Recently in Employment Category

Drafting a Social Media Policy for Your Employees: Part 1

December 12, 2014,

Instituting a company-wide social media policy is one of the best ways to protect your business's brand and image on the Internet. Disgruntled employees may say negative things about your business online, harming your reputation and putting your company at risk. A well-written social media policy sets reasonable restrictions on your employees' use of the Internet. Here are 3 considerations to think about when drafting a social media policy.
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3 Considerations When Drafting a Social Media Policy

1. Read Other Policies
It's important to do your research when writing a social media policy for employees to make sure yours is in line with current industry standards. You don't want to institute a policy so unforgiving that you drive potential talent away from your business. Search for other social media policies and contact an experienced lawyer to make sure your policy is appropriate.

2. Be Specific
Aside from the obvious requirements (be ethical, mindful and maintain a positive presence online), you may also consider adding specific limitations on employees' use of social media. For example, consider having employees identify themselves as such when discussing the company online and requiring them to disclose that their opinions do not necessarily reflect the views of your business.

3. Monitoring Social Media
It is important to consider how you plan to monitor your employees' use of social media. If you prohibit this activity at work, you lose your way to monitor what your employees are doing online, so consider this before placing an outright ban during work hours.

Does your business have a company-wide social media policy? Stay tuned for Part 2 of Drafting a Social Media Policy for Your Company [insert link to part 2 when it goes live], where we discuss 3 more items to consider before you begin writing. For help on drafting a social media policy or assistance with the first steps to starting a business, contact your talented team at Structure Law Group today.


About Structure Law Group
Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

Steps to Creating Bylaws

July 18, 2014,

rules.jpgOne of the first things any newly formed corporation should do is draft bylaws. Bylaws are a corporation's operational blueprint. They identify what the business does, how it is run and who is in charge. Here then are five steps to drafting a set of bylaws.

5 Steps to Creating Corporate Bylaws

1. Detail relevant information concerning shareholders. This includes who holds stake in your corporation, what rights they hold and when and where meetings are to be held.

2. Identify the Board of Directors. Include information on meetings, procedures for resignation and removal or addition of directors.

3. Outline the procedure by which officers are elected. Officers are people like the CEO or CFO. Detail their roles and responsibilities as well as how they will be compensated.

4. Indemnification of Officers, Directors, and Agents. In order to protect those who labor on behalf of the corporation, the bylaws should spell out who is indemnified for acts taken on behalf of the corporation, as well as the procedure for handling claims.

5. Finally, bylaws are made to be amended. What's the process look like? Deciding on this issue now will prevent headaches down the road. You'll want to figure out who has the authority to add, alter or completely remove a bylaw.

These five steps are really just a working model. There are fine points that should really only be handled by a professional. An attorney can help you craft a set of bylaws that are clear, sensible and legal. In reality, this process consists of at least six steps with the first being contacting a local lawyer to help get you started.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

LLC's and Corporations: Making the Switch

June 13, 2014,

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Converting a limited liability company to a corporation is a relatively easy process. Before I take you through the steps, let's take a quick look at the differences between the two types of business structures.

3 Differences Between Limited Liability Companies and Corporations

1. LLCs are formed by one or more people (members). These members file Articles of Organization and craft an Operating Agreement. Corporations file similar paperwork. However, unlike LLCs, corporations have shareholders and governing bodies like a Board of Directors.

2. Corporations have the ability to offer preferred stock which can be desirable to investors, including angel investors and venture capital investors. LLCs do not have a recognized class of preferred ownership.

3. LLCs are subject to a gross receipt fee based on the gross revenues of the company. This fee is charged based on the gross receipts, irrespective of whether the company had net income or a net loss. Corporations by comparison are taxed on net income.

Converting an LLC to a Corporation

Now that I've gone over some of the key differences, it's time to talk about converting your limited liability company into a corporation. There are details specific to your company, but in general the process is pretty straightforward.

1. Adopt a plan of conversion. Here you'll need to address some key questions like the name of your new corporation and how you plan to convert membership interests into shares.
2. Craft a statement of conversion. The statement needs to include the following: the name of your LLC, the Secretary of State's file number for your LLC, documentation that your plan of conversion was approved by the LLC's members and is compliant with California law.

