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TOP 10 MISTAKES EMPLOYERS MAKE

What are the biggest employee-related mistakes employers make these days? And how can you defuse these potential time bombs before they explode into costly disputes? Here's a quick overview of the top 10 employer mistakes — and how to avoid them.

  • Failing to establish an effective sexual harassment policy.
    Supreme Court decisions hold employers liable for their supervisors' actions unless complaining employees fail to take advantage of company complaint procedures. In light of these rulings, implementing policies and procedures for dealing with sexual harassment is more important than ever. It is also essential that supervisors be trained on these policies and procedures. Finally, an employer must act in a timely manner to investigate all sexual harassment complaints that are brought to its attention.

  • Failing to pay overtime to nonexempt employees.
    Many employers pay employees a salary regardless of the number of hours they work and whether they are subject to the wage and hour laws. Unless they are exempt as administrative, executive or professional employees, you must pay them time-and-a-half their regular hourly pay for all hours worked in excess of 40 per week. When in doubt about whether an employee is exempt, pay him or her hourly wages. This will avoid having to pay back wages if you're audited by the Department of Labor's Wage and Hour Division.

  • Failing to complete I-9 forms for new employees.
    Many employers merely photocopy employee-produced documents without filling out the parts of the forms that describe the documents. This can be a costly mistake if the Immigration and Naturalization Service audits you. (One employer was reportedly fined $100,000.) You are not required to photocopy employee-produced documents, but even if you do, you must fill out the forms completely.

  • Failing to take and document disciplinary actions.
    Supervisors, not wanting to be perceived as villains, hate to write up employees. Then when the company can no longer tolerate unsatisfactory performances, the files do not document the poor records and you have no grounds on which to justify discharges. This leaves you open to lawsuits alleging discrimination. Employees who have been discharged for poor performance often have glowing evaluations in their files. This can expose you to lawsuits.

  • Failing to quickly discharge poor performers.
    Employers are advised to progressively discipline employees and to give one warning too many rather than one too few. But often a time comes when failure to act is as bad as overreacting. If you have retained employees for many years despite poor attendance records, multiple infractions and even several "final" warnings in their files, you are asking for trouble. These employees are most likely to sue when finally discharged. The best course is to discharge a poor performer as soon as prudently feasible. The more seniority an employee has, the harder to justify discharging him or her.

  • You must be sure that laying off a group of employees has no disparate impact on any protected group.
    To avoid lawsuits, verify that the group doesn't contain a disproportionately high percentage of age protected employees or employees of a particular ethnic or racial group or sex compared to the rest of the workforce. The decision of who will be laid off should be based on objective criteria, such as qualifications, experience, and ability to perform certain work essential to the company. If the decision to lay off one employee as opposed to another is based on such criteria, make sure the file supports this decision.

  • Failing to get a signed release from a terminated employee.
    As an employer, you may have a legitimate reason for terminating an employee. However, you fear a lawsuit if the employee is a member of a protected class. Many employers are reluctant to use releases because they fear the release may educate the employee about rights and litigation possibilities of which he might otherwise be unaware. But this may be a case of sticking your head in the sand. In light of media attention given to employment discrimination verdicts, employers should not rely on a hope that workers do not know their rights. The right approach to avoid litigation often is to get signed releases from departing employees, particularly if any severance or separation pay is provided to the employees.

  • Conditioning employment offers on medical exams.
    The Americans With Disabilities Act (ADA) bars employers from asking applicants about their disabilities or requiring medical exams before offering employment. You can ask applicants to take job-relevant medical exams only after offering jobs. The burden is on you to establish the medical exam's relevance to job requirements. In addition, employers often fail to accommodate their employees' disabilities after they are hired. The ADA requires employees to reasonably accommodate their employees' disabilities.

  • Failing to take proactive steps to keep your workforce union free.
    Employers must constantly communicate with their employees to deal with their grievances. If employees do not believe their employer is interested in their issues, they may look outside the workplace for representation.

