Independent Contractors vs. Employees:
Brace yourself for a possible future of unfavorable rules and legislation regarding independent contractors. On July 15, 2015 the United States Department of Labor (“DOL”), Wage and Hour Division, took an interesting step by releasing its expansive application of the “Suffer or Permit” standard found within the Fair Labor Standard’s Act (“FLSA”) on the employee vs. independent contractor debate. Since the FLSA was enacted in the late 1930s, employees, employers, attorneys, and administrators have used the courts interpretation of the FLSA to define employee and employer relationships, rather than any agency, and this expansive administrative interpretation new to this area.

The release of the administrator’s interpretation may have the effect and intention of influencing Congress, the Courts, and encouraging employment lawsuits by independent contractors against employers. Before we explain how applying the suffer or permit standard to independent contractors is so drastic, we must first explain how the suffer or permit standard has been used by courts with regards to employees and to pay or not to pay.

Backgroud: To Suffer or Permit (to work) is found under the definition of “Employ” (FLSA 203(g)), and is thus used to classify when one is ‘employed’ (i.e. must be paid); the FLSA only applies if there is an employer/employee relationship. In 1944 the United States Supreme Court declared employees must be paid for “physical or mental exertion controlled or required by the employer and pursued necessarily and primarily for the benefit of the employer and his business” (Tennessee Coal, Iron & Railroad Co. v. Muscoda Local No. 123, 321 U.S. 590 (1944)). You might imagine a security guard sitting in a chair, neither using physical or mental exertion, but neither free to leave nor being paid. Closing that hole, the court decided that no exertion at all is necessary, rather all hours whether standing idle or not must be paid, and that “readiness to serve may be hired, quite as much as the service itself, and time spent lying in wait for threats to the safety of the employer’s property may be treated by the parties as a benefit to the employer” (Armour & Co. v. Wantock, 323 U.S. 126 (1944); Skidmore v. Swift, 323 U.S. 134 (1944)).

Next, you might imagine an employee ‘suffered or permitted’ to work but not requested ‘to work’; through the employee’s own volition, may desire to correct an error or finish an assigned task after hours. The courts decided, so long as the employer knows or has reason to believe that the employee is working, the employee must be paid (Kappler v. Republic Pictures Corp. 327 U.S. 757 (1946)). That means, even if the employee is willing to do the work without being paid and despite the employer not wanting the employee to do the work, the only way the employer can comply with the law is to pay the employee. But, consider an issue that did not exist in 1946: non-exempt employees answering work emails after hours. In summary: the employee’s choice to work, and the employer having reason to know the employee is working, requires the employer to pay the employee.

Independent Contractors: Independent contractors by virtue of their position are not employees. And therefore no employee/employer relationship exists (the FLSA does not apply) and an employer is not necessarily required to withhold income taxes pay Social Security, Medicare taxes, etc. Some distinguishing factors that your independent contractor agreements have that your employment agreements likely do not have are “the company does not have the right to control the manner in which the contractor will complete the project”, “the contractor is obligated to pay income or self-employment taxes and will receive a 1099”, “the contractor must provide his or her own liability, worker’s compensation, health, and disability insurance”, and “costs such as meals and transportation are included in the contract price for the project and will not be billed to the company”. For example the independent contractor decides what tools or equipment to use, and where and when to work.

Now lets move on to the issue that we are truly writing about:

An expanded economic realities test: Courts deciding whether the worker is an employee or independent contractor apply the FLSA, which requires the use of the (court defined) multi-factored economic realities test. And within that test each factor is considered independently of all the others (no one factor will decide affirmatively one way or the other). The factors vary in actual court use, but the DOL’s factors do represent a typical list:

(A) the extent to which the work performed is an integral part of the employer’s business; (B) the worker’s opportunity for profit or loss depending on his or her managerial skill; (C) the extent of the relative investments of the employer and the worker; (D) whether the work performed requires special skills and initiative; (E) the permanency of the relationship; and (F) the degree of control exercised or retained by the employer (DOL Admin. Interpretation 2015-1).