Once these tasks have been completed and approved, your LLC is now a corporation - but don't think you're done. You'll need to draft bylaws, elect officers and directors, hold an initial board meeting and issue stock certificates. The team at Structure Law Group can help you with the transition. You can find more information about our services by clicking on this link.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

Employee vs. Independent Contractor

May 30, 2014,

You're ready to hire. Should you go with an employee or independent contractor? Your decision will have implications for your business. In this blog post we'll address the differences between employees and independent contractors, the benefits of both and how to tell the difference between the two.

What is an Employee?

A simple definition of an employee is someone you hire and directly manage. Employees are generally provided training by the business and work for only one employer. A benefit of hiring an employee is that you get to set a schedule and train the person in the way you want things done. Employers generally have more control over the end result in this situation.

What is an Independent Contractor?

A contractor can have his or her own business. They do not fit within the company framework. Contractors can work for more than one business at a time and they set their own schedule. A major advantage to hiring a contractor is that you don't have to pay into Social Security, Medicare and unemployment. You also can set the terms for employment. If you don't like their work you can let them go at the end of the contract.

How do you know?

The IRS offers some general guidelines to help you determine whether or not you have an employee or independent contractor. The agency looks at degrees of control and independence. The three categories they use are behavioral, financial and relationship.

• Behavioral refers to whether or not your business has the right to control how the worker does his or her job.
• Financial is a measure of how the worker is paid and if he or she is reimbursed.
• Relationship examines any contracts or benefits.

There are several questions to ask yourself to determine if you're hiring an employee or independent contractor.

1. Do you want full control of how the person does the work? If so, the person will be an employee.
2. Do you plan to have the worker paid regularly via your normal payroll system as opposed to having them send you invoices for their services? If so, the person will likely be an employee.
3. Will the worker will be paid by the project rather than hourly? If so, they're likely an independent contractor.
4. Will the person be eligible for company benefits? If so, the person will be an employee.

These are just some of the important things to consider when determining if you're hiring an employee or an independent contractor. If you need help you can fill out a Form SS-8 and send it to the IRS. For quicker results consider calling or email the professionals at Structure Law Group. We're happy to help.

About Structure Law Group

Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

Business Tips: 4 Steps for a Successful Contract Negotiation

May 19, 2014,

Business is an ongoing back-and-forth between interested parties. Contract negotiations, whether they be with employees or a competing business, can be contentious. There's a lot at stake and big feelings are involved. A successful contract negotiation is one where all parties feel they got something out of the deal. This isn't wishful thinking. By following these four simple tips you can create an environment where everyone is heard and respected.

1. Multiple Meetings

The first tip is pretty straightforward. Break down the negotiation into multiple sessions. The longer you sit at a table arguing over the same points the less likely you'll come to an agreement. Give the person time to digest the information. Clear eyes and a fresh head make for better judgment.

2. Focus on Interests not Positions

The second tip involves removing emotion from the table. If a person is angry or frustrated, chances are it's not because of you. Identify the interests behind the issue. Business is a world of clashing personalities and ideas. Depersonalize the process by removing statements like, "I think" or "I believe." Instead, focus on the facts. If an employee is asking for a salary increase you can't afford, then be honest. Say something inclusive like, "We don't have the funds right now." This way you're not making a judgment about the person's abilities, which can lead you into trouble.

3. Know your Priorities

The third tip is all about you. What do you want to see happen? Know what you want before you go into the negotiations. This doesn't mean you should box your ears and ignore what the other person has to say. Good faith negotiation requires keeping an open mind. Still, knowing what you want and expressing those views provides a starting point that is clear to the other party.

4. Ask Questions

Finally, don't be afraid to delve deeper. If the other party is coming back to the same issue it's okay to ask why. This is clearly an important topic to them, so find out why it's so critical; just be mindful of your approach. You want to sound interested and not accusatory.

A successful contract negotiation will help your business. These four tips are a good start. If you need further guidance consider consulting an attorney like those at Structure Law Group. This is a good idea if you need clarifications about contract law or have an especially difficult other party.

About Structure Law Group
Structure Law Group is a San Jose based firm that specializes in business issues including business formations, commercial contracts and litigation.

