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WBON Blog: She Owns It!

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The WBON "She Owns It!" blog features posts by members for members with actionable tips and business information for women business owners and entrepreneurs. 

  • 20 Jun 2016 10:37 PM | Pat Heffernan (Administrator)

    The Worker Classification Dilemma in Small Business

    When your business has so much happening you need more help, that's usually good. But should you classify your new helper as an “employee” or “independent contractor”? Or can you hire an unpaid student intern? Why do worker classifications even matter?

    Why worker classifications matter

    Simply put, federal and state labor laws and regulations apply to employees, but not to independent contractors or unpaid interns. Perhaps the best known is the federal Fair Labor Standards Act (FLSA), but the same is true for the federal Family & Medical Leave Act, Employee Retirement Income Security Act, Civil Rights Act of 1964 and Occupational Safety and Health Act. Meanwhile, state laws and regulations generally dictate in areas such as state unemployment insurance taxes and workers’ compensation insurance.


    In a desire not to make your business life more complicated, it might seem as if avoiding the classification of “employee” is the way to go. But there is more involved than asking your new helper to sign a document titled “independent contractor agreement.” Government agencies tend to look at multiple factors in the relationship.

    What follows provides an overview of some federal law issues, but states (and different agencies), have their own rules and regulations for worker classification, which you need to consider as you build your business — and in Vermont, worker classification has become a contentious legislative and business debate.

    When should a worker be classified as an employee?

    The U.S. Department of Labor (DOL) uses six factors or questions in the FLSA “economic realities” test to help determine whether a worker is economically dependent on the employer and thus an employee, or in business for him or herself and thus an independent contractor. No one factor is determinative.

    1. Is the work performed an integral part of the employer’s business?
    2. Does the worker’s managerial skill affect the worker’s opportunity for profit or loss?
    3. How does the worker’s relative investment compare to the employer’s investment?
    4. Does the work performed require special (business and management) skill and initiative?
    5. Is the relationship between the worker and the employer permanent or indefinite?
    6. What is the nature and degree of the employer’s control?

    If there is an employment relationship, and your business has an annual dollar volume of sales or receipts in the amount of $500,000 or more, you must comply with FLSA requirements related to minimum wage, (and, no, your company’s stock doesn’t count), overtime, withholding taxes, workers’ compensation insurance, and so forth.

    Often, new businesses simply don’t have the resources to comply with all of these laws. But if the factors above indicate a worker is not an “employee,” you can consider classifying the individual as an “independent contractor.”

    When is an independent contractor classification appropriate?

    The IRS applies “common law rules” to elaborate on the general rule “that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.”

    An independent contractor is an individual who is in business for her or himself and not under direct control or supervision. Services being provided should not be core to the company that is paying. This “nature of the business” test is perhaps the biggest hurdle that companies in creative industries or the on-demand economy face.

    What are the guidelines for unpaid interns?

    Alternatively, hiring an intern may seem appealing. You need help but don’t have the money to hire an employee, and the intern gains valuable experience. A win-win, yes? Not necessarily. In for-profit businesses, unpaid interns can carry a lot of risk.

    Numerous public lawsuits have highlighted the risks of operating a non-compliant unpaid internship program. In a for-profit business, only if all of the following factors are met will an unpaid internship be in compliance with the FLSA:

    • The internship, even though it includes actual operation of the facilities of the employer, is similar to training which would be given in an educational environment;
    • The internship experience is for the benefit of the intern;
    • The intern does not displace regular employees, but works under the close supervision of existing staff;
    • The employer that provides the training derives no immediate advantage from the activities of the intern, and on occasion its operations may actually be impeded;
    • The intern is not necessarily entitled to a job at the conclusion of the internship; and
    • The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.

    From the small business or lean startup perspective, these are limiting factors. The conclusion is bringing on unpaid interns is not a feasible way to scale a for-profit business.

    The business dilemma

    On one hand, employers face a fundamental financial tension between increasing fixed costs with an additional 18-30% cost for payroll taxes and benefits plus workers’ compensation insurance for every worker classified as an employee, versus the increasing risk of a lawsuit or government penalty for employee misclassification as an independent contractor. On the other hand, there are significant operational and flexibility tensions between a projected short-term need for additional help and a sustained long-term need that would warrant investing in hiring an employee. The relative importance of these two tensions varies by business model, industry, and competitive environment, but in some sectors, it has become the norm for the majority of workers to be classified as independent contractors.

