Who, What, Why . . .

Who does it apply to: Any employer who characterizes someone who works for them as an independent contractor and does not withhold taxes for payments made to that person.

Why does it matter: While you may not think it matters much whether the individual pays their taxes or you withhold them, the IRS, Texas Workforce Commission (TWC), and Texas Attorney General (for child support) care a lot. It could become an issue for your business in many different kinds of lawsuits.

How does it affect me: The consequences of mischaracterizing an independent contractor as an employee are minimal, but the consequences of mischaracterizing an employee as an independent contractor can be significant. Can you say TWC or IRS . . . Audit? Penalties? Interest?

What is the rule: The TWC and IRS will start with a presumption that the person is an employee so owners really start off with one strike against them. The tests used by the TWC, IRS, and in commercial litigation are all different, but the factors considered are similar. What follows is an amalgamation of the tests that should give you a good idea of what category the person falls into:

• Instruction and Control – This is the KEY factor! If you say where to go and leave it up to the individual to get the work done, they may be an independent contractor. If you tell the individual how to do it, they start to look more like an employee. Each additional instruction slides the scale closer to employee status.

• Training – If you are training them, they are probably employees

• Equipment and Expenses – If you provide equipment and pay expenses, they are probably an employee

• Benefits – If you provide benefits, like healthcare and 401(k), they are almost definitely an employee

• Other Work – If the person works solely for you, perhaps has set hours of work, and would not have time for another “customer” or employer, they are probably an employee. Independent contractors regularly work for numerous customers or clients.

• How Paid – If you pay a weekly salary or draw that is not dependent on performance, they are probably an employee. Independent contractors are usually paid by the job and don’t get paid if a job is done unsatisfactorily.

• Terminating the Relationship – If you can unilaterally let the person go in the middle of a project or they can walk away from work in progress, they are probably an employee. Independent contractors cannot usually be terminated in the middle of a project without someone having a right to damages.

Common Situations:

Outside Sales Rep: Often the most difficult to characterize, the outside sales representative is a bit of a chameleon. The factors that really matter here are: (1) whether you provide training or a particular sales pitch; (2) whether they act as a sales representative for other companies or whether you would allow the person to sell for another company; (3) how they are paid – straight commission or commission and salary; and (4) whether you reimburse expenses. NOTE: If there is ever a covenant not to compete – you best characterize them as an employee.

Terminated “Contractor”: In a down economy, you cut back your workforce, including several “contractor” construction workmen. One decides to file for unemployment. When the TWC investigates, it will determine whether you have properly characterized the workman. If you lose, the TWC will make you responsible for back taxes, and interest (which you will have a great time getting back from the workman). Then . . . the TWC will tell the IRS and Attorney General. After their audits you can find out how much back child support you should have withheld that you are now responsible for!

Contract Employee v. Independent Contractor: Don’t mistake a contract employee for an independent contractor. Contract employees are still “employees” who are paid like any other employee and for whom you must deduct appropriate state and federal taxes.

Accident: One of the few advantages to a business owner in characterizing people as independent contractors arises in the event of an accident. If you have a true independent contractor and they injure someone while working for you, there is less potential liability for you! Conversely, employees involved in accidents are the direct responsibility of the employer (unless they were working outside the “scope of employment”).

What should I do:

Good: Conduct a quick review of those who work for you. In most cases you will quickly be able to rule out concern except in a few cases. For the exceptions, examine the above factors and make sure to maintain appropriate separation. Too often, an independent contractor will grow into an employee over time as they become a more integral part of your business.

Better: Create written job classifications for each position in your company including restrictions on the position. Make a written contract with all independent contractors that clearly lays out their status (but do not include a covenant not to compete – which is a clear sign of an employee)

Best: In this case, best is really “safest.” If you characterize everyone who works for you in any capacity as an employee, except with the most obvious exceptions, there will rarely be any cause for concern. That said, it can result in an administrative headache.

Who, What, Why . . .

