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:

• Workers must be treated as employees unless they are independent contractors;
• Workers who believe that they have been misclassified have the right to report the alleged misclassification to the Employee Classification Section; and,
• The physical and email addresses and telephone number where alleged misclassifications can be reported.

 
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:

• Is the worker guaranteed to get paid, no matter the outcome of the project?
• Does the worker use his or her own tools or equipment?
• Does the worker work for more than one firm or business at a time?
• Does the worker offer his or her services to the general public?
• Do you have the right to give the worker instruction about when, where, and how to work?
• Did you train the worker to do the job in a particular way?
• Must the worker do the work him or herself? Or is the worker free to hire assistants? If assistants are hired, who pays them?
• Do you set the worker’s work hours?
• Must the worker spend all of his or her time on your job?
• Must the individual work on your premises?
• Do you pay the worker hourly? Weekly? Monthly? By the job?
• Can you fire the worker and/or can the worker quit without being subject to a breach of contract lawsuit?

 
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.

What other legal requirements do you have other than filing the paperwork with the Secretary of State’s office and getting a tax ID number?  As we mentioned in a previous article, vendors are going to see in the public records that you’ve started a new business and are going to send you offers in the mail to purchase items like signs that you “legally are required to display or you may be forced to pay federal fines.”  As we discussed, this is sometimes not the case.
 
What about taxes?  This is a new business owner’s main concern.  First, find a good CPA.  They’re the tax experts, not us.  If your business consists of selling a service and you have no employees, you likely only have to concern yourself with estimated quarterly income tax.  If you’re selling a product, you may have to pay sales tax.  If you have at least one employee, you will need to pay FICA Tax (social security and medicare deduction) and submit additional tax paperwork every quarter.  You should register your business online with the state at http://www.dornc.com/electronic/registration/index.html.  You should also fill out this application because most businesses with one employee have to pay unemployment tax, too. https://des.nc.gov/des.  If you have a brick and mortar store, you’ll likely have to pay business property taxes (just personal property tax if it is a leased store).
 
When you hire an employee, we strongly recommend you consult with an attorney or a professional out-sourced human resources company.  There are all sorts of rules and regulations and compliance issues when it comes to hiring an employee.  You need to know about overtime, meal breaks, minimum wage, etc.  Once you get up to three employees, you’ll need to start carrying worker’s compensation insurance.
 
The above information is all general -- depending on the type of business, there may need to be regulatory considerations such as licensing and permitting.  For example, we have clients who are professionals who had to get approval for professional licensing boards before opening their business. If you are opening a restaurant that serves alcohol, you have to get your ABC permit. 
 
The attorneys at Jesson & Rains can assist you in navigating the business start-up process.  As business owners ourselves, we’ve been there!

“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.

A few months ago, we wrote about a significant change in federal overtime law that was scheduled to take effect on December 1, 2016 (see article here).  After the change was announced back in May, several states and pro-business groups sued to stop the law from going into effect.  While the court has not made a final ruling as to the legality of the law, the court did enter a preliminary injunction blocking the law from going into effect nationwide.  On December 1, employers need not be concerned with implementing the new changes.  And, it remains to be seen whether the new law will ever be implemented.  The federal government may appeal the court’s ruling, but the Fifth Circuit Court of Appeals is very conservative.  If this is not resolved before the Trump Administration takes over in January, the rule change may never go into effect.  Stay tuned!

Everyone is somewhat familiar with the law that requires overtime to be paid to employees who work over 40 hours per week.  However, the law exempts any employee employed in a bona fide executive, administrative, or professional capacity.  This exemption is premised on the belief that these types of salaried employees generally earn higher salaries & enjoy other benefits.
 
Now, there is an exception to this exemption – if a person is a salaried employee and employed in an executive, administrative, or professional capacity, they will still be entitled to overtime under federal law if they earn a low salary.  Currently, an employee in this category who earns less than $455/ week or $23,660 is entitled to overtime if they work more than 40 hours per week.
 
Starting December 1, 2016, these figures will increase over 100%.  If an employee in this category earns less than $913/week or $47,476 per year, they will be entitled to overtime if they work over 40 hours per week.
 
While this is a dramatic increase, the law has not been changed in 12 years.  With this new law, the minimum salary for this overtime change will be evaluated and possibly increased every 3 years.
 
If you are a business owner and employ employees who may be affected by the change in the new law, we encourage you to contact an attorney or other human resource professional to ensure you comply with the law.

Non-compete agreements are helpful tools for small businesses, especially those getting established or finding success in their location.  These agreements enable businesses to hire talented employees without worrying that the employee will leave the business and set up shop in the same town as a competitor, using the skills they learned at their previous employer to that employer’s disadvantage.  Non-compete agreements can be signed by employees or independent contractors, and they are oftentimes necessary when selling a business or part of a business.
 
However, former employees are frequently disadvantaged by overly broad and restrictive non-compete agreements that severely inhibit their right to earn a living.  For this reason, North Carolina courts scrutinize non-compete agreements.  But, employers should not shy away from using a carefully crafted, narrowly-tailored non-compete agreement to protect their customer base from poaching and proprietary information.

General Requirements:

1.   The agreement must be in writing, signed by the person agreeing not to do business.
2.  The agreement must be made in exchange for valuable consideration. This means that the    employee who is agreeing to the terms must get something in exchange. For new employees, this consideration is obviously employment.

• For existing employees, valuable consideration includes bonuses or promotions.

3. The agreement's purpose is to protect a legitimate business interest, such as

• "Good will," meaning client base or
• "Trade secrets" or "proprietary information"- this is confidential information you would not want your competitors to know, such as the ingredients for your "secret sauce" or an assembly-line process which makes your product at a rate two times faster than your competitor.

4. Reasonableness of the restriction, so to time, geography, and the scope of activities covered.

• Court look at these factors together, based on the company's client base, the territory of the employee and company, and the original duties of the employee and information he may retain. It is a fact intensive inquiry. Courts have upheld some three year restrictions while invalidating other three year restrictions based on the circumstances. Restrictions of five years or more are presumed unreasonable unless related to the sale of a business.

If a court finds that a particular provision of a non-compete agreement is unreasonable, the court will strike that portion from the contracts but enforce the rest.