Self-settled trusts: How to make sure your trust works for you

A self-settled trust is a type of trust in which the trust creator or “settlor” is also the person who is to receive economic benefits from the trust during his or her lifetime. The simplest type is the standard Revocable Living Trust (RLT). There, the same person is the trust’s settlor, trustee and a beneficiary.

RLTs are typically created as part of an estate plan to manage assets during the settlor’s lifetime, avoid the necessity of a guardian if the settlor becomes incapacitated and ultimately avoid probate upon the settlor’s death. Some settlors want to enhance these benefits by structuring the trust to exempt its assets from the claims of their creditors.

Smart Business spoke with Brian R. Price, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC., about self-settled trusts, their advantages and disadvantages, and the importance of working with an experienced attorney when establishing such a trust.

What should be included in a self-settled trust?

It’s important to include the terms upon which various individuals can receive funds. That should include the trust creator as well as the terms for the ultimate disposition of the trust funds at some point in time, whether before or after the creator’s death. Designating successor trustees is also a crucial component of any trust.

How should a spendthrift provision be utilized?

A spendthrift provision typically prohibits a trust beneficiary from selling, assigning or otherwise disposing of his or her interest in the trust and at the same time prohibits the trustee from honoring claims by third parties to satisfy the settlor’s/beneficiary’s legal obligations from the trust assets.

Can a self-settled trust’s assets be exempt from claims of the settlor’s creditors?

At least 15 states have enacted legislation to permit settlors to create a trust from which they may receive discretionary distributions while exempting the trust assets from the claims of some, but not all, creditors.

To qualify for creditor protection under these states’ laws, the trust generally must be irrevocable, administered by a trustee in the state adopting the protective legislation and created at a time when there are no pending or threatened legal actions against the settlor/beneficiary.

Even in these jurisdictions, the trust assets are not protected from claims for spousal or child support and alimony, or from certain tort or governmental claims. And even if properly formed and administered under a state’s asset protection trust laws, such a trust may not be exempt from claims in a bankruptcy proceeding against the trust’s settlor/beneficiary.

What are some disadvantages?

The possibility that a federal bankruptcy court may ignore the state laws makes the use of such trusts a risky proposition.

It is an open secret that states with favorable self-settled trust laws hope to attract trust business, and their compensation comes from the creators and the trust’s funds. A cottage industry of specialists promotes the concept and they need to be paid as well.

Do some of these trusts actually provide benefits to the settlor/beneficiaries?

The promoted benefits are attractive to many people who believe that because they have amassed a certain degree of wealth, they are the targets of predators. In this regard, trusts of this sort may provide psychological benefits to the trust settlors.

Additionally, the mere existence of such a trust may intimidate creditors who don’t want to pay the costs of trying to extract money from the trust. This is particularly true if the trust is created in a far away place where obtaining jurisdiction over the trust makes matters even more difficult.

How should someone go about creating a self-settled trust?

Anyone interested in creating such a trust should ask what type of benefits he or she can reasonably expect from the trust. Many self-settled trusts are created either by non-legally trained individuals or trustees who aren’t well-versed in the area. It’s important to seek an attorney who is experienced with the technicalities of self-settled trusts.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC.

How to find the right-sized law firm for your business needs

Often, but not always, midsize businesses do not have internal legal departments, but are large enough that they need sophisticated legal guidance on a variety of day-to-day issues that arise. This requires midsize businesses to have a knowledgeable, experienced and cost-effective outside legal resource that supports the midsize business and its operations.

Smart Business spoke with Eric C. Springer, Managing Shareholder and Director at Sherrard, German & Kelly, P.C., about the unique legal needs of midsize businesses and what businesses should consider as they choose a law firm.

What options do midsize businesses have for getting the legal representation they need?

There are as many options as there are midsize businesses out there because one size does not fit all.

