Holiday bonus - pros and cons

Dear Alex:

Our business has a long history of giving holiday bonuses to our employees.

We take pride in the care we have for our employees, and the tradition of bonuses is one of our favorite ways to show appreciation to them.

We used to do our own payroll, but this year we started using a company to do our payroll due to the complications that have grown over the years.

Now, our new payroll company has told us that we might be creating a problem with the bonuses, because of overtime rules.

How can this be?

Holiday bonuses are a great way to show appreciation to employees, engender good relations and loyalty and reward a job well done. I hope you will continue to keep this tradition alive.

Unfortunately, there is a possibility that holiday bonuses can result in several problematic situations for employers, including wage-and-hour liabilities for employers who aren’t careful.

The problem can arise when categorizing what you call a “bonus.”

If the bonus is not truly discretionary, then the bonus gets lumped into the employee’s regular rate of pay.

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For example, a bonus is not discretionary if it is promised as part of the employee’s compensation. This increase in calculating the regular rate of pay carries into the calculation of overtime wages.

Overtime wages are calculated based upon a multiplier of the employee’s regular rate of pay. So if you have undervalued the regular rate of pay by failing to include the bonus during the year, you may have liability for underpaid overtime wages.

Thankfully, if your bonuses are truly discretionary bonuses, they may not be considered a part of the employee’s regular rate of pay, and thus may not result in any change to calculating overtime.

To be truly discretionary, the employee cannot have a contractual right to a bonus, and the employer must have full discretion over whether a bonus will be paid at all, If a bonus is to be paid, the employer must have discretion over the amount to be paid.

This means that bonuses tied to objective metrics such as performance, attendance, or tenure, can be problematic.

Another area of potential unintended consequences for discretionary bonuses is in the equal and fair treatment of all employees.

Discretionary, subjective bonuses are ripe for a claim of discrimination for disparate treatment among employees.

If you award two employees of similar standing with different bonuses, rather than creating goodwill and loyalty among your employees this could become divisive, resulting in resentment, fracturing functional teams, and possibly claims of discrimination.

At a minimum, keep holiday bonuses consistent among job types, if not uniform among all employees.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on December 6th, 2016. You can read it on the Register's website here: "Holiday bonus - pros and cons"

Seasonal hiring pitfalls

Dear Alex: 


My retail shop is looking forward to the holiday shopping season. And in preparation we are planning on hiring a part-time seasonal employee, but we don’t want to make a mistake with the employment rules.

Is there anything we should know before we bring a seasonal employee on staff?

The holiday shopping season can easily make or break a retail store’s numbers for the year. The substantial increase in sales volume may call for extended holiday hours and additional staff to manage sales and inventory.

For smaller employers who aren’t accustomed to monitoring employee overtime rules, tracking hours, paid time off for sick leave, and general management of part time staff can be hazardous in terms of wage-and-hour law compliance.

The financial benefit an employer could gain from these seasonal personnel could be easily wiped out by an employee filing a claim with the California Department of Labor Standards Enforcement.

Your business may not be accustomed to extended store hours, which could result in inadvertently scheduling of your employees to work sufficient hours that they may be eligible for overtime.

Pay careful attention to the number of hours your employees are working per day, the number of consecutive days of work, and the weekly total of hours your employees are working.

In general, non-exempt employees must be paid overtime if they work in excess of 8 hours in any workday, 40 hours in any workweek, or work if they work more than 6 consecutive workdays.

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Overtime rights cannot be waived by the employee. Seasonal workers employed for more than 90 days will be entitled to accrue paid sick leave.

Many seasonal workers are young people. If you are hiring a minor under age 18, if that person is still in high school you will usually need to obtain a work permit from the employee’s school, signed by the employee’s parent or guardian.

Most teens may not work during regular school hours and may only work a reduced number of hours per school day depending upon age.

Teens 16 and older are generally permitted to work until 10 p.m., although younger teens aged 14 and 15 are restricted from working past 7 p.m. Minors under age 14 have much more restrictive employment rules, if they are permitted to work at all.

One area wrought with confusion is how these employees fit within obligations of the Affordable Care Act (ACA).

While most local retail businesses do not need to worry about this, if you have over 50 full-time-equivalent employees, your business is an Applicable Large Employer, and subject to shared responsibility and reporting requirements under the ACA.

Classification of the people who work for you as seasonal employees or seasonal workers is important in the calculation of those full-time-equivalent employees.

