Don’t Treat Your Employees Like Strippers

By | Business Contracts, Employment Agreements, Independent Contractor Agreements, Taxes | No Comments

employees independent contractorsAs reported by Jessica Anderson in the Baltimore Sun (Strip club dancers are suing clubs over pay – and winning), strip clubs are getting in trouble by improperly treating strippers as independent contractors instead of as employees.

Although there’s no hard and fast rule as to whether an individual working for your company is an employee or an independent contractor, the U.S. Internal Revenue Service (IRS) does provide some guidance on the issue.

Important Employment Factors

Two key factors that favor employment status are setting the work schedule and controlling how the work must be done by the person. For strip clubs, this meant club management telling the dancers when they had to perform and dictating what they could and couldn’t do when stripping/dancing.

What’s the potential damage by mislabeling employees?

If you treat your employees as independent contractors, you may be liable for back wages, statutory damages, penalties, employment taxes, plus contributions to workers compensation and unemployment compensation funds. These misclassified employees may also be eligible for benefits you’ve provided to your other workers, such as 401k contributions, paid vacation, and health insurance.

How to this problem?

If your workers are really employees, treat them as such from the time you extend an offer to work for you. Pretending they’re independent contractors when they’re not creates a ticking time bomb of legal and tax liabilities you don’t want.

On the other hand, if a worker truly is an independent contractor, it’s often a good idea to make that relationship clear in a professionally prepared written independent contractor agreement signed by the parties. If the contractor decides to assert employment status, you’ve got a contract to point to when trying to convince a judge or government agency that the worker is not an employee.

IRS Form SS-8

If it’s truly unclear whether your workers are employees or independent contractors after consulting with an experienced business lawyer, you may wish to file a Form SS-8 “Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding” (PDF file) with the IRS for a determination as to the workers’ status.

How to Terminate a Contract Early

By | Business Contracts, Business Lawyer, Consulting Agreements, eCommerce Agreements, Employment Agreements, Independent Contractor Agreements, Licensing Agreements, Technology Contracts, Texas Business Lawyer | No Comments

terminate a contract earlyAlthough parties often benefit by having an annual or multi-year contract that either renews automatically or gives one party the option to renew, there are many cases where an ongoing relationship is not financially beneficial.

Whether it’s poor performance, market changes, or some other adverse event, you may want to terminate a contract early.

Contract Terms and Conditions

According to Texas Business Lawyer Mike Young, the first thing to do is review the terms and conditions of your agreement, including any amendments, to determine if there is a clear path to premature termination. “Many contracts provide for early termination by giving advance written notice, particularly when one party is in material breach and fails to timely fix the problem after being notified of the violation,” he said.

Some agreements provide for termination without cause and with little or no notice if the party who ends the contract pays an early termination fee to the other party.

Negotiated Termination

If one party to an agreement is unhappy, the other party frequently is dissatisfied too. If it appears the differences are too great, and the contract is silent on early termination, you may wish to reach out and make an offer to end the deal early anyway. Frequently both sides will agree to this and go their separate ways without a termination fee being paid by either.

Just as it was important to get your contract down on paper in the first place, it’s equally important to ensure that your agreement to terminate early is in writing signed by the parties.

Why? Because memories fade faster than ink.

If there’s a subsequent disagreement about how the relationship ended, you want to be able to rely upon written terms to show exactly what was agreed to and what was not.

Decide Not to Renew

If a contract contains renewal provisions, such clauses frequently permit either party to provide notice of intent not to renew at the end of the current term. Although this is not technically early termination, it does prevent the contractual relationship from continuing longer than the minimum time required.

Be sure to follow instructions to the letter as to the method and deadlines for giving proper notice.

Terminate a Contract Early by Efficient Economic Breach

If it is essential to terminate your agreement early, you’re able to compensate the other party for such termination, and you’ll financially benefit after paying such compensation, it may make sense to walk away from the contract even if the other party wants to continue the relationship.

