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Tilting the Scales

Business Issues with a Legal Slant

End-of-Year Bonuses? Possible Tax Pitfalls!

Posted in *Way Out - Advice, Legal Risk Management, Money

Business conceptAfter stepping down from running the family oil business (see last month’s article), Jed Clampett runs Mama’s Fried Pies, his late wife Rose Ellen’s fried pie business. With business booming, Jed decides to hire Elly May as the Vice President of Marketing so he can spend more time in the kitchen rather than sales. If Elly May remains with the company for a full five years, she will receive a base salary plus a $50,000 bonus, payable in $10,000 increments over five years with each increment vesting at the end of the calendar year (e.g., the first $10,000 vests on December 31, 2015) but not payable until the following June 1st. Does this retention bonus structure risk additional taxes to Elly May and Mama’s Fried Pies?

Internal Revenue Code Section 409A

Yes. Mama’s Fried Pies’ bonus agreement with Elly May does not comply with IRS Section 409A because the payment is not made by March 15, 2016. The vesting 2015 bonus must be included in Elly May’s 2015 taxable income when it vests. Worse yet, Elly May owes regular taxes plus a 20% excise tax ($2,000) on the bonus amount, plus interest at the underpayment rate plus one percent. Under the Internal Revenue Code Section 409A, Mama’s should have paid the vested retention bonus (a) on a predetermined date; (b) pursuant to a fixed schedule of payments; or (c) no later than March 15th of the calendar year following the year of vesting.

Tilting the Scales in Your Favor

To ensure that your bonus plan – either as an employee or paid by you as the employer – complies with the Internal Revenue Code, confer with your tax attorney or accountant to avoid the penalties of an IRS illegal bonus plan. Executives and employees receiving a retention bonus should confirm the legality of the arrangement before agreeing, and then consult with their employer. Likewise, employers must conform their bonus plans with the Internal Revenue Code to avoid conflicts, and possible litigation with their key employees. Now is the best time to review these bonus plans. Recently, the Internal Revenue Service ruled that if a bonus plan does not meet Section 409A’s requirements, but the company corrects the bonus plan no later than the year before the bonus first vests, the plan will be compliant.

Kudos to Jason Luter, ERISA and deferred compensation expert at Gray Reed, who just authored a client alert on this issue and assisted in editing this article.

Open Carry? Or Not?

Posted in *BTW - Noteworthy, Constitutional Rights & Issues, Legal Risk Management, Property Issues

CHL in TexasPolice Chief Steroid McMuscles reported that Colt Glockenhand who entered Wally-Mart with a shotgun was not charged with “engaging in the lawful open carry of a pump-action shotgun” – a violation of the Cut and Shoot town ordinance. However, when Colt entered Kreamy Kreme, loaded his shotgun and pumped it in front of witnesses, Chief McMuscles arrested him for breach of the peace. Wally-Mart did not have a posted sign prohibiting the open carry of guns; Kreamy Kreme did. Was Chief McMuscles on target?

Texas state law now pre-empts existing city ordinances in Dallas, Houston, San Antonio and Austin, despite a last minute effort by larger cities to opt-out of the “open carry” law. And, Yes, Chief McMuscles is right for two reasons: (1) ignoring a properly posted prohibition of either “open carry” or “concealed carry” is a Class A misdemeanor, (2) displaying a firearm or other deadly weapon in a public place in a manner calculated to alarm is a breach of the peace and a Class B misdemeanor.

Introducing the “open carry” bill, Wichita Falls Senator Craig Estes noted that Texas was one of only six states that did not permit its citizens to openly carry handguns under any circumstances. The other states are California, Florida, Illinois, New York, and South Carolina. To ban the open carrying of firearms, business must post a specifically worded sign at its entrance(s).

Tilting the Scales in Your Favor

Gray Reed attorney and Texas State Representative Jeff Leach tells us: “The ‘open carry’ bill was signed in to law by Governor Greg Abbott on June 13, 2015, and becomes effective (with a few minor exceptions) on January 1, 2016, making Texas the 45th state to allow some form of ‘open carry’ of handguns. Business and property owners who wish to prohibit open and concealed carry must closely observe the signage requirements.”

