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Don’t Ask!

Don’t Ask!

By Ronald I. Paltrowitz, Esq.

Hopefully, there will come a time in the life of every business when it will become necessary, or at least desirable, to hire that first employee. In the last edition of Business Matters (Spring 2010), I addressed the distinction between employees and independent contractors. Hiring the former involves different considerations than retaining the services of the later. While the independent contractor is usually hired on a project by project basis, an employee, whether full or part time, is someone whom you intend to make a part of your business for the foreseeable future. Mistakes in choosing an independent contractor can be easily remedied if you have prepared a properly drafted independent contractor agreement that foresees the possible need for termination. On the other hand, despite the fact that employer/employee relationships in New York are governed by the doctrine of “employment-at-will”, the freedom to fire an employee after the employee has been hired has been severely curtailed over time by federal and state statutes (many of which I summarized in the Winter 2010 edition of Business Matters) and by the courts. Furthermore, an employer’s improper questions during the application process could lead to legal liability even if the applicant is not hired.

Having decided to hire, the job description and qualifications should be carefully determined. Whatever the job, the qualifications usually require some minimum level of education, experience, and ability. In each of these areas, a delicate balance must be struck as various laws prohibit setting limits that discriminate by disqualifying applicants who actually have the abilities to do the job. In addition, things like language and physical abilities must be related to, and an important part of, job performance. And please don’t forget that there are various federal and state restrictions on hiring employees under either 18 or 16 years of age.

When interviewing the applicant, an employer must be aware of questions that should not be asked. Some of these (but certainly not all) include the following: Questions seeking information regarding race, color, religion, ancestry, place of birth or national origin, age (you may ask if the applicant is over 18 or old enough to meet age restrictions such as those for a bartender, but not questions that seek to determine if the applicant is over 40 years of age), sex, marital status, sexual orientation, disabilities (except to determine ability to do the job), names and/or relationship of persons with whom the applicant resides, whether the applicant owns or rents a home, or information regarding credit history. Questions regarding citizenship can be especially tricky. For example, while you may ask if the applicant is a US citizen or intends to become one, you cannot ask to see proof of citizenship until after the applicant is hired. If the applicant is not a citizen, you may inquire if the applicant is prevented from working in the US because of visa or immigration status, but not of what country the applicant is a citizen. Inquiries regarding military history also have restrictions and you may only ask to see a military discharge certificate after the applicant has been hired.

Obviously, proper preparation must include consultation with an expert in this area and a clear understanding of the inquiries that should be avoided. But don’t let the complexities dissuade you. Once the basic concepts are understood, you should be ready to find a qualified employee without fear of repercussions.

© 2010 Ronald I. Paltrowitz, Esq. Ronald I. Paltrowitz, acting as an outsourced general counsel for his clients, provides legal and business counseling to entrepreneurs and closely held enterprises in the areas of corporate and business law, real estate, intellectual property, and commercial litigation and arbitration. Mr. Paltrowitz is also Vice-President and General Counsel of the Manhattan Chamber of Commerce. This column is for your general information only and does not substitute for legal or accounting advice regarding your specific situation.

Independent Contractor or Employee?

Independent Contractor or Employee?

By Ronald I. Paltrowitz, Esq.

On February 18, 2010, The New York Times published an article by Steven Greenhouse with the headline “U.S. Cracks Down on ‘Contractors’ as a Tax Dodge.” The article referred to a federal study that concluded that 3.4 million regular employees were being treated by their employers as “independent contractors” presumably so that the employer might avoid paying Social Security, Medicare, and unemployment and workers’ compensation insurance taxes, and that, on average, independent contractors under report their income by 30%. The federal government hopes to increase tax revenues by $7 billion over the next 10 years as a result of the crackdown. (New York State, along with 36 other states, will also begin more stringent enforcement procedures.) The penalties for companies that misclassify one or more of their employees as independent contractors are not insubstantial. Such a determination can result in the payment of all of the taxes that should have been paid plus penalties and interest.

