2010 may well be the year of the employee.  Both the IRS and the Department of Labor are adding investigators to find “misclassified” employees. 

For many years, employers have relied on independent contractors as a means of controlling payroll and benefits costs, as well as reducing the costs of recruiting and training new workers.  The use of independent contractors was rarely challenged.

The U.S. Department of Labor (DOL) has recently made the misclassification of workers one of its top priorities, with an additional $25 Million allocated for the “Misclassification Initiative.”  DOL plans to hire an additional 100 enforcement personnel to investigate claims of misclassifying workers as independent contractors. DOL is concerned that misclassification is denying workers employment protections, such as overtime under the Fair Labor Standards Act and leave under the Family and Medical Leave Act. 

The Internal Revenue Service (IRS), however, is looking to collect an estimated $7 Billion in payroll taxes that will be lost over the next 10 years as a result of misclassification.  Independent contractors do not pay unemployment taxes. 

There is no clear-cut test for whether a person should be an employee or a contractor.  The IRS has some guidelines.  So does DOL.

A contractor typically can work for more than one person, provided his/her own tools, materials and supplies, works off-site, may hire assistance or subcontractors and have control over the timing and sequencing of the work.  Contractors do not receive fringe benefits and are paid by the job. 

An employee tends to be paid by salary or hourly wages for indefinite work (rather than being paid a set fee to complete a specific project), can be fired or quit without penalty, is reimbursed expenses, is required to do the job themselves and is given the tools to do the job. 

Employers may raise red flags if:

• Independent contractors are performing work that is essential to the business.
• The contractor has no other clients or is required to dedicate all his time to the employer’s business.
• The industry typically uses employees for a certain job, and the employer is using contractors. 
• Some duties are being performed by both independent contractors and employees.

It is essential that employers get the classification right. If you classify an employee as an independent contractor and you have no reasonable basis for doing so, you may be held liable for employment taxes for that worker, and perhaps even overtime pay.  There could be interest and penalties, as well as bad publicity.

President Obama signed an extension to the Temporary Extension Act of 2010 on Tuesday, extending the COBRA subsidy program enacted under the American Recovery and Reinvestment Act (i.e., the Stimulus) and extending unemployment benefits through April 5, 2010.

The extension:

• Extends eligibility for the federal 15-month, 65% COBRA premium subsidy to individuals terminated from employment through March 31, 2010.  Otherwise, employees terminated or laid off after February 28 would not be eligible for the subsidy. 
• Allows employees to be eligible for the subsidy if they first lost group coverage due to a reduction in hours and then were terminated after enactment of the original Act.

The Temporary Act also extends the time periods in which qualifying individuals may file for Emergency Unemployment Insurance (EUC) or Federal Additional Compensation to April 5, 2010.

A further extension of the COBRA subsidy and unemployment benefits (possibly until December 31, 2010) is expected to be debated in the coming months.

Employers and other health plan sponsors should revise their COBRA notices to reflect the new March 31, 2010 subsidy eligibility expiration date.

I have already blogged once about Undercover Boss, but I thought it would be helpful to flesh out just why the pay-docking incident in the first episode stuck in my head.  In that episode a (well-meaning?) manager  of Waste Management, Inc. docked employee pay two minutes for every minute of late arrival after lunch. 

Payroll docking violates most state payroll laws (it is considered an unlawful forfeiture), including North Carolina.  Here, deductions in pay must be agreed to (in writing) in advance. 

If the amount of deduction is known, the employer must get a written authorization from the employee on or before payday stating the reason for the deduction and the amount to be deducted. 

If the amount is unknown at the time the employee authorized deductions generally, the employer must give written notice before payday that there is going to be a deduction, the amount, and the reason.  The employee must have opportunity to withdraw authorization. 

In addition, the docking must not result in the employee’s pay dipping under minimum wage. 

The practice also has some potentially serious consequences under the Fair Labor Standards Act.  If the employee was an exempt employee (a salaried employee who is exempt from overtime), docking the pay cancels the exemption, and the employee would be converted to an hourly employee who is now deserving of overtime. 

In addition, the company needs to make sure even if it correctly docking pay, it is not docking hours worked.  In the Undercover Boss example, the employee was one minute late returning from lunch, but the company can only exclude that one minute from the number of hours she worked that week — it can’t exclude the “penalty minute”  if she actually worked that minute. 

