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Business Protection Plan

What is the difference between Employees and Independent Contractors?

Do you understand the difference between independent contractors and employees? Does your business have extra cash for taxes, penalties and fines lying around?  If not, keep reading.  Although many businesses believe that they should be free to contract with independent contractors as it desires without government intervention, mislabeling an individual as an independent contractor can have serious unintended legal and monetary consequences.

How do you tell if an individual is an employee or an independent contractor

Merely designating a person as an independent contractor is not sufficient to prove that a person is, in fact, an independent contractor. The determination of whether a worker is an independent contractor is a mixed question of law and fact. As such, the overall relationship of the parties and the totality of the circumstances giving rise to the relationship must be taken into consideration. Generally, in Minnesota, the determination of whether an individual is an employee or an independent contractor is based on the consideration of five factors: (1) the right to control the means and manner of performance; (2) the mode of payment; (3) the furnishing of material or tools; (4) the control of the premises where the work is done; and (5) the right of the employer to discharge.

The most important of these five factors is the right to control the means and manner of performance. The existence of the right of control may be inferred from a combination of factors that usually varies according to the circumstances of each case. Essentially, if an individual must follow a business’ instructions regarding things like the “when, where and how” work is accomplished, the individual is likely to be classified an employee. However, if the individual hired is in charge of when, where and how their own work is completed, the individual can usually be classified as an independent contractor.

The following factors are often considered in determining whether or not the “control” factor has been met:

1. authority over assistants;

2. compliance with instructions;

3. existence of oral or written reports;

4. the place that the work is performed;

5. personal performance of the worker;

6. existence of a continuing relationship between the worker and the employer;

7. right of the employer to discharge the worker;

8. who sets the hours of work;

9. training;

10. amount of time dedicated to the work;

11. who provides tools and materials;

12. whether or not expense reimbursement is provided and by whom; and

13. which party is responsible for satisfying requirements of regulatory and licensing agencies.

By example, if an employer conducts training's for workers, sets the hours of work for workers, provides tools and materials to the worker, generates reports based upon the work performed, provides specific instructions relative to the work performed, and ensures compliance with regulatory and licensing requirements relative to said workers, it is likely that said workers will be treated as employees, even if the employer designates the workers as an independent contractor.

Why do you care about this?

The problem is that misclassifying an individual as an independent contractor rather than an employee can have significant monetary consequences on a business, resulting in fines and penalties in the form of double tax and social security withholdings or even monetary fines up to $5,000.00. In order to avoid these penalties and fines, businesses can request a determination from the IRS or the State of Minnesota as to whether an individual is an employee or an independent contractor.

Another potentially prickly area where employers may unwittingly become exposed is unemployment. A worker’s right to receive unemployment benefits is determined by statute and accompanying administrative regulations. A prerequisite to qualifying for said benefits is actual employment. As such, independent contractors do not qualify for unemployment benefits. However, as we have discussed above, it is quite easy to inadvertently treat an independent contractor as an employee. If a worker misclassified as an independent contractor is terminated and is able to successfully claim and receive unemployment benefits, an employer runs the risk of having its unemployment insurance premiums increased.

Worker’s compensation is yet another area where employers can succumb to the pitfalls of worker misclassification. Generally speaking, in Minnesota, the workers' compensation act requires employers to carry compensation insurance for employees. Worker’s compensation insurance is not required for independent contractors. If an employer fails to obtain the proper compensation insurance, the act gives effected employees the option to sue the employer. In addition, the Department of Labor and Industry may also assess penalties against employers that fail to carry the required compensation insurance. As such, if it is determined that an independent contractor is actually an employee, an employer can face serious consequences if the employer has failed to procure adequate worker’s compensation insurance coverage.

