Fall 2009 Business Today Tom Pauken, Chairman Commissioner Representing Employers

Te x a s Bu s i n e s s To d a y Texas Fall 2009 Business Today Tom Pauken, Chairman Commissioner Representing Employers

Texas Business Conferences: Frequently asked questions answered l Employee or Independent Contractor: Some clarificationl New Regulation for Family Medical Leave Act Te x a s Bu s i n e s s To d a y Small businesses keep driving economy despite downturns

In an October address to the American people, Presi- dent Obama said, “Small businesses have always been the engine of our economy – creating 65 percent of all new jobs over the past decade and a half – and they must be at the forefront of our recovery.” By forging new paths and capitalizing on created opportunities, small businesses typically have led the way out of difficult economic downturns. The sheer number of new startups during times of recession is testament to the tenacity and ingenu- ity of the American entrepreneur. In Texas, small businesses accounted for 98.7 percent of total employers in 2006. That same year, firms with fewer than 500 employees represented 46.8 percent of the state’s private-sector employment. They account for nearly Chairman’s sixty percent of the nation’s Corner goods-producing industries, and nearly half of all service- providing firms. In the second quarter of this year, over 85 percent of firms in the construction sector were small firms. Economists have struggled to explain the resilience of small firms during economic downturns. A recent study by the Ewing Marion Kaufman Foundation found that new business startups are more resistant to recessions than larger established firms. It also found that “job creation from startups is much less volatile and sensitive to downturns than job creation in the entire economy.” It cannot be ignored that over half of all companies on the Fortune 500 were started during times of economic Texas Workforce Commission (TWC) Chairman Tom Pauken decline. speaks at a recent Skills Development Fund Conference in Austin. Pauken says TWC understands the critical role of Less than one percent of the federal stimulus money small businesses in the state’s economy. has gone to encourage capital investment and job creation Texas Workforce Commission photo in the small business sector. Nonetheless, there are two little known provisions in the American Recovery and Re- investment Act of 2009 which are of potential benefit. At the Texas Workforce Commission, For example, this year the federal government has we recognize the critical role of small doubled the Section 179 Expensing limits up to $250,000 businesses in the state’s economy. for various small business equipment purchases, allowing for the expensing of those capital investments during By helping Texas employers the current fiscal year. The capital investments have to be understand current interpretations made by December 31, 2009 in order to qualify. In addition, there is an increased Energy Efficiency Tax Credit and developments in the law, TWC for any small business for weatherizing its property. That helps level the playing field for tax credit has been increased from 10 percent to 30 per- emerging firms that may lack exten- cent. (See “Business Briefs” on page 14 of this issue for additional details). sive familiarity with various labor laws. At the Texas Workforce Commission, we recognize the critical role of small businesses in the state’s economy. By

2 Te x a s Bu s i n e s s To d a y Fa l l 2009 helping Texas employers understand current interpretations and developments in the law, TWC helps level the playing field for emerging firms that may lack extensive Economists have struggled to familiarity with various labor laws. For example, in this explain the resilience of small firms issue, one of our knowledgeable TWC staff attorneys discusses a topic relevant to many employers and small- during economic downturns. A business owners: laws and regulations surrounding the recent study by the Ewing Marion issue of who is an employee as opposed to who is an inde- Kaufman Foundation found that pendent contractor. In a September survey by Intuit, 82 percent of 1,004 new business startups are more small business owners said they “see opportunities for resistant to recessions than larger their business despite the current economic climate.” I believe that we need to do much more at the national level established firms. to encourage job creation in the private sector, particularly for small businesses where most new jobs are created. The Kemp-Roth Job Creation Act of 1981 did just that for small businesses in the early 1980s, back when national unemployment rates were as high as they are today.

Sincerely, Tom Pauken, Chairman Commissioner Representing Employers

Chairman’s Corner ...... 2 Frequently Asked Questions from Employers – Answered...... 4 Legal Briefs: Independent Contractor or Employee? Some Clarification...... 8 Business Briefs: New Family Medical Leave Act Regulations Now In Place...... 13 Upcoming Texas Business Conferences...... 15 Cover image: Texas Workforce Commission photo

