HR Issues for Growing Businesses - April’s Catalyst Seminar Recap

HR Issues for Growing Businesses - April’s Catalyst Seminar Recap

May 12, 2014

As start-ups and small businesses begin to grow, they inevitably need the services and skills of other people to stay competitive. April’s Catalyst Seminar (the last in our Lean Start-up Business Tactics Series) focused on some of the human resource (HR) issues that arise as companies begin to expand and add to their talent pool. Our speaker this month was Andrea Chatfield, Of Council at the law firm Cook, Little, Rosenblatt & Manson, p.l.l.c. Andrea has been recognized by Chambers USA as one of New Hampshire’s leading employment law attorneys.

Andrea’s presentation touched on HR topics ranging from protecting confidential information and trade secrets to approaching incentive compensation, but she focused much of the presentation on outlining the method and critical importance of correctly classifying each new staff member as an employee or an independent contractor.

Classifying Independent Contractors

Independent contractors, by definition, are self-employed and are therefore not covered by employment, labor, and related tax laws. Hiring independent contractors can save companies money and provide more staffing flexibility, but Andrea offered a warning that you can’t just make an arbitrary decision that an individual is an independent contractor. There are several requirements, on both federal and state levels, that individuals need to meet in order to be considered an independent contractor. The laws are in place to ensure that companies are paying workers compensation and taxes on all eligible employees, and not skipping out on paying minimum wage and overtime when it’s legally required. 

Federal Law

The IRS uses a “20-factor-test” to help companies determine an individual’s eligibility for the independent contractor status. The process can be complicated as some test factors indicate when the worker is an employee while others indicate when the worker is an independent contractor, but Andrea was able to boil the 20 factors down into three main categories.

  1. Behavioral – How much control does the company have over the worker? Does the company control what the worker does or how the worker performs their job? If the company exercises too much control, the worker must be deemed an employee.
  2. Financial – Is the individual economically dependent on the company? How does the worker get paid? Does the company set the rate of pay? Again, if the individual financially relies too heavily on the company than they must be considered an employee.
  3. Type of Relationship – Does the employer offer benefits (i.e. pension plan, insurance, vacation pay, etc.)? Is the work performed a key aspect of the business? Does the worker have other clients or do they work exclusively for the company? Are there written contracts defining the work relationship? Written contracts stating that the individual is an independent contractor may not determine eligibility but could go a long way in helping a company’s case if they get audited.

NH State Tests:

Andrea also reviewed the NH state requirements in her presentation. Both the New Hampshire Department of Employment Security (NHDES) and the New Hampshire Department of Labor (NHDOL) have their own tests with different factors to determine eligibility. They are a bit narrower in leniency than the federal tests but cover the same essential factors. Of course, each state is different and has its own set of specific tests.

Consequences of Misclassification

But what’s the big deal if you get the classification wrong? With the IRS estimating a loss of over a billion dollars due to misclassification, Andrea warned of the consequences of mislabeling an independent contractor. 

To help explain, she offered a scenario where a woman, working as an independent contractor, gets terminated by her company and decides to go and file for unemployment. The unemployment office contacts her former employer, and says they don’t have any record of the employee at that company.  The company explains that they hired the woman and classified her as an independent contractor, so the unemployment office decides to check her against their tests.

If she does not meet the requirements for the independent contractor status, then some of the company’s financial consequences could include:

  1. Payment of unpaid payroll taxes and interest on the unpaid taxes going back four years.
  2. Fines applied (per person) for every day that the employee was misclassified.
  3. Payment to the employee of unpaid minimum wage and overtime.

All of these penalties could add up to a hefty fine, so it’s important to read through the state and federal tests before classifying new hires, and seek legal assistance in these matters when possible.

Learn More About HR Topics for Growing Businesses

Andrea did an excellent job sharing her legal experience and advice regarding HR issues for growing companies, and she had a great deal more to share on topics like employee agreements and new hire reporting requirements. Check out the full video of this seminar and download the presentation slide deck to learn more.

About the Catalyst Seminar Series

At each seminar in this year’s series of Lean Start-up Business Tactics, we tackled a major topic relating to starting and executing a business with Lean Startup principals, led by local experts who teach from their experience. You can get more information on our past seminars in this series by visiting the Catalyst Seminar Series page on our website.  Stay tuned for the announcement of our next seminar series, which will begin this September. If there are any topics that you are interested in learning more about, please contact me at chelsey.digiuseppe@unh.edu.

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Chelsey DiGiuseppe
Marketing Manager, UNHInnovation
Chelsey.digiuseppe@unh.edu

Disclaimer: This post is meant to be a recap of our latest seminar. I am not a lawyer and this is not legal advice.  Please seek advice from a trained legal professional.

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