In-house counsel can provide the kind of daily legal service that is needed, but not all businesses can support the cost structure of adding this person as a full-time employee. For many companies, the better option is to develop and maintain a close relationship with one or more outside lawyers capable of addressing those issues, when needed, but without a full-time cost component.

In short-term situations or specific initiatives or transactions, the cost of outside counsel might be perceived as a more significant expense. When viewed over the long term, however, these relationships may prove less costly and more efficient for the midsize business —given the breadth and depth of knowledge, resources and practice areas available from the attorneys from a broad-based, general practice law firm.

What are some questions midsize businesses should be asking as they look to establish a relationship with a new firm?

Is the firm a fit with you, your management team and your business? Will the firm be engaged and responsive to your needs and requests? Are the attorneys knowledgeable about your business sector and the issues you tend to confront more regularly? What other practice areas and resources does the firm have that you may need? Do they work with a number of similar sized businesses in your industry?

Once that connection is made, put trust in your law firm’s advice and keep them in the loop on a timely basis regarding issues that are popping up. Trying to minimize costs by compressing the time the lawyer has to work out an issue or keeping counsel on the sidelines as to issues that you are facing may be counter-productive. Getting your legal counsel involved early will often lead to better and more cost-efficient advice and results.

How does a legal firm’s size affect its ability to service a business?

Cost structure is a big feature that tends to fluctuate greatly with the size of the firm. This leads to concerns about costs or whether to reach out to outside legal counsel at all.

Midsize firms are a better match for midsize businesses as the cost structure allows for more accommodating rates and fee arrangements, but offers the variety of high-level, experienced legal resources that a midsize business needs in order to quickly address the legal issues it frequently faces in the commercial, corporate, employment, tax and litigation disciplines.

When interviewing firms, what are some key factors businesses should look for in choosing which will represent them?

Look for a connection with your main point of communication with the firm — the legal point person for your business, so to speak.

Engage them on whether they have an appreciation for and experience in the issues involved with your business and market segment, and how they structure their communications, delegation of work and billing. All these items should help you gain a better feel for the firm and whether building a long-term relationship is a real possibility.

Midsize businesses and midsize law firms share a common focus on knowledgeable, experienced and practical advice in order to make decisions. This common connection can result in a valuable partnership and a cost-effective, long-term relationship.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

A look at how a new trade secret law will affect businesses

A trade secret is valuable information not generally known to the public that a company can use to provide a competitive advantage.

Every business has trade secrets. Trade secrets can include formulas, processes, methods, know-how, customer lists, business plans and other confidential information. Unfortunately, current or former employees, competitors, vendors and even suppliers can improperly acquire a company’s trade secrets.

Current employees may also inadvertently share company trade secrets. Trade secret theft from U.S. companies is estimated to cost those companies billions of dollars every year.

Trade secrets have long been protected by federal criminal laws like the Economic Espionage Act of 1996, but civil actions have been left to state law. On May 11, 2016, the Defend Trade Secrets Act of 2016 (DTSA) was signed into law.

The DTSA now provides federal jurisdiction for civil actions for the theft of trade secrets and seizure of stolen trade secrets in extraordinary circumstances, as well as remedies that may include an injunction to protect the trade secret and monetary damages.

Smart Business spoke with Jennifer Hanzlicek, an Attorney at Law at Brouse McDowell specializing in intellectual property, about trade secrets and the implications of the DTSA for businesses.

How should businesses be protecting their trade secrets?
Adding simple computer features like security software and computer logouts and locks can reduce your exposure.

Companies should also limit access to sensitive company information to necessary employees. Train employees to safeguard company information by locking it away after the workday, to keep and frequently change passwords on their computers and mobile devices, to avoid suspicious links and emails, and to shred hard documents.

Additionally, the use of external hard drives and thumb drives can make it easy to transport data, but also leaves it unsecured. Prohibiting their use can reduce the loss of the company’s trade secrets.