3 Te x a s Bu s i n e s s To d a y Frequently asked questions from employers – answered The following questions were A: Severance pay paid under a best handle the appeal hearing? complied from past Texas Business policy or agreement has no effect on A: Be sure to have the supervisor Conferences around the state: unemployment benefits, so it will not testify during the hearing, as well as reduce the employer’s chargeback any other witnesses who could confirm Unemployment Claims and amount. The company will be charged that attendance was mandatory at the back with its share of whatever benefits meeting for the claimant. In addition, Appeals are paid to the laid-off employee. The submit a copy of any written notices or Q: What is a base period? percentage of chargeback will be the e-mails that put employees on notice A: The base period is a year-long same as its share of the wages paid to about the meeting – send copies to both period of time that determines both the employee during the base period of the hearing officer and the claimant the amount of UI benefits a claim- the claim. prior to the hearing. ant can potentially draw and which employers will be in line for potential Q: We terminated an employee Q: An employee gave two weeks chargebacks if benefits are paid. Lag- for cause. We do not believe she de- notice of quitting. We accepted the ging behind the date the initial claim is serves UI benefits. What do we need resignation immediately. He now filed, the base period is defined as the in order to prove our case? claims we owe him for the two weeks first four A: At a minimum, your company we did not let him work. Do we owe will need to prove that the claimant him such pay? An of the last five com- was fired for a specific incident of A: No, unless you have a written Overview pleted misconduct connected with the work (a policy or agreement promising to pay calendar final incident) and that she either knew resigning employees for the unworked quarters immediately preceding the or should have known she would be portion of a notice period. Under TWC initial claim. An easier way to think fired for such a reason (usually shown policy, if an employee gives notice of about it is to take the date the initial with a final warning or a clear written intent to resign by a definite date that is claim is filed, disregard that quarter policy warning of discharge for a par- two weeks or less in the future, the em- (the quarter in progress), disregard ticular type of problem). ployer can accept that notice anytime the quarter immediately preceding within the two-week period without that one (the lag quarter), and then go Q: Right after her one-year an- changing the nature of the work separa- back in time four calendar quarters. niversary with my company, one of tion from a quit to a discharge. Just That year-long period will be the base my employees told me that she is un- be sure to let the employee know that period, and any employer that paid the happy here and has already started the company is “accepting the notice claimant wages during any of those looking for another job. Can I take early” and will not need him to work quarters will be potentially liable for that as her resignation, and do I have out the notice period, instead of us- chargebacks. The liability will be pro- to pay her for the unused vacation? ing terminology such as “we’re letting portional to the amount of wages the A: TWC would not consider the you go early” or “we’ll go ahead and employer paid in relation to other base employee’s expression of unhappiness process your termination today”, which period employers, i.e., if you paid half as notice of resignation. Many employ- sounds like one would say in the event the claimant’s wages during the base ees think such things from time to time, of a layoff. period and another company paid the and a few actually tell you, but it is only other half, you will each have half of talk. Unless they actually give you a Texas Payday Law the chargeback liability. definite date as the effective date of their resignation, they have not resigned. An Q: My employee just quit last Q: A long-term, but part-time, employer has to pay for unused vacation week and is refusing to return her employee was permanently laid off or sick leave only if stipulated in a writ- uniforms. Can I hold her final pay- with two weeks’ notice and received ten policy or agreement. check until she brings the uniforms severance pay as per our policy. If back? he receives unemployment benefits, Q: The claimant was fired for A: No. Her duty to return the uni- will the company be charged back missing a required meeting. His ex- forms is separate from your duty to for all of his benefits, or else receive cuse was that his supervisor told him give her the final pay she earned. If a “break” for the amount of sever- he did not need to attend, but his you have a wage deduction authoriza- ance paid? supervisor denied that. How can we tion agreement, signed by her, allow-

4 Te x a s Bu s i n e s s To d a y Fa l l 2009 ing you to deduct the replacement cost of the uniforms, then you could take that money out of her final paycheck. Be sure not to let such a deduction take the employee’s pay below minimum wage ($7.25/hour).

Q: Do I need written authorization to deduct child support from an employee’s pay? A: No. Court-ordered garnish- ments and required deductions such as those for payroll taxes, other tax debts, and guaranteed student loan wage at- tachments do not need to be authorized in writing. Generally speaking, any other type of wage deduction must be authorized in writing. Be sure the writ- Alex Little, (center) president of Little Tyke Creative Child Care Inc. in Bedford, ten authorization is as specific as pos- attended the Texas Business Conference in Fort Worth to receive tips on ways sible regarding the purpose and amount to improve and expand his business. Texas Workforce Commission photo of the deduction, and that it states that the deduction will be made from the authorized worker. He did the work – hours of work within a twelve-month employee’s pay. your company received the benefit of period makes an employee eligible to his services – and so he has a right to elect participation in any retirement Q: Our former payroll employee be paid for the work he did. A case like or pension plan that the company may accidentally overpaid two employees this illustrates how important it is to have. for several payroll periods. How can carefully go through the I-9 process and we legally get that money back? use the Social Security Number (SSN) Q: We have fewer than 20 em- A: After explaining the situation Verification Service to minimize the ployees. Can former employees elect to the employees, ask them to sign risk of hiring workers who do not have to receive federal COBRA continua- a written wage deduction authoriza- genuine SSNs. Contact TWC and IRS tion coverage for 18 months, or must tion agreement allowing the company to learn the procedures for reporting they accept Texas “COBRA” cover- to deduct the wage overpayments wages for someone who does not have age for six months? from their future paychecks in certain a valid SSN. A: With fewer than 20 employ- specific amounts. If they refuse, the ees, federal COBRA continuation company may either delay any antici- Benefits coverage is not available. Texas pated pay raises or give the employ- state law allows continuation cov- ees a temporary reduction in the pay Q: What paid holidays are re- erage for up to six months, so that rate in order to recoup the amounts in quired in Texas? would be the best option for the question. Try to keep the pay reduc- A: None. Paying employees for former employees. Remember that tion as small as possible (as much time off is left up to each employer the 65% COBRA premium subsidy under 20% as possible) to avoid giv- to decide for itself. However, paid applies to both federal and state ing them good cause to quit and file holidays that are promised in a written COBRA benefits; the subsidy ap- unemployment claims, and be sure policy or agreement are enforceable plies only to those who were laid off to give the notice of pay reduction in under the Texas Payday Law. or terminated for reasons other than writing. gross misconduct – it does not apply Q: Do we have to offer health in- to employees who quit or were fired Q: I fired an employee for falsely surance to our employees? for gross misconduct. claiming he was authorized to work in A: Under current law, no. the U.S., and did not pay him for the Wage and Hour Law time he worked. Now TWC is telling Q: What is considered “full-time” me I have to pay him. If he was not employment? Q: What breaks are we required legally authorized to work in the U.S. A: While the definition of full- to give employees? and had no right to work, how does he time and part-time employment is A: Breaks are not required under have a right to file a claim? left up to each employer to decide for Texas or federal law. It is up to a com- A: Neither the FLSA nor the Texas itself, 30 hours per week is enough to pany to decide whether rest breaks or Payday Law condition an employee’s make an employee eligible for a com- meal breaks will be allowed and under right to be paid on their status as an pany health insurance plan, and 1,000 what conditions.

