Happy Fourth of July

We’re headed into the long July 4th weekend . . . what better time to talk about a startup.

It’s a big startup, based on a radical idea, revolutionary in fact. It started out with small, modest goals but quickly expanded – far too quickly, it’s on shaky ground, underfunded, and burning up the capital of its main VC. The founders never had the time to do more than hastily incorporate. Operating agreements, much less employment agreements and guidelines, do not competes and non-disclosures were never enacted.

The competition is old, established, monolithic, and slow moving – but rich beyond measure.

The board of directors are split – almost evenly – on the startup’s long-term goals. Some of them want to be bought out by the competition. Unsurprisingly, they spend most of the time arguing among themselves. Only two directors took the time to visit the physical plant.

The CEO is tall, aristocratic, smart, taciturn – the perfect qualities, he is indispensable. The board, however, continuously tie his hands, interfere in day-to-day operations, and withhold funds needed for training. He’s put everything on the line for the company to succeed on its own, the alternative would be personally ruinous.

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Will You Have to Reclassify Your Workforce?

On September 25, 2020, the U.S. Department of Labor published a proposed rule that may revise how an independent contractor is classified under the Fair Labor Standards Act (FLSA).

Currently. the FLSA does not specifically define the term “independent contractor.” However, this proposed rule could very well change that. The proposed rule focuses on the economic reality of each work relationship and provides 5 factors to determine if the worker is an employee or an independent contractor. The proposed rule considers a worker to be an employee if the worker is economically dependent on the hiring entity (employer). However, if the worker is in the business for themselves, then the worker would be considered an independent contractor. To determine if the worker is in business for themselves or economically dependent the Department of Labor provided a 5-factor test.

  • The Nature and Degree of the Individual’s Control over the Work. This factor targets the level of control the worker exercises over their performance and work. Some examples include setting their own schedule, selecting the projects they work on, or who they work for, which can include working for the employer’s competitors. However, requiring the worker to satisfy certain quality controls or meeting agreed-upon deadlines does not constitute control that makes a worker more or less likely to be an employee.
  • The Individual’s Opportunity for Profit or Loss. This factor views whether the worker has had an opportunity to earn profits and/or incur losses dependent on their initiative or expenditures. This includes hiring helpers, equipment or materials used to further their work.
  • The Amount of Skill Required for the Work. This factor involves whether the worker must rely on their own skills and knowledge rather than specialized training or skills provided by the hiring entity.
  • The Degree of Permanence of the Working Relationship. This factor evaluates if the working relationship is definite in duration or sporadic versus an indefinite duration or continuous by design. If the worker has a definite duration or sporadic job, then the scale would more than likely tilt towards an independent contractor. However, the Department of Labor noted that the seasonal nature of some jobs did not immediately suggest the classification as an independent contractor.
  • Whether the Work is Part of an Integrated Unit of Production. This factor weighs whether the work performed is a component or integrated part of the hiring entity’s production process or whether the work is segregable from the hiring entity’s production process. So if the worker provides services that are part of the hiring entity’s core function as long as they are not embedded in the entity’s production process, then the worker will more than likely be classified as an independent contractor.

It should be noted that the 5-factor test in the proposed rule is not to be considered exhaustive, and no single factor is dispositive. However, the Department of Labor has placed heavy consideration on the first two factors as the most probative with greater weight than any other factor. Meaning, if the worker meets the first two factors, then the other three factors become almost immaterial because they don’t always prove whether a worker is economically dependent.

After the 30-day comment period ended on October 26, 2020, we are now waiting to see if the proposed rule will become a final rule that essentially becomes the law of the land. Currently, there are 24 state attorneys general challenging the rule to block its implementation. But, if the rule does in fact take effect, its impact will be limited to the FLSA area, and it will not apply to states that use their own worker classification test. For these reasons, don’t take actions by yourself, contact your employment counsel to discuss if this proposed rule could impact your business.

You can hear more about this topic from Managing Member, at the 2020 Virtual Employment Law Update Conference presented by The Woodlands Area Chamber of Commerce in partnership with The Woodlands Bar Association. For more information visit: www.woodlandschamber.org/events/details/2020-virtual-employment-law-update-conference-11095.

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820 Hits

Payroll Tax

One of the first roll outs of relief was the Families First Coronavirus Responses Act (“FFCRA”) which included advance fefunding of the payroll credit required for paid sick leave. This allowed for an employer to claim refundable tax credits for emergency paid sick leave and emergency paid family leave required for employees due to the COVID-19 crisis. The CARES Act picked up where the FFCRA left off and provides for an expansion of provisions including the following:

Subject to limitations laid out in the FFCRA and calculated through the most recent payroll period in the quarter – the CARES Act provides for an advance of those payroll tax credits.

The CARES Act mandates the Secretary of the Treasury to create forms and instructions in accordance with these advancement credits.

The CARES Act also mandates the Secretary of the Treasury cancel penalties for failure to deposit payroll taxes (only if failure can be attributed to anticipated FFCRA credit).

Payroll Tax Deferral

The CARES Act grants employers and self-employed individuals the opportunity to hold off on payment of the 6.2% social security tax beginning when the CARES Act was enacted and ending at the end of 2020. However – these taxes would then become due across the next two years; 50% in 2021 and 50% in 2022.

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742 Hits