Given her legal background, Jill Pedigo Hall had an advantage when she transitioned to help run a family business, Great Harvest Bread Co., for 11 years. In many ways, it was a dream because she got to fully live her values, and she was blessed to have some of the best employees a business operator could hope for. She resumed her law career 20 years ago, and even after two decades, she still misses certain aspects of the bakery business.
Instead of selling legal counsel, she sold bread and spent her days focused on employees, customers, and inventory. It was a full-time job, and with her legal training, she could help Great Harvest avoid the legal traps that small employers fall into. “I had only done employment law at that point, but I knew enough to understand what we needed to do,” recalls Pedigo Hall, now a shareholder with von Briesen & Roper’s Madison office. “I took into my small business a bit more, and I don’t want to call it sophistication because I learned a lot, but I understood the risk areas. A lot of people don’t have that.”
As Pedigo Hall and other business law attorneys can attest, there are surprising laws and regulations that also apply to small businesses, not just large corporations. “SMBs” often find themselves in hot water with customers, employees, or government agencies when they assume that certain rules do not apply to them. In this look at business law, we spoke to Pedigo Hall; attorney Farrah Rifelj of Michael Best & Friedrich’s Madison office; family business attorney Greg Monday, a shareholder with Reinhart Boerner Van Deuren; and Paul Kaster, legal counsel and compliance attorney at McClone Insurance, which last year merged with Madison’s Neckerman Insurance Services. They offered advice about avoiding some of the legal traps that can ensnare small business operators.
Trap 1: Spilling classified information
Worker classification is an important task for businesspeople to master because it determines an employer’s legal obligations for matters such as wage-and-hour policy, unemployment insurance, workers’ compensation, and civil rights protections.
“It’s been my observation, especially over the last two years in Wisconsin, that there is a huge amount of scrutiny by plaintiff council, plaintiff firms, and the federal Department of Labor [DOL], especially with regard to classification,” Pedigo Hall states. “When you look at small employers, it’s a real area of vulnerability because there isn’t a full understanding of what individuals in their positions are exempt from overtime and minimum-wage requirements [under the Fair Labor Standards Act, or FLSA].”
An exempt employee is one who receives a salary, is not eligible to receive overtime pay, and is excluded from minimum-wage requirements. Non-exempt employees earn an hourly wage, they are eligible for overtime, and must be paid at least the minimum wage. There are two tests to meet for a job to be an exempt position. First, there is a salary test, meaning there must be a certain amount of money paid in terms of salary (at least $684 per week), and there is a duties test. It’s been Pedigo Hall’s experience that employers don’t understand the duty test, in part because they are trying to save costs — specifically overtime costs.
Regarding the salary exemption, it’s not only about how much employers pay employees, and it’s not just a matter of whether they’re paid a salary, it’s that they must have a job that meets the job duties test. It specifies that an employee performs job duties that qualify for an exemption such as professional, executive, and administrative jobs. According to Pedigo Hall, it’s not a very sophisticated test, but it’s sophisticated enough that someone may not understand it or they may feel that it’s more convenient to simply pay somebody a salary and not have to pay them overtime.
Another potential area of exposure is classifying someone as an independent contractor when they are, in fact, an employee. For small businesses, Pedigo Hall notes there are cost savings to treating someone as an independent contractor rather than an employee because they don’t have to make Federal Insurance Contributions Act (FICA) matches, they don’t have to withhold taxes, and they aren’t paying workers’ compensation for that individual. With heightened enforcement, however, states and the federal government are on the hunt for violations. Wisconsin and other state governments have entered into a memorandum of understanding with the DOL to work together on enforcement, Pedigo Hall notes.
Independent contractor status is challenging because for every law in the country, there’s a different definition of an independent contractor. In Wisconsin, there are multiple definitions of what an independent contractor is. The definition of who is an employee for the purposes of unemployment compensation is different than the definition for workers’ compensation, and that’s different than the definition in the Wisconsin Fair Employment Act.
“You have to meet a lot of things in order to be classified as an independent contractor,” Rifelj notes, “and typically, if somebody’s not holding themselves out in their own business and doesn’t file self-employment taxes, they’re not going to meet that standard.
“So, a lot of times, you have a smaller business, and you just want to have somebody doing a little of the work on the side, and you pay them a check, and you give them a 1099,” Rifelj adds. “Then, of course, there could be an audit by one of those [government] agencies, or one of those individuals goes and files for unemployment later on, and the unemployment department then asks them, ‘Well, where are all the places you’ve worked in the last 18 months?’ And even unknowingly, they identify where they were paid by a 1099, and then they come knocking on the small business’ door.”
Trap 2: Lacking accommodations
Another area that is very difficult for small businesses to manage is related to employing people with disabilities, which is governed by nondiscrimination laws and requires accommodating what they may need — accessibility, equipment, work schedules — for various physical or mental disabilities, Rifelj says. If you have just one employee or more, you’re covered by the Wisconsin Fair Employment Act, and what may be a reasonable accommodation for a large employer would be different for a smaller one. “What a large employer has to accommodate, a small employer might not, but you still have to be cognizant of your requirements and go through the interactive process to determine whether or not you do have a reasonable accommodation for an individual with a disability that needs one to be able to do their job.”
Trap 3: Getting cooked in alphabet soup
Other agencies that demand compliance from employers large and small are the federal Occupational Safety and Health Administration (OSHA) and the Equal Employment Opportunity Commission (EEOC). Under OSHA, for example, employers have reporting requirements, and they must have written safety protocols.