Be sure to discuss this option with an experienced business lawyer before taking any action because there are a variety of legal factors that must be taken into account when evaluating the true cost of a willful breach of contract.

Non-Disparagement

Regardless of the method you choose to terminate a contract early, it’s important not to publicly disparage each other as the relationship ends.

In addition to creating ill will and tarnishing your company’s reputation, disparaging the other party can lead to additional claims for damages in a civil lawsuit and increase the likelihood you’ll end up in court rather than walking away from the original deal amicably.

Phantom Equity: How To Use It To Grow Your Business

By | Business Entities, C Corporations, Employment Agreements, Independent Contractor Agreements, Limited Liability Companies, S Corporations, Texas Business Lawyer, Texas Business Lawyer | No Comments

phantom equity certificateIf you’re tight on working capital or don’t want to give up partial ownership of your company by granting shares or stock options, you may want to consider using phantom equity (PE) to compensate employees and independent contractors who are essential to the growth of your business.

What is Phantom Equity?

Phantom equity is a means to reward employees later (deferred compensation) when you can afford to do so. It’s common to tie such payments to key events for your company, such as meeting an annual revenues target for your products/services, sale of the business, a successful venture capital round, or your company goes public (IPO).

According to Texas Internet Lawyer Mike Young, whatever you choose as the payment triggering event must make sense as a “carrot” because you want to encourage workers to stay with you and perform in order to receive the compensation.

If structured correctly, you’re getting the same benefits from the workers with PE as if you had awarded sweat equity but without the headaches of dealing with minority shareholders in the process.

How Do You Pay Phantom Equity?

There are a variety of ways to pay out PE to your workers. Popular methods include:

  • A single lump sum payment triggered by one event
  • A series of bonuses paid as multiple milestones are achieved
  • Extra payment(s) into employee 401k retirement accounts

Who Should Receive Phantom Equity?

Because phantom equity is deferred compensation that reduces your share of the monetary pie, be careful who you choose to give it to. If an employee or independent contractor is essential to the success of your business, then that person is a potential candidate for PE, particularly if they’re willing to work for less now with the promise of deferred comp later if they perform.

However, if you can easily replace the worker with someone else, chances are phantom equity should not be included as part of that worker’s compensation package.

Setting Up a Phantom Equity Plan

Working with an experienced business lawyer and your accountant, you can form a phantom equity plan that’s right for growing your company with respect to, eligibility, vesting, and other legal and tax issues.

How Do You Handle Employee Business Expenses?

By | Employment Agreements, Independent Contractor Agreements | No Comments

employee business expensesAn employee racked up over $100,000 of debt on a credit card. After leaving the company, he sued his former employer contending that the debt was incurred as business expenses and should be reimbursed. However, his former employer disagrees.

This dispute raises key questions about your company’s policy for business expenses.

Employee Business Expenses

Have you defined in writing what are business expenses? If so, is the policy in writing and the same for all employees?

Are your employees required to get permission before incurring such expenses? If so, what’s the procedure for doing so? Is it in writing? Who has the power to authorize or deny requests?

How are reimbursements of authorized employee business expenses handled? Is there are uniform reimbursement request procedure? Is there a deadline for submitting a request (e.g. 60 days after the expense was incurred)? What must an employee provide in order to be reimbursed for an authorized expenditure (e.g. receipts, credit card statements, etc.)?

If your business expense policy varies based upon one’s position within your business, are there written employment agreements that specify the specific rights and responsibilities of employer and each employee?

If you are not using employment agreements, do you have multiple written business expense policies that apply to each level within your company (e.g. C-level executives, middle management, entry level, etc.)?

Independent Contractors and Business Expenses

In addition to your employees, your written agreements with independent contractors should also address what constitutes a business expense and the procedures, if any, for reimbursing your contractors for incurring such expenses.

Many company owners mistakenly assume that a contractor’s bid to do a project covers all expenses related to that project.

However, disputes arise when there are payments to be made for some supplies needed to complete the project.

