Business, Tax, Probate, Estate Planning, Real Estate & Entertainment Attorneys

Author: hsmlawfirm

Have You Classified Your Workers Correctly?

One of the most overlooked issues by employers is proper classification of their workers. Whether to designate workers as independent contractors or employees, is a question employers must consider and failure to do so or guessing incorrectly is a mistake that can have drastic consequences for employers under both state and federal law.

Employers who misclassify workers, typically do so for one of two reasons: (1) Lack of knowledge or (2) Short term benefits.

(1) Lack of Knowledge

Many employers misclassify their workers unintentionally due to a lack of knowledge and understanding regarding the difference between the two classifications. Often employers falsely assume that the existence of an independent contractor agreement by itself means that a worker is thereby properly classified as an independent contractor. To properly determine whether a worker should be classified as an employee or an independent contractor, a multitude of factors must be considered, none of which alone are determinative. The factors, and considerations vary under state and federal law.

Illinois Law

To evaluate the proper designation for a worker under Illinois Law, it is necessary to refer to the Illinois Wage Payment and Collection Act, and decide whether the worker meets the definition of an employee. If not, then they are to be considered an independent contractor. This Act defines an employee to include any individual permitted to work by an employer in an occupation, but shall not include any individual:

(a)  who has been and will continue to be free from control and direction over the performance of his work, both under his contract of service with his employer and in fact; and

(b) who performs work which is either outside the usual course of business or is performed outside all the places of business of the employer unless the employer is in the business of contracting with third parties for the placement of employees; and

(c)  who is in an independently established trade, occupation, profession or business.

Federal Law

To evaluate the proper designation for a worker under Federal law, one should consider the factors as set forth by the Fair Labor Standards Act and the Internal Revenue Service .

Where the Fair Labor Standards Act is concerned, the U.S. Department of Labor tends to focus on:

(a) The extent to which the services rendered are an integral part of the principal’s (employer) business;

(b) The permanency of the relationship;

(c) The amount of the alleged contractor’s investment in facilities and equipment;

(d) The nature and degree of control by the principal;

(e) The alleged contractor’s opportunities for profit and loss;

(f) The amount of initiative, judgment, or foresight in open market competition with others required; for the success of the claimed independent contractor; and

(g) The degree of independent business organization and operation.

Additionally, the Internal Revenue Services uses Common Law Rules which also focuses on the degree of control and independence.

(a) Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?

(b) Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)

(c) Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?

(2) Short Term Benefits

Another fundamental reason why many employers misclassify their workers, is to reap the short term benefits. First, when workers are classified as independent contractors as opposed to employees there is no income and employment tax withholding required by employers.

Second, the Fair Labor Standards Act does not cover independent contractors, and as a result employers are not subject to minimum wage and overtime requirements. Some employees are also exempt from FLSA requirements, but for those which are not, employers must be aware of important hourly wage and overtime requirements. Wage and overtime requirements can be quite complicated. Below are some basic points to be aware of.

The federal minimum wage is $7.25 per hour, although many states have implemented higher minimum wages. Illinois has a higher minimum wage requirement of $8.25 per hour. Certain exceptions to the minimum wage rule apply such as for youths under 20 years of age or employees who receive a certain amount in tips.

For employees covered by the FLSA, an employer is also required to pay overtime (i.e. one and one-half times an employee’s regular rate of pay) for hours worked in excess of 40 hours in a workweek. One’s regular rate of pay is not always as simple as just their hourly rate of pay because there are various types of other work related payments that employers are required to factor in when doing the computation. Moreover, averaging of hours over two or more weeks is not allowed.

Finally, by classifying workers as independent contracts, employers could reap other benefits such as reducing their liability for acts of independent contractors, not being subject to federal and state discrimination laws covering only employees, and not needing to provide certain employee benefits such as insurance retirement plan, paid vacation, etc.

Consequences for Misclassification

Civil Liability

Many misclassification lawsuits are making their way through the court system by private litigants. These lawsuits include both individual suits, as well as FLSA “collective actions” comprising many litigants, who are challenging their “non-employee” status.

