Are Job Applicant Criminal Background Checks Legal?

Does your small business conduct criminal background checks on job applicants? If so, a recent settlement agreement between Pepsi Beverages and the U.S. Equal Employment Opportunity Commission (EEOC) illustrates the legal dangers you may run into if you don’t use such background checks carefully.

According to reports of the settlement, Pepsi ran background checks on job applicants and refused to hire individuals with arrest records (but no convictions) and individuals convicted of minor offenses, as well as those convicted of more serious crimes. The EEOC determined that Pepsi’s policy disproportionately affected African Americans and that more than 300 African Americans who might have received job offers from the company were excluded.

To settle the EEOC’s charges against it, Pepsi paid a $3.1 million fine. The company also agreed to revise its criminal background check policy and offer jobs to qualified applicants who were previously excluded under its former policy.

The Pepsi settlement highlights the legal minefield that your small business can inadvertently wander into if it runs criminal background checks on prospective employees. Under federal law, hiring policies that could have a disproportionate impact on minorities or other protected groups may be illegal, even if you do not intend to discriminate against anyone.

According to the EEOC, an arrest record, without a resulting conviction, is not a useful hiring tool because everyone—including a prospective employee—is presumed innocent until proven guilty. Further, excluding applicants convicted of minor crimes, particularly if the incident occurred years ago and is not related to the particular job at issue, may be deemed irrelevant to the hiring process.

There’s nothing wrong with wanting your company to be staffed by honest and trustworthy individuals, and used correctly, criminal background checks can help you weed out individuals who might genuinely present a problem in the workplace. However, if you do run criminal background checks on prospective employees, you should avoid using the background checks to make blanket hiring decisions.

Instead, evaluate each prospective employee’s record on a case-by-case basis, taking into consideration whether the offense is related to the position at issue. In addition, consider giving the applicant the opportunity to explain or dispute any arrest or conviction information you discover. Taking steps like these will help ensure that your criminal background checks continue to be a useful hiring tool, without running afoul of the law.

By: Guest blogger Steven Koprince, an attorney with Petefish, Immel, Heeb & Hird, LLP in Lawrence, KS. Mr. Koprince’s practice emphasizes government contracts and small business law.

Payroll Tax Cut Extended For First Two Months of 2012


The two percent payroll tax cut for employees that was in effect for 2011 has temporarily been extended until the end of February 2012. Under this measure, employees pay a reduced 4.2 percent of Social Security tax withholding on wages instead of the usual 6.2 percent. It has no impact on employees’ future Social Security benefits.

Employers must make the change to the reduced payroll tax rate by January 31, 2012 at the latest. If any employee’s Social Security tax is withheld at the higher rate in January, the employer has until March 31, 2012 to adjust that employee’s withholding so that the total withholding amount is correct for that period.

For more information, see the IRS website at http://www.irs.gov/newsroom/article/0,,id=251650,00.html.

2012 Business Standard Mileage Rates Announced by IRS

The Internal Revenue Service announced the 2012 optional standard mileage rates for calculating the deductible costs of operating an automobile for business purposes. Starting January 1, 2012, the standard mileage rate for the business use of a car, van, pickup, or panel truck will be 55.5 cents per mile for miles driven. This rate is the same as the the rate that went into effect on July 1, 2011. Taxpayers can choose between the standard mileage rate or their actual costs to calculate their deduction for the business use of a vehicle.

California Passes Law Authorizing Benefit Corporations

California has passed legislation authorizing the creation of benefit corporations, also known as B Corps, a new class of corporations which are created to benefit society as well as shareholders. Unlike traditional corporations which are accountable only to their shareholders, these corporations must consider the impact their business decisions have on the community, environment, and employees as well.

In addition to maximizing profits for shareholders, benefit corporations must have a “material positive impact on the environment and community,” according to California Assemblyman Jared Huffman (D-San Rafael), who authored the bill. The benefit for these companies is that they obtain legal protection from shareholder suits for pursuing their social or environmental goals, which may not always be in line with shareholder financial interests. Another benefit is the potential access to capital these companies get because of their socially responsible mission. Benefit corporations must file a public benefit report each year assessing their social and environmental performance using objective third-party standards.

According to Jay Coen Gilbert, a B corporation advocate and co-founder of B Lab in Philadelphia, the California law provides these companies “with legal protection to pursue what some people perceive as a triple bottom line — creating financial profit as well as social and environmental impact.”

