We are frequently asked what is the difference between an independent contractor and an employee. Hiring independent contractors is often the cheaper choice for employers as the employer saves on taxes and other administrative costs that are involved with hiring and firing traditional W2 employees. However, mistakenly (or intentionally) classifying employees as independent contractors can cost employers thousands of dollars in fines, taxes, and back wages, as well as cost the government millions of dollars in taxes. Several years ago, the News and Observer wrote an article about contractors in the construction industry who were intentionally misclassifying those who should have been employees as independent contractors in order to save money. The article found that the misclassification of employees cost the state of North Carolina $467 million in lost tax revenue that should have been paid by employers; and that was just from a sampling of federally funded projects in North Carolina—ignoring the vast amount of private construction in the State.
On August 11, 2017, Governor Cooper signed into law the Employee Fair Classification Act (S.B. 407). Many in the construction industry have supported this move, feeling that the misclassification of workers by their less scrupulous competitors was making it difficult for them to compete. Companies that misclassify employees and independent contractors can save more than 20% on their labor costs. The new act provides a way for the state to receive complaints that employees are being misclassified as independent contractors by creating the Employee Classification Division within the North Carolina Industrial Commission. The Employee Classifications Section’s website states that: Upon receiving the complaint for employee misclassification the Director will provide this information to the North Carolina Department of Labor, North Carolina Industrial Commission – Compliance and Fraud Investigative Division, North Carolina Department of Commerce - Division of Employment Security, and North Carolina Department of Revenue where each separate agency shall conduct independent investigations to determine whether violations of their operating statutes has occurred. If determined there has been a violation of any operating agency statute, each agency will ensure the necessary enforcement actions under the respective statutes. As such, should a complaint be made, independent investigations will be made into the company being complained of by several different North Carolina governmental agencies and employers could be facing multiple fines from multiple state agencies. Also, employers are now required to post notices including the following information:
To avoid any issues with the Employee Classification Section, employers must ensure that they are correctly classifying employees as either employees or independent contractors. While the classification is determined case by case and depends a great deal on the specific facts surrounding each individual’s employment, here are some basic considerations:
That is not an exhaustive list, and no one question will determine whether a worker should be considered an employee or an independent contractor. However, if in answering those questions, you are finding that you have a lot of control over how the worker performs his or her work, then it is likely that they should be classified as an employee and not an independent contractor. If you find yourself questioning whether your worker should be classified as an employee or an independent contractor, or if you find yourself being investigated by the Employee Classification Section, please give Jesson & Rains a call to assist you in the matter.
0 Comments
The number one reason why we recommend individuals form businesses instead of operating as a sole proprietor or partner is for liability protection. Generally, a member of an LLC or an owner of a corporation will not be personally responsible for the debts and liabilities of the business. Exceptions: 1) If the member or owner signs a personal guarantee. It is very common for banks and landlords to require new business owners to sign a guarantee which “guarantees” the bank or landlord that if the business is unable to pay back the loan or pay the rent, the member/owner will pay personally. 2) If the member or owner is personally negligent. A member/owner can be held personally liable for his own careless actions if he injures someone while operating the business. Professionals can be held personally liable for their own malpractice. This is why we also recommend getting commercial liability insurance. A member/owner can also be held personally liable for conduct occurring outside the scope of employment. 3) If a court “pierces the corporate veil,” meaning the LLC or corporation was merely a shell for the member/owner to carry out his wrongdoing and served no legitimate business purpose. Three elements must be satisfied before a court will hold the member/owner personally liable:
We have written before that businesses do not necessarily have to have written contracts to form a binding contract.[1] If a customer verbally offers to pay you $200 to do X, and you verbally agree to do X for $200, you may have a binding contract. To form an oral contract, there must be an offer, an acceptance, and mutual assent. This last requirement, also called “meeting of the minds,” means that you both agree to the terms of the contract – which can be tricky if the contract is not written down.