5 Te x a s Bu s i n e s s To d a y

of the comp time policy (the best way is to have each employee sign a written wage agreement that includes the comp time policy).

Q: My employee told me I need to give her extra overtime pay based on the commission pay she earned for the past month. Is that true, and if so, how do I calculate the overtime pay? She is paid an hourly rate. A: Commission and bonus payments must be included in the regular rate of pay for overtime purposes. As- suming that the employee has already been paid for the overtime based upon her hourly rate, she just needs to be paid an additional amount of overtime TOP: Texas Business Conference (TBC) attendees watch a presentation dur- pay based upon the commission earn- ing the Ft. Worth conference. ABOVE: TWC staff attorney and TBC organizer ings. If it was a monthly commission, Renee Miller speaks to hundreds of attendees at a recent TBC in Austin. multiply it by twelve and then divide Texas Workforce Commission photos the annualized amount by 52 to deter- compensate employees who work over- mine the weekly equivalent. Take the Q: Can we give employees comp time with comp time, but that must be weekly equivalent, which represents time in lieu of pay for the overtime done at time and a half, i.e., one and a extra straight-time pay for the hours they work? half hours of comp time for each over- worked that week, and divide it by the A: Not if your organization is in the time hour worked, and the employer number of hours worked to get the in- private sector. Public employers may needs to advise employees in advance crease in the regular rate of pay for that

6 Te x a s Bu s i n e s s To d a y Fa l l 2009 week. Then, divide that result by two, time hours, and add that result to the A: While no law would prohibit multiply that figure by the number of straight-time pay. That total would be your company from discharging the overtime hours that week, and add it to the employee’s gross pay for the work- employee if the drug test sample is the commission to bring the commis- week. The regular rate of pay for such found to be altered or otherwise unsuit- sion pay up to time and a half for the an employee must be at least minimum able for testing, it might be difficult overtime hours. wage. to use that one thing as proof of misconduct in an unemployment claim, Q: I just found out that one of the Employee Policies unless you have rock-solid proof that crew managers has been letting his the sample submitted by the claimant crew work overtime without turn- Q: To establish access to the was altered in some way (test results, ing in the extra hours. He prom- company computer system for em- perfect chain of custody, and preferably ised them they would have a better ployees, company staff send e-mails firsthand testimony from the one who chance of avoiding layoff if they with personal information, including tested the sample). Concerning retest- looked like a more efficient crew. employees’ ages and SSNs, to the IT ing, everything depends upon what That is not legal, is it? department. These e-mails are cop- your policy provides. If your policy is A: Correct – that is not legal. ied to all levels of management, even flexible enough, or comes right out and That is basically the same as working those who are not directly involved provides for retesting upon proof of an “off the clock.” Neither employers with those employees. Is this all untestable sample, then require the re- nor employees have a choice about right? test and discharge the employee if he or overtime pay – if non-exempt em- A: To reduce the chance of per- she refuses to cooperate. ployees work overtime, they must be sonal information getting out to paid for it. unauthorized people, as well as the Q: We accepted an employee’s related risk of identity theft, it would notice of resignation early because Q: To trim overtime costs, we are be best to restrict the recipient list to we were concerned that she would considering paying the clerical staff those who have a job-related need not be a good influence upon the on a salary basis. Do we have to get to know the information. In addi- other employees. Now she is refusing them to sign some kind of agree- tion, limiting the number of people to leave. What can we do? ment? who know age-related information A: Hopefully, you have waited un- A: An agreement will make no shrinks the circle of those who can be til the end of the day to let her know difference. If the employees are credibly accused of taking age into that her resignation is being accepted non-exempt, simply paying them a account in an adverse employment early. Take a witness along and let salary will not make them exempt decision. the employee clearly know that she employees. Even an agreement to not needs to remove her personal belong- be paid overtime is not enough, since Q: Are we required to give em- ings and take them with her promptly, employees cannot waive their right to ployees one day off of work per because she will not be allowed to minimum wage or overtime pay. It week? return. If she persists, warn her that is generally best to pay non-exempt A: Only in the case of retail em- she no longer has permission to be on employees such as clerical staff on an ployees, or if the company could let a the premises and will be considered a hourly basis. That way, if they ever non-retail employee have a day off as a trespasser if she does not leave within run out of paid leave and miss work, reasonable accommodation of the em- a prescribed number of minutes. If the company does not have to worry ployee’s religious beliefs. Otherwise, she still refuses to leave, tell her you about getting their written authoriza- there is no legal limit to the amount of will call the police and ask them to tion to deduct the value of the unpaid time that an employer can require an remove her as a trespasser. If she leave from the salary. employee to work. does not take her personal belongings with her, have a witness watch while Q: We have data entry clerks Q: What makes a random drug you carefully assemble her posses- who work at home and are paid test random? sions in a box, keep an inventory of $0.35 per line entered. Are they en- A: Any procedure that makes it im- what goes into the box, place a copy titled to overtime pay? possible to predict with certainty when of the inventory (signed by both you A: Yes, if their total work hours ex- a specific employee will be asked to and the witness) in the box, seal the ceed 40 hours in a workweek. To cal- take a drug test. box, label it, and place it somewhere culate overtime pay for employees paid near the reception area where it can be on a piece-rate basis, determine their Q: If drug test results come back easily retrieved by the ex-employee or straight-time pay (lines entered times as “dilute”, or the lab reports some someone designated by that person. the per-line rate), divide that amount by other problem with the sample, what the number of hours worked to get the can our company do? Can we have William T. Simmons regular rate of pay, multiply one-half of them retake the test? What if they Legal Counsel to the regular rate by the number of over- refuse the second test? Chairman Tom Pauken