Through this test, the Court determines if the worker is economically dependent on the entity (employee) or if the worker is in business for him or herself (independent contractor). This recently released Administrative Interpretation broaden the courts factors as follows (these examples could be extended to any worker):

(A) carpenters would be integral to a construction company that frames residential homes, because carpentry is integral to framing houses;

(B) a janitor that does not schedule assignments, solicit additional work for other clients, advertise services, or endeavor to reduce costs, would not exercise managerial skill that affects profit or loss;

(C) a janitor working for a cleaning company is issued MISC-1099, signs an independent contractor agreement each year, but is provided a vehicle, equipment and supplies, does no advertising or finding clients, has a relative investment comparison with the employer indicative of an employment relationship;

(D) a highly skilled carpenter that does not make any independent judgments at the job site beyond the work he or she is doing for that job, does not determine the sequence of work, does not order additional materials, and does not think about bidding the next job, but rather is told where to perform what work does not demonstrate skill and initiative of an independent contractor;

(E) an editor working for a publishing house for several years completes his or her edits in accordance with the publishing house’s specifications, the publishing houses assigned books, and using its software, indicates a permanence of an employment relationship; and,

(F) a skilled registered nurse listed with the Beta Nurse Registry (BNR) provides care in nursing homes, as was interviewed prior to joining the BNR and requires the nurse to undergo multi-day training; BNR sends the nurse a list of potential clients and requires the nurse to fill out a form with BNR prior to contacting clients and requires the nurse to inform BNR if she is hired by the client or misses work, the degree of control exercised by BNR is indicative of an employment relationship.

Within this Administrator’s Interpretation No. 2015-1, the DOL provides guidance that backs a much broader standard to determine who is an employee and who is not, way further than what courts have already decided. This is essentially the to suffer or permit standard from ‘to pay or not to pay’ applied to ‘employee or independent contractor’; rather than using the plain text of the FLSA and the first set (A-F) of court decided factors mentioned above.

Conclusion: The Administrator applies a worker determinative standard from suffer or permit (payment) in the FLSA to an employee or independent contractor test. Where an employee may be the one who decides to stay late and thus be entitled to overtime (so long as the employer has reason to know), under this interpretation an independent contractor who decides to act like an employee would easily (with very little argument) become an employee by virtue of their actions alone and not by the intent of the relationship and employers expectations.

With this guidance, classifying workers as independent contractors is now much more difficult, and should be very carefully considered. It would be tragic for an independent contractor to be declared an employee and then to apply their existing contract as an employment contract.

Although this interpretation is not a change in policy or regulation, it does pave the way for the DOL to broadly classify independent contractors as employees, penalizing employers by (1) forcing them into legal defense, and then (2) taxing employers by forcing them to reclassify independent contractors as employees to avoid this added scrutiny or potential risk of violation.

As an employer be prepared for Congress to draw regulations based upon this interpretation. Today, in light of these expanded standards, review every independent contractor that your business pays and expects to issue a 1099. If you find an independent contractor whom you believe might fall within the DOL’s employee category feel free to ask. It is better to be safe than stuck paying back income and taxes. As we wade through this uncertain water, without redrafting all independent contractor agreements, we suggest shortening your contracts to under a year and carefully reviewing the business of the independent contractor that you are seeking to hire.

FLSA White-Collar Exception:
The DOL released its updated proposed rules on ‘white-collar exemptions’ under the FLSA. As you know, presently to qualify under the white-collar exemption an employee must be (brief summary only): (1) paid a fixed salary each workweek irrespective of work quality or quantity, (2) executive, administrative, professional, outside sales, or a computer professional, and (3) the salary requirement of $455 per week ($23,660 is below poverty for a family of four) or $100,000 per year for highly compensated employees. The proposed regulation will up the salary constraints to be equal to the 40^th percentile of weekly earnings for full-time salaried workers or in 2016 estimated at $970 per week ($50,440) and highly compensated employees will be set to $122,148 annually. It is important that you count and calculate the number of ‘gap employees’ between $23,660 and $50,440 so that you have some time to react if this regulation becomes codified (a change will be coming either way so be prepared). You can still (1) pay those employees overtime if they work overtime, (2) send employees home who are at 40 hours (prevent overtime), or (3) you could bump the employees close to $50,440 to the next rate once this or similar regulation is passed.