Signage Requirements:

  • To prohibit the “concealed” carry of handguns by licensed CHL (LTC) holders, the sign should include the following language (pursuant to Texas Penal Code Section 30.06):
    • “Pursuant to Section 30.06, Penal Code (trespass by license holder with a concealed handgun), a person licensed under Subchapter H, Chapter 411, Government Code (handgun licensing la), may not enter this property with a concealed handgun.”
  • To prohibit the “open” carry of handguns by LTC holders, the sign should include the following language (pursuant to Texas Penal Code Section 30.07):
    • “Pursuant to Section 30.07, Penal Code (Trespass by license holder with an openly carried handgun), a person licensed under Subchapter H, Chapter 411, Government Code (handgun licensing law), may not enter this property with a handgun that is carried openly.”
  • To prohibit BOTH concealed and open carry of handguns, both signs should be posted.

General Information:

  • HB 910 authorizes individuals (with some exceptions) to obtain a license to openly carry a handgun where licensed carrying of a concealed handgun is permitted.
  • Openly carried handgun must be in a shoulder or belt holster, whether loaded or not.
  • Licensing of both concealed (CHL) or openly carrying a handgun (LTC) will not change. Both will be called LTC.
  • CHL holders may continue to carry handguns both concealed and open carry at no additional fee, nor will they be required to attend additional training.
  • New LTC applicants will be required to complete training updated to reflect new requirements addressing restraint holders for secure carry of handguns.

Even with a CHL (LTC), these weapons may not be carried concealed or “open carry” regardless of whether the handgun is holstered pursuant to Texas Penal Code §46.03 & §46.035:

A concealed handgun cannot be carried while the person is intoxicated.

  • In the premises of an establishment licensed to dispense alcoholic beverages for consumption on the premises, which derives 51% or more of its income from the sale of alcoholic beverages and has a conspicuous warning prohibiting firearms, if posted.
  • On the premises of a public higher education institution or private or independent institution of higher education, including any public or private driveway, street, sidewalk or walkway, parking lot, parking garage or other parking area
  • Inside the secured area of any airport, however a person may carry any legal firearm into the terminal that is encased for shipment purposes and checked as baggage to be lawfully transported on an aircraft pursuant to airline and TSA regulations.
  • In a place of religious worship if a proper TPC §30.06 warning is given.
  • In a hospital or nursing home if a proper TPC §30.06 warning is given.
  • In any court or offices used by a court unless pursuant to written regulations or written authorization from the court.
  • At any polling place on Election Day.
  • At any meeting of any governmental body if proper notice is posted pursuant to Texas Penal Code §30.06.

PAST RELATED ARTICLES:

Glock on Board: Can you Keep a Handgun in Your Car if you Don’t have a Concealed Handgun License?

Texas Concealed Handgun Laws

Open-Carriers Pose a Threat to Restaurants with Liquor Licenses

WARNING to Liquor License Holders – “Open Carriers” Can Cost you your Liquor License

LEGISLATIVE UPDATE: HB 700 Seeks to Allow Handguns to be Carried Openly

Closely-Held Shareholder Derivative Actions are Alive and Well in Texas

Posted in *Way Out - Advice, Family Issues, Legal Risk Management

business people around a tableAfter 30 years of running his family-owned business, Hillbilly Oil Co., Jed Clampett decided to retire in 2013. The board of directors elects Jethro Bodine as Hillbilly’s President and Elly May as Vice President. Both Jethro and Elly May sit on the company’s board of directors. Soon after taking over, Jethro is presented with a proposed lease for the company’s land in Oklahoma. The operator offers Hillbilly Oil above-market bonus payment and royalty. Jethro turns it down though, thinking the company is better off drilling the land itself while oil prices continue to rise. Soon after Hillbilly begins drilling oil prices tank, causing the company to lose $5 million. Jed can’t believe to learn that Jethro rejected the proposed lease, and soon learns that Jethro bought the drilling equipment from a company that he has a 50% interest in and paid double market price, but never disclosed his interest to the other board members. He decides to file a derivative lawsuit against Jethro. Jethro responds to the lawsuit claiming the “business judgment rule” protects him from any liability and that Jed’s lawsuit also fails because he did not make a demand on the corporation. Is Jethro right?