7 Te x a s Bu s i n e s s To d a y Independent contractor or employee? Some clarification

“Contract labor” may be the most widely used misnomer in business today, particularly when determining whether a worker is an employee or an independent contractor. In ba- sic terms, an employee is someone whose work is di- Legal rected and Briefs controlled by an employer responsible for extensive wage reporting and tax responsibility. An independent contractor is self-employed, bears responsibility for his or her own taxes and expenses, and is not subject to an employer’s direction and control. The distinction depends upon much more than what the parties call themselves. Why is this distinction important? For one thing, employers must report and pay employment taxes on the wages of employees; for independent contractors, the only report of earn- ings that Texas employers make is the Form 1099. For another, almost all employment laws apply only to employees; independent contractors are generally covered only by stat- An independent contractor is self-employed, bears responsibility for his or her own taxes and expenses, and is not subject to an employer’s direction and utes limited to discrimination on the control. The distinction depends upon much more than what the parties call basis of race, color, national origin, themselves. Jack Hollingsworth/Photodisc/Getty Images or citizenship. In addition, company benefits are limited to employees. express or implied contract of hire, It is important to note that it does Finally, properly classifying workers unless it is shown to the satisfaction not matter that one or both parties will help an employer avoid audits, of the Commission that the indi- may call their arrangement “contract unnecessary claims and appeals, back vidual’s performance of the service labor.” The above definition makes taxes, interest, and penalties. has been and will continue to be free clear that the important consideration The Texas Unemployment Com- from control or direction under the is the underlying nature of the work pensation Act does not directly contract and in fact.” By implication, relationship. The law creates a pre- define “independent contractor.” an “independent contractor” would sumption of employment and places Instead, it sets forth a broadly in- be a person whose services do not the burden for proving otherwise on clusive test, known as the “direc- meet the above test. To aid in appli- the employer. It sets forth the primary tion or control” or “common law” cation of the common-law test, TWC factor in an independent contractor test. Under this test, “‘employment’ has adapted the old IRS twenty-fac- relationship, namely, the absence of means a service, including service in tor test for use by the agency (online direction and control over the work. interstate commerce, performed by at www.texasworkforce.org/ui/tax/ The United States Supreme Court an individual for wages or under an forms/c8.pdf). has established a widely accepted

8 Te x a s Bu s i n e s s To d a y Fa l l 2009

Who is an Independent Contractor?

In order to be considered an independent contractor, a worker must meet three separate criteria (some states require only that two criteria be met):

1. The worker is free from control or and is done off the premises of the direction in the performance of the business. work. 3. The worker is customarily engaged 2. The work is done outside the usual in an independent trade, occupation, course of the company’s business profession, or business.

