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• posted: Dec. 15, 2015
• Hemmer DeFrank Wessels PLLC
• Uncategorized

Written By: Scott R. Thomas

You’ve built your business on the model that people doing work are independent contractors rather than employees.  Everything has been going fine until one day when you sit down at your desk to find a letter from a federal or state agency.  It might be the Internal Revenue Service, the Ohio Bureau of Worker’s Compensation, the Kentucky Division of Unemployment Insurance, or the Indiana Department of Workforce Development.   Regardless of the sender, the punch-line is the same: the agency in its infinite wisdom has determined that your independent contractors are in fact your employees.  At the stroke of a pen, the agency has created the foundation demand you make back payment for all the obligations you would have had if your contractors were on your company payroll going back however many years the statute of limitations allows.  Imagine if you suddenly had to pay several years worth of payroll taxes, workers’ compensation premiums, and unemployment insurance premiums, plus penalties and interest!  How would that affect your bottom line?  Would you even be able to stay in business?  Under-budgeted agencies are turning increasingly to these tactics in an effort to obtain revenue for operating expenses.  Will your company be next?

Fortunately, you can take pro-active steps to avoid these dire consequences.  The IRS and courts use a list of 20 factors as an aid in determining whether a worker is an employee or an independent contractor.  The test is not a math problem; you need to do more than prevail on 11 of the 20 factors.  On the contrary, the test is rather subjective and that’s part of the problem.  You need to prepare in advance to make sure you land on the independent contractor side when the agency evaluates each individual factor.  The factors are discussed below.

(1)   Do you direct or control the manner or method by which instructions are given to the person performing services?

A worker who is required to comply with another person’s instructions about when, where, and how he is to work is ordinarily an employee. This control factor is present if the person or persons for whom the services are performed have the right to require compliance with instructions.  On the other hand, constraints imposed by your customer’s demands and government regulations do not determine the employment relationship.  Your efforts to monitor, evaluate, and improve the results of ends of the worker’s performance do not make the worker an employee.  Work by independent contractors is often performed to the exacting specifications of your customer.

 (2) Do you require the person performing services to undergo particular training?

The “training factor” refers to an experienced worker giving guidance to new workers to demonstrate how the instructions must be followed.  For example, people who are required by the company to attend more training than was mandated by the government have been deemed employees.  People who arrange for their own training tend to be deemed independent contractors.  Familiarizing a person with a customer’s needs does not constitute training.  Likewise, explaining the paperwork the independent contractor needed to complete in order to get paid does not constitute “training.”

(3)  Are the services performed by the individual integrated into the regular functioning of your business?

The “integration factor” refers to whether a business could continue without the contribution of the person’s services.  Integral services are more likely to be subject to the business’ control.

(4)  Do you require that services be provided by a particular individual?

If the services must be rendered personally, presumably the person for whom the services are performed is interested in the methods used to accomplish the work as well as in the results.  If your independent contractor has the power to hire a substitute to actually perform the services, that power strongly tends to show an independent contractor relationship.

(5)  Do you hire, supervise, or pay the wages of the individual performing services?

This factor tends to state the obvious.  Supervision tends to show an employee relationship.  Where the company does not confer benefits such as paid leave, health insurance, life insurance, or retirement benefits, this suggests an independent contractor relationship.

 

(6)  Is there a continuing relationship between you and the person performing services which contemplates continuing or recurring work, regardless of whether that work would be full- or part-time?

A continuing relationship between the worker and the person for whom the services are performed tends to indicate an employer-employee relationship exists. A continuing relationship may exist where work is performed at frequently recurring although irregular intervals.  Conversely, contracts of a set length often indicate independent contractor status.

 (7) Do you require the individual to perform services during established hours?

The establishment of set hours of work by the person or persons for whom the services are performed is a factor indicating control.  The absence of set hours or a minimum number of hours tends to indicate an independent contractor relationship.

(8)  Do you require the individual performing services to be devoted on a full-time basis to your business?