The California law goes into effect on January 1st. There are five other states that currently have similar benefit corporation laws–Hawaii, Maryland, New Jersey, Vermont, and Virginia. There is legislation underway to create benefit corporations in New York, North Carolina, Pennyslvania, and Michigan.

New Relief From IRS For Improper Worker Classifications

The IRS announced today that it would allow employers who have improperly classified workers to reclassify them as employees and make a minimal payment for past due unpaid taxes. Employers who voluntarily join and are accepted into the program would get a fresh start from the IRS with no further audit, penalty, or other IRS concerns related to the improperly classified workers. Many employers face the possibility of substantial federal payroll tax obligations for workers who should have been classified as employees but were treated instead as nonemployees or independent contractors. “This settlement program provides certainty and relief to employers in an important area,” said IRS Commissioner Doug Shulman. “This is part of a wider effort to help taxpayers and businesses to help give them a fresh start with their tax obligations.”

To be eligible, the employer must:

  • consistently have treated the workers in the past as nonemployees
  • have filed all required Forms 1099 for the employees for the previous three years
  • not currently be under audit by the IRS or any other agency concerning the classification of these workers.

To apply for the relief, you must file IRS Form 8952, Application for Voluntary Classification Settlement Program, at least 60 days before you want to reclassify your workers as employees.

The amount the employer will be required to pay is approximately 1% of the wages paid to the reclassified workers for the past year. No other interest or penalties will be due and no further audits for those workers will occur. Employers accepted into the program will be subject to a 6-year statute of limitations, rather than the usual 3 years that applies to payroll taxes.

For more information, see the IRS website at www.irs.gov.

IRS Clarifies Tax Treatment of Cell Phones Provided to Employees

The IRS issued guidelines today to clarify the tax treatment of cell phones provided by employers to employees. The Small Business Jobs Act of 2010 removed cell phones from the definition of listed property under the tax code. This meant that employer-provided cell phones were no longer subject to the more onerous record keeping requirements that apply to certain property defined as “listed property” under the tax code. However, the Act left unclear whether the value of cell phones provided by an employer should be included in an employee’s taxable income.

The new IRS guidelines provide that as long as a cell phone is provided to an employee for noncompensatory reasons—meaning primarily business reasons–the IRS will treat it as a tax-free working condition fringe benefit. The employer’s purpose for providing the cell phone must not be to give the employee additional income. So, for example, the employer could provide a cell phone to ensure its employee could speak with clients at any time or to be able to contact the employee anytime for work-related emergencies. In those circumstances, the value of the cell phone or any reimbursement to the employee for cell phone expenses would be tax free. However, if the cell phone was provided for the purpose of giving the employee additional income or to promote goodwill or attract employees, the employee would have to report the value of the phone or any reimbursement for cell phone use as taxable income.

 

Reminder About the Small Business Health Care Tax Credit As Filing Deadlines Approach

There are two significant tax filing deadlines coming up for small businesses that requested an extension to file their taxes: (1) September 15th for corporations that file on a calendar year and requested an extension, and (2) October 17th for sole proprietors who file Form 1040, partners, and S corporation shareholders who requested an extension to file.

The IRS and the Department of Health and Human Services have launched a series of outreach to these small business tax filers to make sure they check whether they are eligible to claim the small business health care tax credit. The credit was passed last year as part of the Affordable Care Act and is available for small businesses that employ 25 or fewer workers with average income of $50,000 or less. The employer must pay at least half of the health insurance coverage premiums for their employees under a qualifying plan to be eligible for the credit.

Corporations calculate the small employer health care credit on Form 8941 and then claim it as part of the general business credit on Form 3800, which they would include with their corporate income tax return. Sole proprietors who file Form 1040, partners, and S corporation shareholders who file Form 1040 would also use Form 8941 to calculate the credit and then would claim it as a general business credit on Form 3800, shown on line 53 of Form 1040.

The IRS also has posted the following information about the credit:

  • Businesses who have already filed can still claim the credit: For small businesses that have already filed and later determine they are eligible for the credit, they can always file an amended 2010 tax return. Corporations use Form 1120X and individual sole proprietors use Form 1040X
  • Businesses without tax liability this year can still benefit: The Small Business Jobs Act of 2010 provided that for Tax Year 2010, eligible small businesses may carry back unused general business credits (including the small employer health care tax credit) five years.  Previously these credits could only be carried back one year.  Small businesses that did not have tax liability to offset in 2010 should still evaluate eligibility for the small business health care tax credit in light of this expanded carry back opportunity.
  • Businesses that couldn’t use the credit in 2010 can claim it in future years: Some businesses that already locked into health insurance plan structures and contributions for 2010 may not have had the opportunity to make any needed adjustments to qualify for the credit for 2010. So these businesses may be eligible to claim the credit on 2011 returns or in years beyond. Small employers can claim the credit for 2010 through 2013 and for two additional years beginning in 2014.