In addition to tax consequences and civil fines, misclassification of workers can have other unintended results. Under common law, an employer can be held vicariously liable for certain actions of its employees, if said actions are conducted by employees within the scope of the employee’s employment. On the contrary, the general rule relative to independent contractors is that an employer is not liable harm to another caused by an independent contractor's acts or omissions. There are, of course, exceptions to the general rule regarding independent contractor liability, but the point is that businesses may be inadvertently exposing themselves to unnecessary and unanticipated vicarious liability by treating their independent contractors too much like employees. By failing to be mindful of the employee vs. independent contractor distinctions, employers by surprisingly find themselves liable for negligent acts performed by workers who they considered independent contractors but that the law actually deems to be employees.

What does this mean for your business?

It is important for all businesses, both large and small, to avoid the incurrence of unnecessary and avoidable expenses. Time and money are valuable, and employers do not want to waste their time or resources dealing with issues arising out of misclassification of employers and/or independent contractors. It is important to be aware of the distinctions and to make informed decisions when designating workers in order to avoid the common pitfalls outlined above.

To review your Business Protection Plan and to get any other questions you may have answered, contact our office at (763) 389-0178 to schedule a meeting or send us an email by clicking here.

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Business Protection Plan

When is it time to collect on Past Due accounts?

Past due accounts have notoriously been a thorn in the side of any business. Less than 30% of past due accounts over 90 days old are collected. For small businesses, properly understanding the avenues of collection are imperative to maintaining a steady cash flow.

Small businesses struggle with past due accounts for at least two reasons. The first is that most small businesses don’t know when or how to collect on past due accounts. The second, and perhaps most common, reason is that small businesses don’t want to create bad feelings between themselves and their customers that might result in loss of future business.

Accordingly, a business should start addressing delinquent accounts by first implementing a written internal collection policy and procedure. This procedure should include instructions as to when an initial collection letter should be sent. Specifically, between 30 and 45 days after nonpayment of the initial invoice, you should send your customer a “nice” collection letter and follow up with a telephone call.

If the invoice remains unpaid after a period of 45 to 60 days, a “settlement” collection letter should be sent that requests either payment in full, a payment arrangement or a meeting with your customer to determine the reason for the delinquency and establish a payment plan. Be sure to set a deadline by which your customer is required to respond to this letter.

Any invoice that remains unpaid for 60 to 90 days should result in a final collection letter to your customer. This letter should advise your customer that if they fail to respond and enter into a payment plan that your company will explore any and all options to collect the outstanding invoice amount, including litigation.

Finally, if the invoice continues to remain unpaid after 90 days, a determination must be made as to whether the account should be turned over to a collection agency or an attorney. Based on the legal resources available to an attorney, including garnishments, levies and other judicial procedures, you should consider hiring an attorney to assist your business in collecting outstanding accounts in excess of $500 and a collection agency for any accounts that may be less than $500.

What does this mean for my business?

By identifying the problems most small businesses face when dealing with past due accounts a business can properly determine whether to send a past due account to collections to help maintain cash flow. If a business follows its written procedures it can attempt to avoid the troublesome process of dealing with past due accounts. Although the suggestions listed above will never guaranty collecting on past due accounts they will help remove the thorn that has been piercing small business since the beginning of time.

To review your Business Protection Plan and to get any other questions you may have answered, contact our office at (763) 389-0178 to schedule a meeting or send us an email by clicking here. 

 

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Business Protection Plan

As an employer, do you have the right to require employees to submit to alcohol and drug testing?

It is probably safe to say that most employers do not want their employees intoxicated or under the influence of drugs or alcohol while on the job. An easy solution to that problem would be to require employees to submit to random drug and alcohol testing, right? Well, not so fast. While employers are permitted to perform drug and alcohol testing of employees under certain circumstances, Minnesota law is very specific as to what this means.