Photo Credit: Jonny Goldstein via Flickr

More Case Law for Employee Non-Compete Agreements

December 21, 2012,

Having practiced corporate law in Silicon Valley for 15 years, I must say that there is nothing more frustrating for my clients, who are mostly closely held businesses in the San Jose area, than spending months or years training an employee only to have her leave and go on to compete with the company that trained her. In particular, I represent several staffing and consulting companies and have had to listen to their complaints of how unfair this is from the employer's perspective. Often, I have to tell these hard working, small business owners that there is almost nothing they can do (except pursue a claim against the employee for misappropriation of trade secrets). In 2008, the California Supreme Court decided Edwards v. Arthur Andersen LLP, making it clear that employee post-employment non-compete agreements are unenforceable in California except in certain very limited circumstances, including in connection with the sale of a good business involving goodwill.

Now, a new California Court of Appeals case, Fillpoint, LLC v. Maas (August 24, 2012) further enforces California's attitude towards fostering open competition and disfavoring restrictions on employees. In the Fillpoint case, a major shareholder and key employee signed both a three year non-compete agreement related to the sale of his stock, and a one year post-employment non-compete in his new employment agreement. The Court paid particular attention to whether the stock purchase agreement and the employment agreement should be read together as one document. The employment agreement alone would violate California's view of post-employment non-compete agreements as against public policy. However, in connection with the sale of the business, it could be enforceable. In this case, the shareholder/employee worked for the acquired company until the three year non-compete ran out, but then terminated his employment and went to work for the competition. The company claimed that the one year non-compete covenant in the employee's employment agreement should restrict him from such competing employment. The employment agreement non-compete provision specifically prohibited him from making sales contacts or actual sales to any customer or potential customer of the company, working for or owning any business that competes with the company, and employing or soliciting for employment any of the company's employees or consultants.

The court found that the two agreements should be considered integrated because the covenants were executed in connection with the sale or disposition of stock in the acquired company. In particular, they noted the integration clause in the documents, which stated that if there were any conflicts between the two documents, the stock purchase agreement would control. The court went on to consider whether the non-compete and non-solicitation covenants should be void and unenforceable, and found that they were because they were overly broad. In particular, the court noted the over-broad restriction against selling to potential customers of the company.

So what does this new case teach us? Non-competes are still extremely limited in California. And for me, as a business attorney in the Silicon Valley where mergers and acquisitions are either a way of life or an exit strategy for most businesses, this case reminds me how careful business lawyers have to be when drafting these provisions to make sure they are enforceable. Non-compete provisions should be clear that they are connected with the purchase and sale of a business, including any specific payment allocated to such non-compete covenant. And when drafting a non-compete, do not try to make it any broader than necessary to protect the goodwill being acquired.

There is another question that comes up often in my practice. After I am done explaining how most non-compete covenants are illegal and unenforceable in California, my small business clients almost always ask about whether they can include an employee non-solicitation agreement instead, to at least prevent the person leaving from taking key people with them. I really wish I could clearly and conclusively tell them that they can, but I am not so sure anymore. In the past, we could point to the Loral Corp. v. Moyes (1985) case which held that employee non-solicits are enforceable in California. However, the Arthur Andersen case and now the Fillpoint case make this position a lot less certain, even though they don't specifically overturn Loral corp.

Where does this leave us? It seems like we say this every year, but it is time to revisit your employment agreements and independent contractor agreements. If you insist on keeping an employee non-solicitation covenant, make sure it is as narrow as possible and that your agreement has a severability clause to (hopefully) save the rest of the document in the event a court finds the restrictive covenant to be void and unenforceable.

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

Tax Update: IRS Ruling Affects Automatic Gratuities

October 15, 2012,

Whether it is a group lunch to welcome a new employee to our law firm, a birthday dinner for family, or Moms' Night Out with friends, I often find myself enjoying Silicon Valley restaurants from San Jose to Palo Alto with a group of six or more. It is not uncommon to have the restaurant automatically add the gratuity, which is usually 18%, to our bill. This has always bothered me - not because I have a problem with paying the 18% (I often tip more than that), but because it is sometimes not obvious on the bill, and they still provide the blank line for you to add a tip, as if they are trying to trick people into double-tipping. Well, if you do not like the automatic 18% gratuity added to your bill, you will be happy to hear about a recent IRS ruling (Revenue Ruling 2012-18, June 25, 2012). This ruling clarifies the definition of tips verses service charges, each of which is treated differently for tax purposes. The result will likely be the end of automatic gratuities.