Have nondisclosure agreements with contractors, consultants, suppliers, vendors and other business partners that set forth the terms of the disclosure of any confidential information, including what is considered to be confidential, the term of the agreement, and the provisions for a breach of the agreement arising from an improper disclosure of trade secrets.

Employment agreements should also contain nondisclosure provisions to protect confidential information.

What does the Defend Trade Secrets Act of 2016 mean for businesses?
Although the DTSA may provide added protections for companies, you still need to take precautions:

■  Educate your employees to protect the company’s trade secrets by limiting their exposure. Your trade secrets could be compromised by an ‘innocent’ social media post of a picture taken in a production area or discussions in unsecure locations like restaurants and airports.

■  Eliminate exposure of trade secrets by preventing unnecessary visitor access to areas of the company that contain sensitive company information.

■  Revise employee agreements to fulfill the notice requirement of the DTSA for trade secret disclosure to the government. Under the new law, companies must provide notice of whistleblower and retaliation protections for reporting suspected trade secret violations to both current employees and contractors.

If no notice is provided, the company may lose exemplary damages and attorney’s fees in an action against that employee. You should also include a procedure in your company policies for an employee to report suspected trade secret violations to government officials.

■  Review and update current company trade secret policies to comply with the DTSA, taking into account soon-to-be former employees that may take trade secrets from the company and new employees that could bring trade secrets from a previous job.

It is uncertain how the DTSA will impact future litigation. However, businesses should review current agreements to comply with the new law. Trade secrets are valuable assets that must be protected. Creating policies to safeguard trade secrets within the organization can help to protect them.

Insights Legal Affairs is brought to you by Brouse McDowell

Biometric data could widen your exposure if you’re not cautious

Seeking to reduce their risks and improve security, business owners may unknowingly take steps that invite more risk of liability. Upgrading your security by using biometric data to strengthen security protocols can subject your business to liability from an increased risk of privacy litigation. More businesses are using biometric data for internal operational security, consumer authentication and other identification purposes.

While there is no uniform definition, biometric data is information derived from human biological and behavioral characteristics such as fingerprints, facial scans and voiceprints. Today, the use of biometric data in everyday interactions is exploding — retailers are using fingerprint scans at the point of sale to verify customer payment, banks have announced plans to replace PIN numbers with facial and retina scans at ATMs, and employers are increasingly using biometric identifiers to access and maintain data centers.

Smart Business spoke with Lucas Blower and Amanda Parker, Attorneys at Law at Brouse McDowell, about the consumer and employee privacy implications of this trend.

How is biometric data governed?

One problem with biometric data is that currently, there is no federal or uniform law that directly addresses its collection and use. Consequently, it is unclear whether biometric data will be treated as Personal Identifiable Information or if it will be subject to a heightened standard. While there are regulations for the health care, insurance and employment context, these laws do not address novel uses businesses may employ using biometric data. In some instances, biometric data may be subject to the Health Insurance Portability and Accountability Act or the Genetic Information Nondiscrimination Act.

Currently, the only states with pending or existing laws addressing biometric data are Illinois, Texas, Alaska, California, New York and Washington. The legislation in these states often addresses requirements such as notice, consent, disclosure, policy and destruction periods. Several such laws also provide for civil penalties for each violation.

Additionally, the Federal Trade Commission may have the authority under the Federal Trade Commission Act to pursue enforcement action where businesses do not comply with their own policies regarding consumer data collection. This inconsistent treatment of biometric data increases the potential risk of litigation for businesses using biometric identifiers.

What other issues should be considered when using biometric identifiers?

Businesses across industries collect, use, protect and share biometric data differently. As a result, there are no clear standards for how companies should handle biometric data. Decisions on how to collect, store, protect, share and analyze biometric data should be made in consideration of existing and emerging privacy laws, but also in light of available insurance coverage. Whether businesses use biometric data to prevent fraud, increase internal controls or promote wellness, the collection of biometric data increases a company’s exposure to a data breach. Having adequate coverage in the event of a data breach is the only way to protect against the cost of litigating privacy claims and to reduce the risks associated with using biometric data. A company’s policies and controls for handling biometric data can also affect whether a data breach is covered or excluded from coverage. Insurance companies are adding new exclusions, especially those applying to cyberrisks. Businesses that fail to follow minimum required practices will likely find themselves without coverage.

