Human Resources – Page 3 – Setnor Byer Insurance & Risk

Counting Employees for COBRA

If an employer has 13 full-time employees, each of whom works 40 hours per week, and 10 part-time employees, each of whom works 20 hours per week, can this employer qualify as a “small-employer plan” under the Consolidated Omnibus Budget Reconciliation Act (COBRA)?

Yes. After a qualifying event, COBRA gives certain former employees the right to elect temporary continuation of health care coverage at the employer’s group rates. COBRA’s continuation of coverage requirement does not apply to a small-employer plan, which is a group health plan maintained by an employer who normally has employed fewer than 20 employees during the preceding calendar year. Although all full-time and part-time employees are taken into account when determining whether an employer had fewer than 20 employees, each group of employees is counted differently. A full-time employee counts as one employee. However, each part-time employee counts as a fraction of an employee, with the numerator (the top number) of the fraction equal to the number of hours worked by the part-time employee, and the denominator (the bottom number) equal to the number of hours that must be worked on a typical business day to be considered a full-time employee.

Though this formula may sound complicated, it’s fairly easy to apply. In the situation at hand, the employer’s 10 part-time employees work 20 hours per week out of the 40 hours per week ordinarily worked by full-time employees, thus producing a fraction of 20/40, or ½. Therefore, each part-time employee is counted as ½ of an employee. Ten employees counted as “half” an employee equals 5 “whole” employees, which, when added to the number of full-time employees, 13, total 18 employees. Since this number is fewer than 20, this employer may qualify as a small-employer plan.

Remember the HIRE Act!

Despite the passage of the Hiring Incentives to Restore Employment Act, or HIRE Act, some employers are not taking advantage of the benefits afforded by the law. Since these benefits currently only apply to qualified individuals hired before January 1, 2011, employers should make every effort to avail themselves of the incentives available under the Act.

Under the HIRE Act, employers who hire unemployed workers before January 1, 2011 may qualify for a 6.2% payroll tax incentive, which will effectively exempt employers from their share of Social Security taxes on wages paid to such workers through the end of the year. Additionally, for each worker retained for at least a year, employers may claim an additional general business tax credit of up to $1,000 per worker when they file their 2011 income tax returns.

The HIRE Act’s incentives are available to any employer “other than the United States, any State, or any political subdivision thereof, or any instrumentality of the foregoing.” Additionally, the Act’s incentives only apply to wages paid to “qualified individuals.” Under the Act, a qualified individual means any individual who:

Begins employment with a qualified employer after February 3, 2010, and before January 1, 2011;
Certifies by signed affidavit, under penalties of perjury, that such individual has not been employed for more than 40 hours during the 60-day period ending on the date such individual begins such employment;
Is not hired by the qualified employer to replace another employee unless such other employee separated from employment voluntarily or for cause; AND
Is not “related” to the employer, which means the individual is not a child or descendent of the child, a sibling or stepsibling, a parent or ancestor of a parent, a stepparent, niece or nephew, aunt or uncle, or in-law. An employee is also considered related if he or she is related to anyone who owns more than 50% of the outstanding stock or capital and profits interest of the employer, or is a dependent of anyone who owns more than 50% of the outstanding stock or capital and profits interest.

Under the HIRE Act, businesses, agricultural employers, tax-exempt organizations, and public colleges and universities qualify to claim the payroll tax benefit for such newly-hired qualified individuals. However, household employers cannot claim the benefit.

The Internal Revenue Service created Form W-11, “Hiring Incentives to Restore Employment Act Employee Affidavit” for the purpose of allowing an individual to swear to his or her status as a qualified individual. Although an employee is not required to use this form to state, under penalty of perjury, that he or she is a qualified individual, it is recommended. Upon receiving a completed Form W-11, employers must retain it with other payroll and income tax records.

Employers can claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS, and they will be able to claim the new tax incentive on their revised employment tax form for the second quarter of 2010.