The IRS ruling states:
"The employer's characterization of a payment as a "tip" is not determinative. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge. The criteria of Rev. Rul. 59-252, 1959-2 C.B. 215, should be applied to determine whether a payment made in the course of employment is a tip or non-tip wages under section 3121 of the Code. The revenue ruling provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered. For example, Rev. Rul. 59-252 holds that the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services (e.g., waiter, busser, and bartender) is a service charge and not a tip. Thus, to the extent any portion of a service charge paid by a customer is distributed to an employee it is wages for FICA tax purposes."

This definition may cause several different tax and reporting issues for restaurants, including:

- Restaurants can benefit from applying a general business credit toward employer side Medicare and Social Security taxes on tip earnings, which would be lost if these tips are considered service charges.
- Services charges will have to be reported as wages, affecting overtime rates.
- Services charges would be included in the restaurants calculation of Gross Receipts.
- Restaurants could choose to keep the service charge rather than pay it to employees.

So, next time you go out to eat with a large party, take a closer look at the check when it comes. I am guessing the automatic gratuities will soon change to something like a "suggested tip amount."

The information appearing in this article does not constitute legal advice or opinion. Such advice and opinion are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to the author.

The Brinker Case: Employers Receive Clarification on Meal and Rest Breaks

May 23, 2012,

As a business litigation attorney in San Jose, I am always concerned when clients are confronted with murky or unclear regulations. For many years, employers have been awaiting clarity on California's confusing meal and rest break laws. There has been uncertainty as to whether employers must force their non-exempt employees to take their meal breaks, or whether the employer meets its obligations by simply providing employees the opportunity to take their breaks. The California Supreme Court very recently provided much needed clarification on this important employment law issue in the case of Brinker Restaurant Corporation v. Superior Court of San Diego County.

The Court also addressed the proper method to calculate the timing of both meal and rest breaks, putting an end to the guessing game of how many breaks must be provided, and when the breaks must be given.

Employers Do Not Need To Police Employees During Meal Breaks
The Court decided that employers, while under a legal duty to provide meal breaks at appropriate intervals, are not obligated to ensure that employees do no work while on their breaks. The employer's obligation is simply to relieve its employees of their work duties, relinquish control over the employee's activities, and permit the employee a reasonable opportunity to take an uninterrupted 30-minute break. Of course, the employer must not impede or discourage the employee from taking the provided break.

Also of great importance was that the Court stated quite clearly that employers are not required to police meal breaks to ensure that no work is performed during the break. In fact, employees are free to work during their meal break, if they decide to do so.

Timing of Meal Breaks
The Court also provided clear guidance on the timing of meal breaks. The first meal break must be provided no later than the end of an employee's fifth hour of work. A second meal period must be provided no later than an employee's 10th hour of work. Meal periods can be scheduled prior to the end of the fifth hour of work, including in the first hour of work, and can occur before the first rest break.

Timing of Rest Breaks
The case also clarified when employees are entitled to rest breaks. Employees must be given one 10-minute rest break for shifts from three and one-half to six hours in length, two 10-minute rest breaks for shifts of more than six and up to 10 hours in length, and three 10-minute rest breaks for shifts more than 10 hours and up to 14 hours in length. Employees who work less than three and one-half hours are not entitled to a rest break. The Court also stated that there is no requirement for an employer to give a rest break before a meal break.

Overall, the business community and employer-side employment attorneys view the Brinker case as a common sense legal opinion that offers clear guidelines for handling employee meal and rest breaks. Furthermore, the case may have the effect of curtailing potential class-action lawsuits against California businesses that, prior to the Court's ruling, could have been accused of meal and rest break violations.

Continue reading "The Brinker Case: Employers Receive Clarification on Meal and Rest Breaks" »

Stopping Illegal Acts by Current and Former Employees

March 19, 2012,

As a business litigation lawyer in Silicon Valley, I have seen quite a few employee-related issues come up for businesses in San Jose and Santa Clara. For the purpose of this blog, I have combined issues of several clients into one hypothetical owner of a small Internet company. The owner discovered that one of her employees had started a competing online business and was attempting to staff the new business with her current employees. The owner was justifiably concerned as to whether her employee's acts were illegal, and whether she, as employer, had any recourse. This blog summarizes some of the litigation issues businesses face when employees take actions that violate California's unfair competition laws. Click here to read my previous blog on unfair competition by competitors.