Explaining Closely-Held Corporations and Shareholder Derivative Actions

A closesly-held corporation has fewer than thirty-five shareholders and its shares are not listed on a national securities exchange. Typically the shareholders of closely-held corporations are family members, but that is not a requirement to make the corporation “closely-held.” A shareholder derivative action involves a corporation’s shareholder bringing suit on behalf of the corporation against its officers or directors.

The Business Judgment Rule

The business judgment rule comes up in two contexts. First, it protects officers and directors from a shareholder’s derivative lawsuit for acts that are within the honest exercise of their business judgment and discretion. In other words, officers and directors are protected from liability for past actions that are “negligent, unwise, inexpedient, or imprudent.” Second, the business judgment rule applies to the board of directors’ decision of whether to pursue the corporation’s cause of action against the officers or directors.

The Texas Supreme Court recently held that while the business judgment rule applies to the merits of the shareholder’s lawsuit – that is, the shareholder must prove that the officer or director’s past action was fraudulent, oppressive, or an abuse of power – a shareholder in a closely-held corporation is not required to make a pre-suit demand on the corporation. Thus, unlike a shareholder of a publicly traded corporation, a shareholder of a closely-held corporation does not have to prove that the corporation violated the second instance of the business judgment rule: that the corporation’s board of directors acted fraudulently, oppressive, or abused its power in deciding not to pursue a lawsuit against one of its officers or directors for alleged mismanagement.

Tilting the Scales in Your Favor

Because Hillbilly Oil is a closely-held company, Jethro loses his argument that Jed failed to make a pre-suit demand on the corporation. And because Jethro engaged in a transaction in which he had a conflict of interest without disclosing that conflict to Hillbilly’s board, his “business judgment rule” defense likely fails as well. Minority shareholders in closely-held corporations like Jed should exercise their rights to bring derivative actions when the corporation’s officers and directors engage in abusive or oppressive activities.

Hack Attack?

Posted in *Way Out - Advice, Employment & Labor, Legal Risk Management, Social Media & The Internet

cyber securityBreathing a sigh of relief that he neither works for U.S. agencies requiring security clearances nor do his hiring policies require the details of mental illnesses, drug and alcohol use, past arrests, bankruptcies, Joe Hyre was oblivious to the ranting of Dez Grunteld, a whining employee who he fired last week. Over the weekend Dez hacked into the Ten U Us Employment records and downloaded personnel files containing social security numbers, dates of birth and credit histories of Ten U Us Employment’s people. Not satisfied, Dez deliberately crashed five of the company’s eight network servers as further retribution, permanently erasing all of the information, and forcing Ten U Us to shut down operations in its headquarters for two days sustaining losses in excess of $100,000. Can Joe Hyre instruct his Ten U Us employees to access Dez Grunteld’s old email account to investigate the damage Dez caused? Is Ten U Us responsible to the employees whose information was stolen?

Hack Grunteld Back?

Maybe Hyre can access Dez’s old email account to investigate the damage he caused. Among other things, the Electronic Communications Privacy Act (ECPA) regulates private individuals and businesses, arguably giving employees of private entities a right to privacy in their e-mail. While there are equally good arguments that employers who own the computer system used by their employees have the right to monitor employees’ e-mail, the simplest solution is for Ten U Us to follow the terms to which Dez Grunteld agreed in his employee handbook.

Responsible for Employee Files?

Yes, Ten U Us is almost certainly responsible to its employees for the loss of their sensitive personal information. The Texas Business & Commerce Code obligates businesses to implement reasonable procedures, including taking any appropriate corrective action, to protect the unlawful use or disclosure of any sensitive personal information collected or maintained by a company in the regular course of business, both for customers and employees. Moreover, Texas law imposes notification requirements for the breach and disclosure of sensitive personal information, even if only potentially exposed, for employees and customers alike.

