Category Archives: Laws Affecting Small Businesses

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.

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.

Businesses Must Take Steps to Prevent Workplace Harassment by Non-employees

A business may be found liable for workplace harassment committed by outsiders, according to a recent decision of the U.S. Fourth Circuit Court of Appeals. In that case, EEOC v. Cromer Food Services, Inc., 2011 WL 733814 (2011), the court held that an employee could sue his employer for failing to prevent harassment he encountered on his sales route.

The Cromer case involved a lawsuit by a delivery driver whose job involved restocking snack and beverage machines owned by his employer but located in various businesses and other facilities. The driver’s route included a local hospital, the employer’s biggest client.

The driver alleged that over a period of several months, two hospital employees harassed him whenever he restocked the hospital’s vending machines. The driver asked his employer to change his route or intervene with the hospital to put an end to the situation, but the employer took no action.

After the driver sued, his employer argued that it could not be liable because it was not responsible for preventing harassment by non-employees, such as the two employees of the hospital. In a broad decision consistent with prior decisions in the 7th, 9th, 10th, and 11th Circuits, the court held that employers covered by Title VII of the Civil Rights Act of 1964 can be liable for on-the-job harassment committed by non-employees, if the employer had actual or constructive knowledge of the situation but failed to take action to protect its employee from the harassment. The court allowed the driver’s suit against his employer to proceed.

No small business wants to hear that its employees are being harassed, whether by other employees or outsiders. But Cromer confirms that if your small business learns that an employee is being harassed on the job by a customer or other outsider, taking action to prevent the harassment may not just be the right thing to do from a moral and ethical perspective but a legal requirement.

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.

IRS Increases Standard Mileage Rate for Last Six Months of 2011

The IRS has increased the standard mileage rate to 55.5 cents per mile for business miles driven from July 1, 2011, through December 31, 2011. The standard mileage rate is an optional rate that taxpayers can use to calculate their deduction for the cost of using an automobile for business purposes instead of tracking their actual costs. Small businesses also use this rate when reimbursing employees for business travel.

The IRS usually sets the standard mileage rate annually but decided to make this special adjustment for the second half of 2011 because of the recent increases in gasoline prices. The rate is 4.5 cents higher than the 51 cent rate that was in effect for the first six months of 2011. For more information, go to the IRS website at www.irs.gov.

Employees, Social Media, and Your Small Business

Can you legally fire one of your employees for a Facebook post critical of your small business? No, according to the National Labor Relations Board (NLRB), which issued a complaint in late May against an Illinois BMW dealership, alleging that the dealership unlawfully terminated an employee for making critical comments about the dealership on Facebook.

The NLRB’s complaint alleges that a car salesman posted complaints about the quality of food and drink served at a dealership event promoting a new car. Other dealership employees had access to the salesman’s Facebook page. The following week, management asked the salesman to remove the posts, and the salesman complied. However, soon after, the dealership fired the salesman.

According to the NLRB, the employee’s Facebook posts were protected “concerted activity” under the National Labor Relations Act (NLRA), because they were part of a discussion among employees about the terms and conditions of their employment. An NLRB administrative law judge was scheduled to hear the case on June 21.

The BMW dealership case comes on the heels of other NLRB complaints against employers for penalizing employees based on critical Facebook comments, blog posts, or other social networking activity. For instance, in February, a Connecticut employer settled a NLRB complaint alleging that the company fired an employee for posting a negative comment about her supervisor on Facebook. And in April, the NLRB filed a complaint alleging that a media company violated federal law by restricting its employees’ ability to use Twitter to discuss working conditions with coworkers.

The NLRB’s actions do not mean that every social media post an employee makes is protected by law. In fact, the NLRB recently held that a Tuscon-area newspaper did not violate the law when it fired an employee for unprofessional and inappropriate tweets that included remarks about how Tuscon was “slacking” because there were no overnight homicides and sexual innuendo to describe the employee’s television viewing habits.

While unprofessional and inappropriate conduct may not be protected, the intersection of social media and the NLRA is an evolving area of the law, and it is not yet clear when a Facebook post or tweet crosses the line from protected concerted activity to punishable offense. If your small business is concerned about the social media activities of one of your employees, proceed with caution, because the employee’s actions may be protected by the NLRA.

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.

Woman-owned Businesses: Uncle Sam Wants You

If your small business is woman-owned, the federal government wants to do business with you. After ten years and countless revisions, the U.S. Small Business Administration recently adopted a final rule creating the Women-Owned Small Business Program, offering special incentives for women-owned companies to participate in the $500 billion federal marketplace. Later this year, federal agencies are expected to begin setting aside up to 5% of procurement dollars–more than $20 billion annually–exclusively for competition among woman-owned small businesses.

To qualify as a woman-owned small business for federal contracting purposes, your company must meet three primary criteria:

  1. It must be “small” under the North American Industrial Classification System (“NAICS”) code applicable to the procurement. For more on calculating your company’s size, see Nolo’s article Federal Small Business Contract Eligibility: Is Your Business ‘Small’?
  2. It must be at least 51% unconditionally “owned” by one or more women who are U.S. citizens. If, for instance, ownership of a company is split 50/50 between a husband and wife, the company will not qualify.
  3. One or more women who are U.S. citizens must “control” the company’s management and daily business operations. To satisfy this requirement, a woman must hold the company’s highest officer position, have sufficient experience to effectively manage the company, and work for the company full-time during normal working hours of companies in the same line of work.

If you decide to participate in the Women-Owned Small Business Program, you should carefully review and, if necessary, amend your business’s governing documents (such as bylaws, operating agreements, and shareholders’ agreements) to ensure that women unconditionally own and control the company. Supermajority voting requirements, for instance, might cause your business to be ineligible.

Despite the red tape, the Women-Owned Small Business program promises to provide substantial contracting benefits to woman-owned companies in the federal marketplace. If your company is woman-owned, now might be a good time to think about adding Uncle Sam to your customer list.

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.