In addition to today’s IRS announcement, HHS posted additional information on this credit at HealthCare.gov.

Additional information about eligibility requirements and calculating the credit can be found on the Small Business Health Care Tax Credit for Small Employers page of IRS.gov.

Employees and Salary Discussions—Is Your Policy Valid?

There’s nothing many small business owners hate more than employees discussing their salaries with one another.  After all, what your small business pays its employees may vary considerably, based not only on factors like experience and educational level, but things like productivity and how well the employee negotiated his or her salary before starting work.  To curb hurt feelings (and limit requests for raises), some small businesses have adopted policies prohibiting their employees from discussing their salaries with each other.  The problem?  These policies may not be legal.

In a case recently decided by the Court of Appeals for the First Circuit, National Labor Relations Board v. Northeastern Land Services, Inc., 645 F.3d 475 (2011), a company required a new employee to sign a contract stating that “the terms of this employment, including compensation, are confidential” and that disclosure “may constitute grounds for dismissal.”  The company later fired the employee for allegedly violating the confidentiality provision.

The National Labor Relations Board determined that the confidentiality provision was illegal and that, consequently, firing the employee for violating it was also illegal.  The First Circuit agreed.  It upheld a NLRB order requiring the company to reinstate the former employee, pay him back pay, and rescind the confidentiality provision in all of its employment contracts.

As a small business owner, it can be tempting to require that your employees keep their salary information to themselves.  However, at least under the NLRB’s current interpretation of the law, salary confidentiality provisions can be more trouble than they are worth.

By: Guest blogger Steven Koprince, an attorney with Petefish, Immel, Heeb & Hird, LLP in Lawrence, KS. Mr. Koprince’s practice emphasizes government contracts and small business law.

What to do in the Event of a Double-dip Recession

Just when we thought the economy might be on the upswing, fears of a double-dip recession have hit both Wall Street and Main Street. The New York Times recently asked small-business owners what they’re doing differently in this time of economic uncertainty. Some good advice can be gleaned from what the entrepreneurs had to say:

  • “I mortgaged plants and put $11 million in the bank, paying 5 percent interest, as an insurance policy because I don’t know if there is going to be another credit crisis.”
  • “[I]f I see that sales start to drop 10 to 15 percent in a week and see that it’s a trend over the next two or three weeks, I’ll start cutting. The water cooler, and other extras like employee lunches, will be the first to go. After that, I’ll consider asking the staff to take pay cuts, which I prefer to layoffs. Last time, I was the first to take a pay cut. I brought my salary down to what I needed to pay rent and eat bologna.”
  • “As economic news worsens, a small business tends to get paid later and later, if at all. I’ve learned that when the going gets tough, you’ve got to stand up for yourself and show that you’re the least likely person to be bullied….We took two steps. First, we hired an ex-Army Ranger who had served in Iraq to chase down receivables….The second thing we did was let it be known that we’ll fight over a $100 invoice….In this economy, you have to get your teeth out and fight.”
  • “We’re just starting a catering company…but we’re doing it in a very slow-growth mode….In the past, we would have probably purchased an existing building and converted it; you know, we would’ve gone out and borrowed a million or two million dollars.”
Have you changed the way you run your business recently in anticipation of another recession? What do you plan to do if fears of another recession become reality?

QR Codes- A Powerful New Marketing Tool

Are you familiar with QR codes? If you’re a small business owner, you should be. QR codes are on their way to becoming the latest rage in new technology for small businesses– and with good reason. QR codes (aka Quick Response codes) are two dimension bar codes that can be scanned by smartphone cameras to link the user to videos, text, and online resources. A business can use the QR code on printed material to instantly link to information about a product, its business, or anything else.

One advantage is how specific and targeted the information in the link can be. For example, you could put a bar code on specific products you sell that links the reader to product reviews or instructions on how to use the product. Or, you could put a bar code on receipts or flyers or in your store window that links to updated information on upcoming store sales or special deals or new products you want to advertise. The possibilities are endless and consumers and businesses in the US are just starting to take advantage of this incredible tool. QR codes are widely used in Japan (where they were first developed) and in Europe. Check the Internet for information on how to get started with a QR code and other ideas for uses. Kawya is one of the more popular sites for creating a QR code.