five-part test, known as the “eco- upon the business with which they cupation, profession, or nomic reality” test, to help establish are connected” that they are employ- business. whether a person is an employee or ees. an independent contractor. In United This emphasis on dependence Finally, the Internal Revenue Ser- States v. Silk, 331 U.S. 704 (1947), and economic reality demands noth- vice uses a so-called “Eleven Factor” a case dealing with whether an em- ing more than a common sense ap- test for determining the coverage of ployer owed Social Security taxes on proach. An employee has nothing to various federal employment tax laws. certain workers, the Supreme Court invest in an enterprise beyond the The eleven factors are all based upon found the following factors impor- time he puts in and sells his services the common law, economic reality, tant: to only one “customer,” the employ- and ABC tests and represent their er. He is economically dependent various criteria either reorganized or (1) the degree of control upon that work. On the other hand, broken down into more detail. exercised by the alleged an independent contractor is not nor- The Texas Workforce Commission employer; mally dependent upon only one cus- (TWC) is charged with auditing busi- (2) the extent of the rela- tomer, but rather, being in business nesses to ensure that employee wages tive investments of the for herself and with an investment in are properly reported and appropriate [alleged] employee and her own equipment and supplies, has taxes paid on such wages. If TWC employer; an entire customer base upon which rules that an employer has failed to (3) the degree to which the to fall back. properly report all wages and pay “employee’s” opportu- A third way of approaching this taxes, it will assess back taxes and nity for profit and loss is problem is called the “ABC” test, interest. Non-payment of taxes leads determined by the “em- which is used by almost two thirds TWC to inform the Internal Revenue ployer”; of the states (not including Texas) Service that the non-paying employer (4) the skill and initiative in determining whether workers are is not entitled to the federal tax credit required in performing employees or independent contractors with respect to the wages in ques- the job; and for state unemployment tax purposes. tion, which in turn can lead to an IRS (5) the permanency of the In order to be considered an indepen- audit. Finally, since TWC conducts a relationship.* dent contractor, a worker must meet cross-match of its wage reports with three separate criteria (some states the new hire database of the Child *(quoted from Brock v. Mr. W require only that two criteria be met): Support Division of the Texas At- Fireworks, Inc., 814 F.2d 1042 (5th torney General’s office, an employer Cir. 1987)). Brock, one of the leading (A) The worker is free from that is found to have misclassified cases from the Fifth Circuit explain- control or direction in a new hire as a non-employee and ing independent contractor/employee the performance of the failed to report the new hire may be issues, goes on to state that the “focus work. liable for a $25 per employee penalty is whether the employees as a matter (B) The work is done out- for violating the new hire reporting of economic reality are dependent side the usual course law (for information on new hire upon the business to which they of the company’s busi- reporting procedures, call 1-800-850- render service.” The same case fur- ness and is done off the 6442). ther notes that “it is dependence that premises of the busi- A TWC audit generally begins indicates employee status...the final ness. in one of four different ways. First, and determinative question must be (C) The worker is custom- a former worker may file an unem- whether the total of the testing estab- arily engaged in an ployment claim. If no wages were lishes the personnel are so dependent independent trade, oc- reported for that claimant by the em-

9 Te x a s Bu s i n e s s To d a y

To determine if a worker is an independent contractor, factor in whether the work the person does is done on the premises of the business. Jupiterimages/Comstock Images/Getty Images

ployer, the claim may be disallowed, ers to be “contract labor” should ask other than his or her time, does the in which case the claimant will prob- itself some questions up front: worker have in the enterprise? An ably appeal. The Tax Department will employee is paid for her time. She investigate, and such an audit has the Is the service provided by the would not be expected to provide her highest priority. Second, a competitor individuals in question essential to, own workplace, materials, tools, and or someone else may report that an and an integral part of, the service supplies, or otherwise to invest her employer is misclassifying its work- the employer provides to the pub- own money in the business. An em- ers. The Tax Department will audit lic? The less able an employer is to ployee who makes a costly mistake the employer’s entire workforce and offer its primary service without the can be fired, but cannot legally be will hold the source of its information help of the people whose status is at forced to work without pay. An inde- confidential. Third, TWC may per- issue, the more likely it is that they pendent contractor, on the other hand, form a random audit of the employer will be considered employees. Con- is an independent businessperson as part of its goal of auditing two sider this: if certain services are so es- with expenses of his or her own. He percent of all businesses every year. sential to a business that it will stand will be expected to provide or pur- Fourth, TWC may decide to target a or fall based upon how well those ser- chase everything he needs to do the specific industry or geographical area. vices are performed, the business will job. If he fails to satisfy the customer, For instance, the hair salon industry naturally want to exercise enough di- he would be required to redo the was targeted in that way back in the rection and control over the services work for no additional compensation, late 1980s due to a high number of to ensure they are good. That amount or else face the risk of non-payment reports both from within the industry of control might qualify such workers by the customer. These things create and from ex-workers. as employees. the opportunity for profit or loss. Employers often confront these issues when short-term or as-needed What opportunity for profit What is the compensation ar- workers perform services for them. or risk of loss is there for the rangement? Is the compensation Any employer using what it consid- worker? What kind of investment, negotiated, or is it imposed by