Thus, all the time the employee actually works must be used to calculate whether she worked 40 hours and whether she is entitled to overtime compensation.  It is unclear whether Waste Management docked just pay, or time as well. 

We often joke internally that the FLSA is so complex that no company is ever in complete violation, but violations are significant. 

The Department of Labor, which enforces the Fair Labor Standards Act, can go back three years to look for payroll violations, willful violations, and assess a civil penalty of up to $1,100 per employee. 

An attorney review of your employment practices can be worth every penny.

Small business owners are invited to attend a free corporate legal clinic on Friday, March 5, 2010, sponsored by the Durham County Bar Association, North Carolina Lawyers for Entrepreneurs Assistance Project (NC LEAP) and the Small Business Center at Durham Technical Community College.  Receive vital information concerning business start-up; contracts; employment matters; purchase and sale of a business; and protecting your company’s trademarks, copyrights, trade secrets and other intellectual property. 

 The clinic will be held at the Small Business Center, SOUTHBank Building, 400 W Main St, Suite 101, Durham, NC 27701, from 10 a.m. to 1 p.m.  Space is limited. Please call for an appointment, (919) 686-3448.

 Walk-ins are accepted, but plan to arrive early to fill in registration documents. Clients will be scheduled in groups for one-hour slots and will be able to talk individually to local attorneys for up to 30 minutes on a first-come, first-served basis.  Priority will be given to registrants over walk-ins. 

 The clinic is held in conjunction with the North Carolina Bar Association’s 4ALL campaign, a day of public service by North Carolina attorneys who will donate time to helping low-income residents of North Carolina.  

 NC LEAP assists low-wealth entrepreneurs with their legal needs in starting or expanding their businesses through pro bono service by North Carolina business and transactional lawyers. Services range from basic transactional legal needs as struggling entrepreneurs strive to establish their business and create jobs, to potential long term client-counselor relations as their businesses grow.

The Durham Technical Community College Small Business Center is a state funded organization which is part of the Small Business Center Network of North Carolina. The Small Business Center (SBC) provides small business owners with information they need for success, including advice on marketing, sales, bookkeeping, and management.

If the answer is “yes,” it is time to start thinking about obtaining an H-1B nonimmigrant visa (“H-1B visa”) so that you may stay and work in the United States. 

What is an H-1B Visa?

Much like when in OPT (Optional Practical Training), an H-1B visa allows you to be employed by the company sponsoring the visa for up to six years (sometimes longer) in what United States Citizenship and Immigration Services (“USCIS”) calls “specialty occupations.” The regulations define a “specialty occupation” as requiring theoretical and practical application of a body of highly specialized knowledge in a field of human endeavor, and requiring the attainment of a bachelor’s degree or its equivalent as a minimum. Although the possibilities are endless, examples of common H-1B eligible positions are accountants, computer programmers, database administrators, general managers, marketing research analysts, medical technologists, software engineers, and teachers.

Is an H-1B Visa Only Used for Full-Time Employment?

No!  The H-1B visa can be utilized for both full-time and part-time employment.  Although there are wage issues to be considered, “part-time H-1B visas” may be a life saver for both employers under financial restraints and potential employees who are scared the troubled economy will keep them from finding an employer to sponsor their visa.  It is also possible to have two companies sponsor an individual for two separate part-time H-1B visas. 

When Should You File for Your H-1B Visa?

To be on the safe side, April 1st!  Each year, employers begin filing H-1B visas on April 1st of each year for employees who will begin their employment with the company on October 1 of the same year (beginning of the new federal fiscal year).  Currently, U.S. law limits the number of H-1B visas to 65,000 per fiscal year (with some exceptions).  This limit is called the “H-1B Cap.”  Over the past few years (apart from last year) the H-1B Cap was met by petitions filed on the first possible day of filing (April 1).  Last year, due to the poor economy and restrictions on employers who received TARP funding, the H-1B Cap was not met until after the beginning of the federal fiscal year.  This year is anyone’s guess. 

For more information on H-1B visas or any other business, employment, or immigration issues, please contact our offices.

Undercover Boss aired on CBS after the Super Bowl.  In the first episode, Waste Management, Inc. President Larry O’Donnell worked in several “boots on the ground” jobs in the company: sorting recyclables, cleaning portable bathrooms, riding a garbage collection truck, picking up loose papers on a hillside. He was bone-tired at the end of the first day and got fired for the first time in his life when he couldn’t spear and bag trash fast enough. 