Illinois Law

Under Illinois, misclassifying an employee may subject you and your business to multiple violations under various Illinois employment laws.  Some of these laws include the Minimum Wage Law, the Illinois Wage Payment and Collection Act, Workers’ Compensation Act, and the Unemployment Insurance Act, among others.  Certain consequences for misclassification under these laws include the following:

·    Interest on delinquent unemployment insurance trust contributions at an annual rate of 24 percent.

·    Financial penalties for failing to report wages paid to employees.

·    Financial penalties for willfully failing to make contributions to the unemployment insurance trust.

·    Officers and employees who willfully cause a business to fail to make payments into the system can be held personally liable for the payments due from the business.

·    An employer that knowingly and willfully fails to obtain workers’ compensation insurance for an employee may be fined up to $500 for every day of noncompliance, with a minimum fine of $10,000.

Federal Law

In addition to Illinois legal liability, misclassification of a worker may also result in federal liability. The Department of Labor, through a new initiative, is increasing its enforcement of worker misclassification and is actively working with the Illinois Department of Labor. Most notably, in May 2012, the U.S. Department of Labor announced that it had obtained a $500,000 judgment, including $75,000 in civil penalties, against two Chicago cleaning companies that had misclassified 135 cleaners as independent contractors.  Moreover, in Texas, the Department recently obtained a $105,000 overtime assessment against an employer that had considered workers to be independent contractors for their first 90 days with the company.

Furthermore, if an employer is audited and cannot prove that a worker paid their own income taxes, the employer can be required to pay the tax it should have withheld from the payments to the workers.  A retroactive determination that payments to a worker were in fact wages paid to an employee can have serious consequences, in terms of potential taxes, interest, and penalties to the government.  The amount that the IRS assesses, in part, will depend on the employer’s intent in misclassifying workers.  If the IRS determines that the employer has deliberately misclassified workers, it can hold the employer responsible for all employment taxes that should have been paid.

Our law firm has personally witnessed and been involved in two separate cases recently whereby our clients have faced liability for misclassification of workers, and in addition to any monetary fines or penalties, the legal fees can cost tens of thousands of dollars to resolve the situation.

Owners in many business areas attempt to characterize its workers as independent contractors to restrict tax liability. If you are concerned about misclassification of your workers, Hurley Stanners & Matsko LLC can help assist you and your business with finding the right resources and guidance in avoiding this potential legal pitfall.


Protecting Your Property and Healthcare as You Get Older

Throughout history, humans have been the masterminds behind the building of 300 foot pyramids in Giza and have sent numerous astronauts into space.  Yet, human experience has taught us that even some of the most brilliant minds were prone to making mistakes and lapses in judgment as they got older.  Winston Churchill and Ralph Waldo Emerson are some of the notable examples of people who suffered from dementia and who were prone to making mistakes at an older age.

No one has the ability to stop “father time” from taking its course as we get older and affecting how we think and make day to day decisions.  In this Article, we share our suggestions for simple cost-effective ways for adequately protecting one’s property and health care decisions as one becomes older.

1)      Protecting your Property

a)      Power of Attorney  For Property

Everyone should have a Power of Attorney to protect their property in the event that they become temporarily or permanently incapacitated or disabled.  Generally speaking, a Power of Attorney allows you to appoint someone (usually a family member or close friend) to make property and financial decisions for you on your behalf.  You can specify in the Power of Attorney when the rights under the Power of Attorney will begin and end (if before death), as well as control other aspects of the Power of Attorney such as how to amend it.  Normally, a Power of Attorney will specify that a doctor or a court must determine incapacity before the family member or friend can act for you.

Specifically, in Illinois, A Power of Attorney For Property allows your agent to do the following for you: (1) engage in real estate transactions, (2) perform financial transactions for you or your business, and (3) participate in litigation for you on your behalf.  The duties of the agent can be as limited or broad as desired.  In sum, a Power of Attorney will assist your family and close friends in managing your business and personal affairs if you become seriously incapacitated.  It gives you, as opposed to the court system and others, more control over your life.

b)      Joint Tenancy for Property and Bank Accounts

Titling your real estate property as a “joint tenancy with a right of survivorship” (which often consists of two or more people who jointly own the property) is a great way to ensure that your interest in the property will automatically pass to another upon death, without being tied up in any lengthy legal “probate” process.  The property will automatically pass upon death to the surviving owner(s).

