50% of small businesses surveyed identified
hiring new employees as one of their top challenges for 2016. In the same survey, 36% (39% of businesses
with 11-50 employees) identified cash flow as one of their top challenges.
There is an obvious tension between the need to find
and retain high quality people to grow your business and the cash flow
pressures you face as a small business, which creates the temptation to employ
some common but legally and financially risky strategies.
Deferring
compensation for key employees: this is something that
many start-up companies do. Often the
key employee and the owner are friends or have some other pre-existing
relationship, and agree in good faith and with the best of intentions that they
will defer some part of their compensation until the company gets off the
ground and becomes profitable. However, you should know that even executive
employees are subject to the Massachusetts Wage Act, which:
- requires timely payment of wages to all employees, including executives;
- imposes mandatory triple damages and payment of the employee's legal fees and costs if the employer violates the statute;
- expressly states that you cannot make an agreement with an employee to avoid the requirements of the Wage Act, even if the employee is sophisticated and even if the agreement is in writing;
- allows an aggrieved employee to recover not only from the employing company, but from officers and certain management personnel personally.
What this means is that if your company does not begin
to make money before your employee(s) get tired of deferring compensation, or
if your relationship with that key employee goes bad for some other reason,
both your business and you personally could be subject to significant financial
liability and the added burden of your own legal fees.
Some of these pitfalls can be avoided in the first
place by employing a different compensation structure, which establishes a
minimum base salary with additional compensation available in the form of
bonuses tied to the performance of the company.
Hiring
independent contractors:
particularly if your need for staff fluctuates or is seasonal, it is
tempting to bring in people to provide services as independent contractors rather
than W-2 employees. It is less expensive
for the business, since you do not pay employment taxes, unemployment, or
workers compensation insurance for those individuals. You also may feel like it is a more
appropriate arrangement if the employment is temporary, or if you only need
that person’s services for a limited time each week and they work elsewhere on
the other days.
Be very, very careful about this. Under Massachusetts law, this arrangement is
legal only under a narrow set of circumstances, and almost never legal if the
services being performed are part of your core business operations. If an employee complains about being
misclassified as an independent contractor, damages are measured by what that
employee would have been entitled to as a W-2 employee and, like other damages
under the Wage Act, are subject to mandatory tripling. These damages can include the amount the
employee had to pay in self-employment taxes, the value of any benefits offered
to others in the company who were classified as employees, and any lost
opportunity to collect from unemployment or workers compensation based on their
classification. Also like other Wage
Act claims, if the employee wins in court, you must pay their legal expenses
and costs in addition to your own.
You can employ someone on a part time or temporary
basis, and you can structure that relationship so that it is clear that they
can provide services to others when they are not working for you, all while
still paying them as a W-2 employee and avoiding the risk of a
misclassification lawsuit.
Delaying
payment of commissions:
The Wage Act applies to commissions when they are “definitely determined”
and “due and payable.” It is perfectly
appropriate to structure employee compensation to be a mix of salary and
commissions, so long as the employee is making at least minimum wage. Some employers pay commissions on the closing
of a sale, others on invoicing a new customer, and still others on payment by
the customer. Any of these are
acceptable, so long as you have a written commission policy that specifies the
event that triggers a commission obligation. Without such a policy, the default
position is that commissions are due on the closing of a sale, and if you hold
commission payments until the customer pays you could face a Wage Act claim for
unpaid commissions.
Creating
a bonus structure that operates as a commission: when considering ways to structure
compensation, you should be aware that there is a critical difference between a
“bonus” plan and a “commission” plan, namely, the employee’s entitlement to
payment and the applicability of the Wage Act.
A commission is a form of wages, as described above, while a bonus is
generally discretionary. If you call
your plan a “bonus,” for example, but it is calculated according to sales an
employee makes, it is in all likelihood actually a commission. There is an important balance to strike
here: if you are seeking to attract top talent, you may do better with a
compensation plan that is concrete and tied to a mathematical formula than you
would with a lower salary and a discretionary bonus, as the prospective
employee will discount the value of the bonus because it is uncertain. You can almost have it both ways, however, if
you structure your bonus plan to be tied to the revenue or profitability of the
business as a whole.
These are some of the traps for the unwary small
business person that lie in the Massachusetts Wage Act, and we have seen many
very well intentioned employers fall into them.
If you need to employ non-traditional compensation strategies in order
to bring in new employees and manage cash flow, a consultation with an
experienced employment lawyer is well worth the cost.
+slnlaw LLC
+slnlaw LLC
