As reviewed in earlier blog posts here and here, employment litigation is a hot topic in the business community. To properly classify workers, business owners need to take into account the various tests created by the Internal Revenue Service, the California Employment Development Department, and California state and federal courts. Click here for a review of the IRS 20 Factor Test. Click here for a review of the IRS Control Test.

In general, the most significant factor used to determine whether a worker is an employee or an independent contractor is the commissioning party’s right, regardless of whether it is exercised, to direct and control the details of the work. However, this doesn’t mean that the commissioning party needs to surrender the right to exercise general supervisory control over the worker, including: the right to inspect, the right to stop the work, the right to make suggestions or recommendations as to details of the work, and the right to prescribe alterations or deviations in the work.

There are a number of secondary factors used in determining a worker’s status including overlaps quite a bit with the IRS 20 Factor Test. The right-to-control test is a “totality of the circumstances” approach and requires the balancing of various factors with no one factor being determinative, but with emphasis on the right to control the worker.

In situations where there is doubt regarding the issue of direction and control, the most common reference point used by the courts are the factors set out in the Restatement (Second) of Agency (1958). Section 220 of the Restatement provides that the following 10 factors, among others, should be considered to determine whether a service provider is an employee or an independent contractor:

1. The extent of control that the employer or principal, by the agreement, may exercise over the details of the work;
2. Whether or not the worker is engaged in a distinct occupation or business;
3. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of an employer or by a specialist without supervision;
4. The skill required in the particular occupation;
5. Whether the alleged employer or the worker supplies the instrumentalities, tools, and place of work for the person doing the work;
6. The length of time for which the worker is retained;
7. The method of payment, whether by the time or by the job;
8. Whether the work is a part of the regular business of the alleged employer;
9. Whether the parties believe they are creating the relation of employer and employee (the Restatement uses the terms, “master” and “servant”); and
10. Whether the alleged employer is or is not in business.

Employment litigation is a fast growing area of practice in the State of California. I believe this is largely due to the fact that attorneys’ fees and costs are recoverable by workers who employers failed to comply with California’s wage and hour laws. In other words, plaintiff’s lawyers are highly motivated to find even a nominal amount of unpaid wages because they know that they stand to profit greatly if employers fight their claims.

While many business owners see the short term cost savings to be had by paying workers as independent contractors, they fail to take into account the inevitable litigation costs related to lawsuits from workers, which greatly outweigh any savings they may have realized. Back wages, penalties, interest and attorneys’ fees and costs can snowball quickly into tens or even hundreds of thousands of dollars.

To properly classify workers, business owners need to take into account the various tests created by the Internal Revenue Service, the California Employment Development Department, and California state and federal courts. Below, I outline the IRS 20 Factor Test, which was developed by the IRS to identify factors relevant in determining whether an employee-employer relationship exists. Each case is evaluated on a case-by-case basis based on the totality of the circumstances. The degree of importance of each factor varies depending on the occupation and factual context. The factors are as follows:

1. Instruction – whether the worker is required to follow instruction.
2. Training – whether the commissioning party trains the worker.
3. Integration – whether services are integrated into the business.
4. Personal – whether services must be performed personally.
5. Assistant – whether commissioning party supplies assistants to the worker.
6. Continuity – whether the relationship is recurring.
7. Hours of Work – whether the commissioning party sets the working hours.
8. Time Required – whether commissioning party determines when the worker will work.
9. Work Location – where the work is performed.
10. Sequence of Work – whether the commissioning party establishes a sequence.
11. Reports – whether the worker is required to report to the commissioning party.
12. Payments – on what basis the working party is paid.
13. Expenses – whether reimbursements are made for expenses.
14. Tools and Materials – whether the commissioning party provides tools and materials.
15. Facility Investment – whether the worker is dependent on the commissioning party’s facilities.
16. Profit or Loss – whether the worker is capable of realizing a profit or loss.
17. Simultaneous Work – whether a worker can perform services simultaneously.
18. General Public – whether services are available to the general public, independently.
19. Discharge – whether the commissioning party can fire the worker.
20. Termination – whether the worker can quit at any time.

California Employees Entitled to Paid Sick Leave

On September 10, 2014, Governor Jerry Brown signed into law legislation requiring all California employers to provide paid sick leave to any employee who worked in California for 30 days. California becomes only the 2nd state in the country with such a requirement, which shows California’s continuing commitment to being a very pro-employee state.

Every single private-sector employee is entitled to the paid sick leave. There are no industry exceptions (yet). It applies to all workers whether full-time, part-time or seasonal. The size of the employer is irrelevant.

Here are the details:

• Effective July 1, 2015
• Employers must provide paid sick leave to employees who work 30 or more days within a year from the start of their employment.
• At a minimum, paid sick time accrues at a rate of one (1) hour of paid sick time for every 30 hours worked.
• Employers may limit an employee’s use of paid sick leave to twenty (24) hours or three (3) days in each year of employment.
• Employers may cap the total number of paid sick leave hours that an employee may accrue at a total of forty eight (48) hours or six (6) days.
• Failing to comply may subject employers to enforcement actions by the Labor Commissioner and to private litigation under the Private Attorney General Act. If pursued in court, employees may be entitled to reinstatement, back pay, reimbursement for attorneys’ fee and other costs.
• Civil penalties for failing to comply are up to $4,000 per employee.