If the worker must devote substantially full time to your business, that requirement tends to show an employee relationship because you have control over the amount of time the worker spends working and impliedly restrict the worker from doing other gainful work.  An independent contractor, on the other hand, is free to work when and for whom he chooses.

(9)  Do you require the individual to perform services on your premises?

The performance of work on the premises of the company suggests control over the worker, especially if the work could be done elsewhere.  Where the person has no specific work location, a finding of an independent contractor relationship is more likely.

(10)    Do you require the individual performing services to follow the order of work that you have established?

If a worker must perform services in the order or sequence you set, that requirement suggests employer control.  An employee is typically not free to follow his own pattern of work but must follow the established routines and schedules of the company.

(11) Do you require the individual performing services to make oral or written progress reports?

A requirement that the worker submit regular or written reports to the person for whom the services are performed indicates a degree of control typically present in an employee relationship.

(12)    Do you make payments to the individual for services on an hourly, weekly, or monthly basis?

Payment by the hour, week, or month generally points to an employer-employee relationship, provided that this method of payment is not just a convenient way of paying a lump sum agreed upon as the cost of a job.  Payment made by the job or on a straight commission, on the other hand, generally indicates that the worker is an independent contractor.   The independent contractor status is also indicated when the company does not withhold taxes or benefits on behalf of the worker.

(13)    Do you pay expenses for the person performing services?

If the company pays the worker’s business and/or traveling expenses, the worker is ordinarily deemed an employee.

(14)    Do you furnish the tools and materials for use by the person to perform services?

If the company furnishes significant tools, materials, and other equipment, that fact tends to show the existence of an employer-employee relationship.  Where a worker furnishes his own tools, that fact tends to support the existence of an independent contractor relationship.

(15)    Has the person performing services invested in the facilities used to perform services?

If the worker invests in facilities that are used by the worker in performing services and are not typically maintained by employees, that factor tends to indicate that the worker is an independent contractor.  On the other hand, lack of investment in facilities indicates dependence on the person or persons for whom the services are performed for such facilities and, accordingly, the existence of an employer-employee relationship.

(16)    Does the person performing services realize a profit or suffer a loss as a result of the performance of the services?

A worker who can realize a profit or suffer a loss as a result of the worker’s services is generally an independent contractor; the worker who cannot is an employee.  This factor reflects the shift in emphasis away from the subjective inquiry about “control” toward something that can be measured.   Courts focus on whether the worker has an entrepreneurial stake in his work.  This factor is powerful because independent contractors tend to be entrepreneurs; employees tend to have less ability to affect the income they generate.

(17)    Does the person perform services for two or more employers simultaneously?

If a worker performs services for two or more companies at the same time, that factor generally indicates that the worker is an independent contractor.  If the independent contractor agreement prohibits the worker from providing services to others, that fact will lean toward a finding of an employee relationship.

(18)    Does the person performing services make the services available to the general public?

The fact that a worker makes his services available to the general public on a regular and consistent basis indicates an independent contractor relationship.

Workers who are paid by the job, chose their own work hours, have the right to refuse assignments, and can work for others, are typically deemed independent contractors.  If the worker operates as a partnership, limited liability company, or a corporation, that fact will also weigh in favor of an independent contractor finding.

(19)    Do you have a right to discharge the individual performing services?

The right to discharge a worker is a factor indicating that the worker is an employee and the person possessing the right is an employer. An employer exercises control through the threat of dismissal, which causes the worker to obey the employer’s instructions. An independent contractor, on the other hand, cannot be fired so long as the independent contractor produces a result that meets the contract specifications.

(20)   Does the person performing services have the right to end the individual’s relationship with the employer without incurring liability pursuant to an employment contract or agreement?

This is the flip side of Factor #19.  If the worker has the right to end his relationship with the company any time he wishes without incurring liability, that factor indicates an employer-employee relationship.  A worker who breaches an independent contractor agreement, however, is subject to contractual liability for damages.

