Independent Contractors: Is It Worth the Risk?

The title of this post is not intended to impugn the skill and knowledge of Independent Contractors, but to have you, a business owner, question the risk of misclassifying an employee as an Independent Contractor in an attempt to save some money.  It is true, you can save some money by using an Independent Contractor instead of an employee.  There are no payroll taxes, no Worker’s Comp/Disability and no overtime.  However, the risk you run could cost you a lot more than proceeding in a safe manner.

The first thing you must know is whether someone is an employee or an Independent Contractor.  There are different tests employed by different governmental agencies, but they all come down to basically the same thing, how much control you have over the individual. Guess what?  If you tell them when to be at your office, what to do and how to do it they are most likely an employee.  We discussed the advantages of misclassifying someone as an Independent Contractor now lets discuss the disadvantages.

Lets start with the IRS.  You will have to pay all of those back taxes.  The IRS will let New York State know.  So now you have to deal with the state that means Department of Labor and the Workers Comp Board, at least.  Department of Labor will investigate if you paid overtime.  Besides the actual overtime, the penalties could cripple your company’s bank accounts.  The Department of Labor will then talk to the Workers Comp Board.  The penalty for failure to have proper Workers Comp insurance is $2,000.00 for every 10 days per employee.  Many, if not all, of these penalties will attach to you personally not just to your company.

You may well ask, how will anyone ever find out?  Well your Independent Contractor may get hurt and file for Workers Comp.  They are not going to think twice about you if they need to pay medical bills.  You may fire the person and they try to file for unemployment.  This could trigger an investigation.  You may fire them and they contact every possible agency to get back at you. Before you know it trying to save a little bit of money may cost you your business.

If you are going to use an Independent Contractor consult with an attorney or HR Professional to be sure that person will be classified as an Independent Contractor.  Keep detailed records of what they are doing for you and how they are doing it and have an Independent Contractor Agreement.  Having an Independent Contractor Agreement does not help if the individual is actually an employee, but it is good to be used in conjunction with the other proof of what their employment actually is should it become necessary to prove they are actually an Independent Contractor.

Remember, what may be considered the easier and cheaper option may not be so in the long run.  At Sobel Law Offices, P.C. we believe in preventative lawyering. The best way to mitigate legal costs over the life span of your company is to make sure you do everything right in the beginning.

A Business Owner’s Legal Primer: What Should the Business Owner Know (Part II)

I am going to continue from the last post and go into some more detail about issues that come up right at the beginning.  You are forming a company with your best friend and decide that you don’t need any agreements between yourselves.  Say goodbye to your best friend.  Agreements protect both sides and your friendship.  Most arguments occur because of ambiguities in a relationship.  If you spell out that relationship in black and white, have it agreed to and signed by both parties it cuts down on a lot of those ambiguities and possible arguments.

For the purposes of this post we will call the agreement a partnership agreement, but it may be a shareholders agreement or a membership agreement depending on the from your company takes.  The issues are the same.

Who owns what percentage of the company?  You may be surprised how often something this important and basic is not discussed and overlooked until there is a disagreement about money or power.

What happens if one of the partners stops working for the company?  Unless you have an agreement that states they will give up their interest in the company if they leave they will retain that interest and you will have to wage a long and expensive court fight to get them to give it up.  A court fight you may not win.  Or they could ask for an exorbitant amount of money for their interest.

What happens if one partner dies?  Say hello to your new partner, whoever inherited your old partner’s assets.  Unless he has a will leaving it to you or you have an agreement in place with a Buy/Sell clause you do not get those ownership interests.

These are just the tip of the iceberg of issues that arise when you go into business with someone else without agreements put together by an attorney who knows what questions to ask and what scenarios to be worried about.  If you want more information about things of this nature attend our upcoming seminar or call us for a free initial consultation.  You can contact us by emailing contact@sobellawpc.com or calling 631-264-1070.