Now is a great time to update your Employment Agreements and Employee Handbooks to reflect these changes effective July 1, 2015. If you have any questions about complying with these new employment laws with respect to paid sick leave, please do not hesitate to contact me.

Funding and Other Life Changes

In the previous post, we discussed reasons why estate plans need to be monitored and periodically updated. Here, we look at two common reasons to take a quick peek at your estate plan to make sure everything is working as designed.

Funding

For your trust to work as designed, assets need to either be presently titled in the name of the trust or the trust needs to be named as the beneficiary of life insurance policies or the pay-on-death beneficiary of certain retirement accounts. The trust agreement does not give the trustee the power to deal with assets that are not in the trust.

Some clients think that they can just rely on the Pour-Over Will to make sure everything gets transferred into the trust. This strategy is flawed, because it will require a probate to be opened.

Avoiding probate is one of the most important reasons to create a trust in the first place since probate is exponentially more expensive and takes many more months to complete than a trust administration. It is a very good practice to periodically review your balance sheet and confirm that each asset is properly titled and that each beneficiary designation form is completed correctly.

Other Life Changes

As we grow older each year, things change. Our parents and children grow older. Friends and other family come in and out of our lives to various degrees. As mentioned above, our personal financial situation fluctuates up and down. With all of this constant change, it is good practice to periodically review your estate plan to make sure the one you have in place meets your current life situation.

For example, imagine you executed your original estate plan five years ago. At that time, your parents happened to be the best option for caring for your minor children as their legal guardians in case something happened to you. Now, your parents are older, their mental acuity is slipping a little bit and they just don’t get around very well any more. However, your younger sibling has grown up, is reasonably successful, mature and you share the same core values. It would make sense that you would now lean more toward your sibling as being a better choice as legal guardian for your minor children. In such cases, your will needs updated. To ensure that it complies with California law, an attorney should help you with this.

As another example, maybe when you first executed your original estate plan, you thought all of your children were perfect angels and mature enough to handle receiving a large lump sum inheritance from you when you died. Since that time, perhaps one of your children has fallen off course, and you suspect that he or she may have a serious problem that a large sum of money may actually make worse. It may be wise to consider holding his or her inheritance back in trust for their benefit to make sure that only basic needs are covered while incentivizing or waiting for them to mature to the point where they can handle receiving larger distributions from the trust.

While only three main reasons are highlighted here, there are many other events that would warrant a periodic review your estate plan. There’s no magic timeframe to review since everyone’s situation is different. Just always be aware of significant changes in your life, including changes in your personal financial situation. As a general guideline, it makes sense to sit down with an estate-planning attorney about every three years to discuss your current situation and see how it compares to what is reflected in your current estate planning documents. Whether you sit down with me or another estate planning attorney, it is well worth the investment in the long run.

Change in Assets/Estate Taxes

Needless to say, if your financial situation has changed substantially since you last met your estate planning lawyer, it may be well worth your time to sit down with him or her to discuss how your balance sheet has changed, for better or for worse.

Years ago, our estate tax exemption amounts were much lower (e.g. $1.5 million per person in 2004) and many more people here in California had taxable estates. Estate planning lawyers drafted trusts with various provisions to counter this federal estate tax regime in order to minimize or entirely eliminate estate taxes for their clients. Specifically, these lawyers created A-B Trusts, which utilized the estate tax exemptions of each spouse.

While a thorough description of how an A-B Trust works is beyond the scope of this article, it is important to understand that certain restrictions are placed on the surviving spouse in order to qualify for the aforementioned estate tax benefits – restrictions that most surviving spouses didn’t really want, but put up with to get the tax benefits.

In 2014, where we currently enjoy estate tax exemptions of $5.34 million per person, the vast majority of estates are not taxable, yet these trusts still contain unnecessary restrictions that can have a big impact on how you will be able to spend your assets after the death of your spouse. It’s worth reviewing, whether or not your trust should be restated to a more simple trust structure.

Updating Your Estate Plan

After deciding to implement an estate plan, many people procrastinate for months (even years) before they finally reach out to an attorney to have one prepared for them. Add that to the fact that, despite my best efforts to make the process as painless as possible, it can be an unpleasant conversation for most people. After all, who wants to contemplate their own death?

After finally completing their estate plan, clients often feel relieved since they’ve now checked that task off of their to-do list and have a definite plan. Unfortunately, though, most estate plans do not go through periodic reviews, which jeopardizes the effectiveness of the entire plan. Documents tend to be forgotten about. Estate plan, binders either get placed in a home safe or safe deposit box (best practice), or they are stored in a random drawer or on shelf somewhere in the home where they sit and collect dust.

But while life continues evolving – years go by, kids grow older, assets are accumulated, and people come in and out of your life – estate plans remain the same unless they are reviewed and updated according to your life as it is presently (not how it was when the plan was originally executed).