How can I minimize the risks?

In order to ensure your biometric technology is reducing risk and not increasing your exposure, businesses should develop thorough policies and controls for handling biometric data. Additionally, businesses must develop and train employees in compliance with their privacy and data security policies. Finally, by periodically auditing and re-evaluating both your privacy and data security policies and employee compliance, businesses can reduce the risks of using biometric data and ensure that they won’t be denied coverage in the event of a data breach for failure to follow minimum required practices.

Insights Legal Affairs is brought to you by Brouse McDowell

Consider putting a general power of attorney in place

A durable, general power of attorney is a document in which you appoint an agent to make decisions for you and otherwise act on your behalf when you are incapacitated.

“Everyone needs a durable, general power of attorney,” says John T. Ort, an attorney at Semanoff, Ormsby, Greenberg & Torchia, LLC. “They are not just for the elderly.”

Smart Business spoke with Ort about a general power of attorney, how it should be structured and when it becomes effective.

How should one go about addressing the possibility of being incapacitated?

Without a durable, general power of attorney in place, no one could act on your behalf if you become incapacitated. In that situation, your family or another interested party would have to apply to the local Orphans’ Court to have you declared incapacitated and have someone appointed as your guardian to act on your behalf. That takes time and money, and the court-appointed guardian would be subject to continued court supervision.

It’s better to create a durable, general power of attorney now so you can choose your agent.

A ‘durable’ power of attorney is effective notwithstanding your subsequent incapacity. Pennsylvania law makes all powers of attorney presumptively durable.

How should a general power of attorney be structured?

The concept of the general power of attorney is to grant your agent as broad authority as possible because you don’t know what actions your agent may have to take on your behalf in the future. It’s often useful to designate specific powers such as the power to open and close safety deposit boxes, to write checks, pay bills, manage investments, sign your tax returns, and to sue or defend against a suit on your behalf.

A general power of attorney typically is not the best way to authorize someone to make health care decisions on your behalf. That should be relegated to a separate document, such as a combined health care power of attorney and living will.

What are hot powers?

In Pennsylvania, there are certain powers that an agent is not granted by a general grant of authority. These so-called ‘hot powers’ are very sensitive and can potentially be abused by the agent. Such powers include the power to create or change rights of survivorship, the power to create or change beneficiary designations on insurance policies, annuities and retirement plans, and the power to make gifts. If you want to authorize your agent to exercise these powers on your behalf, you need to specifically grant your agent such powers.

When is a power of attorney effective?

You can make the power of attorney effective immediately when you sign it. This means your agent could act on your behalf even though you are not disabled. The alternative is a springing power of attorney, which becomes effective at some future point in time and requires a clear definition of the future event that makes it effective.

One common way for a springing power of attorney to become effective is upon a certification by a physician that the principal has become disabled. This can be problematic if the physician does not want to be put in that position, especially if there’s family friction about whether or not the power of attorney should become effective.

Alternatively, you could delegate to one or more persons the power to make it effective — for instance, a majority of your spouse and your adult children.

What advice would give about choosing agents?

General powers of attorney are powerful documents and can be subject to abuse by the agent, so you need to have absolute confidence that the agent will act in your best interests. You can have just one agent at a time serve on your behalf. Or, you can appoint two or more agents to serve at the same time, in which case it is presumed that they are required to act jointly, thereby requiring unanimous agreement among the agents, which could minimize the possibility of a single agent abusing his or her powers. Also, successor agents should be appointed and you should consider granting the last-serving agent the power to appoint one or more successor agents.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Contests, sweepstakes provide fun opportunities for customer engagement

Contests and sweepstakes can be a fun way to boost customer engagement, but there are some important details to consider before the games begin, says Christy A. Prince, a Director at Kegler Brown.