As you can see, these factors can be very subjective.  Whether one factor weighs in favor of a finding of an employee or independent contractor relationship can depend on which side of the bed the auditor woke up on.  Remember, the agency is motivated to find the existence of an employee relationship because that relationship will generate revenue.  Accordingly, it is imperative that the company develop a strategy to make it difficult to support a finding of an employee relationship and to implement that strategy immediately.  If you wait till one of your independent contractors files for unemployment benefits or an agency picks your name out of a hat for an audit, it may be too late to put the positive spin on your business model.  When that seemingly innocuous government questionnaire arrives in the mail, handle it with utmost care and at the highest level.  Because the test is subjective and no one factor is controlling, a careless answer or ambiguous word choice could make it easy for the government to brand your independent contractors as employees.

If you would like more information about these issues, please contact Scott Thomas.   Scott has secured victories for firm clients in Ohio, Kentucky, Indiana, New York and Pennsylvania against claims by state and federal agencies that the client’s independent contractors were employees.  He has assisted clients in developing proactive strategies to strengthen the company’s shield against such accusations.  He welcomes the opportunity to work with you on your case.  His direct line is 859.578.3862.  You can email him at [email protected].  If there is a particular topic you would like to see addressed in a blog, please send Scott an email with your ideas.

About Finney Law Firm, LLC

Founded in 2014, FLF has grown to 15 attorneys located in offices in Eastgate and downtown Cincinnati with five major practice areas: Corporate Law, Real Estate Law, Employment Law, Commercial Litigation and Public Interest and Constitutional Litigation.  FLF has the unique claim to three 9-0 victories at the United States Supreme Court for its public interest practice along with breakthrough class action work.

FLF also has an affiliated title insurance company, Ivy Pointe Title, LLC, that closes and insures nearly a thousand commercial and residential real estate transactions annually.

For more information about Finney Law Firm, visit finneylawfirm.com.

Media Contact: Mickey McClanahan; [email protected]; 513.797.2850.

 

• posted: Dec. 03, 2015
• Hemmer DeFrank Wessels PLLC
• Uncategorized

Written By: Scott R. Thomas

You started your business on a shoe-string but you’ve worked hard and built it up.  Now you’re at the point where you’re ready to take on other people to help shoulder the work.  You’ve interviewed several candidates you think have the potential to become true partners as you take your company to the next level.  But then you think, “What if it doesn’t work out?”  Your mind starts racing.  “What if I invest in this new employee, provide expensive training, share my business model, provide access to my hard-won customers, and then he/she leaves to go to my competitor?  Or decides he/she can hang up his own shingle?”  So you decide to make the prospective employee sign a covenant against competition.  If you go that route, there are a number of pitfalls that you need to avoid.  American judges don’t like non-competes because they are a restraint on free trade.  Courts will enforce them but they have to be fair and reasonable or your non-compete agreement won’t be worth the proverbial paper it’s written on.  Here are the “Top Ten” things to keep in mind.