Inside Jobs

Although the cyberbreach of more than 14 million U.S. government personnel records detailing, among other things, military records, job and pay histories and life insurance and pension information was the clever work of Chinese hackers, most business cyber breaches are inside jobs. Speaking of China, did you know that, over the centuries of repelling Mongolian invaders, the only time that the Great Wall of China was breached was in 1644? The gates at Shanhaiguan were opened by Wu Sangui, a Ming border general who disliked the activities of rulers of the Shun Dynasty. Whether in 1644 or 2015, the most likely breaches of your secure walls – whether they be fortifications or computers – is a dissatisfied employee like Wu Sangui or Dez Grunteld.

Tilting the Scales in Your Favor

Ideally? Immediately address resentful or disgruntled employees in a fair and benevolent way. For double coverage, however, plan for a possible separation or firing by implementing the following recommendations:

  1. Cyber Insurance. The detailed insurance company evaluation of your company’s IT department should become the blueprint for internal company protection of sensitive information. Premium costs, depending upon coverage and current IT protection systems can vary dramatically.
  2. IT Policy. Create and enforce an acceptable use policy for your Internet, Email and Computer systems.
  3. Content Filtering. With a content filtering device, monitor internet usage to restrict websites accessible to employees. Consider restricting access to personal emails – a common vehicle for “stealing” company files.
  4. Social Networking Sites. Deny, or at least limit, free access to social networking sites like, Facebook, Twitter and the like, as they invite inappropriate content, viruses, and theft.
  5. Password Integrity. Require separate and regular changed passwords for each employee who accesses a company computer and server. The password should not be known by anyone else.
  6. Regular Audits. Audit computer files for user access and deletion.
  7. Monitor server event logs.
  8. Use Terminal Servers if possible.
  9. Back up at least once a month. Test your backup because restoration data is frequently corrupted, or worse was never backed up at all.

Past Related Articles: Cyber Security: Forewarned is Fair-Warned

Don’t Be a Target: Mitigating Liability From Cyber Attacks

Weighing in – 1.2 Billion Usernames and Passwords. What, Me Worry About CyberSecurity?

Sony vs. N. Korea – Let Capitalism Fight Totalitarianism!

A Lawyer and a Juror

Posted in *Weighing In - IMHO

Jimmy StewartThis month I am flushing the format to talk about jury duty. I recently got selected to serve on a jury in a civil case. The experience fascinated me because, as a civil trial lawyer myself, it gave me the opportunity to see a trial from a juror’s perspective in the courtroom and in the jury room. My case lasted four days. Here are several observations to keep in mind for the next time you find yourself as a party in a trial.

It is a Civic Duty

When one of your friends tells you they received a jury duty notice in the mail, it’s usually not with a joyful tone. Rather, it’s with an exasperated huff. I think there is a simple explanation for that reaction: people have a daily routine, with existing obligations, and jury duty disrupts their schedule. But once selected, my fellow jurors took their responsibility seriously. Litigants should keep in mind that jurors want to see that the parties are taking the case as seriously as they are.

Courtroom Technology: An Asset and a Liability

Today’s technology has radically changed the way litigants can present their case. One hundred years ago, parties presented their evidence through oral testimony, usually without any documentary evidence, and almost certainly without any visual aids. Now parties can show videos, photographs, and documents and can “self-edit” to show the jury what evidence is important to their side of the case. Parties should take advantage of these capabilities. Technology is a “change of pace” in the courtroom and keeps the jury attentive. While jurors take the case seriously, it is tough to sit in a chair for a couple of hours listening to a lawyer and a witness talk back and forth –especially when the lawyer is sitting in his or her chair as well. Also, some jurors may be visual learners. Putting the document up on a screen, instead of simply reading the language, may help a juror better understand your case.