10 Te x a s Bu s i n e s s To d a y Fa l l 2009 the employer? A true independent contractor’s main concern is her own bottom line, not that of the The law creates a presumption of employment employer. Since she is responsible and places the burden for proving otherwise on for her own overhead, including the the employer. It sets forth the primary factor in an hiring of any helpers she may need, there is always an element of nego- independent contractor relationship, namely, the tiation in any bona fide contract for absence of direction and control over the work. services. Usually, but not always, an independent contractor is paid by the job. It is up to him to figure out how much he needs to finish the job one job at a time and are paid on the whether given workers are indepen- at a profit. If he miscalculates, the same basis. dent contractors or employees: loss is his. Is the worker required to pro- Cash flow - how the money gets Does the individual provide his vide services under the employer’s from the customer or the client to the services to the public at large? Does name? Does she represent herself to worker is important. If the client pays he advertise his services in news- the public as being an employee of the employer in general, and the em- papers, the Yellow Pages, or spe- the employer? On whose behalf are ployer pays the worker either by the cialized journals? If a person holds the services performed? If the gen- hour, by salary, or by commission, the herself out to the public as self-em- eral public would perceive the person worker looks more like an employee. ployed and available for work for any to be a representative of the employer If, on the other hand, the employer customer with whom she can negoti- because of business cards, uniforms, pays the contract price for work com- ate an acceptable price, she is likely or other advertising, this would be pleted, the worker would appear to be to be held an independent contractor. more indicative of an employee than an independent contractor. The more the worker advertises, the an independent contractor. An em- Alternatively, if the client pays more it is apparent that she is in busi- ployee performs services on behalf the worker, and the worker remits an ness for herself, since an independent of the employer for customers of the agreed-upon fee or percentage to the business stands or falls based upon its employer. An independent contractor employer, that would look more like business development efforts. performs services on her own behalf an independent contractor situation. for her own customers. If the worker merely collects the pay Is there a non-competition from the client, passes it along to agreement? Generally, non-competi- Does the employer retain the the employer as an agent would, and tion agreements and independent con- right to dictate how the work receives a share of it back, he would tractors do not go hand-in-hand. Such should be done? Is the worker re- appear more like an employee than an a provision in a contract is strongly quired to work a certain schedule, independent contractor. indicative of an employment relation- to notify the employer if he will not ship, chiefly because it proves that the come to work, or to get the employ- “Rent” - closely related to the services in question are directly relat- er’s approval for any helpers who cash flow issue is that of the compen- ed to the primary service provided by are hired? When an employer con- sation the worker gives the employer the employer and not offered to com- tracts for outside services, it is nor- for the use of its facilities or equip- petitors. If those services were not mally interested only in the end result, ment. Keep in mind that the opportu- related, there would be no “competi- not in the details of how the contrac- nity for profit or loss is an important tion” and thus nothing against which tor performs the work. The employer hallmark of an independent contrac- to guard. The power to keep a person should have no interest in how the in- tor. An employer normally provides from pursuing his or her own busi- dependent contractor allocates either its employees with everything needed ness interests and to force a person to his time or that of his helpers. By the to do their work. A business contract- sign such an agreement is typical of same token, the employer would have ing with an independent contractor the power wielded by employers over no interest in the contractor’s right to normally expects the contractor to employees. hire his own helpers, beyond the right supply what is needed to accomplish to contractually specify that anyone the project. If the worker uses the em- Does the worker provide his providing services on a project must ployer’s facilities and equipment at services on a continuous basis? be properly licensed under whatever no cost, he looks like an employee. If The more long-term, continuous, laws apply to the work. the worker must pay some negotiated and exclusive the relationship is, the amount in rent or usage fees regard- more likely it is to be employment. The above points are all general less of the contract price or of how Independent contractors, on the other factors, but there are many details much he takes in from customers, that hand, generally perform their work that can be helpful in determining looks very much like the kind of prof-

11 Te x a s Bu s i n e s s To d a y the workers. The power to award benefits carries with it the power to The bottom line in any case in this area will be deny them, and that kind of power is whether the facts show that the worker in question exercised by employers. Think about is in effect an independent business entity in a it: a business that contracts to have its roof fixed would not be telling the position to make a profit or loss based upon how roofers whether they could or could he manages his own enterprise. Employers in not go on vacation. It would be up to the roofing contractor to decide doubt over any of their workers are encouraged to whether workers could go on vaca- request a ruling on the status of such individuals tion and still have the roof fixed by from TWC’s Tax Department and to call their local the contract deadline. Similarly, the business would not be extending its TWC tax office for further information. employee health plan to the roofing company’s workers. The same con- siderations apply to any industry.