For example, if a third party is implementing CRM software for your business, does the bid for the project include the cost of licensing the software? If not, is the contractor purchasing a license for your business with the expectation of being reimbursed or are you expected to pay for the license directly?

The Key to Preventing Business Expense Lawsuits

Whether its employees or independent contractors incurring business expenses, the most important step to reduce your potential legal liability in a dispute is to have your expense policies and procedures in writing. Your business lawyer can prepare the appropriate legal agreements and policies based on industry standards and the unique needs of your company.

Non-Compete Agreement: How To Make It Legally Binding

By | Dallas Business Lawyer, Employment Agreements, Featured Articles, Independent Contractor Agreements | No Comments
non-compete agreement

A valid non-compete agreement can help you protect your business

Although an employee non-compete agreement is disfavored as against public policy because it discourages commerce by restricting an employee’s right to work elsewhere or set up a competing business, generally such contracts have been enforceable if they’re reasonable in scope.

What’s a reasonable scope for an agreement not to compete?

Although there is no hard and fast rule because the laws vary by state, generally the scope of a noncompete agreement is considered reasonable if:

(a) it is for a short term (e.g. 1 to 3 years);

(b) covers a geographic area that’s consistent with the area where your company does business; and

(c) it only limits the same type of work as the employee is doing for you.

Consideration for a valid non-compete agreement.

In addition to being reasonable in scope, the employee must receive consideration (something of value) in exchange for signing the noncompetition agreement. I

n mos

t cases, this can be satisfied by making the offer of employment to a job applicant conditional upon an agreement not to compete.

However, Dallas Internet Lawyer Mike Young cautions against making the noncompete agreement a separate contract from the employment agreement instead of making it part of the employment contract. He said, “If you have a covenant not to compete as a separate contract, the employee may argue that there was no valuable consideration received in exchange for it. In Texas, that’s a difficult claim to make if the noncompetition covenant is within the employment contract itself.”

Post-Hiring Noncompete Agreement

After an employee has been working at your company for a while, you may decide you want to protect your business by having the employee sign an agreement not to compete. This means that you’ll need to provide some valuable consideration to the employee beyond continuing his employment if you want the noncompetition agreement to be legally binding.

Your business lawyer can help you come up with the type of consideration that makes the contract binding but without costing you a fortune in the process. Common types of consideration given in exchange for a noncompete agreement to an existing employee include:

  • a small raise;
  • extra paid time off (PTO); or
  • increased employer contributions to the employee’s 401k.

Rather than incur an ongoing increase in expenses, some employers prefer to provide a lump sum monetary payment or pay for a short vacation as the consideration for the covenant not to compete.

Are There Employees Ineligible for a Noncompetition Agreement?

Under the guise of protecting the consumer, there’s a recent trend by states attorneys general to crack down on employers who force low wage employees with minimal skills to sign noncompete agreements as a condition of employment.

For example, both the Illinois Attorney General and the New York Attorney General recently went after fast food franchisor Jimmie Johns for requiring low level employees to sign 2-year noncompetes that barred the employees from working for a competitor within two miles of a Jimmie Johns’ sandwich shop. In June 2016, Jimmie Johns agreed to stop this practice.

Had the sandwich shop franchisor limited its noncompetition agreements to executives and other upper management, it’s unlikely the chain would have been targeted by either state’s attorney general.

What About Independent Contractors and Covenants Not to Compete?

According to Dallas Internet Lawyer Mike Young, there are additional dangers when having an independent contractor sign a non-compete agreement. According to Attorney Young, making an individual who is an independent contractor sign an agreement not to compete can be a factor used by a court or government agency to determine the individual is actually your employee. This can lead to liability for additional taxes, unemployment compensation, and workers’ compensation.

How to Get a Good Non-compete Agreement

Whether you want to use a noncompete agreement with a prospective employee, an existing employee, or an independent contractor, your business lawyer can advise you whether it’s feasible and draft a contract that’s designed to protect your interests from unwanted competition by your workers.