Even though oral contracts are valid, we always recommend contracts in writing because (1) then there is proof that the parties contracted with each other, other than just two people’s versions of the truth, and (2) there are oftentimes many more terms and conditions other than X and the price that need to be included in the contract. What time does X have to be completed? When is payment due? Inclusions/exclusions? For example, if X is painting a house, does the painter include white paint on the front porch railings but exclude the stain on the wood deck? If you and the customer are not on the same page and do not have a “meeting of the minds” as to these terms, there can be no contract. However, if you hand your customer a piece of paper with terms and conditions written on it, that is simply an offer (or a counteroffer to their offer). How do you know the agree to the terms? This is why people get their customers to sign it, which acknowledges that they agree to the terms (even though a signature is NOT a legal requirement to form a contract). For a lot of our clients, written contracts and signatures just aren’t practical. The house painter is going to want the homeowner client to agree to the terms and conditions BEFORE the painter buys supplies and drives out to the house, for example. These days, everyone has e-mail. A lot of our clients are already utilizing e-mail to send their customers appointment reminders and quotes. Why not incorporate terms and conditions into the email? To legally guarantee that those e-mailed terms are incorporated into the contract, the customer would need to take some affirmative step to acknowledge that they’re agreeing to it. They could hit reply to the e-mail and say they agree to everything, you could include a way for them to electronically sign a document, or you could utilize software that allows the customer to click “I agree” or “I disagree” to the terms. This latter example is called “click-wrap” and technology companies like Apple have been using it for years to get consumers to agree to their terms of service. Click-wrap contracts are universally upheld as long as some procedures are put in place, like allowing the customer to click “I disagree,” putting the terms and conditions near the “I agree” button, and allowing the customer to download or print the terms of service. Putting all the terms of the contract in writing helps to avoid confusion between the parties and prevent potential lawsuits if customers become unhappy. Please keep Jesson & Rains in mind if you or a colleague needs assistance drafting a click-wrap contract or other terms and conditions. Litigation happens. We believe it’s beneficial to all parties involved to amicably resolve disputes before getting the courts involved; but sometimes that just isn’t possible. Litigation costs can be wildly unpredictable, vary on a case by case basis, and can add up quickly.
Take two similar cases: In “Case 1,” the case moves quickly towards trial but resolves early at mediation. In “Case 2,” the case moves slowly through discovery, with all parties objecting to the other party’s discovery requests; there is a day-long mediation where the case doesn’t settle; there are complicated issues of law to be researched and argued before the Court; and then a costly trial. It is obvious that “Case 2” would cost more money; however, what is not always obvious in the beginning is whether a case is going to follow “Case 1” or “Case 2”’s path. We try our best to estimate costs for our clients and be honest (sometimes brutally) about potential cost, but a lot of the cost depends on your opposing party. For our business clients, and in some limited circumstances, individuals, there may be a cheaper and more predictable way: Alternative Dispute Resolution (“ADR”). ADR has been around for a long time and can be contractually mandated between the parties, usually in the form of mediation and/or arbitration. Mediation is when a neutral third party goes back and forth between the parties in an attempt to negotiate a compromise. Arbitration is a middle ground between mediation and a lawsuit. The parties present their evidence to a neutral third party who will decide the case; however, arbitration is generally far less formal than a lawsuit and costs less time and money because there are no motions filed or discovery exchanged between the parties. There are other advantages to just saving time and money. For example, disputes that a business may not want made public (which would be a matter of public record should litigation ensue) can be resolved in a confidential nature through ADR. Where ADR really shines is in the resolution of complex disputes, like a complex breach of contract dispute or complex construction defect case. Using ADR, the parties can select an expert in the field to act as the arbitrator or mediator, instead of relying on a jury of average people who likely would not have the necessary specialist knowledge to properly decide your case. However, businesses should be careful about blindly throwing in arbitration clauses into their contracts without first consulting an attorney. If the arbitration clause in your contract is not enforceable, then you will end up in litigation anyway. For example, there have been many lawsuits filed recently regarding the Samsung “exploding” phones. People who have been injured when the Samsung phones spontaneously combust are finding that, when they file the lawsuit, Samsung is filing a motion to dismiss the case because there is an arbitration clause contained within the phone’s warranty guide. While the consumer has 30 days to opt out of that provision after buying the phone, the majority of people do not do so because they do not know about it! Further, pursuant to the contract, the