Individuals in the process of selling their property in Michigan often encounter certain disclosure requirements related to the property. The seller must notify the buyer of certain statutory defects or face penalties. Known property conditions that may be viewed as favorable, or unfavorable must be disclosed to the buyer. For example, if Seller-A wants to sell their property to Buyer-X, Seller-A must disclosed all issues with the property before closing on the property. And if Seller-A does not disclose such information, and has knowledge of damages, and/or deficiencies with the property, Seller-A may be liable to Buyer-X. Participating agents, however, might not be held liable for the lack of disclosure under the Seller Disclosure Act (active concealment might be necessary).

Under MCL 565.954(1)(a), if a statement of property conditions is not given to the transferee, they have the right to cancel the sale. Under MCL 565.954(3), if after signing the purchase agreement, the buyer receives information about the condition of the property within a specified time of signing the agreement, and no longer wishes to purchase, they are able to stop the purchase. However, under MCL 565.954(4) a purchaser’s right to terminate the purchase agreement expires upon the transfer of the subject property by deed or installment sales contract.

For commercial real estate, “as is” clauses protect the seller in regards to defects that should have been discovered during inspection, but were not. The seller cannot always rely on a buyer’s inspection, and “as is” declarations help guard the seller from defects that may be present on the property. If the seller misrepresented, or withheld defects regarding the property before the purchase agreement was signed, the seller might be liable. Revisiting the previous example, if Seller-A knows there are damages that are a danger in regards to the property, but do not disclose these defects, Seller-A is likely liable for any and all damages as a result. However, if the Buyer-X closes on the property with full knowledge of the defects and the damages that may occur as a result, the Seller-A may be released from liability. Thus, in our example, if Buyer-X is aware that there are defects to the property, and despite the defects closes on the sale, Buyer-X may have no remedy.

There are several required disclosures under the standard Seller Disclosure Act statutory form. Thereunder, the seller must disclose if it is located within one mile of farmland as well as other ‘need to know’ disclosures, a few of which are listed below:

1. Basement/crawl space: seller must disclose whether or not there has been any evidence of water in the space.
2. Insulation: seller must disclose what type of insulation is used on the property, specifically if it is Urea Formaldehyde Foam Insulation (UFFI)
3. Well: seller must disclose any wells, if any, the age, depth/diameter, and repairs, as well as whether the water has been tested, and dates that testing was completed.
4. Environmental Problems: seller must disclose if they are aware of any substances, materials, or products that may be an environmental hazard, including, but not limited to, asbestos, radon gas, formaldehyde, lead-based paint, fuel or chemical storage, and must explain if one of these are present on the property.
5. Mineral rights: seller must disclose whether or not they own the mineral rights to the property.

The United Sates has a wide reputation as being a land of opportunity, and Michigan is an excellent location for investment; therefore it is understandable that foreigners see Michigan as a wise place for investments. There is much to benefit by investing: prospering companies, increase in capital, and access to a nation that has much to offer in general interests. Foreign investors as well as individuals looking for foreign investors should have a rough understanding of the Immigrant Investor Program (EB-5). EB-5 visas is one way investors may obtaining a green card (authorization to live and work within the country’s boarders).

Generally, investors must invest in a new commercial enterprise or a for-profit entity. This includes, but is not necessarily limited to, a partnership or corporation. Additionally, the “new” element requires that the commercial enterprise is either formed after November 29, 1990; or if it was established on or before that date, it may be either: (i) restructured to create a “new commercial enterprise”, or (ii) expanded through investment.