A Business Owner’s Legal Primer: What Should the Business Owner Know

Our firm is having a seminar on May 11, 2011, that will cover highlights of what business owners should know about their legal issues.  It seemed like a good time to write an article that covers the same topic.   Quite often in my practice I get a new client when they are already in trouble because there legal infrastructure was not set up properly.  It is not necessarily that they did not care about the laws or issues they were ignoring, but they just did not know.  This is the issue that the upcoming seminar and this article will begin to address.

Your infrastructure begins when your business is first formed.  Was it formed properly?  If you have an LLC and you never published the required legal notices you may find yourself being sued with no LLC liability protection.  If you have partners, do you have the proper agreements between you and your partners? These issues are best dealt with when the company is first being created, but can be addressed at a later date if you did not take care of it originally.  Next you must make sure all of your assets are properly protected.  This includes the appropriate insurance policies and registering any intellectual property you may have.  In todays day and age of branding even if your company does not deal with intellectual property you most likely have intellectual property to protect.

So you are doing well and have employees.  Not having the appropriate policies and procedures in place may be the quickest way to lose your company.  By the way there are certain liabilities when dealing with your employees that may not only affect your company’s assets, but your personal assets as well. Did you know that in New York there is a legal requirement to provide to your employees in writing when they will be paid, how much they are being paid an hour and what their rate of overtime is?  It is the little stuff, not the big stuff that will be your downfall.  Also, you are in business sometimes you cannot be the good guy to your employees.  Our client who was trying to be nice and pay an employee of the books got received gratitude and a huge liability.  If a government agency finds out the employee will have to pay back taxes.  What will be your liability?  Well you will have to pay the payroll taxes you were supposed to be paying in the first place.  In New York that will trigger an investigation by the Department of Labor and Workers Comp/Disability.  Workers Comp and Disability will fine you for every 10 days you did not have the appropriate policy in place.  Department of Labor will investigate to make sure you paid your employees properly including overtime.  You were such a  nice boss you no longer have a business.

I know attorneys are an expense and a non-revenue generating one at that.  Look at the expense as protecting the revenue you are generating as opposed to just throwing money away.  Benjamin Franklin once said “An ounce of prevention is worth a pound of cure.”  There is no way to keep legal issues from occurring, but if you build your legal infrastructure properly to begin with you will help mitigate those legal costs when they do arise.  For more information about our upcoming FREE lunch and seminar or to schedule a FREE consultation email us at contact@sobellawpc.com or call 631-264-1070.

Start the Year Off Right

The start of the year is upon us.  Do we continue with the mistakes we made this past year or do we take stock and decide to change that which is in our power to change?  The first step is to realize what mistakes we made.  Without knowing what is wrong, there is no hope of correcting anything.  Many of us do this as an annual rite in our personal lives, but how many take the same introspective steps in our business lives?  For the business owner, the success of their business life has a direct impact on their personal life.

Now is the time to take a long hard look at your business and to take care of the problem areas.  Is your business organized correctly?  Do you have the appropriate agreements between you and your partners?  How will the business provide for your family if you pass away or are disabled?  These are just some of the initial questions you should be asking.  Once you get past those, it is time to look at all the areas of your business.  Do you have enough insurance?  Do your contracts adequately protect you?  Are your employees classified correctly and being properly paid?  The answers to these questions may surprise you and quite possibly frighten you.

Just as an example – A new client hired the firm to defend them against a Fair Labor Standards Act (FLSA) law suit.  During the initial consultation the client provided answers that seemed to provide them a viable defense.  However, the paperwork did not back up what they believed to be the truth.  They were vastly underpaying the employee who was suing them and had no defense to the action at all.   Since the start of the suit the Department of Labor has now audited their payment records and has found a number of employees who are owed wages.  These wages must be repaid and the Department of Labor may levy hefty penalties.  By the way, they received advice from an accountant, bad advice.  It does not hurt to get a second opinion.

The employee wages issue is just one area that could cause you undue concern and financial heartache.  Over the next week I will take different topics important to the business owner and discuss them in further detail.  On January 26, 2011, our firm will be presenting a seminar on the importance of performing a legal audit at the start of the year.  For more information contact us at info@sobellawpc.com or 631-264-1070.