If your company is close in proximity to the Applicable Large Employer classification, be sure to research these rules carefully and consult an employment law adviser.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on November 22nd, 2016. You can read it on the Register's website here: "Seasonal hiring pitfalls"

Four end-of-year business compliance activities

Dear Alex:

The end of the calendar year is coming fast. Are there any legal compliance steps for my business that I should take to wind up 2016 and be ready for 2017?

It’s hard to believe that we’re already in the second week of November — I am always surprised by how fast the time between Thanksgiving and New Year’s Day passes.

Legal compliance activities can seem like a mystery, but in most instances they are fairly straight forward. Here are some important annual compliance measures that businesses should be aware of:

File your statement of information with the Secretary of State

This document serves as an update to the state of California concerning who the owners and executives of your company are.

Corporations are required to file this document annually, while Limited Liability Companies (LLCs) need to file only every other year.

There are late penalties for failing to file, and your due date is based on your entity’s filing date. E-filing is available online at the Secretary of State’s website.

Conduct an annual meeting

Your formation documents (corporate bylaws or LLC operating agreement) will give instruction on how to properly conduct an annual meeting of the company owners and company management.

The meeting can be as simple as affirming and approving the activities of the previous year, or if necessary, as complex as developing long-term planning strategies and discussing significant financial or structural changes to the business.

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This also provides a great opportunity for everyone to check in with one another on how things are progressing with the business.

Take minutes, write them down, add a copy of the minutes to your company’s minute book, and provide attendees and absentees with copies.

Employee evaluations

If you have not performed annual evaluations of your employees, while the holiday season may not be an ideal time to conduct those evaluations you may want to take use the milestone of the New Year to schedule performance evaluations.

Performance evaluation meetings are also an opportune time to award end-of-year bonuses, if your company offers those incentives.

Incorporate or form an LLC

Many sole proprietors or partnerships wonder when to form a limited liability entity.

The end of the year, and specifically the last two weeks of December, is an excellent time to form your new business entity.

If you form your entity too far in advance of the end of the year, you will owe franchise taxes to the State of California for the current year as well as the next year, but by waiting until the very end of the year, franchise taxes will not be assessed for the current year.

If you commence business operations under the new entity as of the first day of the New Year, you may save money by only operating as one entity type during the year, which means you should only have one tax return to file for the year.

If you wait, you may have to file two tax returns, which is an additional cost for your business.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on November 8th, 2016. You can read it on the Register's website here: "Four end-of-year business compliance activities"

Tips when buying a business

Dear Alex:

I am in negotiation to buy a printing business in Sonoma County.

I have never bought a business before, so I don’t know what legal issues to look out for before I finalize the purchase.

Any tips?

When you buy an existing business, you should know all of the potential rewards and liabilities that will come along with the business.

The process of weighing these factors and evaluating a business prior to completing the purchase is called “due diligence.”

During due diligence, a review of profit and loss statements, prior years’ books and records and a physical inspection of the assets are first steps.

A Uniform Commercial Code (UCC) lien search on the assets of the business should also be conducted and may be done through the California Secretary of State’s office.

There will be obvious assets and liabilities, like equipment and accounts payable, but there may also exist liabilities that are harder to identify and quantify.

These difficult to identify risks are of significant concern to business buyers.

Long-term contracts can be great sources of value or great sources of liability, depending upon their terms.

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A long-term lease for below market rent may help the company be profitable for many years in the future, however a long-term lease recently executed and signed at full market rent may be a significant operating cost of the business which makes profitability difficult.

Similarly, long-term client contracts must also be carefully scrutinized.

Long-term contracts may result in stable streams of reliable revenue, but if the terms are difficult to satisfy, long-term contracts may just as easily create a monthly struggle to produce product at a profitable rate.

There may also be liabilities that are unknown or unknowable at the time of the sale.

There could be potential lawsuits which have not yet been filed against the business. For example, the present owner may not know that a prior customer was injured by a product of the business and has been working with an attorney to file a lawsuit.

For this reason, many business purchasers will attempt acquire only specific assets of the business — not the entire business entity — and form a new business entity that will then utilize and implement the assets of the old business.

Business sellers generally want to sell the whole business, from soup to nuts, including any pending liabilities. It is always a point of negotiation.

Generally speaking, the market for business sales is fairly illiquid, there are not usually many qualified buyers looking for a particular type of business, and serious buyers will have strong bargaining power.

These are only a handful of common due diligence considerations.

The due diligence process can seem painstakingly slow, but can save a buyer from making a costly mistake, or identify additional value in a business or asset purchase of which the buyer was not previously aware.

Take your time and maintain communication with the sellers during due diligence to reduce your risk exposure as much as possible.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on September 27th, 2016. You can read it on the Register's website here: "Tips when buying a business"

Friends need advice about rental property investment

Dear Alex:

A good friend and I want to buy a house together to rent out as investment property, but we want to make sure that we are legally set up the right way.