“These types of promotions are a valuable and relatively inexpensive way to engage with customers and build brand recognition and customer loyalty,” Prince says. “They can also help the company position itself as fun, creative and relevant depending on the structure and execution of the promotion. The key is to have good rules for your promotions to ensure that they run smoothly and that any disputes can be handled appropriately without creating exposure or negative publicity.”

The worst-case scenario is you develop an exciting contest that draws customers to your business, but you end up in court because you didn’t verify that the prize and method of selection were in compliance with laws and regulations.

“If you have a good framework and clearly understood rules in place, it is a great opportunity,” Prince says. “You want someone who has compliance in mind to be involved as you develop your plan.”

Smart Business spoke with Prince about how to engage customers and build momentum with contests, sweepstakes and social media promotions.

Where is a good place to begin building customer engagement using contests and sweepstakes?

One of the first steps is to be clear about the difference between contests and sweepstakes. A sweepstakes is a drawing in which the winner is randomly selected and everyone has an equal chance to win. A contest is based on skill, meaning everyone does not have an equal chance to win. The winner is the person with the cutest dog or someone who answered a series of trivia questions correctly or came up with the funniest one-liner for your new slogan.

As you consider the nature of your promotion, you should also think about customer demographics and what type of promotion customers would best respond to. Would they prefer a skill-based contest or a simple raffle for a prize? You should also consider whether you want to incorporate audience participation to select the winner or use a preselected panel of judges. In either case, participants need to clearly understand how the winner will be selected.

Look at your goals for the promotion. If you’re trying to drive traffic to your website or social media channels, that forum would be your ideal method of entry. Social media has led to a surge in promotions as companies see value in the exposure and the additional opportunity for engagement, especially if your promotion goes ‘viral’ and gets shared with a wider audience.

What are some legal concerns that need to be addressed?

There are laws you must comply with when conducting your promotion. If your promotion is only going to be available to Ohio residents, you should state that in the rules. Make sure the entry method for your promotion is clearly understood.

Requiring any form of consideration (payment or valuable effort like completing a lengthy feedback survey, etc.) can be problematic if you don’t have the right safeguards in place. For example, if you run a drawing and the only way to have a chance to win is to buy a product, and you don’t fit into some exception, such as a charity, that would be illegal gambling. You must be aware of the law of each state where the promotion will be offered, and each state typically has substantial differences in what it considers to be permissible promotions  Your promotion must also comply with federal requirements.

Also, companies can run into ‘troll’ participants who perceive problems in the promotion (for example, with unclear rules or selection criteria) and threaten to sue or create negative publicity. Work with your attorney or legal counsel to ensure you’ve addressed all legal questions that might pertain to your promotion.

If you don’t maintain your focus or try to take shortcuts as the promotion is developed and operated, it’s easy to run into legal trouble. As long as there is a framework in place and you work within that framework, you can typically avoid problems and focus on the benefits of increased visibility that the promotion will offer you.

Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter

Before you sign a contract, take time to understand indemnification clauses

Business executives often spend a considerable amount of time negotiating the contract terms they deem the most critical while others are merely glanced over.

As such, monetary terms, warranties, lead times, contract length, termination and noncompete covenants typically generate a lot more passion than indemnification or “hold harmless” clauses.

Smart Business spoke with Isabelle Bibet-Kalinyak, an Immigration and Health Care Corporate Attorney at Brouse McDowell, in order to better understand the purpose and importance of these technical provisions.

What are indemnification clauses?

Risks are inherent to all types of contracts. Indemnification is the process whereby one party seeks to secure another party against anticipated losses or damages. It is a contractual tool that allocates in advance the risks or losses associated with the contractual relationship, whether such risks or losses are suffered by the parties to the contract or a third party.