proceedings between the consumer and Samsung are secret, Samsung has the right to choose the arbitrator, and, if Samsung wins, the consumer may be required to pay Samsung’s costly legal fees. Seems like a great deal for Samsung, right? However, In January of 2017, a federal appeals court in California ruled that the arbitration clause did not comply with California law and, therefore, the consumers were not bound by the clause. There have been many other cases in recent history where Courts have refused to enforce arbitration clauses against consumers. Frequently, the Court’s reasoning is that the clauses are hidden among other terms (so the consumer is “tricked”), not negotiable, and unfair. The takeaway from all of this should be that, while ADR is a useful tool to move cases towards a quick and often relatively cheap resolution, the arbitration clause needs to be enforceable. Litigating the issue of whether an arbitration clause is enforceable can be extremely costly. Make sure to consult an attorney who can check to ensure that your arbitration clause is enforceable in the states in which you do business. Almost everyone has heard of the phrase “double jeopardy” and knows that it means a criminal defendant may only be tried once for a crime. It he is found not guilty, the government cannot try him again for the same offense.
But did you know that the civil justice system has something like “double jeopardy” and it is even more stringent in civil cases? Two similar principles called res judicata and collateral estoppel will prevent you, as a plaintiff, from suing someone for the same claim more than once or even filing a different claim with the same underlying issue as the first case. Also, you cannot sue someone a second time for a completely new issue if you could have included it in the first lawsuit but did not. Generally, this means that if you were wronged and you file a lawsuit, and if it is dismissed with prejudice by the Court, you cannot refile the same lawsuit or a lawsuit involving the same underlying facts. For example, let’s say your neighbor’s dead tree fell onto your property, hitting your car and your pet, killing him. You file a lawsuit seeking compensation for your pet. You believe your insurance company will reimburse you for the car. The court dismisses the lawsuit because it found that the tree falling was an act of God and your neighbor was not negligent. Later, you find out that the neighbor knew the tree was dead and had been advised by a tree expert that it was going to fall within the next month. You believe that your neighbor was negligent. Your insurance company does not reimburse you for your car. You file a lawsuit seeking money to compensate you for damage to your car. More than likely, you will be barred from filing that lawsuit. Even though you are seeking money for different damages and because you have new information that may prove your neighbor was at fault, the court has already made a decision that your neighbor was not negligent. You do not get to relitigate the case. There are many lessons to be learned. First, you should not rush into a lawsuit. You should wait and file the lawsuit after you’ve gathered as much information as possible because if you learn of new information after the case has been dismissed, you’re out of luck. It is very rare that a court will allow a second lawsuit due to newly discovered evidence. However, also be aware of statutes of limitations (limits on the time you can file the claims – normally, about three years). Second, you should really consider hiring an attorney. A lot of people try to file lawsuits on their own, especially in small claims court, if the money damages sought are not very high. However, if you attempt to navigate the legal system on your own and are unsuccessful, you will not get a second bite at the apple. An attorney can help you with the fact gathering before filing a lawsuit and with identifying all potential claims to make sure they’re all included with the first lawsuit. Finally, you should not underestimate your opponent. You may quickly file a lawsuit, thinking it is an open and shut case, there’s no way you’re going to lose, and be completely unprepared when the defendant shows up with an attorney who swiftly and successfully gets the case dismissed. You may be blindsided, and there’s nothing you can do about it if it is dismissed with prejudice. A lot of “pro se” plaintiffs (meaning, without an attorney) do not know to ask the court to dismiss a claim “without prejudice” and with leave to amend the complaint, which would allow them to refile the case. This blog article serves as a cautionary tale for people who try to navigate the system on their own. A lot of people are successful, but for those who are not, it comes at a price. Not only do they lose that particular case, but they may lose their right to bring additional claims or issues before the court in the future. If you are currently involved with a dispute and are considering filing a lawsuit, please consult with an attorney before doing so, so that you do not unknowingly waive your right to bring claims in the future. “One size fits all” is the wrong approach to take when dealing with estate planning and business documents. And when you purchase legal forms from the internet, that is exactly what you are getting. For estate planning, no person’s circumstances and wishes is going to be identical to the next. For businesses, while forming the LLC or incorporating may be simply accomplished by using the Secretary of State’s forms (no need to even use RocketLawyer, here, for example), what about the other documents that you may need to go with it? We’ve talked about the importance of operating agreements before. Those are absolutely not one-size-fits-all.