A word of caution about technology in the courtroom. If you are going to use it, you need to make sure it works in the courtroom before trial starts, and you need to know how to use it. Technology problems are distracting and kill your momentum. Think of yourself as the director of a movie – you want to show the jury the final, finished product. To put it another way, follow the Scout Motto: Be Prepared.

Jury Deliberations: Behind the Curtain

When the jury goes to deliberate they are given the “jury charge,” which contains the questions they are asked to answer. The jury charge also contains instructions and legal definitions. Sometimes these questions can be complicated. Nonetheless, it is important to know that jurors will make every effort to “get it right” with their verdict. This doesn’t mean they will decide the case based on sympathy, bias or prejudice. Rather, juries seek to render a verdict that is based on a common sense assessment of the facts.

Tilting the Scales in Your Favor

My service has reconfirmed my belief that the jury system works. If you end up as a party in a jury trial, respect the jury’s decision no matter the outcome. And if you are selected for jury duty, thank you for your service.

Foreseeability and a Business Owner’s Liability for Criminal Acts of Others

Posted in *Way Out - Advice, Criminal Law, Legal Risk Management

Recently we’ve discussed how the foreseeability of the potential harm caused by a person’s actions can make them liable for negligence. Recent horrific events in Garland and Waco, Texas bring up a related question: can a business owner ever have a duty to protect his customers from the wrongful – even criminal – acts of another? The answer is yes – if those criminal acts are foreseeable.

Recently, the Twin Peaks restaurant in Waco, Texas became a hang-out for “outlaw” motorcycle clubs. The Twin Peaks management had encouraged the bikers to patronize the restaurant, going so far as to hold bike events for them. The Waco police repeatedly requested that the restaurant eject the bikers or stop allowing them to hold events on the premises, citing the strong likelihood of intergang violence; however, the managers refused.

Just a few days ago, the police warning proved prophetic as several biker gangs started a brawl that turned into a massive gunfight, leaving nine bikers dead, more wounded, and bullet-riddled cars throughout the parking lot. Luckily, no citizens or police officers were wounded – but if they had been, could they have held the Twin Peaks restaurant liable for their injuries, even though the injuries were actually caused by the bikers?

Yes, if the crime is foreseeable. Generally in Texas, a business owner is not liable for injuries caused by the criminal acts of a third party. However, the Texas Supreme Court has held that there is an exception when “the risk of a crime [is] sufficiently unreasonable and foreseeable to justify imposing a duty on [business owners] to protect [their customers] while they are on the [business owner’s] property.” Generally in Texas, the courts analyze previous acts of crime on the premises and weigh the proximity, publicity, recency, frequency, and similarity of the prior crimes to determine if the crime in question was foreseeable. In this case, there have been no reports of similar prior crimes in the past. However, according to the police the restaurant owners were warned of the possibility of a violent clash of biker gangs in advance. If a person were injured during the melee, they could have good reason to claim that the crime was foreseeable – and that the restaurant owners were liable for their injuries.

Tilting the Scales in Your Favor. So what should business owners do to prevent being held liable for the criminal acts of third parties on their premises? Luckily for them, it is generally difficult for a plaintiff to establish that criminal activity is foreseeable, and Texas appellate courts are quick to second guess juries’ determinations of foreseeability. Nevertheless, the prudent business owner should take reasonable steps to prevent criminal activity on their premises when it is routine or when the police give an express warning of future criminal acts.

Update! Not surprisingly, a lawsuit has already been filed as a result of the shootout in Waco. One of the Twin Peaks restaurant’s neighboring business sued the Twin Peaks management and national franchisor alleging that the management failed to “exercise ordinary care and operate its place of business in a reasonable and prudent manner.” The suit seeks damages including the profits lost while the neighboring restaurant was closed during the police investigation and for damage to its property. The suit also alleges that the franchisee management is the “agent” for the national franchisor, rendering the national franchisor liable to the same extent as the franchisee. Alleged negligent acts include the negligent hiring of the independent franchisor’s management, failing to heed warning from the police about motorcycle related violence, and failing to supervise and control patrons.