Why are indemnification clauses important?

Indemnification or ‘hold harmless’ clauses have become universal in the business world. Although initially most common in the construction industry, they are now pervasive across all industries and contract types by default.

Parties should carefully review all indemnification terms because they may cause substantial financial losses (including, at times, reimbursement for all legal fees) to the indemnifying party if successfully invoked.

Are indemnification terms required in all contracts?

The parties should analyze the necessity and scope of the indemnification terms to best fit their respective needs and risk tolerance.

Express indemnification terms may not be required when insurance (general liability, medical malpractice, etc.) for the risks or losses at stake is already part of the deal.

Further, various common law principles already allocate vicarious or derivative risks based upon the relationship between the parties.

For example, under the legal doctrine of respondeat superior, an employer is responsible for the wrongful acts of its employees, and under the doctrine of agency by estoppel, a principal is liable for the acts or omissions of its apparent agents. These common law doctrines vary from state to state.

Are indemnification clauses legal?

Indemnification clauses are legal, for the most part. Their proliferation and abuse have, however, triggered statutory limits at the state level, notably in the construction industry and landlord-tenant context. Some states now prohibit certain transfers of risk or void clauses that attempt to pin all liability on one party, even when concurrent negligence exists.

What are some key elements executives should discuss with legal counsel?

Executives should not forego all negotiations relative to indemnification merely because of relatively unequal bargaining power between the parties.

The parties should at least review and weigh the following elements of the clause, particularly when the stakes are high: necessity, scope, types of risk transferred (acts, omissions, concurrent negligence, etc.), defense, defense/legal costs, duration and termination, effect of settlement, damages limitation, insurance coverage, effect of merger and acquisition, statutory limitations at the state and federal level, and regulations (Medicare).

Amending the language or establishing reciprocity can help mitigate the risks. Indemnification clauses are risky and complicated. Understanding exposure and specific terms is key prior to signing on the dotted line.

Insights Legal Affairs is brought to you by Brouse McDowell

Estate planning 101: Stop and think about the pieces

Many people don’t understand that when it comes to transferring property after death a will does not cover all assets. When designing someone’s estate plan, it’s critical to look at the different types of property so the decedent’s intentions will be carried out correctly.

“An estate plan isn’t just getting signed documents in place, it’s also looking at the asset base to make sure everything will match up and play out properly,” says Mary Jo ‘MJ’ Baum, an attorney at Semanoff Ormsby Greenberg & Torchia, LLC. “Otherwise, the estate plan or will isn’t worth the price you paid for it.”

Smart Business spoke with Baum about properly transferring property at death and the problems that can arise if a will is not crafted correctly.

How is property transferred at death?

There’s a misconception that a will controls the disposition of all of a person’s assets at death. The truth is that if you own an asset with your spouse or child as ‘joint tenants with rights of survivorship’ — for instance, a bank account or primary residence — it’s the last person standing who receives the asset in full. After the first death, the surviving co-owner only needs to show a death certificate to retitle the joint bank account to the survivor’s sole name.

This also holds true for joint tenants with rights of survivorship (JTWROS) real estate. Usually a new deed is not prepared after the first co-owner’s death. Instead, it is normal for a new deed to be prepped only when the surviving co-owner subsequently transfers the property by sale or gift. For ‘chain of title’ purposes, that deed then recites the death of the first co-owner, which resulted in the survivor’s exclusive ownership and set the stage for the instant sale or gift.

Another asset category is property subject to a beneficiary designation. For life insurance, annuities, IRAs and 401(k) or other retirement plans, the owner designates a beneficiary in writing on a form supplied by the provider. The last designation on record with the provider controls. Unless a beneficiary designation asset is made payable to the owner’s estate, reference to that asset in a will has no meaning.

