Starting a New Business – Common Start-Up Costs

Starting a new business is an exciting time. For serial entrepreneurs, starting a new business is often more routine because they have developed a system from their prior ventures. For those who are just diving into entrepreneurship, understanding how to handle the early stages of the business, such as start-up costs, won’t be so routine. If you have a business idea and you’re considering taking the plunge with a start-up, it is essential to have a good business plan which will provide structure for handling the early stages of the company as well as managing start-up costs. The core start-up costs include:

Legal Fees

When establishing a business plan, many entrepreneurs overlook the cost of legal fees. For many, legal fees are an unwanted expense which results in pursuing subpar legal documents online. Unfortunately for many entrepreneurs, these documents fail to account for the individual needs of the business and entrepreneur, which can result in expensive litigation and exorbitant future business expenses. When establishing a start-up, always consult with a business attorney to ensure that you and your company are protected.

Regulatory Costs

Another often overlooked cost is related to regulatory costs. Depending on your start-up, you may be required to receive certain licensure and permitting from the state, local governments, or professional associations. These costs can quickly build up from a fee standpoint, and failure to satisfy these requirements can result in greater costs as your business may not be able to operate while you wait for the licensure, permit, or other regulatory approval.

Insurance

Insurance protects you and your company from unexpected events that would otherwise cripple the company. Carrying the proper insurance means that your employees are protected, your customers are protected, your business is protected, and you are protected. In addition to potentially being illegal in your area, attempting to skip out on insurance has the potential to sink your company and make you personally liable.

Marketing Expenses

Even if you have the greatest product in the world, no one can buy it if they don’t know it exists. Thus, your business plan should always include a budget for marketing. The avenue you pursue for marketing will be specific to your business, but always take the time to budget for marketing costs.

Employee Expenses

One of the largest expenses for companies around the world is the cost of labor, or the amount it costs them to have employees. When budgeting for employees, you need to be realistic in what you are requiring of each employee when estimating the wage that the employee will require. In addition to an employee’s salary, don’t forget about employee benefits. Underestimating the cost of an employee can cost you thousands in unplanned expenses.

Administrative Costs

An often-overlooked expense is the administrative cost of operating the business. Here, you need to budget for accounting costs, payroll costs if you intend to have employees, and information technology costs. Additionally, some may include the costs of operating a website as an administrative cost, although others may budget their website as a marketing expense.

As you can see, there are numerous costs common to start-ups that need to be addressed in the business plan. If you need assistance with starting your business, we can help! Call us today!

An Overview of Foundational Corporate Documents

There are a number of steps to form a corporation, including selecting a name, obtaining the necessary licenses and permits, paying certain fees, and filing foundational documents with the appropriate state agency. While an attorney can help prepare and file the required papers, the owners, officers and directors should have a basic understanding of these documents.

Articles of Incorporation

The first underlying document is the Articles of Incorporation, which states the corporate name, business address, registered agent and purpose of the business. This is typically, but not always, a generic statement that the corporation will conduct any lawful business in the state in accordance with its objectives.  In addition, the type and amount of authorized stock that will be issued (common or preferred) must be established. This document should also contain an authorization for the corporation to indemnify its officers and directors.

Corporate Bylaws

Bylaws are the formal rules regarding the internal operations of a corporation. This document outlines the corporate structure and establishes the rights and powers of the shareholders, officers and directors. Bylaws specify how officers and directors are nominated and elected, as well as their responsibilities. In addition, this document should clarify how disputes among the parties will be resolved. Bylaws establish where and when shareholder and director meetings will be held, whether quarterly, annually or at other times, what constitutes a quorum, as well as number of directors on the board of directors, voting, and proxy rules. This document should also contain information on the issuance of shares of stock and other operational details.

Meeting Minutes

After corporate existence is commenced, an initial organizational meeting of the principals must be held in order to adopt the bylaws, elect directors, issue stock, authorized banking powers, and to conduct any other business. All of these activities must be memorialized in meeting minutes, which must also be prepared during any subsequent meetings.

Stock Certificates

Stock certificates are the record of any stock in the corporation that was issued to the stockholders. These certificates are the record of ownership of the corporation.