Similarly, unless you have created one or more trusts with an estate planner, it is wise to have your bank account and other investment accounts be jointly owned and titled as “joint tenancy with a right of survivorship.”  This also avoids the probate process as whatever is left in an account after one’s death automatically becomes the other account holder’s personal property.  This account titling ensures that your money is going to the individual(s) you desire and it can provide a huge relief to one’s family in obtaining necessary funds to pay for funeral expenses and other costs.

2)      Protecting your Health Care: Power of Attorney For Health Care

Regrettably, some of us may have experienced difficulty in making health care decisions for a spouse or loved one in the event of an emergency when they are incapacitated.  Fortunately, like a Power of Attorney For Property, a “Power of Attorney For Health Care” is a legal document in Illinois that gives a family member or serious friend the power to make certain health care decisions for you.

A Power of Attorney For Health Care provides a trusted agent (usually a close family member or friend) with the ability to make health care decisions for you in the event of an emergency or disability.  This power to make personal health care decisions for you will be effective to the same extent as though you made the decisions yourself.  The health care powers that may be delegated to an agent include all powers that you have such as (a) the right to be informed about your health care and (b) the right to consent to, refuse, or withdraw from any type of health care.  Additionally, worth noting, even though a Power of Attorney For Property generally ends at death, a Power of Attorney For Health Care may extend beyond your death if desired so that your agent can access your medical records, request an autopsy, or address other post-death issues.  Lastly, worth noting, this power may be revoked by you at any time.

Overall, while most of us may not be of likes of a Winston Churchill or Ralph Waldo Emerson, we can at least be wise in how we plan for the future.  The examples, noted above, for how you can protect your property and health care decision making as you get older will assist not only you, but also your family and your loved ones.  For more information, please do not hesitate to contact Hurley Stanners, LLC.


10 Things Every Business Person Should Know

Every year we realize that our business clients, whether in the manufacturing, service, real estate development  or creative arts and entertainment fields, are more knowledgeable about some issues and less about others than we would have imagined.  We have learned that our clients  are very sophisticated about marketing and about the internet. What we were not prepared for were repeated instances that suggested that they did not know  as much as they should about the requirements of operating  their corporations or limited liability companies, and about their  business contracts. We have decided to share what we have learned  so that as the economy improves our clients will be able to avoid unnecessary legal and accounting costs.

With the increase in the use of the Internet generally and the creation of governmental web sites, like the Illinois Secretary of States web site, more information is available today about self incorporation, whether as a corporation or a limited liability company. Many mistakes are made as a result of self incorporation and sometimes the mistakes are quite serious. These generally include issues with regard to Sub-S elections, federal and state tax registrations, business licenses, and state statutory requirements. There are also important conceptual things which clients miss when they do not work with an attorney to incorporate their business. One is that generally the corporation and not the business owner should be the party to enter into the business’s contracts. We had one client incorporate to protect her personal assets and then sign individually and on behalf of the corporation on all contracts.  This totally negates the advantages that corporations and limited liability companies (LLCs) have over sole proprietorships and partnerships.  We worked with a great number of clients who self incorporated and then had to pay to correct costly errors or to be re-instated because they did not understand certain statutory or administrative requirements. We always advise our clients of the types of matters they can handle themselves to save costs. Incorporating is simply not one of those items.

We suggest to all clients who want to set up a new business that they first create a  business plan. A Business  plan helps to identify your business market, customers, operating capitol (cash) requirements and other issues. It is required if you are going to seek bank financing. But even if you are going to provide self or family financing for your business venture, a Business Plan helps to flesh out the facts that you need to operate. It can also serve to clarify which owner will do what and ultimately whether you are better off with joint owners or not. There are numerous tools for creating good Business Plans. Let us know if you need any resources.