Although it is not yet clear precisely how the IRS will go about ensuring the proper use of the HIRE Act’s incentives, it is fair to say that those caught abusing the system by fraudulently taking the credits will be dealt with harshly. Accordingly, it would be wise for employers to proceed cautiously in this regard and make every effort to ensure compliance with the Act’s provisions.

According to the commissioner of the IRS, “these tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead.” Although these incentives will not operate to generate unnecessary hires, an employer whose business needs demand the hiring of a qualified individual would be wise to accept the incentives offered by the HIRE Act while they can.

If you would like more information, please contact us.

Independent Contractor or Employee? Answering Incorrectly Can Prove Costly

Determining whether a new worker should be classified as an employee or an independent contractor has always been an important decision. The choice is not always an easy one, and the absence of a clear-cut rule of universal application often leads to inadvertent misclassifications. Moreover, the lack of a clear rule, coupled with the potential organizational benefits resulting from classifications of convenience, also open the door for manipulation and abuse.

Classifying a worker as an independent contractor rather than an employee may benefit an organization in various, often significant, ways. For example, an employer must generally withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes on wages paid to an employee. Since these obligations do not generally carry over to independent contractors, a business can experience significant cost reductions by classifying individuals as independent contractors rather than employees. Additionally, since amounts paid to independent contractors are not typically included in payroll calculations, a business can effectively reduce its workers’ compensation insurance premiums by classifying employees as independent contractors. Thus, the decision to classify an employee as an independent contractor can result in significant financial benefits.

The deliberate misclassification of employees as independent contractors in order to reap these benefits is tantamount to theft in the form of unpaid taxes. Since the amount of lost revenue is significant, the federal government is undertaking aggressive initiatives designed to catch those organizations participating in employee misclassification.

One report suggests that the federal budget assumes the government will collect approximately $7 billion over the next ten years through a federal crackdown on employee misclassification. The budget also allocates approximately $12 million and 90 new investigators for the express purpose of catching violators. Additionally, the Internal Revenue Service announced that it is planning to randomly audit thousands of employers to prevent misclassifications and, more importantly, collect unpaid taxes, fines, and penalties.

Given this increased scrutiny, it has never been more important for businesses to properly classify their workforce. Unfortunately, a simple rule or standard does not exist for making this determination. Rather, the nature of the relationship must be considered on a case-by-case basis by looking at all the facts of a particular situation.

The first step is to know the difference between an employee and an independent contractor. According to the IRS, anyone who performs services for a business is an employee if the employer can control what will be done and how it will be done. This is true even if the employee has freedom of action. What matters is that the employer has the right to control the details of how the services are performed. By contrast, a person is an independent contractor if the business for which the services are performed has the right to control and direct only the result of the work and not the means and methods of accomplishing the result.

Thus, the degree of control and independence are the critical factors for determining the nature of the relationship. According to the IRS, evidence of the degree of control and independence fall into three categories.

Behavioral. Does the company control or have the right to control what the worker does and how the worker does his or her job? One element to this category involves examining the type and degree of instructions that the business gives to the worker. Employees are generally subject to instructions about when, where, and how to work. Instructions may detail when and where to do the work, what tools or equipment must be used, where to purchase supplies/services, and what order the work must be done. Employees may be trained to do the job, whereas independent contractors ordinarily use their own methods. The key consideration is whether the business has retained the right to control the details of a worker’s performance or instead has given up that right.
Financial. Are the business aspects of the worker’s job controlled by the payer? Facts that show whether the business has a right to control the business aspects of the worker’s job include: the extent to which the worker has unreimbursed business expenses (independent contractors are more likely to have unreimbursed expenses); the extent of the worker’s investment (independent contractors often have a significant investment); the extent to which the worker makes his services available to others (independent contractors often work for others and advertise); how the business pays the worker (employees generally get a guaranteed wage whereas independent contractors usually get a flat fee); and the extent to which the worker can realize a profit or loss (an independent contractor can make a profit or a loss on a job).
Type of Relationship. Are there written contracts or employee type benefits? Additionally, relevant facts include the permanency of the relationship and whether the services performed by the worker are a key aspect of the regular business of the organization.