Once these foundational documents are in place, a corporation is also required to keep complete and accurate books and records of account and must maintain a record containing the names and addresses of all shareholders.

Incorporating is a complicated process and one that requires careful analysis and consideration.  An experienced business law attorney at Schneiders & Associates can help you prepare and file the necessary foundational documents for your corporation.

By: Elana Cuzzo, Esq.

Should I Incorporate My Business?

By: Theodore Schneider, Esq.

The primary advantages of operating as a corporation are liability protection and potential tax savings. Like any important decision, choosing whether to incorporate involves weighing the pros and cons of the various business structures and requires careful research.

Once incorporated, the business becomes a separate legal entity, and assets of the corporation are separated from the owner’s personal finances. As a result, the owner’s personal assets (house, cars, savings, investments), generally can be shielded from creditors of the business.

However, to maintain this legal separation and avoid a creditor “piercing the corporate veil,” the corporation must observe certain formalities, including:

  • Keeping corporate assets and personal assets separate (no commingling of funds);
  • Holding shareholder and director meetings at least annually;
  • Maintaining a corporate record book including bylaws, minutes of shareholder and director meetings and shareholder records;
  • Filing annual information statements with the Secretary of State; and
  • Filing a separate tax return for the corporation.

Failing to observe these corporate formalities could result in personal liability for the owner. Having the corporation formed and maintained by an experienced business attorney will help to ensure that the corporation is properly formed and maintained so the benefits of incorporating are not lost.

Many business owners are concerned about “double taxation” of income that affects certain types of corporations known as “C-Corporations.”   Double taxation results when the C-corporation has profit at the end of the year that is distributed to the shareholders. That profit is taxed to the corporation, at the corporate tax rate, and then the dividends are taxable income to the shareholders on their personal tax returns. However, the corporate tax and dividend rates can be lower than the individual tax rate that a sole-proprietor would pay on a 1040 Schedule C, and a knowledgeable accountant or tax attorney may be able to advise on how to minimize the burden of double-taxation and indeed pay an effective tax rate which is lower than what a sole proprietor would pay.

For example, a small C-Corporation will likely have a shareholder who is also an employee. Paychecks to the shareholder-employee are, of course, tax deductible to the business. To the shareholder-employee, they are taxable income (as would be the case with a paycheck from any employer). A bonus could be paid to the shareholder-employee in order to lower the corporation’s taxable profit, eliminating the double-taxation. These calculations should be performed by a tax advisor, but shifting income from the corporation to the shareholder-employee (or not, depending on which has the lower tax rate) can be an effective way to lower your overall tax liability. In addition, there are certain advantages that are only available with a C-Corporation. Of course, if the shareholder decides to sell the business, the double-taxation will be a significant deterrent to structuring the sale as a stock sale.

The S-Corporation avoids the double-taxation by offering a tax structure similar to the Limited Liability Company. A corporation with 100 or fewer shareholders, all of whom are United States residents, can elect to be treated as an S-Corporation. If the corporation is profitable, the shareholder-employee must draw a reasonable salary (and pay employment tax on it), but then all remaining corporate profits flow through to the shareholder’s personal tax return (thereby avoiding the FICA tax on the portion of profits that is taken as a distribution).

An experienced business attorney at Schneiders & Associates can help you decide which form of ownership is best for your business, help you establish the entity, and ensure the required formalities are observed. Please contact one of our attorneys with any questions about entity selection and formation.

Oral Contracts & The Statute of Frauds- Is The Agreement Binding?

By Ted Schneider, Esq.

There is a widespread misconception that verbal contracts are unenforceable.  A contract made orally with another party, without embodying the particular terms in a signed writing, can still be valid and binding. However, without a signed writing, any disagreement between the parties concerning the deal terms will create multiple problems for both parties. In order for a court to enforce a verbal contract, each party will have to try to prove its version of the terms of the deal, and that there was in fact a meeting of the minds of the parties. This could involve pricey litigation and an extensive discovery process. Therefore, it is advisable to have an attorney draft any contractual agreement.