Before setting up a new business, using a new trade name for a product or service or creating a domain name and/or web site, you should make sure that you are not infringing the rights of another business in that name. Remember that anytime you use a name in your business which is similar to that of another business selling a similar type of product, you could be causing confusion in the market and exposing your business to a lawsuit based on trade or service mark infringement. Just because you have obtained a domain name from a domain name service does not mean that you will not be infringing on another party by using the name. A domain name must be registered as a trade mark for protection. Whether the conduct on your part is intentional or not is not the issue. To avoid this costly mistake you should have a search conducted by a reputable intellectual property law firm   The intellectual property law firm can then tell you if the name is available and how to register the trade or service mark with the United States Patent and Trademark Office for your business.

The Secretary of State is the governmental office which controls business entities and enforces the various state statutes regarding business entities.  The Secretary of State requires companies and limited liability companies to have a registered agent. This is the contact person with the Secretary of States Office. It is common business practice that this person be your business’s attorney. This is because business people get busy and do not always understand the legal ramifications of the communications they receive from the Secretary of State. Your business attorney does and will see that all time sensitive matters are handled timely.

A Minute Book is a book which contains all of the important papers  relative to a corporation. This would include the Articles of Incorporation, which is the initial form filed to create a corporation as well as Minutes, Stock Certificates and tax registration number applications. Keeping a Minute Book updated is important in the event that an IRS audit occurs, a joint owner wants to sell  his or her interest or you want to buy a business or sell your own business.

Business owners seek a business entity that protects them as well as provides them with certain accounting and tax advantages. Once incorporated, whether as a corporation, limited liability company or otherwise, you must  comply with all of the state statutory and other requirements that exist in order to maintain the protection against personal liability that you desired in the first place. Your business attorney should explain these items to you in detail. Suffice it to say this generally means creation of a business bank account, minimum initial capital requirements and compliance with yearly statutory annual report and meeting requirements.

As a rule if you have created a corporation, limited liability corporation, partnership or other business entity you need  to understand that you are signing not individually on a contract for your business  but as the corporation, limited liability corporation, partnership or other entity. You need  to talk to your attorney on how to effectively sign contracts without personally obligating yourself, as an owner.

We had a number of clients use e-mail in communicating with clients, including communications which sought to create a contract. Unfortunately the too casual form of “e-mail speak” when using e-mail for business can prevent a clear meeting of the minds as to the terms of the contract being created. In some instances, it is not even clear that a contract has been created. One client risked recovery of $50,000 because he had used e-mail for all communications with a client, which client eventually tried to avoid total contract liability. While the term “snail mail” is used today as a popular derogative remark for regular first class mail,  formal business letters sent by mail are generally written much  clearer as to the terms of a contract being created than  e-mail communication used to confirm a business contract.

If you write formal business letters and e-mail them instead of mailing them and they contain a clear and concise statement of the terms of a business relationship then you should end up with each party understanding that a contract has been formed and what the terms of the contract are. However, e-mail by its nature and practice seems to cause even the most careful business person to be too casual. It is not adequate in most business contexts to write, “Ah, sure that’s great. Let’s move forward and sign it Bill.” Have you created a contract?  What are its terms? Who is the party entering into the contract, the business or the owner personally. While e-mail saves time and avoids delays through playing telephone tag, it is also a devise that must be used wisely in order to avoid expensive mistakes.

As a part of your general  business practices, you should make sure that you have a fully executed copy of every business contract. We suggest a separate file for each. These files can then be reviewed for budgetary purposes, notice requirement (i.e. when a renewal or termination notice needs to be given) and other contractual obligations. We had a major client that failed to contemplate its contractual obligations when making major business structural changes and ended up in litigation for breach of contract with a vendor. This was totally unnecessary and should not happen to you.

Because we hear this frequently from our clients, we can not over emphasize that any contract can be negotiated. The fact that a contract looks like a typed form is irrelevant. Short term contracts often reflect the power of the stronger party to the contract but long terms contracts should be created and viewed by each party as mutually beneficial.  Otherwise, problems should be expected.