On a micro level, he recognized and rewarded individual workers with great attitudes or difficult work situations.  On a macro level, he was able to see how corporate policies he designed failed (for example, hourly workers were docked two minutes pay for every one minute late — an obvious wage and hour violation– and supervisors monitoring quality control on garbage routes actually gave employees the creeps). 

There are two moments that stuck with me:

• He was “sweating bullets” while sorting trash and cardboard on the recycling line—a mistake could jam the equipment and he knew just how much it cost.
• He realized that the company never thought about garbage truck drivers having to use the bathroom, and how degrading it was for a woman driver to pee in a can she brought because she didn’t have time to stop. 

While many businesses are too small for the boss to be undercover, I think it is invaluable for the C-level executives to observe first-hand what it is like to work at their companies, particularly for a larger organization where the execs did not rise through the ranks. 

I remember when First Union abolished those annoying automatic phone answering machines (push 1 to get your account balance, push 2 to pay a bill, …) when an executive called in and couldn’t get to a live person. 

What do you think would change at your company if your boss spent a day walking in your shoes?

The photographic arts community is buzzing about this photo of an unidentified man following the bronze mambo steps embedded in a Seattle sidewalk.  The sculptor has sued the photographer for copyright infringement.  These Mambo Steps (part of 12 dance-step panels installed along Broadway in Seattle) were commissioned by the City and paid for with public funds. Yet the copyright was retained by the private artist. 

It is not always easy to determine who a copyright owner is, particularly where a business hires someone to produce a “work of art” (such as software, logos or other graphic design or a web site).  If the work is a “work-made-for-hire,” it is owned by the company commissioning the work. 

Section 101 of the Copyright Act defines a “work made for hire” as:

• a work prepared by an employee within the scope of his or her employment; or
• a work specially ordered or commissioned for use:
  as a contribution to a collective work,
  as a part of a motion picture or other audiovisual work,
  as a translation,
  as a supplementary work,
  as a compilation,
  as an instructional text,
  as a test, as answer material for a test, or
  as an atlas,

if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.

This is a rather esoteric list, and the upshot is that an independent contractor graphic artist or web designer may end up owning the software, logo or web site that was commissioned.  Many companies assume since they paid for the work, they automatically own it.  Other companies never even realize there is an issue.  Complicating matters is that if an employee creates the work, the employer does automatically own it, but if a contractor creates the work, it is likely that the contractor owns it. 

While there may be implied licenses, it is important for companies to address ownership issues up front via contract.

A number of people have called recently with questions about closing a fledgling business before it has really taken off.  This breaks my heart, but I thought it would be a good time to review what needs to be done to close a North Carolina business properly, regardless of its longevity. 

How do I close my business? If you formed an entity, you must vote to dissolve the company, pursuant to your bylaws, operating agreement, operating documents or appropriate statute. 

Then you can either: 1) file Articles of Dissolution with the Secretary of State yourself, 2) have an attorney prepare and file these for you or 3) just stop filing your annual reports with the Secretary of State. After 5 years, the company will be administratively dissolved.

Is there something I need to do with the Department of Revenue?  Some states require a tax certificate or tax clearance document indicating that the entity is current on its state taxes before it is allowed to be dissolved, but North Carolina does not require this. If you are a sole proprietor or a general partnership, you can simply stop doing business.  Either way, the company or the owner may still be liable for the debts of the business. 

Do I need an attorney? If you have signed any contracts (and especially if you have given personal guarantees), it is wise to work with an attorney to dissolve the business to protect the owners from personal liability and to assess the liabilities.  There are some additional steps we can take to protect the company and its owners from the creditors of the business by shortening the time in which creditors must file a claim for payment.  We can also negotiate to get you out of contracts early. 

It also may be beneficial to review whether a bankruptcy filing would be a good idea. It is possible to close down the business operations, but keep the entity active so that it is available for a future activity.  This does require some risk/benefit analysis from your accountant and attorney, and would be most appropriate for a fledgling business than one with business activities.

I never generated any revenues.  Do I still have to file a tax return? This will depend on your individual situation, but the conservative view is that if you obtained an EIN, the IRS will be looking for a return. Some accountants advise not filing a return, and if the IRS notices sometimes a mere conversation will suffice and sometimes a “zero return” is needed. 