Moreover, according to the Statute of Frauds, there are certain contracts that must be in writing in order to be legally binding. This includes: (i) contracts for the sale of land or real estate, (ii) surety agreements (in which one person guarantees to take over another's contractual obligations), and (iii) agreements that cannot be performed within one year. Other agreements that must be written to be legally binding include agreements “made in the consideration of marriage,” and those made for the sale of goods valued at $500 or more. If the requirements for contractual validity are not met, either party runs the risk of the other party rescinding the contract by declaring it void.

In an effort to prevent deception and fraud, the Statute of Frauds requires specific written terms for a contract to be valid. The Statute of Frauds requires the document to include a description of the “subject matter” of the agreement, the primary conditions of the deal, and the signatures of the parties. These requirements may vary with the sale of goods under the Uniform Commercial Code, where a signature only by the “party to be charged” (rather than both parties) may be sufficient. For a sale of goods, the terms should include the price and quantity of the goods to ensure the contract will be enforced.

Often, even if the contract is unenforceable under the Statute of Frauds, it may be saved if one party suffered damage or cost by relying on the oral contract (i.e., the verbal promises made by the other party), and if the injured party can prove this reliance in court. Likewise, an exception may exist if “specially manufactured goods” were provided under the contract or one party “partially performed” what was required by the agreement. The outcome may also vary if two merchants were the contracting parties, rather than a business and a consumer.

Seek advice from an experienced business law and contract attorney at Schneiders & Associates, LLP to draft your agreements to ensure they are legally enforceable, or to have one our attorneys evaluate a verbal agreement that you may be trying to enforce.

Forming an LLC to Purchase Real Estate

By: Ted Schneider, Esq.

Ownership of real property is a risky business. There are many ways in which users of real property can become injured, from tenants falling down stairs, injuries from construction equipment, or even an entire building collapsing from natural forces or faulty construction. Landowners often become defendants in lawsuits claiming damages from the use of their property.

Because of the inherent risks of owning real property, owners limit that risk by holding property in entities, such as LLCs, rather than their personal names. In this article, we will focus our attention on these critical considerations:

  • Entity selection strategies
  • Minimizing risk
  • Critical tax considerations based on choice of entity

ENTITY SELECTION STRATEGIES

Series LLC, Single member LLC, S-Corp, or C-Corp?

Series LLCs: Although series LLCs are flexible and hold promise, they have not yet been widely used in real estate transactions. Series LLC’s cannot be formed in California, but California recognizes series LLC’s formed in other states (e.g., Delaware).  However, California treats each unit of a master LLC as a separate entity for filing and tax purposes, essentially eliminating the utility of a series LLC in California. There are also uncertainties as to how series LLCs will be treated under federal tax law, questions about how bankruptcy courts will treat bankruptcy of one series of a series LLC, and how to protect security interests.

Single Member LLCs: Single member LLCs are often used for wholly owned subsidiaries. They have pass-through taxation, yet are treated as separate entities for liability purposes.

The primary concerns of an owner in structuring an LLC to purchase real estate include (a) creating the LLC in a jurisdiction that has the right balance of legal protection and accessibility; (b) choosing a management structure that provides fairness, protection, and expertise; and (C) documenting membership interests in ways that minimize asset protection and tax concerns.

Although the single member LLC, properly formed and managed, protects the owner from liability arising out of a claim related to the real estate owned by the LLC, in many jurisdictions, including California, an owner’s membership interest in the single member LLC will be subject to attachment by creditors for liabilities of the owner arising outside the property owned by the LLC.  For example, if the owner is subject to a large monetary judgment for a business-dealing unrelated to the real estate in the LLC, the judgment creditor can take the membership interest (and the property owned by the LLC) in satisfaction of the judgment.  This result is avoided in multi-member LLC’s.  Further, some states still shield an owner of a single member LLC from that type of liability, and consultation with a legal advisor on that topic is recommended.

In addition, if an individual owns multiple properties, it is advisable to form separate LLC’s to hold each piece of property, to prevent cross-collateralization, or putting all of the real estate at risk from a claim arising out of only one of the properties.

