The Internal Revenue Service today launched a new program that will enable many employers to resolve past worker classification issues and achieve certainty under the tax law at a low cost by voluntarily reclassifying their workers.

This new program will allow employers the opportunity to get into compliance by making a minimal payment covering past payroll tax obligations rather than waiting for an IRS audit.

To be eligible, an applicant must:

• Consistently have treated the workers in the past as nonemployees,
• Have filed all required Forms 1099 for the workers for the previous three years
• Not currently be under audit by the IRS
• Not currently be under audit by the Department of Labor or a state agency concerning the classification of these workers

Employers accepted into the program will pay an amount effectively equaling just over one percent of the wages paid to the reclassified workers for the past year. No interest or penalties will be due, and the employers will not be audited on payroll taxes related to these workers for prior years. Participating employers will, for the first three years under the program, be subject to a special six-year statute of limitations, rather than the usual three years that generally applies to payroll taxes.

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Here are some examples of provisions that would be void under California law:

Employee shall not directly or indirectly solicit any current customers to transfer any account or relationship from Employer to any business other than Employer.

For 18 months after termination of employment Employee shall not render services, directly or indirectly, to any competitor in which such services could enhance the use or marketability of a competing product.

These kinds of provisions are very common in employment and independent contractor agreements even though they are unenforceable.  An employee should not sign an agreement that contains a clause like this.  Even though it’s unenforceable, a new employer might refuse to hire an employee that has signed such an agreement unless the former employer releases its rights under this agreement.  Why?  The new employer does not want to take a chance that the former employer will litigate the issue even though the chance of success is basically nil.

While employers should not put any non-solicitation or non-compete provisions into their agreements, they can and should include provisions to protect any secret information such as a prohibition on employees and former employees from revealing company secrets to any third party.

Even though the private for-profit businesses get some benefit from the work the interns do, the state approved the unpaid internship program.

Coincidentally, this opinion was released just five days after the publication of a New York Times article called “The Unpaid Intern, Legal or Not.”

Apparently, there has been a recent proliferation of unpaid internships and the federal and several state governments are taking notice.  Generally, all people who work for for-profit businesses must be paid at least minimum wage.  While there is an exception for interns (aka trainees), the exception is very narrow.

There are six criteria for unpaid interns that must be adhered to:

1. The training, even though it includes actual operation of the facilities of the employer, is similar to what would be given in a vocational school or academic educational instruction;

2. The training is for the benefit of the trainees;

3. The trainees do not displace regular employees, but work under their close observation;

4. The employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion the employer’s operations may actually be impeded;

5. The trainees are not necessarily entitled to a job at the conclusion of the training period; and

6. The employer and the trainees understand that the trainees are not entitled to wages for the time spent in training.

According to the New York Times article, there are many incidences of paid workers being displaced by unpaid interns, interns being assigned non-instructional, menial labor, and much of the work being unsupervised.

Many employers argue that the DOL criteria need updating because they are based on a 1947 Supreme Court decision (a time when many internships were for blue collar production work).

A prototypical producer co-op is made up of farmers that each work independently on their own farms.  They each contract with the co-op to provide a certain amount of produce that the co-op will market for them.  Patronage dividends are paid based on the amount of produce each member markets through the co-op.

Imagine a different scenario: a group of bookkeepers gets together to form a bookkeepers’ co-op.  Should the co-op be a worker co-op or a producer co-op?  Note that in California and in many other states, there is not a separate statute for a worker co-op versus a producer co-op.  So the co-op would form under the same statute in either case.  The important question is whether the bookkeepers would treat themselves as employees or independent contractors with respect to the co-op.

Co-op members will often prefer to treat themselves as independent contractors to avoid the compliance issues that come with having employees.  Whether they are co-op members or not, (in most cases) employees must be paid minimum wage, have workers compensation insurance, have employment taxes withheld from their pay, etc.  But co-ops should be careful about choosing this route.  Before treating co-op members as independent contractors, the co-op should consider whether the members comfortably fall within the IRS’s definition of an independent contractor (for example, how much control does the co-op have over the day-to-day activities of the members? are the members free to work for others? do the members purchase their own supplies and equipment? etc.).

The IRS, as well as other regulatory bodies, is very concerned about workers being misclassified as independent contractors.  The penalties for misclassification can be harsh.  So do some careful thinking before treating co-op members as independent contractors!

Another thing to be aware of is that a corporate officer must always be treated as an employee and not an independent contractor.  So if a co-op member is paid for serving as secretary, treasurer, or some other officer position, those payments must be treated as wages, subject to withholding of employment tax.

A guest post by

Susan Zeme, Esq., Law Office of Susan Zeme, 510.652.6895 or susan@swzeme.com

1.  Workers’ Compensation Insurance – Every employer must have Workers Compensation Insurance coverage.  Contact your general liability insurer or State Fund (www.scif.com) for details.  Things to know: If an employee is injured at work, he or she must be given a claim form immediately.  The employee completes the form and the employer submits it to the insurer.  Within one day, the employee is entitled to begin receiving treatment.  Within fourteen days, the insurer must inform the employer of claim status.  Reach the Department of Workers’ Compensation at www.dir.ca.gov/dwc.