Businesses must weight all these factors when determining whether a worker is an employee or independent contractor. While some factors may indicate an employment relationship, others may suggest that the worker is an independent contractor. Unfortunately, there is no magic combination or set number of factors that make a worker one or the other. Since it is the entirety of the circumstances that must be considered, no one factor stands alone. Moreover, since each situation is specific, factors which may be relevant in one case may not be relevant in another.

This analysis must be undertaken for each individual worker or category of worker. Since different circumstances can affect the relevancy of any specific fact, it is very difficult to develop a one-size-fits-all approach to making this determination. The key is to look at the entire relationship, including any specific or unique facts, and consider the degree or extent of the right to direct and control.

Given the severity of the consequences for improperly classifying a worker, it may be necessary to seek the assistance of a licensed professional. Alternatively, a business or a worker may request a determination by the IRS by submitting Form SS-8 to the IRS; however, it can take up to six months to get a response. In any event, guessing at the right answer, or even worse, deliberately misclassifying workers can result in severe consequences. And, given the government’s renewed focus on finding violators, the chances of proceeding undetected have significantly decreased.

If you would like more information, please contact us.

Insuring Against Claims Brought Under the Fair Labor Standards Act

Employers face numerous federal laws that govern the employment relationship. These laws, such as Title VII of the Civil Rights Act, the Family and Medical Leave Act, and the Americans with Disabilities Act, impose requirements on employers regarding the manner in which they interact with their employees. If these requirements are overlooked, employers can expect to be called upon to pay a potentially substantial damage award to the aggrieved employee. While avoiding a violation of all applicable employment laws is the goal of every organization, there is one law which employers should be concerned about above the others—the Fair Labor Standards Act.

The Fair Labor Standards Act (FLSA) is the federal law that establishes the minimum wage and that governs the payment of overtime compensation. Its broad applicability, the manner in which it was drafted, and its complex and highly technical requirements, make it one of the most feared federal employment laws. The significance of potential FLSA violations has only increased since the economy began taking a turn for the worse because the ever-increasing number of laid-off employees has served to increase the number of potential plaintiffs.

The FLSA has been described as the perfect plaintiff’s law. Consider that in most cases, the FLSA’s attorney’s fee provision operates to only benefit the employee. Under the FLSA, an employer who successfully defends an employee’s claim is typically not entitled to an award of attorney’s fees. The FLSA also allows a single employee to file a lawsuit on behalf of all similarly situated employees. Under the FLSA’s collective action provision, the burden a plaintiff must satisfy before being authorized to notify all potential class members is relatively low. This means that an employer may be faced with the prospect of defending a collective action involving dozens, or even hundreds, of current and former employees.

In addition to the procedural benefits afforded employees under the FLSA, the complexity of the law itself serves to increase the level of concern faced by employers. Unlike laws that prohibit discrimination or harassment, which are relatively easy to understand, the FLSA is replete with complex and technical provisions which, in many cases, are counterintuitive. For example, when does the amount of time an employee spends on a break constitute hours worked? If an employee is compensated at two or more different rates, how is the overtime calculated? When can an employer make salary deductions without jeopardizing the employee’s exempt status? If an employee violates company policy and works overtime without permission, does the employer have to pay the employee overtime? In many cases, the answers to these questions cannot be obtained by relying on common sense. So, in addition to being relatively plaintiff-friendly from a procedural standpoint, the FLSA’s complex and highly technical nature increases the likelihood of a violation.

Given the confluence of these factors, it should not be surprising to discover that literally thousands of lawyers and law firms have developed a niche practice involving nothing more than filing lawsuits under the FLSA. These firms seek out recently laid-off employees for the purpose of putting their former employer’s compensation practices under a microscope. And in most cases, the employer’s attorney will likely recommend settling the lawsuit as soon as possible.