It will be interesting to follow the course of this litigation; the legal theories asserted by the plaintiff appear to be novel and in some cases contrary to existing Texas law. Typically, a business owner’s duty to prevent criminal acts is limited to its patrons; this case seeks to greatly expand that doctrine. Time will tell if the courts agree that these claims have merit.

 

Business Owners Don’t Have Crystal Balls: Foreseeability and Liability for Criminal Actions

Posted in *Way Out - Advice, Legal Risk Management

Crystal BallRecently we’ve discussed how the foreseeability of the potential harm caused by a person’s actions can make them liable for negligence. Recent horrific events in Garland and Waco, Texas bring up a related question: can a business owner ever have a duty to protect his customers from the wrongful – even criminal – acts of another? The answer is yes – if those criminal acts are foreseeable.

Recently, the Twin Peaks restaurant in Waco, Texas became a hang-out for “outlaw” motorcycle clubs. The Twin Peaks management had encouraged the bikers to patronize the restaurant, going so far as to hold bike events for them. The Waco police repeatedly requested that the restaurant eject the bikers or stop allowing them to hold events on the premises, citing the strong likelihood of intergang violence; however, the managers refused.

Just a few days ago, the police warning proved prophetic as several biker gangs started a brawl that turned into a massive gunfight, leaving nine bikers dead, more wounded, and bullet-riddled cars throughout the parking lot. Luckily, no citizens or police officers were wounded – but if they had been, could they have held the Twin Peaks restaurant liable for their injuries, even though the injuries were actually caused by the bikers?

Yes, if the crime is foreseeable. Generally in Texas, a business owner is not liable for injuries caused by the criminal acts of a third party. However, the Texas Supreme Court has held that there is an exception when “the risk of a crime [is] sufficiently unreasonable and foreseeable to justify imposing a duty on [business owners] to protect [their customers] while they are on the [business owner’s] property.” Generally in Texas, the courts analyze previous acts of crime on the premises and weigh the proximity, publicity, recency, frequency, and similarity of the prior crimes to determine if the crime in question was foreseeable. In this case, there have been no reports of similar prior crimes in the past. However, according to the police the restaurant owners were warned of the possibility of a violent clash of biker gangs in advance. If a person were injured during the melee, they could have good reason to claim that the crime was foreseeable – and that the restaurant owners were liable for their injuries.

Tilting the Scales in Your Favor. So what should business owners do to prevent being held liable for the criminal acts of third parties on their premises? Luckily for them, it is generally very hard for a plaintiff to establish that criminal activity is foreseeable, and Texas appellate courts are quick to second guess juries’ determinations of foreseeability. Nevertheless, the prudent business owner should take reasonable steps to prevent criminal activity on their premises when it is routine or when the police give an express warning of future criminal acts.

The Top 3 Things Tom Brady Can Learn From Blue Bell Creameries: “Nothing is More Important To Us Than Maintaining Your Trust”*

Posted in *Way Out - Advice, Legal Risk Management, Social Media & The Internet
  1. Tom_Brady_vs._Vikings_2014Take it Seriously. A week ago, when asked about the “elephant in the room,” New England Patriots quarterback Tom Brady replied before 4,000  cheering and laughing Patriots fans “Where? When I digest it fully, I’ll be sure to let you know how I feel about it… This is like a Patriots pep rally.”

Last March Blue Bell announced a product recall for the first time in 108 years after discovering what was then believed to be a single machine producing a limited amount of frozen snacks with a potential listeria problem. Crisis Communication Rule 1: Treat Serious Matters Seriously.

2.  Actions Count. Although Brady appeared for an interview and voluntarily answered questions, his failure to cooperate contributed to his punishment when he refused to produce texts and emails even with his attorney being allowed to screen and limit production strictly to responsive materials.

Last April Blue Bell reiterated its commitment “…to doing the 100 percent right thing, and the best way to do that is to take all of our products off the market until we are confident that they are all safe…. [bringing] in one of the world’s most respected food safety microbiologists to inspect our plants and systems to help us get to the bottom of this issue.” Crisis Communication Rule 2: Actions Speak Louder than Words.

