In honor of National Small Business Week, Doerner is pleased to show our support by sharing a series of insightful business tips for entrepreneurs and small businesses to help improve their business strategies. This article is written by Attorney Kristen L. Brightmire and it is the second of several articles in this series.
You have a great idea for a business. You have the know-how, the contacts, and a plan. Everything is going so well that you need more workers to improve your business. Maybe you just need more “hands,” but maybe you need a sales staff, an accountant or an IT professional. For those of you who already have workers, you know all too well that growing your small business can be a double-edged sword. Growth is the goal, but it comes with challenges – the biggest of which may be the workers.
Will you grow by adding “employees” or “independent contractors?” A seemingly simple question but often answered incorrectly. Employers cannot simply choose whether to treat a worker as an employee or independent contractor. And, no, the worker cannot choose either. The law doesn’t work that way. There are legal tests to determine whether a worker is to be classified as an employee or an independent contractor. This article cannot address the complexities of the tests, but here is a brief overview. With an employee, the employer controls the time, method, and manner of the work. An employee cannot hire others to do the work assigned. An independent contractor has more control over the time, method and manner of the work, including things such as investment in the equipment or tools necessary and an opportunity for profit or loss associated with the work. In reality, there is a spectrum from employee to independent contractor, and a knowledgeable employment attorney can help you classify a particular worker.
Properly classifying each worker as an employee or an independent contractor is significant. An employee receives W-2 Wages, where legal required deductions are made and employer-matching taxes are paid. An independent contractor receives payments reported on a Form 1099. The business does not withhold or pay anything to the government. The burden falls squarely to the independent contractor to ensure all required monies are submitted to the government. (Perhaps now, you see one of the concerns.) If the worker believes that they are not properly classified, they can file a challenge with the IRS or local taxing authorities. Or, various taxing authorities can file their own challenge. If you are incorrect, you can be liable for back taxes, penalties and interest.
But wait, there’s more. Each “employee” also has a classification of either “nonexempt” or “exempt” under the Fair Labor Standards Act (FLSA). The FLSA governs, among other things, overtime compensation. It sets as the default that all employees are nonexempt, which means that they are entitled to receive overtime wages for all time actually worked in excess of 40 hours in a single work week. To treat an employee as “exempt” from the overtime requirement, it is incumbent upon the employer to prove that an employee qualifies for one of the specific exemptions in the FLSA. Each exemption has a specific test to be applied. Paying someone a salary to cover all hours worked in a week is not, in and of itself, sufficient to prove any FLSA exemption. Unfortunately, this is a misconception which has caught some businesses unaware. The result of failing to properly classify your employees (or to misclassify a worker as an independent contractor and fail to pay them overtime) can be a Department of Labor investigation, a single worker lawsuit or a collective (class) action lawsuit by a group of workers. In all three, the damages can go back as far as three years from the date the claim is filed. The cost to you will include not only your attorneys’ fees, but generally, you are required to pay the attorneys of the employees suing you.
Finally, you may be considering Employment Practices Liability Insurance (EPLI). Businesses often purchase insurance to mitigate risk. Like other policies, this is a product which covers and excludes certain items. Read the policy carefully to ensure you understand what it is you might be buying. For example, does it cover wage and hour (FLSA) claims like the ones discussed above? Many do not. Does it cover the cost of defense, damages, etc.? The insurance product may be a good option, but don’t let the term “insurance” lull you into a false sense of security.
Small businesses should focus their energy on their growth. Ordinarily, time spent with attorneys is seen as a distraction, perhaps even an unnecessary expense. However, planning for growth and for the proper addition of workers is an important strategy to help your business be successful. You need to understand the laws and the risks, so you can make sound decisions. To do that, you need experienced, practical legal guidance. Doerner, Saunders, Daniel & Anderson offers full-service legal counsel to assist you with your business growth. To develop an employment law relationship for now and in the future, contact Kristen L. Brightmire at kbrightmire@dsda.com or 918-591-5204. When it comes to growing your business, be proactive.
Doerner, Saunders, Daniel & Anderson, LLP provides this content for informational purposes only. It is not intended to provide legal or other professional advice nor does the transmission of this information create an attorney-client relationship between any attorney of the Firm and the reader. If you seek legal advice or assistance, please consult with a competent attorney familiar with the applicable laws. If you wish to initiate possible representation by an attorney with this Firm, please call the attorney of your choice. You will be advised of our processes to avoid conflicts of interest and requirements of our letter of engagement before the commencement of representation.