Corporations: Corporations may be either “C” corporations or “S” corporations. Corporations are not used for real estate investments as frequently as LLCs, because of LLCs’ preferable tax characteristics. However, there are a number of situations in which corporations do hold real property, such as part of a portfolio of assets, including equipment, inventory, and other assets of an ongoing business operation, which assets are not as negatively affected by being held in a corporation. However, if the only asset to be held by the entity is real estate, a corporation is not the recommended vehicle.

MINIMIZING RISK WHEN PURCHASING REAL ESTATE WITH LLCS

In addition to forming an LLC as a basic form of protection, owners can increase that protection by using single purpose entities, seeking limitations on guarantees, considering use of a particular state’s law, purchasing adequate insurance, and carefully drafting the operating agreement.

An experienced business attorney at Schneiders & Associates, LLP can provide advice and assistance regarding the best practices mentioned above for minimizing risks.

CRITICAL TAX CONSIDERATIONS BASED ON CHOICE OF ENTITY

Partnerships (and LLC’s taxed as partnerships) and S corporations have pass-through taxation, which means that tax is assessed on the member, partner, or shareholder obtaining income, rather than on the entity itself. By contrast, C corporations are taxed first at the entity level and then, a second time, at the shareholder level. LLCs can elect to be taxed as corporations, but when holding real estate, an LLC should elect to be taxed as a partnership.

An S corporation must divide profits according to share ownership. By contrast, an LLC can divide profits in any way it chooses. Part of the flexibility of partnerships (including LLCs taxed as partnerships) is that they can set up different classes of owners with different benefits.

Members of an LLC may be able to deduct business losses on their individual income tax returns, which is a benefit of LLCs taxed as partnerships. However, deduction of losses is subject to various tax restrictions, such as risk of loss rules and passive loss limitations.

LLCs usually can be converted to other types of entities without tax consequences, in contrast to conversion of corporations.

In California, LLC’s are subject to a $800 franchise tax each year, just like a partnership or corporation.  However, LLC’s are also subject to an additional tax called a gross receipts tax.  This tax is calculated based upon the LLC’s annual gross revenues, and can be as much as $11,790 per year.

Forming an LLC to Purchase Real Estate is an expansive topic with many important considerations. While this article highlights critical considerations, this list is not exhaustive. For more information on forming an LLC to purchase real estate, contact an experienced business attorney at Schneiders & Associates, L.L.P.

Common Lawsuits Brought Against Small Businesses

By Ted Schneider, Esq.

It is impossible to predict every lawsuit that a small business might possibly face. There is nothing to prevent angry vendors, entitled customers, or disgruntled employees from filing a lawsuit, even if there is no legitimate basis for it. The more a business owner delegates responsibilities to employees, the greater the risk that an employee makes a mistake and exposes the business to a lawsuit. Even the most vigilant, hands on business owner could make a mistake that can lead to a complaint filed against the business.

The most common lawsuits brought against businesses are brought by employees – typically discrimination, wrongful termination suits or claims for wage and hour violation. The impetus for such a suit can be anything from a fired employee feeling slighted to an employee being demoted or passed over for an advancement opportunity. If the employee or candidate believes that the action was taken for a reason related to race, gender, religion, sexual orientation, gender identity, or another protected classification, that employee might file a lawsuit. It is important to document any sort of negative or positive behaviors at work, so that if an employee does complain of discrimination, the court can see the employee’s work history and the real reason why he or she may have been terminated or passed over for a promotion. Disparaging remarks made about any of these protected classes have no business in a work place as they can create a hostile work environment and lead to lawsuits as well. In the event that an employer is faced with a lawsuit, or threat of a lawsuit by an employee or former employee, it is advisable that the employer seek counsel immediately from a knowledgeable attorney experienced in employment law and employment litigation.

Other common lawsuits brought against businesses concern overtime pay. Many employers deny their employees overtime pay in the interest of saving money, often through misclassifying the employee as “exempt” and paying the employee on a salary basis. This can be significantly more expensive in the long run because, if an employee sues, he or she may be entitled to back pay (potentially up to four years), penalties, and applicable attorneys’ fees. It is a good idea to discuss the new federal overtime rules with an experienced employment law attorney and to have contracts or offer letters clearly establishing the relationship between an employer and an employee to minimize confusion. Working with an experienced attorney is the best solution for drafting these agreements and avoiding these types of lawsuits.