3.  Accountability is Critical. Brady’s agent blasted the 243 page Wells report and vowed to appeal the decision. Patriots’ owner Bob Kraft, who last week said he would accept any punishment despite his serious misgivings about the Wells report’s findings, denounced both the penalties and the initial report.

In its latest May press release, Blue Bell reported that it collected approximately 8 million gallons of ice cream sold domestically and internationally, and closed production plants in Brenham, Texas, Oklahoma and Alabama to thoroughly clean and sanitize each facility and review all operating procedures and its production process to eliminate possible contamination pathways. Crisis Communication Rule 3: When You are Wrong, Admit it and Take Your Medicine.

Tilting the Scales in Your Favor. Nothing is more important than your reputation, and a key ingredient to reputation is trustworthiness. Rather than denying outright any knowledge or participation in “Deflategate,” had Brady first communicated that he was a fierce competitor who looked to take advantage of every opportunity to help his team win and later acknowledged that the air pressure was below recommendations, Brady might have preserved his reputation as a fierce yet forthright competitor.

When challenged by a crisis, you must have a plan– Failing to Plan is Planning to Fail.

*Paul Kruse, CEO & President of Blue Bell Creameries in March 27, 2015 letter to customers

Paying Child Support: Are Your New Hires Being Honest?

Posted in *Way Out - Advice, Criminal Law, Employment & Labor, Family Issues, Legal Risk Management, Money

divorceKnowing that his old high school friend Iman Dedbeet had just been taken to the cleaners by his ex-wife Goldilocks in a nasty divorce, Johnny Clueless decided to help Iman out by hiring him as his general sales manager at Clueless Automotive. Johnny knew that Goldilocks got full custody of Dedbeet’s kids and that Dedbeet owes Goldilocks back child support. Nevertheless, when Clueless handed Dedbeet the IRS Form W-4 to complete, Dedbeet urged Clueless to make him an independent contractor and pleaded, “You know what I need Johnny. Goldi doesn’t deserve another penny.” Relenting, Clueless classifies Dedbeet as a 1099 independent contractor. Is Clueless getting taken for a ride?

Employers Must Report New Hires. Within 20 days of hiring a new employee Employers must report the new hires to the Texas Attorney General’s Child Support Division. However, this requirement is limited to new personnel classified as employees. An employer is not required to report new hire independent contractors, allowing new hires to avoid having child support withheld from their paycheck.

Employers Are Liable for Falsely Reporting a New Hire’s Status. Johnny Clueless should know, however, that Texas law subjects employers to a $500 fine for conspiring with a new hire to fail to submit a new hire report, or submit a false report. By agreeing to Dedbeet’s pleas Clueless risks sharing Iman Dedbeet’s responsibilities because he knew that his new hire wants to avoid the possibility of having child support withheld.

Proposed Legislation Would Remove Loophole Senate Bill 1727 currently before the Texas Legislature would add “independent contractor” to the definition of “employee” in Texas and close the loophole used by some to avoid child support withholding.

Tax Issues Both Clueless and Dedbeet also create tax issues by misclassifying Dedbeet as an independent contractor. Clueless will not pay FICA. Instead, Dedbeet will have to pay the Self Employment tax on a quarterly basis.

Tilting the Scales in Your Favor Although misclassifying employees may not look overly penal, it will cause a substantial disruption in your business when you have to deal with the Attorney General’s investigation and, is it worth it? It’s easier (and the law) to classify the employee correctly before the hire for any number of reasons. If a new hire asks to be classified as an independent contractor, and particularly if you know the hire owes child support, make sure that the hire is truly serving as an independent contractor – which means the hire provides all of their own tools and equipment, and has complete control over the manner in which it performs tasks.

Avoiding Job Applicants who Smoke: Is Snuffing out Smokers Discrimination?