• New employee. If you think you need the protection of a non-compete, make it part of the hiring process.  Once an employee has begun work, the employer must provide some additional value in exchange for the employee’s promise not to compete when the employment ends.  When the agreement is hammered out at the beginning, no consideration beyond the job itself is necessary to support the agreement.
• Geography. You may want to make the new employee agree not to compete with you in the same galaxy but non-compete agreements must be reasonable.  Consider how far your most distant customer is.  Pushing the envelope beyond that distance is dangerous.  Try to match the non-compete zone to your company’s footprint.  Pick a radius to be drawn from each place where you do business.  The reasonableness of the length of the radius will vary with each business.  If it’s more appropriate, you may specify a city, or a county or other defined region but be prepared to show that you have customers to protect in the territory you’ve identified.
• Duration. As with geography, you need to pick a time period that is reasonable.  You may wish to prevent the employee from competing till the rocks melt with the sun but judges will take a red pen to your agreement.  Again, the time period varies with the nature of the employer’s investment.  In some businesses, a year is appropriate; in others, two years might be reasonable.  Pushing it past two years is difficult.
• Activities. The activities that are prohibited must be spelled out clearly and in detail.  If any ambiguity exists, the law requires the Court to interpret the agreement in favor of the employee.  Accordingly, you must state exactly what your new employee cannot do in the event the employment ends.  In this regard, it’s a good idea to define what your competitors look like—without naming them.  You don’t want your employee to have any wiggle room.
• Injunctive relief. An injunction is an order from the Court that, in this case, would require your employee to refrain from violating the contract.  If the employee continues to violate the agreement, the Court can punish the employee via its contempt powers.  Your agreement should require the employee to agree to the things you would otherwise have to prove to the Court.  For example, the agreement should specify that the employee understands and agrees that if he were allowed to compete with the employer during the time and in the locale specified, you would suffer “irreparable harm,” i.e., harm that could not be remedied by mere dollars and cents.  By having the employee agree to the elements you would have to prove, you avoid much of the risk of litigation and make it much less expensive.
• Damages too. Your agreement should also specify that you are entitled to damages.  I know what you’re thinking, that I just said the employer has to prove “irreparable harm” to get an injunction.  True enough, but your employee will have violated the agreement for some period of time before you get a chance to persuade a judge to give you the injunction.  In many cases, you won’t know that your employee has been unfairly competed for some weeks or months.  Your agreement should state that while you are entitled to injunctive relief going forward, you are also entitled to compensatory damages for the unfair competition that occurred before you obtained the injunction.
• No Bond, thank you. Before an injunction takes effect, the Court has to specify a bond.  The bond is a surety that can be used to compensate the employee if it later turns out that the Court should not have issued the injunction. You don’t want to have to pay a bond to get the benefit of the bargain you made with the employee.  So put that in the agreement: the employee agrees that no bond is necessary to make the injunction effective.
• No cherry-picking, if you please. While we’re making the employee promise not to compete, you ought to make him promise not to hire away your employees.  You don’t want to come in to work and find out that your ex-employee has made your secretary a better offer to come work for him five miles away.
• Re-start the clock. Five hundred years ago, Hamlet complained about “the law’s delay.”  Courts try to work quickly when it comes to temporary restraining orders but things still take time, more time than you probably like.  By the time you get your injunction, your former employee may have been improperly competing for six months.  It’s only fair that that six months not be counted against the non-compete period in your agreement.  Unfortunately, that’s exactly what will happen unless you put language in the agreement that will re-start the non-compete period.
• Attorney fees. In the absence of an agreement or statute, American litigants have to pay their own attorney fees.  You can change that by putting it in your agreement.  You can provide that the “prevailing party” gets an award of attorney fees from the other side.  You can even specify that the employee has to pay your attorney fees but not vice versa.  That sounds harsh but the employee is the one violating the agreement.  But you won’t get fees unless it’s in the agreement.

Lastly, the employer has to keep his nose clean too.  An injunction is what Courts call “equitable relief.”  The goal is fairness.  If the employer has violated the employment agreement is some way—e.g., not paying a promised bonus—the Court may deny a request for an injunction.  The Court is going to look at the conduct of both parties.

If you would like more information about these issues, please contact Scott Thomas.   Scott has secured victories for firm clients both seeking and defending claims for injunctive relief in Ohio and Kentucky courts.  He welcomes the opportunity to work with you on your case.  His direct line is 859.578.3862.  You can email him at [email protected].  If there is a particular topic you would like to see addressed in a blog, please send Scott an email with your ideas.

About Finney Law Firm, LLC

Founded in 2014, FLF has grown to 15 attorneys located in offices in Eastgate and downtown Cincinnati with five major practice areas: Corporate Law, Real Estate Law, Employment Law, Commercial Litigation and Public Interest and Constitutional Litigation.  FLF has the unique claim to three 9-0 victories at the United States Supreme Court for its public interest practice along with breakthrough class action work.

FLF also has an affiliated title insurance company, Ivy Pointe Title, LLC, that closes and insures nearly a thousand commercial and residential real estate transactions annually.

For more information about Finney Law Firm, visit finneylawfirm.com.

Media Contact: Mickey McClanahan; [email protected]; 513.797.2850.