it or loss opportunity any independent how the work is assigned to the work- Termination of the relationship business that rents commercial space ers. A worker receiving assignments - a business that has the right to fire a or equipment would have. It is impor- from the employer as they come up worker at will is generally considered tant to note that this kind of compen- is likely to be indistinguishable from the employer of that worker. An inde- sation does not have to be separately a regular employee. An independent pendent contractor will usually have invoiced or structured as “rent” in contractor, having been engaged to some kind of contractual recourse if order to be a factor in the profit or perform a specific job or project, fired before completion of the work, loss equation. The price for the work derives his “assignments” from the and the contract will generally spec- in the underlying contract can simply terms of the contract and determines ify conditions that must be met if the be adjusted to reflect the reasonable what his daily tasks will be in fulfill- contract is to be cancelled. value of the employer’s assets used ment thereof. by the contractor in performing the These are the main factors TWC work. Any such adjustments should Insurance - if the employer pro- will consider when determining be specifically noted in the contract. vides liability insurance for the work- whether certain workers are em- ers, the situation would likely be held ployees or independent contractors. Hours of work - clearly, any to be employment, since the workers TWC’s official test is a variation of worker who is told to work certain would not have ordinary business li- the old IRS twenty-factor test (see hours does not have control over her ability as a risk of doing business. www.texasworkforce.org/ui/tax/ own schedule, an essential compo- forms/c8.pdf). No one factor will de- nent of the profit or loss equation. If Advertising and listings - the em- termine the entire case, and not every the worker has a key to the facility ployer should not be providing adver- case will involve all the factors dis- and can work during hours outside tising for the workers. Independent cussed herein. Each case is decided on the normal operating times of the businesspeople provide their own an individual basis after weighing all employer, she will look more like an advertising, such as business cards, of the factors present. The bottom line independent contractor. If an indepen- business stationery, Yellow Page in any case in this area will be wheth- dent contractor wants to take time off, listings, brochures, and so on. In ad- er the facts show that the worker in that should be up to her. If she can do dition, workers who are independent question is in effect an independent that and still meet her contract obliga- contractors should have their own business entity in a position to make tions, that should not matter to the listings in the phone book, if not also a profit or loss based upon how he employer. That is not to say that the separate numbers. If they are listed in manages his own enterprise. Employ- contract can not specify that the con- ads and directories as being associ- ers in doubt over any of their workers tractor will be available within certain ated with a particular business, the are encouraged to request a ruling on guidelines for purposes of consulta- risk is that they may be considered the status of such individuals from tion or progress checks. However, the employees, rather than self-employed TWC’s Tax Department and to call more control the employer exercises businesspeople. their local TWC tax office for further over the hours of the worker, the information. greater the risk is that the situation Benefits - an employer who pro- will be considered employment. vides benefits such as vacation and William T. Simmons sick leave, health insurance, bonuses, Legal Counsel to Assignments - closely related to or severance pay will almost inevi- Chairman Tom Pauken the issue of hours of work is that of tably be considered the employer of

12 Te x a s Bu s i n e s s To d a y Fa l l 2009 New FMLA regulations roll out The Family and Medical Leave Act (FMLA) applies to employers with 50 or more employees sta- tioned within 75 miles of each other, and new FMLA regulations be- came effective on January 16, 2009. If you Business haven’t Briefs already done so, there are several steps your company should take to comply with the new regs.

1. Revise your existing FMLA policy in your employee handbook. Make sure that the policy contained in your handbook is consistent with the new FMLA regulations, including the newly added types of FMLA military family leave. The revised policy In order to comply with new Family and Medical Leave Act (FMLA) regulations, should contain all of the you must begin using the new FMLA forms. Stockbyte/Getty Images information that is included on the FMLA poster entitled “Notice to Employees of • The Notice of Eligibility to substitute company- Rights Under the FMLA.” and Rights and Responsi- provided paid leave as bilities form. This notice part of the time off taken, 2. Post the new FMLA work- must be given to employ- and whether a fitness for place poster, “Notice to Em- ees within five business duty certification will be ployees of Rights Under the days of an employee’s re- required before returning FMLA” where it can be eas- quest to take leave for an from leave. An employer ily seen by current and pro- FMLA qualifying reason. must provide a Designa- spective employees. To ob- • The Certification form. tion Notice to an employ- tain a free copy of the poster, This form should be pro- ee requesting leave within visit the Texas Workforce vided to the employee, five business days after Commission’s Web site, along with the Notice of the employer’s determina- www.texasworkforce.org, Eligibility and Rights and tion regarding whether the and type “required work- Responsibilities form, leave qualifies as FMLA place posters” in the search within five business days leave. box. You will be taken to of an employee’s request • All new forms references the Department of Labor’s to take leave for an FMLA above are available from poster advisory page, where qualifying reason. Em- the Department of Labor’s the new FMLA poster can be ployees must be given at website at www.wagehour. downloaded. least 15 days to return a dol.gov. completed certification. 3. Train all human resources • The Designation form. As always, be sure to carefully personnel and managers to This form notifies the document all communications with be aware of the new regula- employee whether the employees about leave-related is- tions and their provisions. requested leave is FMLA- sues. If there is ever a question qualifying or non-FMLA whether or not an employee was 4. Begin using the new FMLA qualifying, whether the improperly denied leave, or some forms: employee will be required other question about their entitle-

