variables of your non-compete?
All non-competes address two variables: the territory and the length of time in which the non-compete will be in effect after employment ends.
Non-competes are usually effective for one year, some for two years. Some are nationwide, others specific to geographic areas, such as the New York Tri-State area.
Non-competes are governed by state laws, and in most states, non-competes are enforceable. California non-compete clauses are generally illegal.
If you are a project manager or non-revenue-generating employee, and your non-compete is specific to your city or state, moving to another geography is an easy and viable way to evade conflict. It can be a bit trickier if you are a sales professional, because future employers generally want you to work in the geography where you have a network of relationships, and moving a sales pro to a new territory often doesn’t translate to success (and if it does, it can take years to reestablish previous sales success).
Some business development professionals and consultants do “sit on the bench” and then try to re-enter the legal technology industry, but things change quickly in this arena, and often relationships, no matter how personal, are hard to quickly monetize after being out of the game for 12 to 24 months.

4. What are the parameters?
How broad is the scope of the non-compete? Can you work in legal technology sales as long as your future employer doesn’t directly compete with your previous employer? If you sold service and consulting for your former employer, can you sell software and enterprise licensing for your future employer?
It is to the employer’s benefit to keep the parameters as broad as possible, and to the employee’s benefit to narrow the scope. This is an area for sales professionals to carefully 
negotiate in their contracts—and a place where negotiation is often both viable and entertained by the employer.
Carefully considered wording around breadth of the market can help a business development professional change employers down the road and still leverage the same relationships, but not violate the terms of his or her non-compete.

5. What is the climate of non-complete enforcement in your state? 
 With California in a category of its own, it is the responsibility of you, the employee, to research rulings in your state related to non-compete litigation. Public record will point to trends, and there are states that strongly lean toward the employee in non-compete disputes, while others typically favor the employer.

6. Does your current employer have a history of enforcement?
If you did not do this homework when you took your current position, it is never too late. Hopefully, there are people you work with, who you can trust to answer this question. There may also be former employees in your community who can advise you as to the track record of non-compete enforcement by your company. Online research can often point to this too, but nothing is more valuable than insight from people who work for, or have worked for, your employer.

7. Does your future employer have a history of enforcement?
This is when it is invaluable to have a really honest agent, or to be very well connected within your industry’s community. Ask the question and ask around. Certainly, within legal technology, there are organizations that are notorious for enforcing their non-compete clauses. There are also others who maintain a reputation for not enforcing their non-competes.

8. Does violation of your non-compete result in binding arbitration or can it lead to litigation?
This is usually outlined in your employment agreement, and if it is not, it should be! There are several big differences when resolving a non-compete issue through arbitration versus litigation; carefully consider this part of your contract for a “worst-case scenario.”
Key differences include privacy, time, cost and ability to appeal. Arbitrations are private between the parties. Litigation is public record and held in a court of law. Arbitrations usually resolve quickly, but litigation can be drawn out over long periods of time, delaying your ability to gainfully work in your field. Arbitrations can cost attorney fees, but those can be nothing when compared to possible discovery and litigation fees. Arbitrations are usually binding, while litigations offer the opportunity for an appeal.
The question of arbitration versus litigation is often one professionals do not consider thoroughly when starting a new job or negotiating an employment agreement. Remember that both parties are forced into spending money and time to battle a non-compete clause in court, but typically the employer has deeper pockets.

9. Will your future employer indemnify you in the event the non-compete is enforced?You can ask, but few legal technology companies indemnify new hires. When a company indemnifies an employee, it is essentially agreeing to assume the cost and responsibility of defending you if you violate your existing non-compete.

In addition to the potentially large attorney fees, there is always a risk the company will lose the battle, resulting in an inability to employ you.
Some larger organizations, particularly big consultancies and accounting firms, will offer indemnification for wildly successful individuals, but as the gap widens between big and boutique providers, fewer organizations will find a desired return on investment, post indemnification.

10. Can you go to work “in-house” at a law firm or corporation to avoid non-compete issues?
Yes, but few law firms and corporations are hiring ex-sales professionals, no matter how consultative or managerial their experience. It is very challenging to move from a vendor business development role into a law firm business development role. Those lucky enough to make that transition usually have meaningful corporate relationships, a track record of selling into corporations at the highest level and often a willingness and ability to take base salary cuts to facilitate the transition.
For non-revenue-generating talent fearful of their current employers’ enforcing a non-compete if they go to work for competitors, the pathway to law firm or corporate employment makes sense.
However, in 2014 there were significantly fewer roles available in the Am Law 200 than in years past. Partly as a result of the rapid adoption of managed service contracts and partly as a result of the continued commoditization and price compression of legal technology services, operational and consultative staffing is moving to the service providers.
That is where the most jobs will be in 2015 and where most talent currently working at a vendor will have the greatest opportunity for vertical and financial mobility.

 

Liability

FROM NATIONAL LAW REVIEW …

This week U is for under utilized – the readily available liability prevention tools that, in our estimation, employers most often neglect to use to their advantage.

