How To Use Business Contracts To Prevent A Single Point Of Failure

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How To Use Business Contracts To Prevent A Single Point Of FailureBusiness contracts can help prevent your company’s cascading collapse caused by a single point of failure (SPOF). Did you know that one of the biggest mistakes entrepreneurs make is running their ventures so that a SPOF can wipe out everything?

In fact, most small businesses are riddled with SPOFs ready to explode like a land mine when you can least afford it.

For example, let’s say you have a worker (employee or independent contractor) that’s vital to your operations who needs to take a week off to attend a parent’s funeral. If the worker’s absence brings your company to a halt, that’s a SPOF.

Or your software developer acts like a prima donna, making unreasonable demands or not timely delivering. Will your business be held hostage?

Related Article – B2B Contracts: How To Avoid 4 Common Mistakes

And for business owners, the most vital SPOF is the one you see in the mirror, i.e. your business can’t survive without you. Your vacations (if you take one) are 24/7 working vacations where you’re checking text messages, voicemail, and emails to make sure everything’s running.

How To Prevent SPOFs

It doesn’t have to be that way.

Build in redundancy by cross-training workers and finding alternate sources for vital products and services.

One of the best places to start eliminating SPOFs is to identify all of the key tasks that must be performed for your business to function smoothly (including your own responsibilities) and make sure there’s at least 2 to 3 people who can handle those tasks.

The Importance of Business Contracts For Avoiding SPOFs

Then use employment contracts and independent contractor agreements to formalize those responsibilities with each worker to ensure you’re protected. Our firm prepares these types of agreements as part of a Business Contract Legal Protection Package.

Let’s face it. Because it’s essential to your company’s success to make sure no one becomes a fatal bottleneck, you need to put the right business contracts in place to prevent your operations from grinding to a SPOF halt.

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.