Electing to settle the lawsuit early is virtually predetermined by the FLSA itself. In most cases, the employee will be entitled to a relatively small amount of unpaid wages. The real evil lurking behind the lawsuit is the attorney’s fees. Almost immediately after filing the lawsuit, the amount of attorney’s fees that the employee will be entitled to receive from the defendant-employer likely dwarfs the amount that may have been due the employee under the FLSA. This amount does not include the amount the employer will have to pay its own attorney. From a purely economic standpoint, it makes more sense to settle the case early for $10,000 and be done with it, than it does to litigate the case by paying at least twice that amount for the employer’s own attorney, and still face the prospect of having to pay the employee’s damages plus the employee’s attorney’s fees. Thus, the most common course of action is to settle the lawsuit, even if the employer has a valid defense to the employee’s allegations.

These reasons, coupled with the surge in lawsuits brought under the FLSA, compelled many insurance companies to exclude claims brought under the FLSA from standard employment practices liability insurance (EPLI) policies. Since the numbers simply did not support insuring against FLSA claims, FLSA exclusions found their way into virtually every EPLI policy.

However, some insurance companies are beginning to offer defense coverage for FLSA claims in their EPLI policies once again. Although the coverage may be subject to a sub-limit, some coverage is being provided nonetheless, oftentimes at very reasonable premium rates. By purchasing this coverage, employers no longer need to be held hostage by the plaintiff-friendly FLSA. The existence of such coverage gives employers, through their insurance company, the option of actually defending against such claims rather than being forced by the economies to settle. In the current economy, no amount of money is considered disposable, and by obtaining an EPLI policy that offers coverage for FLSA claims, employers no longer have to feel compelled to buy their way out of a lawsuit brought under the FLSA.

If you would like to learn more about obtaining an employment practices liability insurance policy to insure against FLSA claims, contact us.

Did You Know? Employee Dishonesty

Did you know that eight out of ten crimes against businesses are carried out by employees? Workplace fraud and employee theft are more prevalent than ever: It is estimated that the average American business loses six percent of its total annual revenues due to some form of employee fraud. Small businesses are particularly vulnerable to occupational fraud and abuse because they usually cannot afford extensive safeguards against these risks, nor can small firms easily absorb the large losses to which employee fraud and theft can lead.

Most business owners prefer to think of their employees as loyal, trustworthy and honest, and are unwilling to accept the reality that those whom they regard as “family” might be stealing from them. But there are many reasons why an employee may be tempted to defraud an employer, not the least of which is financial pressure on the employee. Also, a dishonest employee may attempt to rationalize a crime with such excuses as “The company will never miss this money” or “This isn’t really stealing because I’m not being compensated as I deserve.”

Typically, losses attributable to employee fraud can range from relatively small, one-time thefts to long-term schemes that go undetected for years. Statistics indicate that the average length of time that an employee fraud goes undetected is eighteen months, during which time an employer can lose enormous sums of money. That’s why early detection of employee fraud is vital. To protect against this ever-present risk, companies would be wise to establish loss prevention programs that include training in fraud prevention and detection for all managers.

Additionally, sound controls must be in place to prevent employee fraud, with thorough reviews of these loss control practices occurring regularly.

But no loss prevention program is foolproof, which is why all companies ought to obtain separate employee dishonesty insurance coverage. Under virtually all commercial property policies, employee dishonesty coverage, also known as employee theft coverage, is a standard exclusion. But employee dishonesty insurance is specifically designed to protect an employer from financial loss due to the fraudulent activities of an employee or group of employees, including such employee-driven crimes as embezzlement and internal theft. No business owner wants to believe that employee dishonesty insurance is necessary, yet without such coverage, a business is severely exposed to potentially devastating losses. That’s why no business insurance program is complete without appropriate employee theft coverage.

To learn more about how you can protect your business from employee dishonesty, contact us.

The 10 Must Have Traits Of A Salesperson

“What are the traits of an effective salesperson and how are they identified in a candidate?” These questions have been studied for decades and a broad range of opinions have been offered by corporate executives, college professors, industrial psychologists and human resource managers. Corporate America, in need of effective and profitable salespeople, continues to develop interviewing and testing standards designed to define and uncover sales talent.