It also makes sense to put agreements with vendors and customers in writing. The contracts should include a general description of the work to be performed, a list of any items to be delivered, a project schedule with deadlines, the fee, and the circumstances under which additional fees might be charged, warranties included with the work, indemnification, how long the contract lasts, how it can be terminated, and how disputes will be resolved.

Personal injury lawsuits against businesses are also common. In addition to keeping a place of business in safe condition, it is important that employees are properly classified as employees or independent contractors, and that the business carries the correct worker’s compensation insurance. Most states require employers to carry insurance in case of a workplace injury. Additionally, employees who are injured at work are usually precluded from suing their employer and are instead referred to worker’s compensation courts; however, an employer may be responsible for an injury and associated damages of an employee that has been misclassified as an independent contractor, and therefore no workers’ compensation insurance coverage was in place for the employee.

The attorneys at Schneiders & Associates L.L.P. are well versed in the areas of employment law, contracts, and litigation. For more information on any of the above, please contact us at www.rstlegal.com, info@rstlegal.com, or 805-764-6370.

Is My Business Worth More Than its Tangible Assets?

Goodwill is an asset that is an intangible part of a business being purchased. In spite of its intangibility, goodwill may be worth more than physical assets, such as buildings, machinery or inventory. Goodwill is the essence of the company's value to its customers, clients, and employees – its good name, if you will – and, as such, is a critical asset to any buyer. It is easier, as many people intending to purchase a business will tell you, to maintain goodwill than to establish it, because, among other things, goodwill takes time to build. Purchasing a business that already has established goodwill in the community can give the new owner a strong competitive edge. 

What Intangible Assets Compose Goodwill? 

Prospective buyers and sellers should be aware of the various aspects of goodwill. Not all will apply to every business, but aspects of goodwill include:

  • Brand name
  • Solid customer base
  • Good customer relations
  • Good employee relations
  • General reputation
  • Future sales projection
  • Going-concern element

Goodwill is a salable asset, presumed to generate sales revenue and customer continuity. Having been established over years of honest and efficient behavior by the previous owner, it is transferable to the buyer, assuming the buyer maintains the pre-established excellent business practices.

 How Is Goodwill Established?

As mentioned, goodwill can only be established over a period of years during which it is nourished and maintained. In business, it is assumed that expenditures have been involved in creating and preserving goodwill. Steps taken to do this include:

  • Healthy and continuous investment in promotion
  • Maintenance of high quality products or services
  • Support of excellent relationships with both customers and suppliers
  • Maintenance of efficient and respectful management and employees relationships
  • Establishment and maintenance of corporate identity and image
  • Maintaining appropriate business location and facilities

How Is Goodwill Evaluated?

There is no set price for goodwill, though it definitely features in sales negotiations. Generally, goodwill is reflected in the amount paid that exceeds the  total value of the Company’s tangible assets. The value can be reflected in the ability of the established business to earn a higher rate of return on an assembled collection of assets than would be expected if those assets had to be acquired separately – the synergies of the assets of the business. In well-established businesses, goodwill may result in a sales price much higher than the value of the company’s physical assets alone.

There are several complex methods by which business goodwill can be calculated, so it is essential to have a highly competent business attorney involved in the negotiation process. If you are considering the purchase or sale of a business, and need guidance on the value of the business’s intangible assets, or assistance negotiating the purchase and sale agreement and related transaction documents, please contact an expert business attorney at Schneiders & Associates, L.L.P

 

Why Should I Incorporate my Small Business?

By: Roy Schneider, Esq.

Why Should I Incorporate my Small Business?

Not every small business needs to form an LLC or a corporation in order to function. A child selling lemonade by the side of the road has no use for a Tax ID number, nor does it seem practical to set up a new business entity to host a garage sale or a Tupperware party. As a venture starts to grow from a hobby to a full-time job, however, there are questions every business owner should ask to determine whether it is best to establish a legal entity to own and operate the business. Previously, we’ve talked about when in the process is the best time to consult with an attorney. If you’re thinking of starting a new business, purchasing an existing business, or have questions about how to best structure your organization, the experienced business attorneys at Schneiders & Associates, L.L.P. can be invaluable advisors. In the meantime, here are some important considerations when deciding whether to incorporate.