 

• posted: Dec. 01, 2015
• Hemmer DeFrank Wessels PLLC
• Uncategorized

Written By: Justin Whittaker

What happens when your previously reliable commercial tenant stiffs you on the rent?  If you are a commercial landlord in Kentucky, you’ve likely had to grapple with this question.  If you are a commercial landlord who has not yet faced this issue, give it time; you’re up next.  All landlords have a fundamental interest in securing a responsible tenant to occupy their property, the security of their property, and collecting rent for the use of their property.  In the event of a breach of a commercial lease, the last thing the commercial landlord wants to do is misstep in securing its rights.  Any misstep may result in landlord being left out in the cold on months of rent, and damage to its property.  These risks will rear their ugly heads if the commercial eviction is not handled properly.

In Kentucky, the commercial eviction procedure is known as a “forcible detainer” proceeding.  The purpose of a forcible detainer proceeding is to simply determine who has the right to possession of the commercial property at issue.  Forcible detainer proceedings arise if the commercial tenant hasn’t paid rent, or if it has otherwise failed to comply with other terms of the commercial lease.  In order to recover the money owed by the tenant for back rent, late fees, damages, etc., a landlord is required to file a separate civil action against the tenant.  In either case, the commercial landlord must act swiftly – and act correctly – to secure its rights.

Commercial landlords are required to provide proper written notice and an opportunity for the tenant to cure its breach of the commercial lease.  If the commercial tenant fails to cure its breach within seven days of proper notice, the landlord must proceed formally by filing a forcible detainer complaint to evict the tenant.  After the complaint is filed, the court will schedule a hearing.  In Kentucky, a representative of the landlord must appear at the hearing to offer testimony as to the landlord’s right to possession of the property.  If the judge grants a forcible detainer judgment, the tenant has seven days to either vacate the property or appeal.  At this point, the commercial tenant can either make plans to vacate the property, appeal, or try to make a deal with you.

Resolution at this point may sound great.  It is important, however, that in your eagerness to put the matter behind you, you do not give up your rights to continue collecting rent and enforcing the commercial lease.  If the tenant appeals the forcible detainer judgment ordering it to vacate, the court will require it to post a bond in the form of ongoing rent payments.  The court clerk will hold these funds until the appeal is resolved.

If the tenant does not file an appeal but also does not willingly vacate the property by the end of the seventh day, the landlord must obtain a writ of possession from the district court judge and ask the County Sheriff to enforce the judgment.  The Sheriff will require a fee for this service, and precise instructions as to the removal of the tenant, either by “put out” or “set out.”  The Sheriff is then authorized to physically remove the tenant and reclaim the property for the landlord.  You may be tempted to avoid the hassle and expense of enlisting the Sheriff’s services and resort to “self help” in evicting the deadbeat tenant.  It is important to understand the risks to the self-help approach.  Regardless, once you have successfully removed the commercial tenant, you will need to secure as much of the back rent as possible through the enforcement of a “landlord’s lien” on the personal property of the tenant.  It is critical that you differentiate between the value of your lien and the overall value of the tenant’s property.  While you are entitled to receive value for rent of your property, you are not entitled to convert the tenant’s property in excess of the value of your lien, lest you face a lawsuit for damages and attorneys’ fees from the tenant.

If you need assistance with these issues, please do not hesitate to contact Justin Whittaker at 859.344.1188.  Justin is also happy to help you prepare a commercial lease agreement.  You can email Justin at [email protected].

About Finney Law Firm, LLC

Founded in 2014, FLF has grown to 15 attorneys located in offices in Eastgate and downtown Cincinnati with five major practice areas: Corporate Law, Real Estate Law, Employment Law, Commercial Litigation and Public Interest and Constitutional Litigation.  FLF has the unique claim to three 9-0 victories at the United States Supreme Court for its public interest practice along with breakthrough class action work.

FLF also has an affiliated title insurance company, Ivy Pointe Title, LLC, that closes and insures nearly a thousand commercial and residential real estate transactions annually.

For more information about Finney Law Firm, visit finneylawfirm.com.

Media Contact: Mickey McClanahan; [email protected]; 513.797.2850.