Otherwise, the S-Corp must file (both federal and state) tax returns. The LLC or partnership would only file a federal tax return if the entity receives income or incurs expenditures treated as deductions or credits for federal income tax purposes. If the entity is required to file a federal tax return, it will be required to file a North Carolina tax return as well.

Individuals (sole proprietors) may still be able to deduct the start-up expenses.  Check with an accountant. 

What about losses?  Check with your accountant, but owners of eligible small businesses may be able to amend their personal or company tax returns for the previous 5 years to apply certain losses against income earned during those years.

What else should I do?

• Cancel all services.
• Cancel all licenses, registrations and permits.
• Cancel insurance policies, but make sure of coverages first. 
• Pay all taxes and debts.
• Notify creditors, employees and customers. 
• Sell your inventory, equipment or other assets.
• Close all bank accounts in the business name.
• Keep your records in an organized manner for at least seven years.

While these steps may sound simple, the process will be very emotional, and a mis-step can make it that much worse.  If there are significant assets and liabilities, money on professional advisors will be well spent.

In these slow economic times, it is espeically important to manage cash flow.  Here are some tips for implementing precautionary measures before taking on new customers and pursuing outstanding invoices. 

An ounce of prevention: 

1. Have an attorney prepare your terms and conditions to maximize the enforceability of your contract, and to provide for collection interest, collection costs and attorneys fees.
2. Vet the customer thoroughly before you extend credit. Ask for trade references and do a credit check.
3. Familiarize yourself with the Fair Debt Collection Practices Act to know what you can and can’t do to collect the debt.
4. Require prepayment or partial payment from a new customer.

A pound of cure:

1. Call promptly after the first payment deadline is missed as a reminder and to make sure there was no problem with your goods or services. The longer you wait the harder it is to collect.  
2. Follow up with a formal demand letter after another month.  Give a firm deadline before further action will be taken and state what that action is. 
3. Work out a payment plan if necessary.  A small monthly payment or a reduced lump-sum payment may be better than nothing. 
4. Know the North Carolina collection laws if a lawsuit becomes necessary. But your goal is to prevent filing a lawsuit in the first place. 

This week, Department of Homeland Security (DHS) Secretary Janet Napolitano designated 11 new countries as eligible to participate in the H-2A and H-2B nonimmigrant visa programs.  With the addition of the 11 new designated countries, the following countries are now designated for H-2A and H-2B purposes:  Argentina, Australia, Belize, Brazil, Bulgaria, Canada, Chile, Costa Rica, Croatia, Dominican Republic, Ecuador, El Salvador, Ethiopia, Guatemala, Honduras, Indonesia, Ireland, Israel, Jamaica, Japan, Lithuania, Mexico, Moldova, the Netherlands, New Zealand, Nicaragua, Norway, Peru, Philippines, Poland, Romania, Serbia, Slovakia, South Africa, South Korea, Turkey, Ukraine, United Kingdom, and Uruguay. 

The H-2A nonimmigrant visa program (“H-2A  program”) allows foreign nationals to enter into the U.S. to perform agricultural labor or services of a temporary or seasonal nature.  In order to employ foreign nationals under the H-2A program, employers must prove that no qualified U.S. workers are available at the time and place needed and that use of foreign workers will not create an adverse effect on the wages or working conditions of similarly employed US workers.  The employer must also provide housing (if employee cannot reasonably commute from home), three meals a day, and transportation. 

Although similar to the H-2A program, the H-2B nonimmigrant visa program (“H-2B program”) allows foreign nationals to enter into the U.S. temporarily and engage in nonagricultural employment which is seasonal, intermittent, a peak load need, or a one-time occurrence. H-2B workers are frequently used to fill labor needs in occupational areas such as construction, health care, landscaping, lumber, manufacturing, food service/processing, and resort/hospitality services. Like the H-2A program, employers must prove that no qualified U.S. workers are available at the time and place needed.  Up to 66,000 H-2B visas are granted each year with half reserved for jobs with start dates in the first half of the government fiscal year and the remainder reserved for the second half.  The employer must pay the employee’s transportation costs home if the employee is terminated early.  Unlike the H-2A program, H-2B program employers are NOT required to provide housing or meals for their H-2B workers. 

For more information about the H-2A or H-2B programs, please contact our offices.