The owner's biggest problem was the fact that her employees were being solicited to work elsewhere. Like many small business owners, this owner had worked hard to create a business staffed by well-trained employees who provided customers with excellent goods and services. The deliberate effort by the company's existing employee to pick up her other employees caused the owner undue stress and frustration.

The soliciting employee in this case was clearly in the wrong. Under California law, while working for a company, an employee cannot solicit fellow employees to leave that company and work for a competitor. To do so is a breach of a confidential relationship, a breach of an implied obligation, and possibly even a breach of fiduciary duty, depending on the soliciting employee's position. Where the employee is a fiduciary, liability for unfair competition may also extend to the hiring competitor if it knows of the employee's actions and benefits from them.

While the owner provided a top-notch online service with an established and growing customer base, she was also concerned about her employee's competing web site. California law permits an employee to make some preparations to establish a competing business while employed. However, the employer may have good cause to terminate the employee if the acts by that employee to establish the business are such that the employee cannot give his or her undivided loyalty to the employer. Once an employee ceases work, the employee may go into direct competition with his now-former employer.

It is also important to note that employers may also sue former employees who misappropriate their ex-employer's proprietary information or trade secrets. For example, businesses expend a great amount of time, effort, and money in developing customer lists. Such lists are often the most valuable asset a company a may have, and can qualify as both proprietary information and a protected trade secret. Under California law, an employee may not take an employer's protected customer address list and then begin directly soliciting the customers.

However, to qualify as protected information, the customer list should contain specific information not generally known to the public or competitors. This information might include names of contact personnel, history of previous dealings with the customer, price quotes provided to the customer, and other particular information. A company should also maintain its customer list in a confidential manner. The more rigorous a business attempts to maintain the secrecy of its customer list, e.g. informing employees of the confidential nature of the information, protecting the information with passwords, including notices that the information is proprietary, and other steps, the more likely the court will be to find that the customer list qualifies as proprietary information or a trade secret. A non-solicitation clause in an employment contract, restricting the employee from soliciting the employer's customers for a certain period of time after leaving, may bolster an employer's argument that the employee cannot lawfully use the customer list.

Trade secrets, of course, are not limited to customer lists, and include a wide variety of formats, such as business plans, bid specifications, software code, and other documents and information. Such documents and information should be proactively protected by businesses, in case an instance occurs where litigation arises due to an employee's misappropriation of trade secrets, or other acts of unfair competition.

Continue reading "Stopping Illegal Acts by Current and Former Employees" »

New California Law Regarding Willfully Misclassifying Employees as Independent Contractors

March 13, 2012,

As a corporate and business lawyer in San Jose, I have been busy speaking with Silicon Valley business owners about a recent California law affecting companies that have misclassified employees as independent contractors. When the 2008 economic crisis hit, large high tech companies and small start-ups in San Jose, Santa Clara and Sunnyvale, among other cities, adapted by hiring workers as independent contractors to avoid paying payroll taxes and offering benefits to the new hires. Unfortunately, some companies may have inadvertently misclassified employees as independent contractors.

There has been a lot of publicity around the new IRS program allowing businesses to voluntarily correct the misclassification and pay only a low penalty. However, there has not been quite as much news about the recent California law (Senate Bill 459 signed into law by Governor Brown in October, 2011) which makes the willful misclassification of employees and independent contractors illegal and subject to severe penalties. Under the California law, the Labor Commissioner can impose penalties not just on the employer, but also on the employer's accountant or other paid advisor (other than employees or attorneys). These penalties range from $5,000 to $15,000 for each misclassified person, or $10,000 to $25,000 per violation if there is a "pattern and practice" of violations. There are still more penalties for employers that charge their misclassified employees a deduction against wages for any purpose (including space rent, goods, materials, services, equipment maintenance, etc.), which is considered as another attempt to wrongfully treat them as independent contractors.