Verbal Contracts: Are They Worth the Paper They Are Printed On?

We enter into verbal contracts all the time in our everyday life and never think twice about it. When your spouse offers to wash the dishes if you take out the garbage and you agree you have entered into a verbal contract. What are the issues and consequences, however, of entering into a verbal contract in business?

Most verbal contracts only contain one part of an agreement. One party agrees to take an action if the other party takes a corresponding action. What happens if one party breaches and defaults on the agreement? Have both parties agreed on penalties for a breach and default? Usually, they have not. So what happens now?

You can argue that there is established contract law in place to protect you and you would be right, to an extent. Which established contract law is protecting you? If you are in New York and the other party is in California which state’s law governs your verbal contract? A written contract would most likely specifically state which states law controls and where you can sue someone. That’s right – unless the other person meets certain criteria, you will have to sue them in the state they are in. That’s an additional cost of finding an attorney in a different state and traveling back and forth when you are required to appear. By the way, without a written contract how are you going to prove a contract even exists?

Now you are spending a great deal of money to enforce the contract, but at least you will get it back when you win, right? Not necessarily. Unless you have a clause in your contract providing for legal fees and costs when you have to enforce the contract (Do you have one of those in your verbal contract?) most courts will not grant legal fees and costs.

Verbal contracts are fine at home, but in business, have a written contract that spells out both parties rights and responsibilities. Any money you may save by not having an attorney draft a contract for you will be used up in litigating the existence of a contract to begin with.

Join our firm on October 26, 2010, as we offer a free seminar covering employee issues, including a proper employment contract.  Contact us at info@sobellawpc.com for more information.

Protecting Your Business: Contracts and Business Practices

If an attorney ever tells you they have a sure fire way to keep your business from being involved in law suits, turn around and walk away.  It is not possible for a business, especially a successful one, to stay out of a law suit.  The best way to protect yourself is to plan on being sued and prepare accordingly in your contracts and business practices.  As a transactional and litigation attorney I can ensure you that any extra money you spend on an attorney making sure your contracts and business practices are set up in the best possible way to protect you is pennies compared to the money that will be spent on litigation and defending a law suit.

I stated at the start that there is no way to keep you from being sued, but your litigation costs can be mitigated by having good contracts and sticking to proper busines practices.  As an example of penny wise pound foolish I can give you an example from my own practice.   A client, prior to retaining my firm, hired a new employee.  The employee previously worked for a company that was engaged in the same business as our client.  Our client was aware that the competing company routinely had employees sign non-compete agreements.  Instead of talking to a lawyer prior to hiring the employee, our client took the employee’s word that the non-compte clause was not an issue.  Well the non-compete clause was the issue in a 3 year litigation that has cost our client six figures in legal fees and has destroyed his business.  This could have all been avoided by spending a few hundred dollars on an attorney.  The only silver lining, and it’s a small one, is that as soon as we were aware that a claim was going to be made that the non-compete clause was violated, we had our client insist the employee sign an indemnification agreement for any legal fees and judgments arising from the law suit.  This will allow our client the opportunity to get back whatever money has been lost.

As an example of good business practices saving your business money I will relate a story told to me by an acquaintance.  A company had an employee who was routinely being disciplined for poor work performance.  All of the issues were properly documented in her personnel file.  Eventually she was fired at which point she made a claim that she was fired because she was pregnant.  This would obviously violate both state and federal discrimination laws and could lead to lengthy and costly litigation, not to mention possible governmental sanctions.  The company spent a few thousand dollars on an attorney and, thanks to their record keeping, the matter was resolved in their favor much quicker and less expensve than it otherwise might have been.

My firm will be presenting a free seminar on July 28, 2010, that will cover contracts and business practices.  We will provide information that will allow business owners and decision makers to know what questions to ask and what practices to avoid. For more information contact us at info@sobellawpc.com.