  1. The extra step.  Before terminating an employee with a medical issue, that is. As we have written here and here, much FMLA and ADA liability is preventable if you will methodically work through the communications steps that years of case law tells us courts are looking for. The sooner you start, the sooner you can finish. I tell employers:  I know it’s convenient, but taking one more step with the employee will pay off. If you think the employee has had plenty of chances to get you documentation from the doctor or to demonstrate that he/she can do the job, write that down – this is when we would terminate, but we’re not, we are giving you one chance to accomplish X by date Y. Don’t get stuck with an avoidable lawsuit because you wouldn’t take one more step to nail down your file and make it clear you fulfilled your legal obligations.

  1. Job descriptions. Job descriptions define the target of the employee’s job duties that is critical to so many employment law disputes.  In determining whether an employee is exempt under the Fair Labor Standards Act, the job description is Exhibit A in explaining what the employee really does. In the above-mentioned area of FMLA, ADA and other employee health related legal issues, the job description is the guidepost for whether an employee can perform his/her job, and the baseline for what is a reasonable accommodation. In discrimination cases, the job description is the starting for determining who is liable as a supervisor under the U.S. Supreme Court’s Vance v Ball State. The list goes on. A job description signed by the employee within the relatively recent past is too powerful a tool in litigation not to have one.

  1. The gut check. Specifically, the termination gut check phone call to counsel. Every termination involves risk, even those that do not involve risk factors that may be obvious such as the employee having made a past harassment or other legal complaint, or membership in one or more classes protected by discrimination laws.  Indeed, with relatively few exceptions, employment litigation is about terminations. There are unlawful hiring or failure to promote cases, but the vast majority of employment law is about terminations. Is there any event in your business that is as predictably a potential liability event? Certainly major commercial disputes or serious injuries involving the company may involve greater liability, but is there anything else in business where there is a predictable moment, voluntarily initiated by the company, that we know is a potential litigation event? Yet employers often trigger this legal event without talking to a lawyer, and miss issues that could have been avoided. It is a classic example of paying a little now rather than a lot more later.  Protect yourself and the company, make the call. If you are ready, it will be a few minutes. If it is more than a few minutes, you might not have been ready, so it will help get you there.

Companies that are using these three tools are spending less time and money in court and more time focused on their true mission.

Use of temporary staff, employee leasing

FROM INSIDE COUNSEL NEWSLETTER …

The use of temporary staff, employee leasing agreements and other alternative employment arrangements has increased over 40 percent in the last four years, a rise which has not gone unnoticed by the government. Because government agencies, legislatures and courts have responded differently, legal departments should be aware of changes in the law that may affect common contracting arrangements, including the franchisor/franchisee relationship.

The NLRB: McHappy about joint employment

The National Labor Relations Board (NLRB) initiated a not-so-covert mission in 2014 to broaden the definition of “joint employer,” which has manifested itself through the familiar McDonald’s and Browning-Ferris cases. If successful, the NLRB’s efforts will impose liability for Unfair Labor Practice Charges (ULPs) and the duty to bargain on the putative joint employer.

On December 19, 2014, the NLRB followed through with its previously-declared intention to bring administrative complaints against McDonald’s, USA, LLC, the parent company, as a joint employer along with McDonald’s franchisees.

The McDonald’s case is concerning, obviously, because of the relationship between the two entities as a franchisor and franchisee, the very nature of which depends on independent ownership and operation. The NLRB’s move is likely an attempt to encourage settlement. If settlement is unsuccessful, McDonald’s will undoubtedly challenge the NLRB’s new joint employer standard. The decision may ultimately change the way in which legitimate contracting relationships function.

Privately, the NRLB general counsel allegedly stated that it has not decided how to proceed with the McDonald’s cases, and has admitted that significant legal obstacles remain to expanding joint employment liability to encompass franchisors. Further promising is that the NLRB wrote in its Browning-Ferris brief that the NLRB “should continue to exempt franchisors from joint-employer status to the extent their indirect control over employee working conditions is related to their legitimate interest in protecting the quality of their product or brand.”

But other commentary remains concerning. With regards to Browning-Ferris, on May 10, 2014, the NLRB invited public comment on its joint employer standard. It received 18 comments, including from the NLRB and Equal Employment Opportunity Commission (EEOC). Both agencies argued for a more expansive definition of “joint employer,” including the EEOC’s assertion that “staffing firms and their clients generally qualify together as joint employers.”

According to the NLRB’s brief, the rise of contingency and temporary workforces has created an incentive to reduce wages and thwart collective bargaining. Thus, the NLRB general counsel advocated for the replacement of the TLI/Laerco standard with the less-stringent “traditional” standard, which was abandoned several decades ago. If the less-stringent standard is adopted, joint employment would be found when the alleged joint employer is an essential party to bargaining, or has direct or indirect control over the conditions of employment.

This is a significant broadening from TLI/Laerco, which finds joint employment when an employer has direct and immediate control over employees. Under the current standard, companies can tell their contracted workers what to do, as long as they do not tell them how to do it.

Browning-Ferris represents the most realistic pathway for the NLRB to impose greater liability and obligations on companies through joint employment. However, given the appellate process, any changes may take several years and could ultimately be overridden by Congress.

In the meantime, franchisors are well-advised to audit their practices and writte