“They don’t look at the fact that yes, we fall under OSHA too,” Pedigo Hall says. “Also, the EEOC enforces, if you have more than 15 employees, Title VII [of the 1964 Civil Rights Act, which prohibits employment discrimination], and then there’s the Americans with Disabilities Act [ADA], so those are the areas where employers need to pay attention to the compliance. Here in Wisconsin, obviously, if you have basically any employees, you fall under the Wisconsin Fair Employment Law.”
Liability prevention argues for good policies, including consistent payroll policies, written schedules, and safety postings. “Documentation is pretty critical [for compliance], and that’s where a small business can fall down,” Pedigo Hall says.
Trap 4: Putting family first
When it comes to compliance issues faced by family businesses, Greg Monday often advises his clients that there is no exception in the statutes for family-owned businesses or for shareholders who receive their stock units by gift. Doing things the right way — as though family members are really investors — is essential because business operators must comply with securities laws when selling stock to employees or run the risk of being sued by other shareholders or owners. “It’s funny,” Monday says. “I mean, the reaction is, ‘I know but this is my son,’ or ‘I know but this is my employee. We’re doing him a favor.’ So, it usually takes a little bit more of a conversation to fully explain the impact of what ignoring the statue could lead to.”
Trap 5: Putting me first
Many times, especially as it relates to compensation, business operators foolishly put themselves first. The majority shareholder might feel that he or she is entitled to the greater share of the profits, and they take that in the form of compensation without either disclosing it or by taking an amount that seems unfair to the other shareholders or owners. If the business is an S corporation, that can cause some problems because it could be treated as a disproportionate dividend, and not only does that give the minority shareholders a right to bring a lawsuit to recover that disproportionate dividend, but it also threatens the company’s S corporation status for tax purposes.
“That would possibly mean the company would be deemed to have underpaid its taxes because it would be — by default if it doesn’t qualify as an S corporation anymore — a C corporation,” Monday explains. “That may be a little technical, but there can be a lot at stake in a situation like that.”
Monday also cited a receivership case that illustrates this point. Two men owned a couple of companies, and one of the ventures was not doing well, and they sold assets from the company that was failing to the other company. They were not only the sole shareholders, but also the sole directors, and so they approved everything themselves and they transferred the assets to their other company at less than fair value. In so doing, they took some comfort in the fact that while technically they were violating their fiduciary duties to shareholders, they were the shareholders, but that did not absolve them from consequences.
“The company that was failing ended up going into receivership,” Monday noted. “It was forced into receivership by creditors, and the receiver got really aggressive, and when he looked in the records and saw that some of these assets had been sold to another company of the owners for less than fair value, the receiver brought a lawsuit against the owners for breaking their fiduciary duties to the company. They argued, ‘Hey, we owned the company, we could do whatever we wanted,’ and the receiver’s argument was, ‘No, you breached your fiduciary duty to the company. It’s just that as the owners and directors, you would not have brought the lawsuit, but now it’s the receiver. I’m functionally the owner and I’m bringing a lawsuit against you.’ Can you imagine that?”
Trap 6: Failing to communicate
When the three-year national emergency to respond to the COVID-19 pandemic ended, a new project for employers began. On April 10, President Biden signed a congressional resolution to bring the emergency to a close, and now there are several things local businesses should consider with respect to obligations regarding COBRA benefits and the Health Insurance Portability and Accountability Act (HIPAA).
Kaster (McClone Insurance) says actions are required with respect to the 60-day COBRA election window and the 30-day grace period to make COBRA premium payments. According to Kaster, most plan sponsors (employers) need to take three different steps. The first is understanding how the national emergency and its deadlines affect COBRA, which is named for the enabling law (the Consolidated Omnibus Budget Reconciliation Act of 1985) and how it affected HIPAA special enrollment, which are opportunities for individuals and their families to access health care if they’ve been terminated or lost their employment.
Those deadlines are known as outbreak periods and they expire 60 days after expiration of the emergency. In this case, the national emergency ended on April 10, “so we have 60 days after that for COBRA or HIPAA special enrollment periods to continue,” Kaster notes. “After that, they’re no longer in effect. You’re going to go back to the traditional COBRA aspects of ascertaining health care 60 days after loss of coverage.”
Sixty days from April 10 is Friday, June 9, but there is a fair amount of communication planning work to do before that date, and your health insurer, insurance broker, and attorney can provide assistance. Needless to say, any business operator that has waited this long to act is already behind the eight ball.
Another thing employers must do is connected to the public health emergency, which is related to the national emergency but different. The public health emergency is declared by the secretary of the Department of Health and Human Services (HHS), and those emergencies go for 90 days and can automatically be renewed. That expired on May 11, but while COVID vaccinations will continue to be fully covered, other aspects of COVID testing and treatment will be subject to cost sharing.
Regarding the communication steps, plan sponsors (employers) must inform their employees about changes in their health care coverage, and there are two ways to do that. One is an SPD [summary of planned description] wrap. “It says ‘summary,’” Kaster notes, “but they tend to be a little bit longer, and they require a whole lot more investment of time and effort on the part of the plan sponsor.”
The other option is a summary of material modification, or SMM document, which would, on a short-term basis, allow employees to understand the forthcoming changes 60 days after the national emergency has ended should they need to have some type of COVID related or outbreak period deadlines.
Meanwhile, HIPAA ensures that all individuals have access to health care. The national emergency granted a 30-day grace period called the special enrollment period, which allowed individuals and their families an additional time period of 30 days to access health care coverage under the HIPAA provision. With the end of the emergency, this special enrollment period will go away as of June 9.
Reliance on compliance
Complicating matters is that the focus of federal enforcement is always changing. “We’ve seen developments in evaluating AI [artificial intelligence] and how that impacts employment decision-making and related bias,” Rifelj notes. “So, we’re seeing new developments — some of which would impact small businesses and some of which wouldn’t.”