Do I need to protect my personal assets?

The greater the risk of being sued, the more necessary it becomes to file the necessary paperwork to form a legal entity, whether a corporation or an LLC. This will limit the owner’s financial liability to the assets invested in the business. This means that, if a business gets sued, the business owner’s personal assets, like his or her home, automobile, personal bank accounts, and belongings, may not be targeted by the lawsuit. Common lawsuits of concern are for the satisfaction of contracts and leases and personal injury claims for accidents on the premises. Similarly, a bank may not seek a business owner’s assets to repay a loan unless the business owner signs a personal guarantee. Banks often require such a guarantee for new businesses that have no credit history.  Also, the shield of a legal entity will not protect a person from his or her own tortious conduct, such as negligently driving an automobile.

Do I need flexibility in my obligation to pay income taxes?

Legal entities can be set up to provide tax savings and even shift income tax liability.  There are tax pros and cons among a C corporation, S corporation or LLC. The experienced business attorneys at Schneiders & Associates, L.L.P., working with your accountant will assist in the choosing of the best tax-advantaged form of business for you.

Do I need to protect my company name?

In California, legal entities register their names with the Secretary of State which helps ensure that only one business can operate under that name. This is important for branding and marketing purposes. Adding Inc. or LLC to the end of a company’s name can also add legitimacy to a new business, thus enhancing the brand.

Do I want to sell all or part of the business?

Ownership of an LLC or corporation can be shifted relatively easily compared to those of a sole proprietorship. Adding partners and selling the business can be difficult if there are no lines between where the business ends and the owner begins. Once a business is incorporated, it lasts until it is dissolved, meaning it continues to be an asset for a business owner’s estate after the individual passes on.

If you’re thinking of starting a business, or if you operate a sole proprietorship and are considering restructuring your organization, it is best to consult with legal counsel early in the process. An experienced business attorney at Schneiders & Associates, L.L.P. can advise about how to best structure your organization, and help you avoid common mistakes made by entrepreneurs.  Call our office at (805) 764-6370 or write us at info@rstlegal.com to schedule a consultation with one of our knowledgeable business attorneys today.

Negotiating a Commercial Lease

By Roy Schneider, Esq. 

Negotiating a Commercial Lease? Be Sure to Address These Issues

When it comes time for your business to move into a new commercial space, make sure you consider the terms of your lease agreement from both business and legal perspectives.  While there are some common terms and clauses in many commercial leases, many landlords and property managers incorporate complicated and sometimes unusual terms and conditions.   As you review your commercial lease, pay special attention to the following issues, which can greatly affect your legal rights and obligations.

The Lease Commencement Date

 

 

Commercial leases typically will provide a rent commencement date, which may be the same as the lease commencement date. Or not. If the landlord is performing improvements to ready the space for your arrival, a specific date for the commencement of rent payments could become a problem if that date arrives and you do not yet have possession of the premises because the landlord’s contractors are still working in your space. Nobody wants to be on the hook for rent payments for a space that cannot yet be occupied. A better approach is to avoid including in the lease a specific date for commencement, and instead state that the commencement date will be the date the landlord actually delivers possession of the premises to you. Alternatively, you can negotiate a provision that triggers penalties for the landlord or additional benefits for you, should the property not be available to you on the anticipated rent commencement date due to the fault of landlord’s contractors.

Lease Renewals

 

 

Your initial lease term will likely be a period of three to five years, or perhaps longer. Instead, you may be able to negotiate a shorter initial term, with the option to extend at a later date.  This will afford you the right, but not the obligation to continue with the lease for an additional period of years.   Be sure that any notice required to terminate the lease or exercise your option to extend at the end of the initial lease term is clear and not subject to an unfavorable interpretation. Carefully calendar the dates on which to exercise your option to extend the lease.

Subletting and Assignment

If you are locked into a long-term lease, you will likely want to preserve some flexibility in the event you outgrow the space or need to vacate the premises for other reasons. Be careful to review the limitations and procedures applicable to requesting the landlord’s permission to assign or sublet the space. Assigning or subletting your leased space without complying with the exact terms required by the lease often will result in an un-curable default of the lease and give the landlord the right to terminate the lease.