A shortcut form of beneficiary designation asset is one that is earmarked as an in trust for (ITF), pay on death (POD) or transfer on death (TOD) asset. Accounts retitled in these ways won’t be available to fund a bequest in the will or to pay for the funeral or death taxes. This is tricky because the monthly statement for the bank/brokerage account often only shows the owner’s name and doesn’t reflect that it’s an ITF/POD/TOD account.

Another asset category is one where an asset is owned by a trust. These have an underlying written trust document containing specific terms that apply to the trust’s assets.

Essentially, the only property that is disposed of by will is property that is titled in the decedent’s name alone, which is not subject to a regular or shortcut form beneficiary designation, or owned as ‘tenants in common’ (TIC). With TIC ownership, two or more people possess portions of the asset together, but not with rights of survivorship. Each person’s portion is his or hers to control or transfer. Each person’s separate portion is treated as the person’s sole name property.

What problems can arise if a will is not written correctly?

In one post-death situation I handled, a gentleman had written his own will. He had been widowed, was remarried and had children from his first marriage. His will stated that at his death his life insurance was to pay for his funeral, his second wife could live in his house for the rest of her life and then it would pass to his kids, and specific bank accounts were bequeathed to his kids. Of all of the provisions he wrote, not one was validated because the extra-testamentary asset arrangements trumped his will’s contrary provisions. Even worse, the will contained no residuary clause — a ‘catch all’ provision in a will that disposes of property not expressly disposed of by other provisions. He had sole name assets not mentioned and no residuary clause to cover them. So, in essence, he died without a will as to those assets, leaving his wife and children to parse their way through the intestate laws.

Don’t let this happen to you.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Why you need to take caution when using independent contractors

As independent contractors continue to become a bigger part of the American workforce, the Department of Labor (DOL) is investing more time and energy to make sure companies follow the law when it comes to classifying these workers, says Timothy J. Gallagher, an attorney at Kegler Brown.

“Employers are shifting toward using more independent contractors,” Gallagher says. “It’s a direct result of companies trying to control costs where they can. You can’t keep reducing the price on goods or you’ll never make a profit. You can’t keep limiting services or you’ll be swallowed up by the competition.

“If you can minimize your labor costs by paying a lump sum for a project and avoid paying benefits or taxes for an employee, it’s easier and cheaper for the employer.”

The practice of using independent contractors has grown significantly since the recession as companies look to reduce long-term costs. In a 10-year period, usage of this contingent workforce has grown from under 30 percent of the overall workforce to more than 40 percent of that group, according to the U.S Government Accountability Office.

Smart Business spoke with Gallagher about what companies should know before utilizing independent contractors.

What is the difference between an employee and an independent contractor?

An independent contractor is not entitled to benefits from the employer. This person doesn’t have to be paid overtime or a minimum wage and bargains for terms that he or she is willing to accept. Employees are entitled to benefits from the employer and certain protections for minimum wage and overtime compensation.

The employer is also required to pay unemployment tax, income tax and worker’s compensation for employees. These costs are not required with an independent contractor, which is where the financial savings can be achieved.

How do employers get into trouble with independent contractors?

You could decide that rather than call these individuals you’ve identified as employees, you’ll change their hours and duties a bit, provide them each with 1099 tax forms and call them independent contractors.

The IRS, however, does not base its worker classifications on what the employer chooses to call its workers. Rather, the federal agency looks at 20 different factors with the goal of determining who it is that controls the relationship.

If you’re telling people where to show up, where to work, what tools to use, what equipment to use and you’re providing training and instruction, at that point, you’re controlling the whole relationship. They will likely be seen as employees, even if you’ve decided to call them independent contractors.

What happens if the IRS determines you’ve misclassified your employees?

If you’ve labeled someone as an independent contractor when the individual should be an employee, the IRS will come after you for the unpaid taxes. If it’s determined that you willfully changed someone’s classification, you’ll also incur a $1,000 penalty per each worker that you misclassified.