  • Failing to retain labor and employment counsel to avoid making the first nine mistakes.
    The proliferation of complex statutes prevents most employers from keeping on top of employment law without professional help.

Robert Gilmore is a partner in the labor and employment practice at Cleveland-based Kohrman Jackson & Krantz. Robert can be reached via e-mail at rsg@kjk.com.

The information contained in this article is intended to provide useful information, but it should not be construed as legal advice. For specific legal requirements, please consult your attorney.

Legal

Seven Costly Myths About Managing Independent Contractors

In an effort to trim labor expenses, many businesses have cut costs by replacing employees with independent contractors. Some savings are certain-employers don't pay employment taxes to the IRS or benefits to these workers. But with independent contractors, the risks-and the hidden costs-may reduce or even wipe out the savings!

This article focuses on seven legal myths, and what you can do to protect your business.


MYTH #1

Employers should use the IRS's "20 Common Law Factors Test" to determine worker status as employee or independent contractor.

REALITY:
The IRS no longer applies its long-standing, much-publicized and frequently used "20-Common Law Factors Test" to determine a worker's status as employee or independent contractor. The IRS has replaced this test with a new approach focusing on three categories to determine if a worker is an employee or independent contractor:

  • Behavioral Control

  • Financial Control

  • Type of Relationship

Companies relying on the "20 Common Law Factors Test" today risk costly fines and penalties for worker misclassification by IRS auditors.

The IRS is specifically targeting companies that laid off employees then hired back independent contractors to perform the same work (even those that rehired the same person as a contractor). Uncle Sam wants his payroll taxes, and to be safe you must classify your workforce properly, complying with the agency's new tests.


MYTH #2

Employers can avoid costly worker misclassification risks by complying with the IRS Worker Status Test.

REALITY:
The overwhelming focus on the IRS's worker status tests has led many employers to believe they can avoid worker misclassification entirely by pleasing Uncle Sam. However, the IRS's worker status test only applies for employment tax purposes. Many other federal (and state) laws govern the workforce, and each has its own tests to determine worker status. Four examples are:

  • Employee benefits: A 12-factor test determines whether a worker is an employee or independent contractor under ERISA, the federal law governing employee benefits.

  • Immigration: the Immigration Reform and Control Act (IRCA) applies a 7-factor test to determine worker status.

  • Employment discrimination: the Equal Employment Opportunity Commission (EEOC) applies a test based on the "right to control the means and manner of worker's performance" in federal employment discrimination cases.

  • Wage and hour laws: the Fair Labor Standards Act (FLSA) applies an "economic realities" test including six factors to determine whether the worker is economically dependent on the business to which the services are provided.

While it is important to learn the worker status rules under the various laws and regulations governing the workplace, just knowing that "all worker status tests are not the same" is an important first step in reducing legal risks.


MYTH #3

You can avoid costly worker misclassification liability by complying with federal statutes and regulations governing the workforce.

REALITY:
Even if your company complies with all the laws and regulations governing the workforce, you still risk liability for misclassifying workers as independent contractors who our Courts and the IRS consider to be "common law employees."

The IRS defines a common law employee as "any individual who, under common law, would have the status of an employee…a person who performs services for an employer who has the right to control and direct the results of the work and the way in which it is done." For example, the employer provides the employee's tools, materials, and workplace, and can fire the employee.

Our Courts and the IRS will find that workers are employees if they meet the common law employee criteria, whether they are hired as independent contractors, free-lancers, temporary or other "contingent" workers.

Many high-profile worker misclassification lawsuits, whose staggering costs to employers made national headlines such as Vizcaino v. Microsoft (settled for $97 million in June, 2001), were based on courts' findings that plaintiffs were common law employees.


MYTH #4

An employment contract expressly stating that a worker is an independent contractor means that the worker is an independent contractor.