What does "Willful Misclassification" Mean?
The definition of willful misclassification in the law is: "avoiding employee status for an individual by voluntarily and knowingly misclassifying that individual as an independent contractor." (California Labor Code Section 226.8 (i)(4).)

Contractors Beware
The labor agency is required to notify the Contractors State License Board if a contractor is determined to have willfully misclassified workers, and the new law requires the Contractors State License Board to initiate discipline against the contractor.

Everyone Beware
The new law also provides for public embarrassment by requiring employers who have willfully misclassified employees and independent contractors to prominently display a notice on their website (or if they do not have a website, then in an area accessible to all employees and the general public) saying that they have committed a serious violation of the law by willfully misclassifying employees, that they have changed their business practices so as not to do it again, that any employee who thinks they may be misclassified may contact the Labor and Workforce Development Agency (with contact information), and that the notice is being posted by state order.

It is not just the employer that needs to worry about misclassification. If you provide paid advice to an employer, knowingly advising the company to treat a worker as an independent contractor to avoid employee status, you can be held jointly and severally liable for the misclassification. This rule does not apply to business lawyers like myself, because attorneys providing legal advice are exempt from this liability, as are people who work for the company and provide advice to the employer.

Continue reading "New California Law Regarding Willfully Misclassifying Employees as Independent Contractors" »

IRS Program for Employee Misclassification

February 7, 2012,

Has your business been misclassifying workers as independent contractors? If so, you should pay special attention to a recent IRS announcement of its new program giving a break to employers who voluntarily correct such misclassifications. With Silicon Valley being a technology hub, there are thousands of computer programmers and engineers working as independent contractors in San Jose, Sunnyvale, and Mountain View. High-tech companies and start-ups that employ these individuals should carefully review their HR files to see if they have misclassified any employee. If a company discovers that it has wrongly classified an employee, it should then evaluate the IRS program to determine if the company should participate in the program.

In an earlier blog, I wrote about the importance of companies classifying their workers correctly in order to avoid substantial penalties and taxes. If your company may have misclassified workers, the new IRS program will let you voluntarily correct your errors and just pay a low penalty equal to 1.068% of compensation paid to those workers last year. IRS Announcement 2011-64 provides the details. To qualify for the IRS program, your company must not be under audit, and must have consistently treated the workers as contractors for the past three years. No reasonable basis for the previous misclassification is necessary. Going forward, you must treat the workers correctly as employees. The minimal penalty may be a good idea if you consider that the Labor Department and the IRS are beginning to share leads on misclassified workers. [Kiplinger Tax Letter September 30, 2011, Vol. 86, No. 20.]

However, there are some potential downsides in addition to having to pay the penalty. So, think twice before you come clean with the IRS. First, you will lose IRS Safe Harbor protection on those workers and they will always be treated as employees going forward. Second, as part of the deal, the IRS requires you to agree to extend the statute of limitations for an extra three years, meaning you can be audited for employment taxes and misclassifications for six years. Third, the California Employment Development Department ("EDD") is not participating in the program, so it is not bound by the rules and will likely assess your identified workers for the full three year statutory period. And the EDD is likely to find out about your deal with the IRS because of their agreement with the IRS to share information, and because they will see your employer credit for paying unemployment taxes and it will not reconcile with your quarterly wage reporting, triggering an audit. [Spidell California Taxletter, vol. 33.11, November 1, 2011, pages 124-125.] California has some new misclassification penalties which are significant.

If you still feel that participating in the IRS program is a good idea and will help you sleep better at night because you have been misclassifying workers, think carefully about which workers do and do not need to be reported and re-classified. It may be that only some of your workers are misclassified, but once you claim them as employees under the new IRS program, you are stuck with that classification.

Continue reading "IRS Program for Employee Misclassification" »

Catching Up On New California Employment Laws For 2012

January 23, 2012,

With the new year comes new laws, and businesses in the San Jose area should be aware of the new California employment laws that are on the books in 2012. Ensuring compliance with these new laws is good for the bottom-line, as it will make for happy employees, who will in turn make for satisfied customers. Making sure that your business complies with the new laws put on the books each January 1st may help your company avoid employment-related litigation.