The DOL has developed memorandums of understanding and is sharing data with the IRS and state tax departments and agencies in 28 states. Ohio is not currently one of those states, but the trend is moving toward getting those memorandums with every state.

So if you’re reporting one thing to the federal government and something else to the state, you’re at increased risk of those discrepancies being identified and then audited and penalized.

What should employers do?

If you’re a small business that has changed employee classifications to save money, talk to an attorney about the risks and how to do it the right way.

If you’re a larger company and you use a staffing company to open a new factory or support a large expansion, you could be considered an employer or a joint employer with the staffing firm for the people you bring in, depending on how much control you exert over these workers.

Review the IRS and DOL worker classification factors and do a self-audit. You’re better off paying for a $500 consultation with an attorney before you make changes versus paying that attorney $50,000 to defend you in a lawsuit for a class action by workers you misclassified.

Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter

Legal bills too high? How to reduce sticker shock

Most lawyers in private law firms bill by the hour. And many types of legal work — particularly drafting, research and document review — require more time than clients generally assume. So “sticker shock” over the amount of the first legal is common.
Are there things a client can do to lower the shock? Yes, says William J. Maffucci, attorney with Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Maffucci about how clients can lower their own legal bills.

How can one go about lowering legal expenses when hiring an hourly-fee lawyer?

Legal work billed by the hour will always be expensive. But many people who hire hourly-fee lawyers don’t realize that they can reduce their future legal bills by, effectively, becoming part of their own legal team. They can handle many tasks that, although necessary to the representation, do not require a legal degree or a paralegal certification. The savings can be substantial, and — not paradoxically — the client’s efforts can improve the quality of the legal service.

What are some tasks clients can handle on their own?

One simple thing can be done whenever you are about to deliver documents to your lawyer: organize them. At a minimum, put them in chronological order. This is particularly important at the beginning of the engagement.

Recently a new client told me she had about 100 documents that were relevant to her matter. I asked her to arrange the documents chronologically before bringing them to my office. She ignored my request and showed up at my office with a grocery bag of unorganized, unstapled and unfastened documents. It took us over two hours to sort, which resulted in additional legal fee of approximately $900.

Clients can also review and comment upon documents, such as deposition transcripts, that are produced or created during the course of the representation. I have had many intelligent and motivated clients make comments that were at least as helpful as the comments I would have expected from paralegals, working at billing rates of perhaps $200/hour.

Are there other things a client can do to reduce the cost of hourly-rate legal service?

Whenever possible, the client should communicate with the attorney by email and not by telephone. Reading an email takes less time than having the same communication by phone. Far more than emails, phone calls disrupt a lawyer’s day in ways that a lawyer often reflects in a bill.

Many law firms and lawyers have a policy of billing in minimum time increments, often 15 minutes, even if the work at issue required less time. Clients understandably can get upset when they are billed for fifteen minutes of a time on a phone call that only took, say, six or seven minutes. But billing for the additional time is defensible because the disruption that a phone call usually causes to workflow almost always results in additional time spent by the lawyer.

The other email-related rule is this: Make it clear to your lawyer that, whenever possible, written communication to you should be through email, not the postal service or hard-document courier service. No one expects standard email communications to be as polished and professional-looking as documents on letterhead. So, whether the lawyer types the email or dictates it and gives it to a secretary to type, the elapsed lawyer time will usually be less than the time the lawyer spends preparing a hard-copy letter. And email avoids postage, which many lawyers would pass on to their clients.

Do lawyers generally appreciate when their clients use these techniques?

I’ve never met a lawyer who didn’t welcome the efforts of a client to relieve the amount of non-legal work the lawyer was obligated to do. And I’ve never met a lawyer who was offended by a client’s insistence that the lawyer communicate via email.

Eliminating the time that a lawyer must spend on non-legal work and reducing the amount of time that a lawyer must spend on written communication helps the lawyer focus on the important components of the representation. That can only make the legal service more effective.

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