REALITY:
In a series of recent cases, several Federal Appeals Courts across the country have ignored or rejected employment contracts that expressly designated workers as independent contractors. These and other courts have considered written contracts less important than the actual working relationships, control of worker performance and other factors when worker status is at issue.

In December 2001 the EEOC filed a $2 billion lawsuit against Allstate Insurance Company after its life insurance agents signed written agreements to convert from employee to contractor status as part of a company-wide restructuring program. The agency recently charged Allstate with "coercive and intimidating practices" when it forced its agents to sign written statements agreeing to the change of status from employee to independent contractor.


MYTH #5

Hiring CEO's, CFO's and officers as independent contractors rather than employees is an acceptable, routine, legal business practice.

REALITY:
While hiring corporate chief executives, as independent contractors may be a common, routine and legal business practice, it carries its own legal risks for creditors, employees and shareholders. Our current corporate accountability crisis is exposing these risks every day. Consider the Enron case. When Enron hired Stephen Cooper as its new CEO his contract designated him as an independent contractor, not a full-time employee. SEC investigators characterized the designation as "inappropriate" and scolded the company for its independent contractor designation. The SEC forced Enron to change Cooper's contract status to "full- time employee" to promote corporate responsibility.


MYTH #6

All contractors are the same when it comes to legal compliance.

REALITY:
All contractors are NOT the same. The IRS considers independent contractors to be self-employed. Each is a business owner with the right to choose from various forms of business entity, including a corporation. An independent contractor's business entity can affect the potential liability of any company that hires or manages that person when legal disputes arise. Recognizing that all contractors are not the same can help reduce the costs of future potential legal disputes in contractor workforce management.


MYTH #7

Workers compensation policies protect employers from liability for work-related injuries suffered by employees, but not independent contractors.

REALITY:
This is true, however the risks of potentially costly legal consequences also need to be considered. Because independent contractors aren't covered by an employer's workers compensation plan, hiring independent contractors (or converting employees to independent contractor status) can open the door to personal injury lawsuits when contractors suffer work-related injuries. Because they are not employees, independent contractors who are injured on the job can bring a personal injury lawsuit alleging negligence, defective machinery or equipment, or other grounds for liability just like any other business customer or client. Employers need to recognize the real costs of losing the protective shield that workers compensation provides against such lawsuits.


CONCLUSION - EDUCATION IS THE BEST DEFENSE

As businesses strive to enhance profits, alternative staffing arrangements should be considered. However, to avoid being faced with unexpected, costly legal surprises, business managers need to educate themselves-and understand the real legal risks in independent contractor workforce management and the potentially high costs of ignoring these costs in their business planning.

Ron Wainrib, Esq., is editor and publisher of Temp Law On Line, at www.contingentlaw.com, Ron teaches how to avoid costly legal risks such as co-employment liability through his interactive seminars and articles. He can be reached by e-mail at Needtokno@comcast.net.

*The information in this article should not be construed as legal advice or a legal opinion. Also, please remember that state laws may differ from federal laws. This article was published August 2003.

Legal

Using Independent Contractors? Beware!

If you use independent contractors in your business, be sure that you've classified them properly and not simply chosen to treat workers as independent contractors (IC) when they are actually employees.

Many business owners prefer IC classification because it saves the company considerable money. The company doesn't have to pay employment taxes, workers' compensation, or employee benefits, such as health insurance or retirement plan contributions, saving the company 20% or more in contrast to having an employee.

But the company's preference is not the determining factor in worker classification, and the government is looking closely at businesses to make sure that workers aren't being misclassified. The reason: Revenue. The government believes that ICs fail to report 30% of their income. And additional revenue loss results as follows:

  • The federal government loses out not only on income taxes not paid by the ICs, but also employment taxes (Social Security and Medicare taxes as well as federal unemployment insurance) not paid by the company.

  • States lose out on unemployment insurance not paid by the company, as well as income taxes (where applicable) not paid by the ICs.