2.  Wage and Hour Laws – You need to know what they are and how to comply.  The Division of Labor Standards Enforcement and its chief, the Labor Commissioner, are responsible for enforcement.  Contact them at www.dir.ca.gov/dlse. Very generally, full time employees must be paid minimum wage, receive overtime when they work more than eight hours in a day or forty hours in a week, and take a ten minute paid rest break every four hours, and a thirty minute unpaid meal break when they work more than five hours.  Non-exempt employees must be paid twice monthly on regularly scheduled pay days.  All employees must receive an itemized wage deduction statement with each paycheck.  Often, a payroll service is a good idea, because it can guide you through the specifics of paying employees properly.

3.  Occupational Health and Safety – Every California employer must provide a safe and healthful workplace.  Thus, each business must have an appropriate, effective Injury and Illness Prevention Plan.  This area is overseen by California’s Department of Occupational Safety and Health, or Cal/OSHA.  The specifics differ, depending on the nature of each business.  There are also record keeping and retention requirements.  Contact Cal/OSHA at www.dir.ca.gov/DOSH/Cal/OSHA.

4.  Equal Employment Opportunity laws – California employers are bound by both state and federal law.  You need to know about The Civil Rights Act of 1964, or Title VII, the Equal Pay Act, the Age Discrimination in Employment Act, the Immigration Reform and Control Act, the Americans with Disabilities Act, and California’s Fair Employment and Housing Act.  Because the California laws are most protective of employees, we focus on them.  There is too much detail to include here, but the focus of all of these laws is to require employers to judge employees and applicants on their ability to do the job, based on an analysis of the legitimate business reasons for making an employment decision.  That is, no protected characteristic, such as race, gender, age, disability, religion, national origin, sexual orientation, etc. should contribute to an employment decision.  And, you will need to be able to prove it.  For more information, check out the California Department of Fair Employment and Housing at www.dfeh.ca.gov.

5.  The Hiring Process – Hiring standards must be demonstrably without reference to legally protected characteristics.  That is, they must judge a candidate or employee exclusively on legitimate business reasons, and ability to perform the job.  A job application and questions asked during the hiring process should reflect this.  If there is a medical condition or disability, be prepared to inquire about reasonable accommodations that might be necessary.  It is legal for an employer to impose standards of dress and personal appearance, but they must be non-discriminatory.  Employers may require fluency in English if it is a necessary job qualification.  Always ask for references and check them.  Describing your workplace (and its quirks) in detail to an applicant can save a lot of headaches later.

6.  Posting Requirements – Every employer must post a variety of legally required notices, in a location easily available to employees.  The required postings include information about the minimum wage, payday, unemployment insurance, paid family leave, disability insurance, discrimination, Cal/OSHA, emergency numbers, access to medical and exposure records, pregnancy disability, workers compensation, family care/medical leave, time off for voting, smoking, and other state and federal laws.  Thankfully, there are companies that sell pre-made, laminated posters including all of the legally required information.  One web site that sells these posters is www.businessknowhow.com.

7.  Employee Policies – Every employer needs written employee policies.  The employer’s size, complexity and number of employees will dictate how detailed the written employees policies should be.  Small employers may be able to use a shorter set of basic guidelines, while a larger employer will want a complete employee handbook.  In either case, there are several policies that every employer should have in writing: Attendance, Breaks, Confidentiality, Disciplinary Rules and Procedures, Dispute and Complaint Resolution, Dress Code, Drug and Alcohol Use, Employee Privacy, Equal Employment Opportunity, Holidays, Hours of Work, Immigration Law Compliance, Injury and Illness Procedure, Leaves of Absence, Overtime, Pay, Performance, Sexual Harassment, Termination Policy, Timekeeping Requirements, Unemployment Insurance, Vacation, Workers Compensation, Workplace Violence.

8.  Termination of Employment – Terminating someone’s employment can be stressful and challenging – for both parties.  Some general rules can make the process smoother:

• Operate throughout employment under the premise that employment is terminable at will (the default state of the law in California)
• Treat the employee fairly and respectfully, before, during and after termination (Employees who feel they have been treated fairly are less likely to sue)
• Give the employee the real reason for the termination – in writing
• Do not open an argument with a terminating employee
• Assume that any termination letter you write will end up in front of a jury – use it proactively
• Do not close a termination letter with platitudes – that is insulting
• Consider offering severance pay in exchange for a release of claims.

These are just the basics, and there is lot more to California Employment Law.  Please contact me if I can help, or answer questions.

• Have an up-to-date job description for each employee
• Have each new employee complete the I-9 form and provide the required documentation on the first day of employment – the Form I-9 is revised periodically and it is the employer’s responsibility to use the most recent form for new hires
• Carefully consider whether your new employee is “exempt” or “non-exempt” from the Fair Labor Standards Act overtime rules – most employees are non-exempt, but if an employee’s duties include things like supervision of others and exercise of discretion and judgment, he or she may be exempt
• Make sure non-exempt employees take their legally mandated meal and rest breaks and have them document this on their timesheets
• Have an employee handbook to clearly communicate company policies regarding holidays, vacation, privacy, etc.
• Be aware of the strict limitations in California on “non-compete” agreements – make sure any agreements you have your employees sign are legally enforceable
• If you have 50 or more employees, be aware of your obligations under the Family and Medical Leave Act
• If you have 50 or more employees, be aware that California mandates annual sexual harassment training for supervisors
• Understand that when an employee leaves, he or she must be compensated immediately for accrued vacation time
• Have a system in place to ensure the privacy of employment records