Who does it apply to: Every employer, regardless of whether employees access the internet at work.

What is it: Blogging, use of sites like Facebook, Flickr, MySpace, Twitter, Digg, LinkedIn, and the like. Virtually every person in the workforce has some access to a computer and likely uses one of the more than 3 billion Facebook accounts or the estimated 300 million Twitter accounts. These accounts are used to share personal information and sometimes information about work or co-workers which employers would prefer to keep private. If you don’t think your employees are using it, think again.

How does it affect me: Employers have always been concerned about how their employees act at work and when on their personal time. Most employers have maintained at least oral policies about how employees should act and dress while at work. Some have maintained policies about how employees act when on personal time. But what used to be shared among friends over a beer on Friday night has become an entry on the employee’s Facebook or MySpace page where thoughts are expressed in writing and open for virtually the whole world to see.

How can I tell my employees what to do in their off time: This is America and we do protect the freedom of speech, but working for your business is a privilege. If an employee is unwilling to be careful about how they act outside of the workplace, they can do so, but not if they want to work for you. You can fire employees who do not agree to adhere to your conduct standards in or out of the workplace.

Common Situations:

Personal Blogging: An employee who acts as a pilot for a company expresses their personal observations about safety issues with their employer’s airline, or that of another airline (who employer is in negotiations to purchase) based on information learned at work. In the first instance, the employer has just become open to investigation by the FAA. In the second, a prospecting journalist might find the information and use it to write an article about concerns by employer over the safety of the airline it is trying to purchase.

Personal MySpace Use: Infighting among two feuding employees that the employer is not aware of has lead to racially or sexually charged comments being posted. The information is collected and used by the victim to file a discrimination lawsuit against the employer.

Unsupervised Company Blogging: An employee who is an architect expresses safety concerns on the use of a particular type of material in specific building applications. The employee feels he is doing a service to the company by increasing its visibility to the public as safe operator. Unfortunately, the employee is unaware that company formerly advocated the use of the material and its customers now have a potential lawsuit based on the company’s change in viewpoint.

Personal Twitter Use: A supervisor about to board a plane to travel to Phoenix where she must terminate several employees, bides her time by “twittering” that she is sad because she is about to fly Phoenix and let several employees go. Some of her “followers” on Twitter unfortunately are the employees in Phoenix who will be let go. With the cat out of the bag early, one of the employees deletes hundreds of files from the employer’s servers before even meeting with the supervisor.

Use of YouTube: Two employees of a franchise pizza eatery decide to do extremely despicable things with some of the food before baking it into pizzas which will be sent out to customers. For their later personal amusement the employees make a video of the whole act and, on the spur of the moment, post it on YouTube so their friends can view it and laugh along.

Unsupervised Use of LinkedIn: An employee excited about being promoted to work on a new project for employer on a cutting edge technology immediately updates his profile on LinkedIn, which the employer recommended all employees keep for use with business contacts. A competitor discovers the promotion and because the employee was so eager to explain his new job, learns of the employer’s new technology and begins work in the same area.

Use of Company Email for Personal Topics: An employee receives a humorous, but off-color joke or picture and uses company email to forward it to friends. The email is now a reflection on your business because the employee sent it from their work email account. Emails like these, especially those including video, also take up valuable space on company servers which might otherwise be used for business purposes.

What should I do:

With the millions of permutations on the hypothetical situations expressed above which all end badly for an employer, it would be valuable to take steps against such conduct before it happens:

Good: Orally inform your employees of the potential issues which may arise from their conduct in the use of social networking sites. Make sure they understand the potential implications and the possible consequences for their employment at the company. Ask employees to use free accounts from gmail, hotmail, or other similar sites for personal business.

Better: In addition to the personal email suggestion above, implement a written policy regarding the use of social networking sites and have each employee sign it.

Implement a written policy regarding the use of social networking sites, appoint a supervisor to oversee the use of social networking for work purposes to keep employees on the right track, and randomly check the internet to learn what employees have been up to.