First and foremost, prior to conducting drug and/or alcohol testing of any kind, an employer must have a written drug and alcohol testing policy in place and the subject employees must be aware of the same. If such a policy is implemented, employers may request or require employees to undergo drug and alcohol testing as part of a routine physical examination no more than one time per year upon two weeks written notice. Employers may also request or require employees to undergo drug and alcohol testing on a random selection basis if they are employed in positions where an impairment caused by drug or alcohol usage would threaten the health or safety of any person. Employers may similarly require employees to undergo drug and alcohol testing if the employer has a reasonable suspicion that the employee is under the influence of drugs or alcohol, has violated an internal employer policy regarding drug use, has sustained or caused a personal injury, or has caused a work-related accident. Even if an employer’s testing procedures are aligned with the applicable statutory requirements, it worth noting that an employee nonetheless has the right to refuse to undergo drug or alcohol testing.

All testing must be conducted in an objectively fair manner. This means that certain chain-of-custody requirements must be adhered to. Tests are also required to be performed at testing laboratories meeting specific standards. Any positive tests must be re-tested and confirmed.

So, if you have an employee who tests positive for drugs in their system while on the job, you can fire them on the spot, right? Not necessarily. First, an employee who tests positive is entitled to have the same sample re-tested a second time at the employee’s expense. In addition, an employee who tests positive is entitled to submit a written notice to explain why the test may have come up positive. Finally, and most surprising, the first time an employee tests positive on a drug and alcohol screen, an employer actually can NOT terminate them. A first time offender must be given the opportunity to complete, at their expense (not the employer’s), a treatment program. If the offending employee refuses to participate in treatment or fails to successfully complete treatment, the employee may, at that point, be terminated.

The moral of the story: drug and alcohol screening can be a valuable tool if utilized properly. However, it is critical to follow all necessary statutory processes and procedures in order to avoid legal pitfalls arising from improper testing practices.

To review your Business Protection Plan and to get any other questions you may have answered, contact our office at (763) 389-0178 to schedule a meeting or send us an email by clicking here.

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Business Protection Plan

Can I really keep possession of personal property that I have worked on until I get paid?

Have you or your business ever stored or cared for others’ personal property thereby preserving or enhancing its value? If you have, you may have the legal right to retain the personal property until you receive payment for the work you performed.

Minnesota law provides that anyone who stores, cares for, preserves or enhances the personal property of another is entitled to a lien on the subject property, so long as the property was stored, cared for, preserved or enhanced at the request of a person legally possessing the personal property at issue (ie: the owner). Minn. Stat. §514.18. The law operates to allow the person or entity storing or caring for the property to retain possession of the property until the owner of the property pays for the services performed or pays for storage costs, as the case may be. In addition, the law allows the party who cared, preserved or enhanced the value of the property to recover any legal charges they have incurred.

As with most legal theories and statues they are notoriously convoluted. This law, however, can be easily explained by a relatively simple example.

Let’s say that you are the owner of a bike repair shop. In the normal course of your business you perform maintenance on bikes and replace broken parts. In addition, your business occasionally stores bikes over the winter months. In October, a customer comes in and requests that you repair a broken chain.

Unfortunately, after you have repaired the bike and contact the customer to arrange a time to pick the bike up, they never return your call and ignore the invoice that you have sent them.

It is now May (7 months later) and the owner of the bike has finally decided to contact you to pick up the bike. The chain replacement was invoiced for $50; however, the new invoice is for $225. This new invoice includes the cost to store the bike at a rate of $25 per month. The owner of the bike is very upset and claims that he only owes the $50 for the chain replacement.

In this situation, you, as the owner of the bike repair shop, have a legal claim for the amount of storing and caring for the bike for seven months by means of the statute described above. Further, you may retain possession of the bike until the bike owner pays the amount due. In addition, you are allowed to collect any legal charges you incur should the bike owner dispute the new invoice.

Why do you care?

This area of the law can be a powerful tool when used correctly to help obtain payment from customers that have provided you personal property to care, preserve or enhance.

To review your Business Protection Plan and to get any other questions you may have answered, contact our office at (763) 389-0178 to schedule a meeting or send us an email by clicking here.