Small businesses can sometimes face significant liability under employment laws because they aren’t aware of the rules that regulate certain employment activities. Even where employers and employees agree to certain employment practices, these practices may nonetheless be illegal if the employer does not comply with applicable regulations. In a previous post, we discussed minimum wage and overtime regulations. Additional areas of concern to business owners include the following:
Employee vs. Independent Contractor
Most individuals working for a small business (such as an auto body shop, a corner store/deli, a contractor) are “employees” because they do not control how their work is performed. It doesn’t matter whether the employer calls a worker an “independent contractor” or employee and it is irrelevant if the employee asks to be “treated” as an independent contractor in order to avoid automatic payroll deductions by the employer. What matters is how much supervision, direction and control the business has over the worker’s services.
Why is the distinction between employees and independent contractors important? Independent contractors are self-employed. They do not receive a W-2 and no payroll deductions are required. Some common examples of independent contractors include – a freelance computer programmer, a self-employed electrician or an independent architect.
It is illegal to treat an employee like an independent contractor if the individual is not actually an independent contractor. Incorrectly classifying a worker can result in serious consequences for employers, such as liability for unemployment insurance contributions and interest, tax penalties and interest, and wage violations. Accordingly, employers should consult with an attorney if they are not sure how to classify a worker.
Deductions from Wages
The law governs what amounts can be deducted from wages and how to handle the deduction. The key point for employers to remember is that in many cases they need an employee’s written consent before making certain deductions from wages. For example, sometimes employers in small businesses may “advance” wages to their employees at the request of the employee. This is legal, but repayment of this advance is regulated by the Labor Law.
Employers cannot simply deduct the advance from an employee’s next paycheck. The employee must give prior written authorization for the deductions to repay the advance. The amount being advanced and the per-wage deductions to repay the same must be in writing and agreed to by the employee. No additional advances may be given until an existing one is repaid. Any money advanced to an employee beyond the amount authorized cannot be recovered by the employer through wage deductions. Additionally, employers must have a procedure in place for employees to object to deductions not in accordance with the authorization and provide written notice of the procedure to their employees.
As with advances, if an employer erroneously overpays an employee, the overpayment may be recovered by wage deductions. However, regulations limit the timing, frequency and amount of the wage deduction and require prior notice and procedures.
Employers who fail to follow these regulations risk penalties as well as a potential lawsuit by the employee.
Other Employment-Related Laws
It is crucial for smaller businesses to understand what rules apply to them. However, it is also important to know what rules may not apply. For example, obligations under the Affordable Care Act; Family Medical Leave Act; and certain Federal and State civil rights and anti-discrimination statutes depend on the number of employees in the business. We will address these laws in future blog posts.
If you have questions about how these regulations apply to your business, contact us for a consultation. You can also read more about our business representation practice here.
This post does not constitute legal advice or establish an attorney-client relationship.