I have participated, as an employer, in screening techniques that have been highly successful and I have participated in an equal number that have clearly failed. Unfortunately, a majority of sales screening techniques, at their best, will fall short of the employer’s expectations. The most reliable screening tests, although not completely full-proof, will embody a full day of psychological screening by an industrial psychologist. How many of us, as small to medium employers, can afford the $800 – $1500 price tag that goes along with this approach? Is the small to medium employer at a disadvantage in the hiring process? Maybe not.

If you are in the market for a salesperson or a sales team, first consider the “10 Must Have Traits” of a salesperson:

1) Salespeople rarely perceive obstacles.

Obstacles always exist, but a salesperson will typically charge through the obstacle, rarely pausing to take note of its challenge. A salesperson is inspired by obstacles and they don’t “ruminate or contemplate” the challenge for too long.

2) Salespeople overcome rejection.

Rejection does not deeply wound a salesperson. Their emotional response is more akin to the feelings associated with an act of dishonor. After all, a good salesperson knows the client or prospect made the judgment in error. This is not to say that salespeople do not have hearts. They have hearts, but they are selective in whom they respond to.

3) Salespeople live to persuade.

Their desire to persuade will not be misunderstood as simple persistence. These are people that have a belief and passion for their position. Their self-esteem is derived largely from the people and events they inspire to action.

4) Salespeople must be able to “read and relate” to the prospect.

Experiencing the feeling, thoughts, and attitudes of others permits the salesperson to form their presentation and responses in a way that will foster true communication. A prospect’s motivations and a salesperson’s responses to the prospect’s verbal and non-verbal language (body language) represent the basis of all sales efforts.

5) Salespeople want to be liked, but they rarely need to be liked.

Salespeople have a clearly defined mission; they keep their focus on the requisite outcome — the sale. They are not trying to build friendships and they will not be maneuvered to digress from their goal. Although they will develop friendships and are likable people, they do not misunderstand their purpose for visiting with a prospect. They will not construct their message to win friends and be liked, rather they will construct it to close the sale. They would rather not offend, but if they do, it’s O.K.

6) Salespeople like people.

Not all people like people, but a salesperson does. They don’t like all people, but they generally enjoy interacting with people and engaging in lively dialogue.

7) Salespeople need to have some “sense of urgency.”

There are the “plodders” and they, through persistence, routine and hard work, will achieve success. Plodders may not have a sense of urgency, but their peer, the “every minute counts” guy does. These folks are driven by benevolent demons that challenge them every minute of the day. You’ve met these salespeople. They are the producers in the office who have to get the job done now!

8) Salespeople will always have a tale of “accomplishment from adversity.”

These people are proud of their accomplishments and they will usually value the lessons learned and skills developed from a particularly challenging obstacle. They may even be proud of their failure because of their ability to rebound and refine themselves. These people win, even when they lose.

9) Salespeople have to have a definitive lifestyle goal.

Even with the best of sales personality traits, no one will achieve great economic success unless they are driven to be wealthy. As crude as it may seem, working hard at a job that yields “money for effort” requires a distinct and passionate commitment to money or to the power, security, and influence that money can buy.

10) Salespeople need to have a need.

Ask any successful salesperson about ambition and where they feel it is derived from. It seems that “a need” is at the core of their commitment and energy. Their needs are widely varied, but these are not people that want things, they need things.

Many of these traits mentioned above can be uncovered in a carefully crafted interview process. In fact, why not go ahead and ask the questions directly. Remember, though, that an intelligent applicant will be prepared for even the most rigorous of interviews. Ask a direct question, ask it again, indirectly, and then challenge the applicant to support their answer. Throughout the interview, look for opportunities to prove or disprove the existence of the “ten must have traits.” You’ll find them, if they are there.

One last word of advice, and this applies explicitly to experienced salespeople. Never, never, never hire a successful salesperson who cannot support his claims of success with records and wages. Because salespeople, even in the absence of every other sales trait, have a record of closing sales.