Posted in *Way Out - Advice, Employment & Labor, Legal Risk Management

smokingFaced with increasing healthcare costs and wanting to be a good role model, Gus Grohcer of Canned Foods 4 Less advises all prospective employees that he does not hire smokers and tests for nicotine, making all job offers “contingent upon passing a pre-hire drug screen including nicotine test.” During the ninety day probationary period, Chimm Nee Stax volunteered a urine sample for testing. When the test returned positive, Gus Grohcer advised Chimm Nee that he was canned. Can Canned Foods 4 Less butt into the lives of its smoker-employees like Stax? Does Chimm Nee Stax have a claim for discrimination, for wrongful termination or for violation of ERISA by interfering with his rights?

Discriminate Against Smokers in Texas? Yes, Gus Grohcer and Canned Foods 4 Less can refuse to hire smokers despite any threat or complaint of Chimm Nee Stax. Smokers are not a protected class under federal law, nor is being short, being overweight or being ugly. Refusing to hire smokers is not illegal in Texas and some 19 other states where it is perfectly legal for an employer to ask if you are a smoker and let that be determinative of hiring.

Eighteen states prohibit discrimination against tobacco users; and eight protect an employee’s right to use in the workplace an otherwise lawful consumable product. Four states prohibit discriminating against employees engaged in lawful activities outside work, including smoking tobacco in California, Colorado, New York and North Dakota, where it is illegal to not hire you simply because you smoke. What about a marijuana smoking Colorado employee Chimm Nee Stax might ask? A case is pending before the Colorado Supreme Court. Even in those some 30 states that prohibit discrimination, if being a nonsmoker is an important part of a specific job’s qualifications, such as an antismoking advocacy group like the American Lung Association, smokers can be rejected.

Relationship Between Smokers and Healthcare Costs? When the smoke clears, Gus Grohcer and Canned Foods 4 Less are not missing the mark on reducing labor costs. The Center for Disease Control reports that smoking is the leading preventable cause of death, disease and disability in the United States, is responsible for more than 480,000 deaths per year, costs more than $289 billion a year, including at least $133 billion in direct medical care for adults, and costs more than $156 billion in lost productivity. Eliminating smokers will increase the bottom line because tobacco users’ annual health care costs are $3,000 to $4,000 greater than non-smokers.

And Gus is not the only one. Estimates are that 61% of large employers are surcharging tobacco users. Hospitals like Baylor Health Care System lead the way with 21% of all hospitals having bans this year (one-third are expected to have bans next year) by imposing a health insurance surcharge on smoking employees of greater than a thousand dollars annually. Those smokers seeking health insurance through the exchanges are seeing insurance rates of approximately $4,000 per year above those for a comparable nonsmoker.

Socioeconomic Discrimination? Since smoking is unevenly distributed, some argue that by refusing to hire Chimm Nee Stax, Gus and others like him are unethical because they are cherry-picking ‘low-risk’ employees and denying smokers employment, risking hurting vulnerable groups. “More than 36% of Americans living below the federal poverty line are smokers, as compared with 22.5% of those with incomes above that level.” And since about 45% of unemployed people smoke, no-hire policies would create a “double-whammy” among this group.

Tilting the Scales in Your Favor. The uncertainty of the costs and regulatory implications of Obamacare undoubtedly encourages every company, including Gus Grohcer and Canned Foods 4 Less to promote the health and well being of its employees. Whether the rationale is as fickle as physical appearance or as pragmatic as healthcare costs and productivity, a non-smoking, fit employee has fewer unplanned, missed work days and is likely to be less burdensome upon the company’s healthcare program. The result? A better, cheaper insurance plan for all employees of Canned Foods 4 Less. Our Gray Reed employment experts Ruth Ann Daniels and Michael Kelsheimer[1] advise that companies are becoming more mindful of excluding job applicants who smoke and are obese. Some companies are even modifying their Employee Handbooks to motivate the reduction and even elimination bad health habits and to promote healthier habits, including health club memberships and the like.

* Thanks to one of our faithful readers Mary Ann Markowitz who recommended this April Tilting article. We welcome recommendations for any legal or business issue affecting your closely held company.

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