Here are some risks: 1) The document may not be valid at all. I have personally had a client bring me a form he purchased online that was advertised as North Carolina-specific that was NOT valid in North Carolina. He wasted money on that form and then paid me to re-do it, when it could have been done correctly the first time. Attorneys oftentimes say, “Pay us a few hundred dollars now to do it right the first time or a few thousand dollars later to fix it.” 2) While valid, the document may not be the best. Admittedly, the online legal form websites sell forms that are likely valid. They put just enough stuff in there to make them valid. However, they leave out state-specific clauses and references to statutes that may save you and your family or business tremendous time and money in the future. Here are some examples: a. Attorney’s fees provisions. In North Carolina, these are only valid in some types of contracts and only if reciprocal. Without these clauses, you could be out thousands of dollars if a dispute arises. Or, you could have a false sense of security thinking you will be entitled to attorney’s fees if a dispute arises, only to find out that your type of contract or the way the clause is written does not allow for attorney’s fees. b. Leases. Did you know that if a tenant breaches a lease, other than for non-payment of rent, you cannot evict the tenant unless the lease specifically provides for such? This has happened to a client of ours – the lease did not provide for it, and he was stuck with that tenant. Also, you can put language in a lease that waives notice requirements prior to evicting them. Online form leases do not contain this language. c. Wills. We have already discussed the very important language that can be included in a will that will save your executor time, money, and stress when they are handling your estate. It goes without saying, the only way to ensure that your last wishes are accomplished is to hire an attorney. There’s no way of knowing if you use an online form. I have spoken to attorneys who litigate estate cases (after someone has died, for example contesting a will on behalf of a beneficiary, or just asking the court for guidance in interpreting a will) and their business is booming thanks to online legal forms. d. State laws are different. North Carolina treats non-compete clauses and forum selection clauses differently from Florida, for example. Laws are created by the courts, too. A legal form website is not going to be current on courts’ interpretations of a state’s statutes. Just take a look at LegalZoom’s terms of service: “. . . LegalZoom cannot guarantee that all of the information on the Site or Applications is completely current. The law is different from jurisdiction to jurisdiction, and may be subject to interpretation by different courts. The law is a personal matter, and no general information or legal tool like the kind LegalZoom provides can fit every circumstance. Furthermore, the legal information contained on the Site and Applications is not legal advice and is not guaranteed to be correct, complete or up-to-date. Therefore, if you need legal advice for your specific problem, or if your specific problem is too complex to be addressed by our tools, you should consult a licensed attorney in your area.” 3) While valid, the document may be worse than not having one at all. You may leave language in an online form that actually puts you in a worse position. A business owner may do something that puts him personally liable for the business. The devil is in the details. In a case out of Canada, a poorly placed comma cost a business nearly $1,000,000. 4) No attorney-client relationship. By having personal interaction with an attorney, the attorney can draw information out of you that is important that you did not know was important. As a layperson, you don’t know what you don’t know – and that’s what you pay an attorney for. Hopefully you develop a long-term relationship with your attorney. You can continue to seek advice from someone who knows the ins and outs of your business or knows your family. On a different note, an attorney is a fiduciary who owes a duty to you. If they do something incorrectly which costs you money, you can sue the attorney for malpractice. You cannot do this with online legal forms. As simple as your legal issue may seem, there is value in consulting with an attorney. The document itself, in my opinion, is free. |
Subscribe to our newsletter.AuthorKelly Rains Jesson Categories
All
Archives
April 2024
|