Hiring Practices
Starting in 2012, employers may no longer obtain consumer credit reports about employees and job applicants. There are exceptions to this law, particularly for positions requiring access to bank or credit card information and other personal information, positions that include access to $10,000 or more during the daily course of business, positions involving signatory authority, and management positions.

Also, at the time of hire, employers must now provide notice to new nonexempt employees of the following information: pay rate; overtime rate; form of pay (hourly, salary, commission, other); a list of allowances that are included as part of the minimum wage; name, principal address, and telephone number of the employer; and the regular pay day designated by the employer. The employer must provide written notice to employees within seven days of any changes to this information.

Finally, the penalty for willfully misclassifying employees as independent contractors is now between $5,000 and $25,000. This five-fold penalty increase underscores the importance of properly classifying new hires.

Employee Leave
All employers with five or more employees must maintain and pay for a group health plan for any eligible female employee who takes Pregnancy Disability Leave for up to a maximum of four months during a 12 month time period. These benefits must remain at the same level as though the employee had been working during the leave. These requirements extend beyond those of the federal Family and Medical Leave Act.

The law regarding organ and bone marrow donor leave has also been clarified for 2012. During a one year period, employees are allowed 30 days of leave for organ donation and 5 days of leave for bone marrow donation, with the law now stating that the leave days are to be calculated as business days.

Discrimination Law
The California Fair Employment and Housing Act (FEHA) has been amended to prohibit employers from discriminating against employees based on genetic information, including genetic tests of an employee or his or her family members, and the existence of a disease or disorder in family members of the employee. FEHA differs from a similar federal law in that FEHA applies to employers with five or more employees, while the federal law covers employers with 15 or more employees.

FEHA has also been updated to clarify that discrimination on the basis of gender identity or gender expression is prohibited. Previously, only the term gender identity was used. Gender expression is defined as, "a person's gender-related appearance and behavior whether or not stereotypically associated with the person's assigned sex at birth." Employee dress codes must allow employees to dress in a manner consistent with both the employee's gender identity and gender expression.

Additionally, health care service plans and health insurance policies issued to California residents must provide equal coverage to domestic partners as that provided to spouses. While this has been the standing policy in California, the new law ensures that employers located outside California and with a majority of employees located outside of California must comply with California law as it pertains to California residents.

Wage and Hour Laws
Employees alleging violations of the minimum wage may now recover liquidated damages as a result of a complaint heard before the Labor Commissioner. Liquidated damages, which serve to punish the employer, are permitted in an amount equal to the unpaid wages owed to the employee. Put simply, for every dollar an employee is awarded in unpaid wages, the Labor Commissioner is authorized to award an additional dollar in penalties. Previously, employees could receive liquidated damages only after filing a complaint in civil court.

In the prevailing wage arena, which applies to specified state or federal public works contracts, the minimum penalty for wage violations has been raised from $10 to $40 per day for each worker paid less than the prevailing wage, and the maximum has been raised from $50 to $200.

When it comes to new year's business resolutions, some cannot fall by the wayside. Resolving to make sure that your business is in compliance with the new California employment laws for 2012 is an easy resolution to keep, and one that will help keep your employees happy and avoid costly litigation.

Continue reading "Catching Up On New California Employment Laws For 2012" »

Reminder for Employers in California - Reporting New Employees and Independent Contractors

December 16, 2011,

During the past few months, we have seen an increase in hiring from small startups and larger corporations here in San Jose and other parts of Silicon Valley. At this time of year, when companies are about to review Forms W-2 and 1099 for their workers, it is a good time for a reminder about California worker reporting requirements. In California, when a company hires a new employee, it is required to report this to the Employment Development Department (the "EDD") within 20 days of hire, regardless of whether the employee is full-time or part-time, or the amount of compensation.

If a business hires an independent contractor and pays the contractor more than $600, or enters into a contract with that individual for $600 or more, within a calendar year, the business is required to report the hiring to the EDD within 20 days of making a payment. Although the hiring of a new employee need only be reported once, the hiring of an independent contractor must be reported every year. However, if a company contracts with another business that provides a tax identification number rather than a social security number, the company hiring that business does not need to report to the EDD.

