As your business grows, it’s inevitable that you’ll need extra help. And often, you’ll need this help before your business can really afford to hire extra help. Enter: Unpaid Internships. Your small business gets free labor, and the intern gains valuable experience for their resume and (hopefully) a good reference for later on down the road.
But like so many things, the law isn’t so simple. All employees are entitled to at least minimum wage under the Fair Labor Standards Act (FLSA), and the FLSA determines who is an employee (regardless of what you might call the worker). So the question for you as a small business owner is whether or not your intern will be considered an “employee” under the FLSA.
Non-Profit Caveat: While most of our blog posts apply equally to both for-profit and non-profit entities, this one is an exception. The Department of Labor recognizes that individuals may freely volunteer their time to non-profit organizations. Because of this, unpaid internships are generally permissible in the non-profit sector. However, non-profit organizations should still be careful with paying stipends because they can call into question whether the person is still a volunteer or is now an employee.
Hiring a new employee is an exciting time for any business. But it can also be a legal minefield, especially when you don’t have a dedicated HR professional or department. Once you find your next great hire, should you send them an offer letter or an employment agreement? What’s the difference between the two? And what legal risks should you be aware of, regardless of whether you decide to send an offer letter or an employment agreement?
We’ve talked before about why it’s so important to know the difference between an employee and an independent contractor (and the penalties for getting this wrong). But as I was deciding what this week’s blog post should be, I realized…we didn’t really discuss what is the difference between an employee and an independent contractor? As year-end approaches and you start making strategic plans for next year, it’s critical that you know how to make this determination.
The IRS considers a worker 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.” If you think about it, this makes sense. An independent contractor must be “independent.” If you are telling a worker what to do, when to do it, where to do it, and how to do it, they’re not an independent contractor. They’re an employee. Even if the worker has some level of discretion (as most professionals do in this day and age), the key is whether or not you as the employer have the legal right to control what is being done and how it’s being done. In other words, are you paying the worker to accomplish a result, or are you paying the worker to perform a list of duties and responsibilities)?
Are you paying the worker to accomplish a result or to perform a list of duties and responsibilities?
Of course, like most things in the practice of law, it’s never as simple as results vs details. The IRS is cracking down on misclassification, and with the growth of the so-called gig economy, some states are even passing legislation to treat more workers as employees. The ultimate answer to the question “what’s the difference between an employee and an independent contractor” is it depends on the specific facts in your situation. How’s that for a lawyer answer?
As your business grows, you realize there are only so many hours in the day, and those 24 hours simply aren’t enough for everything that needs to get done: producing your product or service, marketing the business, making sure there is enough money to keep going, growing yourself as a leader and entrepreneur, etc., etc. At some point you simply need more help.
But taking on a regular payroll expense seems daunting and payroll taxes sound confusing and expensive. (After all, if you hire someone at $10/hr, it actually costs the business more than $10/hr…thanks Uncle Sam!) Many small (and some not so small) businesses in this situation decide to hire independent contractors instead. But is that truly the way to grow your business, or is it a trap waiting to spring?
The Fair Labor Standards Act (“FLSA”) requires that virtually all employees be paid at least the federal minimum wage for hours worked, plus overtime (at time and a half the employee’s base pay) for any hours over 40 in any given work week. It is critical for small businesses to know which employees are considered “exempt” from the overtime rules and which are “non-exempt,” meaning they must be paid overtime.
Many small businesses and non-profits assume that if they pay an employee a salary, then they don’t have to worry about the overtime rules. After all, paying overtime is expensive. However, the penalties for misclassifying employees and refusing to pay overtime can be steep. And while happy employees generally don’t complain, disgruntled employees (and former employees) will suddenly demand their unpaid overtime no matter what “understanding” you thought you all had.
Before adopting a policy of simply not paying overtime (or making everyone a salaried employee), small businesses and non-profits should ask three questions:
The Fair Labor Standards Act (“FLSA”) requires that virtually all employees be paid at least the federal minimum wage for hours worked, plus overtime (at time and a half the employee’s base pay) for any hours over 40 in any given work week. On December 1, 2016, new rules for overtime pay will go into effect, making more executive, administrative and professional (“EAP”) employees and highly compensated employees (“HCEs”) eligible for overtime.
The Ban the Box Campaign is picking up steam.
For those of you who may not be aware, Ban the Box refers to the check box on an employment application, “Have you ever been convicted of a crime?” Simply put, the argument against using this pre-emptive rejection tool is that it could result in disparate impact downstream, as a disproportionate percentage of those convicted of crimes are minorities. Beginning with Hawaii in 1998, thirteen states and 70 cities and counties have enacted legislation that prohibits such questioning for public and/or private sector jobs. Likewise, mega-employers Target and Wal-Mart have eliminated the practice nationwide. If your business has not yet been compelled to change, you may be soon, so you might as well get on board.
“Additionally, small to mid-size businesses in particular risk the more direct-type employment discrimination claims as they are more likely to hire family, friends, and friends of friends (people who look like you do). By continuing to use The Box, they also run the risk of making exceptions for family and friends that you wouldn't make for a stranger applying for the same job.” - M. Nelson of Law Office of Maritza S. Nelson, LLC
Based on the reaction I have seen from my clients, the initial thought of many business owners is that this is a cataclysmic turn of events. “You mean I have to hire criminals?”