    The societal dilemma

    Labor laws were established to provide basic protections for employees and prevent abuse. Workers classified as independent contractors not only lose these protections while creating an uneven playing field for employers who properly classify their workers, but there is growing concern society loses out from the “tax gap” created because employee payroll tax revenues are not collected on the compensation independent workers receive. For example, independent contractors operating as partners or sole proprietors without employees are not required to pay for workers compensation coverage or unemployment insurance. If that “independent contractor” is working for a construction company, falls from a roof, is seriously injured and unable to work for an extended period, that worker’s medical bills may be paid through publicly funded Medicaid, and their family may need an array of publicly funded services.

    Takeaway

    Class-action lawsuits and enforcement of worker classification are increasing, so entrepreneurs need to be informed, properly classify your workers under current laws, and talk with your legislators about suggestions for ways to improve the status quo for Vermont’s businesses, workers, and economy.

    --------

    Pat Heffernan is President of Marketing Partners in Burlington, VT, a board member of the Women Business Owners Network and co-chair of WBON’s public policy committeeThis blog post is adapted from a Money & Your Business column recently published in BusinessVermont June 12, 2016.


  • 04 Nov 2015 10:22 PM | Pat Heffernan (Administrator)

    In the last blog post, I talked about the value of business mentors—people who are willing to advise you on business topics that you struggle with or need additional information about. Don’t underestimate the power of a master mind or an informal network of business advisers, too. They can see your problem from an objective viewpoint, and can advise you in ways you can only imagine right now. Their insight is invaluable.

    And if you don’t yet have a network, how about using the upcoming conference as a way to start one? Take that idea one step further and consider having lunch with an experienced, highly successful entrepreneur who is there to answer your questions and provide you invaluable advice.

    Really, you ask? Yes! Keynote speaker, Katy Lesser, is dining with eight smart businesswomen before the conference. This is where you can get some highly individualized input on your current business, or about running a business in general. She’s the owner of two Healthy Living Market and Cafés—South Burlington, VT and Saratoga Springs, NY.

    She opened the first in 1986 without any formal experience or training in business. In fact, before Healthy Living, she was a psychotherapist, English teacher and stay-at-home Mom. So, here’s someone with incredible street creds, years of in-the-trenches experience, and she’s a woman, too, who has volunteered her time to advise and encourage your entrepreneurial experiences.

    I heard there are a few seats remaining at Katy’s lunch table. Does one of them have your name on it? Go to www.wbon.org and sign up now!

    ------
    Paula Diaco is the owner of Write Stories Now


  • 21 Oct 2015 11:26 PM | Pat Heffernan (Administrator)

    After more than 25 years as an entrepreneur and business owner, you would think I have all the answers. Answers about sales and marketing, financials, bookkeeping and accounting, human resources, networking and promotion, adding quality products and services to your offerings, pricing on the fly, and a myriad of other related business topics.

    Well, I don’t have all the answers, and of course no one does even after a lifetime of business experience. But all of us have some experience that can be universally applied to almost any type of business.

    Is this you?  You have experience in solo-entrepreneurship, or retail sales, or nonprofit management, or manufacturing know-how. You have great ideas, great clients, great vendors, and yet sometimes you just need some advice. When you have a question, however simple or difficult, how do you get some answers?

    Your peers! Seek them out at networking events, workshops and retreats, and yes, conferences, including the one we (I hope you, too?) are attending October 27st at the Hotel Vermont in Burlington.

    Your colleagues can help you evolve or revolutionize your business beyond what you even think you can do, or are capable of doing.

    Maybe you need an advisory board? One that meets at least monthly live or via Skype.

    Why? Advisors of all sorts, and you can include master mind participants in this as well, see things from an objective viewpoint and a fresh set of eyes at what you consider to be a major problem with no solution or way out. They offer resources, suggest people you can speak to, listen to your laments and offer changes that have worked for others.

    During the conference, seek out the help of the women there. Use the day as your mini-Master Mind and take advantage of the incredible amount of knowledge, expertise, and wisdom in the room. You may even be able to coordinate a regular meet up of you and a few other women who can push each other to excellence.

    See you at the conference, and feel free to say hello!

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    By: Paula Diaco, Write Stories Now



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