It is wise for a company to report to the EDD contractors it expects to pay in January of each year (e.g. continuing contracts) when the company prepares and reviews 1099s for the prior year. There is no penalty if a company reports a contractor and then the contractor does not actually perform services in the new year. However, the EDD could assess a penalty against a business for each failure to report a contractor within the required time frames. Source: Spidells California Taxletter Vol. 33.10.

Employer Update

December 2, 2011,

Starting in April, 2012, the EDD will calculate an ex-employee's unemployment claim differently than it does now. Currently, the EDD calculates the unemployment claim based on a lookback period of one year ending two quarters prior to the termination of employment. In April, 2012, the EDD will calculate the claim based on a lookback period of one year but ending one quarter prior to the termination of employment. This is a good reason to convert to online filing if you haven't already. For online filers, the EDD will already have this information and the change will be seamless to your business. However, if you do not file online, the EDD may not yet have your wages report for the prior quarter, or may simply not have processed it yet. In that case, you will receive a request for wage verification, and the employee will receive a request for proof of wages claimed. As the employer, you will have 10 days to complete the form and mail it back.
Source: Spidells California Taxletter Vol. 33.11, November 1, 2011, pages 130-131.

Alternative Workweek Arrangements in California

November 15, 2011,

As always, be careful when dealing with employees. I recently was contacted by a small business owner in Sunnyvale who was irate because her previous business attorney assisted her with a new alternative workweek schedule and all the employees agreed. Then, years later, they had to lay off some employees and the terminated employees just made a claim for overtime for all the hours worked over eight in a day. Because the alternative workweek was not agreed to in a secret ballot, it was not upheld by the Labor Board and her company had to pay significant amounts to several ex-employees.

In the past few years, I've noticed that more and more small businesses and corporations in San Jose and throughout Santa Clara County have moved a portion, or all, of their employees from a standard five day, eight hours a day workweek to a four day, ten hours a day workweek. A company that is interested in implementing this type of alternative workweek schedule must go through the proper process for implementing the schedule, or the company may risk misclassifying employee hours worked and end up paying penalties and fines for the misclassification. If an alternative workweek schedule is implemented correctly, an employer may be exempt from paying overtime to employees working up to ten hours a day, four days a week. Alternative workweek schedules can be proposed for an entire work unit or as a part of a menu of options for a work unit.

In California, there are several actions that must be taken before an alternative workweek schedule can be adopted by a company. A company cannot simply impose the new schedule on its workforce. One required action is for the company to hold a meeting with employees who would be affected by an alternative workweek schedule. The meeting is held so that the employer can discuss the effects of the alternative workweek on the affected employees and the employees can vote on the proposed schedule.

The following are some steps that should be taken before the vote can take place:

• The employer must first provide a written notice to the affected employees. The notice will inform the employees that the company would like to adopt an alternative workweek schedule, and invite them to attend a meeting to discuss the effects of the alternative workweek and vote on the proposal. The written notice, which must be provided 14 days before the actual vote, should disclose the effects of the proposed arrangement on employees' wages, hours and benefits, and include meeting logistics.

• The proposed alternative workweek schedule must be adopted in a secret ballot election by at least two-thirds of the affected employees in the work unit. The secret ballot election must be held during regular working hours at the employees' work site.

• Ballots for the election can only be cast by the affected employees.

• The results of the election must be reported by the employer to the Division of Labor Statistics and Research within 30 days after the results of the vote are final. The report must be given in letter format and must include the date of the election, a final tally of the vote (number of "yes" and "no" votes), the size of the unit considering the change to an alternative workweek, the nature of the employer's business, contact name and phone number. This information becomes public record.

• The letter must be sent to the following address:
Division of Labor Statistics and Research
455 Golden Gate Avenue, 9th Floor
San Francisco, California 94102

• If a work unit votes in favor of an alternative workweek schedule, employees who are affected by the change may not be required to work those new work hours for at least 30 days after the announcement of the final results of the election.

If an employer adopts an alternative workweek schedule consisting of four, ten hour days, the employer must still pay overtime pay of 1½ times the hourly rate for any hours worked in excess of ten hours per day up to twelve hours, and double time for any hours worked over twelve. The employer must also have a standard five days, eight hours schedule available for employees who are unable to work the four day schedule.

If you have any questions about implementing an alternative workweek, talk to a professional with experience in this area and don't assume that if all the employees agree everything will be fine.

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