13 Te x a s Bu s i n e s s To d a y ment to take FMLA leave, you want increased from 10 percent of cost to be sure that you can demonstrate to 30 percent, and the maximum that you took all appropriate steps credit has been raised from $500 to to comply with the new regulations. $1,500. More expensive upgrades, such as geothermal pumps, solar 2009 Tax Incentives for panels and solar water heaters are not limited to the $1,500 maximum. Small Businesses The $200 tax credit cap on efficient The American Recovery and Re- windows has been removed as well. investment Act (also known as the This may make 2009 a good year to “stimulus bill”) passed Congress in insulate, upgrade and weather-proof February 2009, and contains a few tax your workplace. incentives that may help your small business – if you act quickly. Here are 50 Percent Special Deprecia- tion Allowance/Bonus Deprecia- a few tax credits that can help boost Two surveys released in late October your bottom line next April, if you tion. The new law extends the 50 percent depreciation allowance that indicate that many businesses are prepar- take advantage of them in 2009: ing to hire employees in the near future. was available for 2008 acquisitions Stockbyte/Getty Images Section 179 Expensing. Until of qualifying property that was December 31, 2009, the stimulus placed in service in 2009. This pro- that had occurred since October doubles the small business ex- vision enables businesses to deduct 2008. pensing limit from $125,000 to half of the adjusted basis of quali- According to NABE, job losses $250,000. For the 2009 tax year, fying property. While the exten- “appear to be slowly abating” with small business owners can deduct sion applies to qualifying property the percentage of firms slashing up to $250,000 for software or pur- placed in service in 2009, it will payrolls falling from 36 percent to chased equipment as soon as it is remain in effect through 2010 for 31 percent during the quarter. And, put to use. Computers, heavy ma- long production period property and the percentage of companies adding chinery, office furniture, equipment certain transportation property. employees doubled from an all-time and vehicles may be deducted under For additional information on low of six percent to 12 percent in Section 179, but property invest- these and other small business tax October. ments, including building or land incentives, you may visit www.irs. In another survey released by upgrades are not covered. If you gov, or consult with your accoun- Intuit, Inc. of Mountain View, hold off on these investments until tant. California, 44 percent of the small 2010, the allowance will drop back business owners responding plan to to only $135,000. New Surveys: Some hire new employees within the next Businesses Plan to Hire year. The survey also revealed that Estimated Tax Requirement while many small business own- Modified. Many individual small Despite the U.S. unemployment ers believe benefits are critical to businesses may be able to defer rate hitting a 26-year high of 9.8 attracting qualified new hires, they paying a larger part of their 2009 percent in September 2009, two are finding them difficult to pay for. tax obligation until the end of the surveys released in late October in- Sixty percent of the respondents year. For 2009, eligible individuals dicate that many businesses are pre- expect their businesses to grow in may make quarterly estimated tax paring to hire employees in the near the next year, with newer business- payments equal to 90 percent of future. According to the National es exhibiting the most optimism: their 2009 tax, or 90 percent or their Association for Business Econom- eighty percent of companies that are 2008 tax, whichever is lower. Indi- ics (NABE) October 2009 Industry less than three years old expect to viduals may qualify if they received Survey, the number of employers grow over the next 12 months. more than 50 percent of their gross planning to hire workers during the When it comes to hiring job ap- income from their small business in next six months exceeded the num- plicants, small business owners said 2008, and meet other requirements. ber projecting job cuts for the first they are looking for candidates with time since December 2007 when broad skill sets: 50 percent of the Energy-Efficiency Tax Credit. the recession began. small businesses responding said If you’ve been considering making The survey of 78 NABE mem- they would be looking for a “jack your businesses greener, this might bers also revealed that more compa- of all trades” or a “people person” be a good time to take that next nies increased rather than decreased as opposed to a “creative genius” step. Under the stimulus package, capital spending during the third (11 percent) or a “mathematical energy efficiency tax credits have quarter of 2009. It was the first time wizard” (four percent).

14 Te x a s Bu s i n e s s To d a y Fa l l 2009

Please join us for an informative, full-day conference Upcoming to help you avoid costly pitfalls when operating Texas Business your business and managing your employees. We have assembled our best speakers to discuss state Conferences and federal legislation, court cases, workforce development and other matters of ongoing concern to Texas employers. Denton ...... January 22, 2010 Topics have been selected based on the hundreds College Station. . . . . March 26, 2010 of employer inquiry calls we receive each week, and include such matters as the Urban Legends of Corpus Christi...... April 30, 2010 Texas Employment Law and the Basics of Hiring, Texas and Federal Wage and Hour Laws, Employee San Antonio...... June 11, 2010 Policy Handbooks: Creating Your Human Resources Houston...... June 25, 2010 Roadmap, Employee Privacy Rights, Handling Employee Medical Issues and Unemployment McAllen ...... July 16, 2010 Insurance: Stay in the Game and Win. To keep costs down, lunch will be on your own. The registration fee Denison...... July 30, 2010 is $85.00 and is non-refundable. Seating is limited, so please make your reservations early if you plan to attend. San Angelo...... August. 13, 2010 For more information, go to Galveston...... August 27, 2010 www.texas workforce.org/events.html Tentative: Arlington...... September 17, 2010 Beaumont...... October. 1, 2010 please print Seminar choice:

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15 Texas Business PAID PRSRT STD US POSTAGE AUSTIN, TEXAS Today PERMIT NO. 1144

Texas Business Today is a quarterly publication devoted to a variety of topics of interest to Texas employers. The views and analyses presented herein do not necessarily represent the policies or the endorsement of the Texas Workforce Commission. Articles containing legal analyses or opinions are intended only as a discussion and overview of the topics presented. Such articles are not intended to be a comprehensive legal analysis of every aspect of the topics discussed. Due to the general nature of the discussions provided, this information may not apply in each and every fact situation and should not be acted upon without specific legal advice based on the facts in a particular case.

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Telephone: 1-800-832-9394 (512) 463-2826 W o ff icia l b usiness Tom Pauken, Chairman FAX: (512) 463-3196 Web Site: www.texasworkforce.org Austin, Texas 78778-0001 101 East 15th Street, Room 630 E-mail: [email protected] e x a s ——————————————— T Printed in Texas on recycled paper ADDRESS SERVICE REQUESTED Commissioner Representing Employers