Top 3 Small Business Mistakes (That Could Lead to Bankruptcy) and How to Avoid Them
A California employer has a 51.7% chance of having to defend an employment charge or lawsuit. With those odds, can your business afford to spend hundreds of thousands of dollars to defend a lawsuit? If your answer is no, here is a list of top 3 mistakes to avoid.
Misclassifying Employees as Independent ContractorsThe growth of the "freelance economy" has created a supply of freelancers/independent contractors to do work that a company might normally hire employees to do. There is economic appeal to hiring independent contractors but if that classification is challenged, your company could be on the hook for a lot of money. In fact, Uber, the popular ride-sharing service is in the midst of a multi-million class action lawsuit on this issues right now. The 3 main costs to employers who misclassify employees as independent contractors are: 1) unpaid taxes; 2) meal and rest break premium pay; and 3) unpaid overtime. All of these unpaid items and penalties add up to a lot of money when the IRS, government agency, or misclassified employee comes knocking. Use Independent Contractor Classifications with Caution o Carefully consider whether to retain any independent contractors as service providers. o Weigh the benefits of retaining independent contractors against the likelihood of liability for misclassification, considering: o the increasing difficulty of qualifying as an independent contractor under any of the various classification tests; o the increase in agency (IRS and Department of Labor (DOL)) audits and class action lawsuits challenging independent contractor classification as a result of recent federal and state enforcement efforts o merely identifying a worker as an independent contractor in an agreement does not in itself ensure that the worker is properly classified; and o businesses using many independent contractors in lieu of employees to provide core services may be a red flag for substantial liability risks during due diligence that may deter investors or hinder fundraising efforts. o Analyze the independent contractor relationship in light of the federal standards and the applicable state test in any jurisdiction where the service provider works. o Assume workers are employees unless the business can clearly justify why they should be treated as independent contractors. If it is appropriate to retain an independent contractor, your business should: o draft an appropriate contract to govern the independent contractor relationship; and o ensure that the agreement accurately reflects the parties' relationship.
Misclassifying Non-Exempt Employees as ExemptMany companies mistakenly believe that anyone with the title "manager" or "supervisor" who is paid a salary is automatically an exempt employee and therefore not entitled to overtime pay. This is not necessarily true. To be properly classified as exempt, the employee must qualify for a specific enumerated exemption and must satisfy: o the applicable exempt duties test; and o the salary basis requirement, the fee basis requirement or an exemption from this requirement. Misclassifying an employee as exempt when they are not will expose your company to claims for unpaid overtime wages, failure to pay minimum wage, and other penalties and fees. o Analyze the each exempt employee's duties and pay against the appropriate exemption (executive, administrative, professional, computer software field, outside salespersons, etc.) in light of the federal standards and the applicable state test in any jurisdiction where the employee works. o Assume workers are non-exempt employees unless the business can clearly justify why they should be treated as exempt employees.
Not Having Clear Workplace PoliciesEstablish Workplace Policies and Procedures to Minimize Liability o Formalize certain policies in writing to best protect the company. o Determine whether to incorporate policies in a formal employee handbook or distribute stand-alone policies. o While there is no federal legal requirement to enact any policies, the following are highly recommended for all companies, regardless of the size or stage of the business (unless otherwise specified): o at-will employment policies; o equal employment opportunity policy; o anti-discrimination and anti-harassment policy; o anti-retaliation policy; o disability and religious accommodation policies, to the extent the size of your business warrants it under federal, state or local law; o a payroll practices and compensation policy, including a safe harbor provision under the FLSA to preserve an employee's salary basis status and give employees a mechanism to complain if there have been improper payroll deductions or other errors in pay; o holiday, vacation and paid time off (PTO) policies, if these benefits are offered; o paid sick time policy, if not covered by a paid time off policy; o family and medical leave policies, to the extent the size of the business warrants it under federal, state or local law; o social media, internet and email monitoring policies; o code of conduct, code of ethics and conflict of interest policy; and o business expense and reimbursement policies.