In light of all this, it is now more critical than ever that a business owner correctly classify the individuals providing services to the business as either independent contractors or employees. Simply stated (although not simply applied), the determination is based upon the degree of control the employer has over the worker and the degree of independence the worker has from the employer. While the IRS does not have any hard and fast rules, it will consider all of the specific facts that provide evidence regarding these two factors, i.e. control vs. independence. The facts fall into three general categories: 1.Behavioral; 2. Financial; and, 3. the Business Relationship. The following are example of the questions that need to be asked and correctly answered in each area:

I. Behavioral
1. Does the business have the right to control what and how the worker does his or her job?
2. Does the business determine when and where the work is to be done and/or the tools or equipment to be used?
3. Does the worker have the right to hire assistants and/or purchase the necessary supplies, or is this the sole prerogative of the business?
4. Does the business have the right to determine who must perform a particular task and/or the order or sequence in which the work must be performed?
5. What degree of instruction/training is provided by the business?
6. Does the business evaluate the how the work is performed or just the end result?
II. Financial
7. Does the worker have a significant financial investment in the business aspects of the worker’s job and/or the equipment or tools that are used?
8. Does the worker have overhead expenses that are not reimbursed by the business?
9. Does the worker have the opportunity to make a profit or suffer a loss?
10. Does the worker have the right to perform similar services for other businesses, and may the worker advertise and market his or her services?
11. Does the worker maintain a separate business location?
12. Is the worker paid an hourly or weekly salary or a fixed fee?
III. Business Relationship
13. Do the worker and the business have a written agreement?
14. Does the worker receive any employee type benefits like vacation pay, paid sick leave or insurance?
15. Has the worker been hired for an indefinite period rather than for a specific project or period?
16. Are the services being provided a key aspect of the business that must be provided on an on going basis?

Clearly, when weighing the factors, some may indicate that a particular worker is an employee while others may weigh in favor of independent contractor status. The IRS does not set a specific number of factors that determines the worker to be one or the other. Rather, the business must consider the entire relationship and determine the extent of control. And the decision should never be made without the assistance of professionals who work in this area.

© 2010 Ronald I. Paltrowitz, Esq. Ronald I. Paltrowitz is Vice-President and General Counsel of the Manhattan Chamber of Commerce. Acting as an outsourced general counsel for his clients, Mr. Paltrowitz provides legal and business counseling to entrepreneurs and closely held enterprises in the areas of corporate and business law, real estate, intellectual property, and commercial litigation and arbitration Send your queries for this column to rpal@paltrowitzlaw.com. This column is for your general information only and does not substitute for legal or accounting advice regarding your specific situation.

Protecting Intellectual Property

Protecting Intellectual Property

By Ronald I. Paltrowitz, Esq.

Very often, clients who are beginning new businesses or expanding those already in existence come to me with questions as to how they can protect what they consider to be property that is unique to their businesses. It is not uncommon that there be some confusion about the types of property that may be protected by copyright, trademark or service mark , patent, or otherwise. This being so, I thought that a brief primer might be helpful.
First, let’s start with some simple definitions: (1) Property is something belonging to someone; (2) Real Property is property consisting of land and/or buildings; (3) Personal Property is all of someone’s tangible property other than real property; and (4) Intellectual Property is intangible property that is the result of creativity. Thus, the term Intellectual Property refers to creations of the mind including, but not limited to, literary and artistic works, symbols, names, images, designs, and inventions (usually referred to collectively in legal documents as the “Work”). Most of one’s creative ideas may be protected either by common law (law that is based upon judicial decisions rather than statutes) or by federal and state statutes. At the federal level these statute are included in the United States Code. Title 17 of the Code covers Copyrights while Trademarks and Patents are covered in Titles 15 and 35, respectively.
Federal Copyright and Trademark statutes, unlike patents which are granted by the government, do not create a copyright, trademark or service mark. A creator’s intellectual property rights arise contemporaneously with the reduction of the creator’s idea to some tangible form. For example, as I created this article, I obtained a copyright in its content, which I evidence by the symbol © that you can see below. Rather, the purpose for registering the copyright or the trademark is to place the world on notice of the date that that you either created or first used the Work in commerce and that you claim ownership of the Work. In addition, you may institute actions for infringement in federal courts and collect statutory damages and/or legal fees. As an example, statutory damages for copyright infringement can be as much as $150,000.00 per Work and $100,000.00 for trademark infringement. However, it is critical that you comply with the registration requirement of the various statutes to insure that you will be entitled to these benefits.