Creating jobs entails more than just hiring to create the illusion of a company. There must be a minimum of 10 full-time positions created within a two-year period.

For the commercial enterprise to be a true investment, actual capital investments must be bad. These can be made in the form of cash, equipment, inventory, or any property. And investments must be made towards either: (i) a general investment in which the minimum investment is $1,000,000, or (ii) a Targeted Employment Area where the minimum investment is $500,000.

Work closely with your counsel to properly invest, EB-5 visa together with SEC regulations should be navigated with caution. Investing is an inherently risky matter. See http://www.uscis.gov/eb-5 for more information.

Generally, nearly every estate plan will be governed, in some form, by the Michigan Estates and Protected Individuals Code (EPIC) (MCL 700.1101 et seq.) and the Michigan Trust Code (MTC) (MCL 700.7101 et seq.). When developing a proper estate plan, both statutes and common law should be reviewed.

As a legal title holder of valuable assets, such as real property or jewelry, it is essential that a procedure is developed, well before death, to assure they are handled properly after death. Placing those assets legal title under the management of a trust is one step in ensuring smooth passage of assets to proper parties (beneficiaries) after death (MCL 700.7401). A living trust (inter vivos trust) is different in several aspects from a trust created at death (testamentary trust); those aspects should be considered with the assistance of legal and tax professionals.

Choosing a trustee wisely is an important step to consider. The trustee is responsible for the proper management, safeguarding, and administration of trust assets. Thus, not only should the trust creator (settlor/grantor) choose wisely, it is critical that the trustee (him or herself) understands the full weight of accepting the position. They should be counseled on the details of the asset management of the trust as well as any liability that accompanies (statutory, implied, or written).

The establishment of a trust and regulation thereof, is outlined in MCL 700.7401 et seq. When you consult with your professionals, be clear and frank with him or her. Think about what your 5 year and 10 year goals are before and after death so you may articulate those goals to your chosen professionals. Establishing a trust is a very detail rigorous process, thus it is important that you express your desires to your attorney and accountant so that the trust may take over, as you wish, in the case of incapacity or death.

If you have ever received SPAM e-mail, or junk e-mail, from businesses that you have never had an affiliation with, then you may have been subject to unsolicited commercial e-mailing. In Michigan, the Unsolicited Commercial E-mail Protection Act protects against this type of e-mail solicitation by requiring the sender to include certain notices and options for the receiver (you). A few of these are (i) clear statement of advertisement, (ii) valid contact information, and (iii) an option to ‘opt out’. (see MCL 445.2501 et. seq.)

Clear statement of advertisement requires unsolicited commercial e-mails to contain a subject line indicating that they are indeed an advertisement. The Act states that the sender must include “ADV:” as the first four characters of the e-mail’s subject line. This allows you to clearly discern that the e-mail you are receiving is of a commercial basis, and may regard it as “junk”.

Valid contact information must be established, as this allows the receiver to contact the sender regarding any information being distributed. It is required that the sender has a valid toll-free telephone number, e-mail, and return mailing address thus allowing access for the receiver to cancel contact from the sender.

Option to opt out allows the receiver to be removed from any future contact by the sender. The provided means of contact must be at no cost to the receiver, as well as no cost to be removed from their e-mail list. For example, they cannot have a cancellation fee, since you were never asking to receive their information. Additionally, this option must not be hidden in fine print, and must be conspicuous to the receiver.

Be careful! Just because you view an e-mail to be unsolicited commercial “junk”, does not mean it falls under this act. Any time that you voluntarily give your e-mail to a company they are able to send you promotional advertising, and may not need to follow the required guidelines listed above. Due to an existing relationship between you and said business, they are not necessarily bound by this act. If you have ever signed up to receive more information from a company, business, store, etc. then you have established that you have a relationship with that entity, thus all information sent via e-mail would not be considered to be “unsolicited”.

Further, federal law CAN-SPAM (Chapter 103 of 15 U.S.C.) provides individuals and businesses a federal cause of action, and generally preempts state law on this subject matter.