Government Interest in Worker Classification

The federal government estimates (www.treas.gov/tigta/auditreports/2009reports/200930035fr.html) that 3.4 million workers are misclassified as ICs. Many states have their own estimates about misclassified workers. The Obama administration's budget proposal (www.whitehouse.gov/omb/factsheet_key_americas_workers) for fiscal year 2011 includes measures to raise about $7 billion in the next 10 years by providing $25 million additional funds for the Department of Labor (DOL) to hire 100 additional enforcement personnel to work on ensuring proper classification. Also, the DOL and Treasury Department would work together to eliminate incentives for employers to misclassify employees as independent contractors.


Current Safe Harbor

The determination of whether a worker is an employee rests with "control." Generally, if a company has the right to say when, where, and how a job is performed, the worker is an employee. Having an independent contractor agreement labeling the worker as an IC doesn't count for tax purposes (although having one doesn't hurt).

At present, a company can use a "safe harbor" and continue to treat a worker that has been classified as an IC as such for employment tax purposes if one of the following four conditions is met:

  • A past IRS audit with the company did not change worker classification.

  • There is a case or ruling that supports this worker classification.

  • There is long-standing recognized practice in the industry in which the company is a member that treats workers as ICs.

  • Any "reasonable basis" for treating a worker as an IC.

The Administration supports a change in the safe harbor rules, which would make it harder for companies to escape employment taxes.


What to Do Now

As yet, there have been no changes (only proposed changes) in worker classification rules. The IRS continues:

But if the IRS audits a company and reclassifies workers, the cost can be financially devastating—back employment taxes for the government and back benefits for workers. Companies need to work closely with their tax advisors to review their worker classification and follow these guidelines:

  • Be consistent. If you're already treating workers doing certain tasks as employees, don't start to treat them as ICs. And be sure to treat all workers doing the same task in the same way, either as employees or ICs, depending on the circumstances.

  • Find a basis for the classification you're using (e.g., some precedent established), so at least you'll have a safe harbor to rely on.

  • Issue a Form 1099-MISC each year to any IC who earns $600 or more from you.

  • Stay vigilant about possible law changes that could impact your worker classification. Even without law changes, expect the IRS and states to look very closely at all businesses, especially those in construction and trucking (where IC classification is common and labor unions are pushing for reclassification).

  • Learn more about worker classification from the IRS (www.irs.gov/businesses/small/article/0,,id=99921,00.html).

Barbara Weltman is a top selling author, attorney, tax and small business expert. Barbara's books include "J.K. Lasser's Small Business Taxes" and "The Complete Idiot's Guide to Starting a Home-Based Business."

Legal

Notice – News Alert from Contingent law- April 2010

The Employee Misclassification Protection Act of 2010 (EMPA), amends the federal Fair Labor Standards Act (FLSA) to Increase government enforcement against employee misclassification practices by employers of all sizes, to curtail and penalize worker misclassification.

EMPA sets strict notice and record-keeping requirements on all employers, with costly penalties for non-compliance (up to $5000 per worker). It requires all states to develop and enforce their own employee misclassification enforcement programs through audits and other methods.

On April 22, 2010, the Employee Misclassification Prevention Act (S. 3254, H.R. 5107) was introduced in both the House and the Senate. In addition to imposing civil penalties for misclassification and directing the DOL and state unemployment insurance agencies to perform misclassification audits, this bill would require employers to keep records concerning their classification of individuals as independent contractors and notify those individuals of their classification, along with information on what to do if they feel they have been incorrectly classified. Additional pending legislation, such as the Taxpayer Responsibility, Accountability, and Consistency Act of 2009 (S.2882), which proposes amending the tax code to make classifying workers as independent contractors more arduous, also seeks to address this issue.

Editor's Note: This is one of several bills now pending in Congress to increase federal agency enforcement against misclassification of employees as independent contractors. It appears likely that at least one or a combination of these bills will be passed by Congress shortly.

Additional information is always available at: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html