Briefly, then, you may register a copyright for any original works of authorship including literary, musical, dramatic, , choreography, pictorial, graphic, sculpture, motion picture and other audiovisual works, recordings, and unique designs. You may register a trademark for logos, business names, brand names, and other specific forms of identification of goods or services. You may obtain a patent for any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, as long as the invention (i) was not known or used by others in this country; or (ii) was not patented or described in a publication in this or a foreign country before the invention; or (iii) was not in public use or on sale in the foreign country more than one year prior to the application for patent in the United States.

Obviously, these matters are complicated and should not be undertaken without the assistance of knowledgeable legal counsel.

© 2010 Ronald I. Paltrowitz, Esq. Ronald I. Paltrowitz, acting as an outsourced general counsel for his clients, provides legal and business counseling to entrepreneurs and closely held enterprises in the areas of corporate and business law, real estate, intellectual property, and commercial litigation and arbitration. Mr. Paltrowitz is also Vice-President and General Counsel of the Manhattan Chamber of Commerce. This column is for your general information only and does not substitute for legal or accounting advice regarding your specific situation.

April is the Cruelest Month

“April is the Cruelest Month”

By Ronald I. Paltrowitz, Esq.

For small business owners who have just enjoyed the annual ritual of filing tax returns (and, perhaps, even having to pay some taxes), this may not be in the best time to discuss tax deductions. On the other hand, now may be the best time to begin your preparation for next year’s ritual. With this in mind, I would like to discuss a number of potential income reducing possibilities that many small business owners do not use to their fullest advantage.

Most business owners are aware that that they may take a deduction for the business use of their automobile. The easiest way to do this is to take the standard deduction. However, actually keeping track of mileage, parking fees and tolls for business use very often results in higher deductions. And don’t forget, you may also deduct a portion of your expenses for repairs, insurance, maintenance and depreciation.

Keep careful records of your expenditures for supplies and other purchases of furniture and/or equipment used in your business. The cost of these items may either be deducted in full or depreciated over time. Your accountant will know which choice is better.
Speaking of accountants, don’t forget that professional expenses are also deductible. But, be sure to differentiate startup expenses, which you may need to amortize, from expenses that you may fully deduct in the year incurred. If you wish to deduct the expenses you incurred to start your business, make sure that you make a thought out decision as to whether you wish to deduct these expenses all at once or amortize them over time. If you wish to amortize, you must attach your election to your tax return.
Many small business owners are afraid to deduct the costs associated with a legitimate home office. Don’t be. Just be sure that your home office is used exclusively for business. If it is, you can deduct a portion of rent or mortgage interest, insurance, taxes, utilities, and maintenance. You may also deduct any telephone or internet expenses that are attributable to your business.
Interest on business loans is deductible but not the repayment of principal. Make sure that any loans from family and friends are properly documented in writing with appropriate rates of interest and repayment provisions. Otherwise, they may be deemed to be gifts. Similarly, the premiums for your business, errors and omissions, and similar insurance policies are also deductible.
Unfortunately, many small business owners have clients or customers that don’t pay their bills. However, in order to deduct the amount of a bad debt, your business must be an accrual basis taxpayer and have already paid taxes on the amount of the bad debt in a prior year. Otherwise, the amount of the bad debt is not deductible.
If you would like to take deductions for entertainment and/or travel expenses, you’d best keep very accurate records of who you entertained or where you travelled and why. And don’t forget, only 50 percent of meals and entertainment costs are deductible.
And, finally, while getting a refund may seem like pennies from heaven, remember that you are only getting back your own money and that you have lent this money to the federal and, perhaps, state and local governments, interest free.
Over the years, I have been continuously amazed by the large number of smaller business owners who do not have line items in their yearly budgets for competent professional guidance from accountants, lawyers, and other experts whose expert advice could and would be of enormous help in successfully growing their businesses. Absent such advice, the other eleven months may be cruel, as well.

© 2011 Ronald I. Paltrowitz, Esq. Ronald I. Paltrowitz, acting as an outsourced general counsel for his clients, provides legal and business counseling to entrepreneurs and closely held enterprises in the areas of corporate and business law, real estate, intellectual property, and commercial litigation and arbitration. Mr. Paltrowitz is also Vice-President and General Counsel of the Manhattan Chamber of Commerce. This column is for your general information only and does not substitute for legal or accounting advice regarding your specific situation.