What do we need to do?

There are two primary fields to consider:

1. How will title to the house be held

2. How should you organize your business partnership?

While these areas are separate legal issues, they overlap.

The most common way for investors to take title together is as “tenants in common.”

Tenants in common means that you each own a proportional, interest in the property, but it is an undivided proportion.

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For example, if you each own 50 percent of the house, the ownership rights of the property aren’t split in half, where one person owns and controls the north half and one person owns and controls the south half.

Instead, each person owns a one-half interest in the whole thing, and you share ownership and control over the entire property. There are default rules in the law for owning a property as tenants in common which govern what happens when the property requires repairs or improvements, decision-making authority, and other factors which you may not have considered.

You may use a written Tenancy In Common Agreement, to more specifically describe the intended rights and obligations of the co-owners. Upon death of an owner, that person’s ownership interest will pass on to their heirs or devisees according to their estate planning instructions or by operation of law.

A tenancy in common agreement is useful among separate owners who are not necessarily doing business together, but if you intend to continue to purchase properties with this person, another common arrangement is to form a Limited Liability Company (LLC), and for the LLC itself to own and hold title to the property.

The owners each own their agreed upon proportion of the LLC, and therefore own that proportion of the assets held inside the LLC. By structuring your investment this way, the liabilities associated with the property will be contained to the LLC due to the liability protections offered by that business structure.

Your operational rules may be governed by the Operating Agreement of the LLC, much like the Tenancy In Common Agreement would outline the operating rules for tenants in common. It is generally unwise to use a corporation for real estate holdings, because corporations are subject to tax treatments which are different from LLCs and which are not favorable to real estate investment.

In each case, your lender will have specific requirements for you to consider in order to be approved for a loan, and your property insurance provider will need to be informed that the property is intended to be used for investment as a rental.

Both tenancy in common interests and LLC membership interests can be contributed to a trust for estate planning purposes.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on August 30th, 2016. You can read it on the Register's website here: "Friends need advice about rental property investment"

Do I need to form an LLC?

Dear Alex:

I am starting a blog and podcast to talk about sports.

I haven’t started publishing any material yet, and do not expect to generate any revenue from these activities. A friend of mine told me that I should form an LLC in case I get sued for defamation.

What do you think?

It sounds like you are starting a great hobby. At this stage, it is probably too early to worry about forming a business entity.

In the future, an LLC might be a good idea. While it goes without saying that I hope you don’t say anything that would constitute defamation, here are three more reasons why you probably don’t need a business entity:

First, your risk is very low at this stage.

If you have readership and podcast subscribers, the number of subscribers is probably very small. Even if you accidentally defamed a famous sports star, there is almost no risk that the individual would find out or care. Even if the person did find out, there is not likely to be any measurable harm to that sports star.

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An LLC costs $800 per year in state franchise taxes, as well as initial costs of formation. Due to your very low-risk exposure, the annual cost of the entity does not appear to be worth the protection that it might offer you.

Second, while an LLC is an effective business entity type for insulating the individual owners against liability of the business, your activities at this point have no business purpose.

The business’s liability protection would probably fail if you were sued, leaving you personally exposed. With no revenue or chance of revenue, the only assets of the entity will be the money that you contribute, and all of the activities conducted through the entity will be drawn off of those personal funds. Any expenses of the LLC will serve no real business purpose.

This means all spending of the LLC would be for your personal use of LLC’s assets. Spending entity assets on personal activities may be called “commingling” of funds, and commingling of funds is one method of “piercing the corporate veil,” which is a legal term for holding the owners of a business liable for activities conducted by the business.

The third reason is that you can always be held accountable for your own negligence.

If the LLC did make money, the main activity driving the revenue would be your own personal commentary in the blog and radio. If you were negligent and accidentally committed defamation on a podcast or blog posting, that writing would be a personal act of negligence that the LLC may not protect you against.

As your hobby grows in subscribers and you start to gain paid sponsorships, then you might want to revisit the idea of forming an LLC or other limited liability entity from which to conduct your activities.

Alex Myers is a business attorney with Myers & Associates in Napa. Reach him at alex@myers-associates.com or 707-257-1185. The information provided in this column is not intended as legal advice, nor does it create an attorney-client relationship. The information is not a comprehensive analysis of the law — if you need legal advice, contact an attorney.

This column originally ran in the Napa Valley Register on August 16th, 2016. You can read it on the Register's website here: "Do I need to form an LLC?"