Subordination and Non-disturbance Rights

What if the landlord fails to comply with the terms of the lease? If a lender forecloses on your landlord, your commercial lease agreement could be at risk because the landlord’s mortgage agreement can supersede your lease. If the property you are negotiating to rent is subject to claims that will be superior to your lease agreement, consider negotiating a “non-disturbance agreement” stating that if a superior rights holder forecloses the property, your lease agreement will be recognized and honored as long as you fulfill your obligations according to the lease.

These represent just a few of the myriad provisions in a standard commercial lease that require special attention and care in review.  If you are considering leasing commercial space for your business, please contact one of the expert real estate attorneys at Schneiders & Associates, L.L.P. to review your lease, make you aware of potential costs and pitfalls, and assist you with negotiations.

Seven Common Mistakes Employers Make

By Ted J. Schneider, Esq.

American employers are subject to numerous federal, state and local laws, imposing various requirements, including wage and hour and anti-discrimination laws. Unfortunately, many employers – particularly small businesses – are unaware of their legal obligations, and often violate various worker protection laws, resulting in expensive lawsuits, civil settlements and fines. Here are some common, costly mistakes employers make, all of which are easily avoidable with proper guidance and advice:

Misclassifying Nonexempt Workers as Exempt

Unless a special rule applies, all workers in California must record hours worked, are entitled to overtime pay and meal and rest breaks. Some employees – typically executive, managerial or professional employees – are “exempt” from overtime and meal and rest break rules, and receive a flat salary. However, this exemption only applies in very specific situations outlined by law. The employer and the employee cannot agree to avoid these rules. The law narrowly defines which employees can be treated as exempt. Unfortunately, many employers improperly classify workers as “exempt” simply because the employees are paid a salary, in situations where these employees legally are entitled to overtime pay and meal and rest breaks.

Misclassifying Employees as Independent Contractors

Determining whether a worker is an employee or independent contractor depends on a multitude of factors, but primarily on the level of independence and control the worker has in completing his or her tasks; the less control exercised by the worker, the more likely he or she will be classified as an employee. Factors to consider include how the worker is compensated, whether the worker faces any risk of loss in the transaction, whether the company pays the worker’s business expenses, whether the company can withhold payment for non-performance, and whether your industry as a whole considers workers in similar positions as employees or independent contractors.

Failing to Train Supervisors Regarding Employment and Labor Laws

Employment laws prohibit employers from taking action against an employee for certain reasons, including discrimination on the basis of a protected characteristic such as race, religion, age, gender, sexual orientation and disability. Employees are also protected from retaliation for complaining about discrimination or illegal activity. It is vital that supervisors are trained to manage their employees in accordance with all applicable laws, properly investigate complaints, and not to retaliate against employees for voicing legally-protected concerns.

Failing to Use an Employee Handbook

An employee handbook informs employees about the employer’s values and policies, and facilitates compliance with employment and labor laws. A properly drafted, custom tailored and comprehensive employee handbook can serve as a strong shield for the employer against employee claims.

Failing to Properly Document Employee Job Performance

Proper documentation clearly establishes the employer’s expectations and where the employee failed to reach those expectations. Written job descriptions and employee evaluations serve as training tools, performance measures and critical evidence in the event you have to terminate an employee.

Failing to Accommodate Disabled Workers

The law not only prohibits employers from discriminating against those with disabilities, it also imposes a duty on employers to “reasonably accommodate” their disabled employees, so they can perform essential job functions. Accommodations may include assistive devices, a modified work schedule or a restructuring of job duties.

Failing to Comply with Wage Payment and Notification Requirements

California law requires employers to pay their employees in a certain manner, and provide employees with an itemized wage statement with each paycheck. Failure to comply with these detailed requirements can subject the company to penalties.

The above list highlights some of the more common – and costly – areas where employers make mistakes, but is by no means comprehensive.  If you have questions about your compliance in regards to any of the foregoing employment laws, please do not hesitate to contact an employment attorney at Schneiders & Associates, L.L.P. for advice and legal guidance.