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• Before You Reduce Your Employees' Wages Or Hours
  

   By Cliff Ennico

  “I run a commercial printing business with 10 employees.  Our business has suffered with the recession, and I desperately need to cut payroll, but I really don’t want to let anybody go.  We’ve become like family, and I know when the economy improves I will need every one of them.  I understand that in lieu of downsizing someone, you can reduce all of your employees’ salaries across the board, or ‘furlough’ them by reducing their working hours.  What are some of the legal things you need to think about before you do that?” 

  Payroll, or “headcount,” is the first place many owners look when they’re looking to trim costs, but one of the most painful experiences any business owner will face is terminating a good, faithful, hard working employee due to “economic conditions”.  “Halfway” measures, such as reducing all of your employees’ salaries or working hours (called a “furlough”), are seen by many owners as a way to reduce costs while avoiding painful job cuts.

  But just because “everyone’s doing it” doesn’t mean it’s the right thing for your business, says employment lawyer Roseann Padula of Sullivan Schoen Campane & Connon, LLC (www.sscc-law.com/ourattorneys-padula.php).

  While acknowledging that it’s painful, “eliminating and restructuring jobs may be the best thing for your business in the long run,” says Padula, explaining that: “it’s a one shot deal – when it’s done, it’s over, and everyone understands where they stand.”  Even if spread across the entire company (including perhaps – ahem – yourself), furloughs and salary reductions are often seen as penalizing your successful performers who, after all, are the ones you most strongly wish to retain in a difficult economy.   

  “It’s the ‘Death of a Thousand Cuts’ – long, painful and insecure,” says Padula.  “It’s likely going to be at least a one-year impact on your employees’ income, and there’s the risk your good employees will jump at the first chance to move to a better paying position.”   

  If you do decide that furloughs and salary reductions are the best approach for your business, here are some of Padula’s tips for doing it the right way: 

  First, look at your contracts and employment offer letters.  If you have written agreements with your employees saying they “will” receive a certain salary and benefits or are guaranteed a set number of hours per year during the life of the contract (including collective bargaining agreements if you have unionized employees), then you cannot unilaterally reduce their pay or hours without breaching their agreements and exposing your business to lawsuits.  “Promises you make during employment interviews, and the rosy, glowing forecasts you make during sales meetings, can be problems as well because in some states they have been construed as implied contracts,” says Padula. 

  Next, make sure your hourly and salaried employees remain properly classified.  Padula cautions that employees who receive a fixed salary regardless of the number of hours worked (called “exempt” employees under federal and state wage and hour laws) may be reclassified as hourly (or “nonexempt”) employees if you improperly tie their salary reduction to a reduction in hours worked. 

  Next, check your state unemployment compensation laws.  In some states, significant reductions in hours (especially for hourly employees) may trigger a right to unemployment benefits, which could increase the payments you make into your state unemployment compensation system. 

  Next, watch out for unlawful discrimination.  If the only employees you furlough are those protected by employment discrimination laws, you may be opening your business up to a lawsuit.  “Make sure there is a connection between the workers who are impacted and your business needs,” cautions Padula, who adds that furloughing only your most highly paid senior employees is “a really, really bad idea” if they are also your oldest workers. 

  Next, don’t violate your own rules.  If you tell employees to take Fridays off without pay, warns Padula, “don’t call them on Friday to ask them questions.  They are not to WORK AT ALL during the furlough time.”  Padula adds that if you send a nonexempt employee an e-mail on Thursday night and he replies on the Friday morning he is not paid, this could lead to an investigation by your state Department of Labor for wage and hour violations.  The problem is more difficult to manage, Padula says, if you cut back a number of hours each working day rather than cutting an entire day each week, because “it’s very difficult for conscientious workers to stop working precisely on time when the rest of the world is still open for business.” 

  Finally, be careful how you communicate changes both inside and outside the company.  “You don’t want your salespeople whining to customers about their hours being cut, because your customers will start thinking you’re in trouble,” explains Padula. 

  The bottom line, says Padula, is to review your furlough and salary reduction plans with a competent employment law attorney before you execute them.

  Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and former host of the PBS television series 'Money Hunt'.  This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state.  To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com.  COPYRIGHT 2009 CLIFFORD R. ENNICO.  ALL RIGHTS RESERVED. DISTRIBUTED BY CREATORS SYNDICATE, INC.

• Don't Give Stock to Your Employees; Make Them Pay
  

   By Cliff Ennico

  “I have been running a successful distribution business for several years.  I have two or three key employees that I would hate to lose.  Because of the economy my business has fallen off and I’m thinking about asking these people – actually all my employees – to take a reduction in pay or reduced work hours.  Because I don’t want to lose these key people, though, I’m thinking about giving them some stock in my corporation so that when the economy gets back on track they will be able to grow along with it.  What do you think about this, and what are some of the legal things I need to think about before I make them this offer?” 

  Whenever you have key employees in any business, it’s always a good idea to make them part owners of the business so they are motivated to stay on board during difficult times. 

  The problem here is that your business has been in operation for several years, so it has an actual value.  By “giving” stock to your key employees, you will be creating a tax headache for them, because the IRS sees this as part of their overall taxable compensation. 

  The IRS rules here are really very simple.  If you mow my lawn and I pay you $20, that $20 is income to you.  You must report it on your annual tax return and pay taxes on it.  If you mow my lawn and I give you a share of stock that’s worth $20, the result is exactly the same.  You must report $20 on your annual tax return and pay taxes on it.  Now, the last time I looked, you can’t pay your tax bill with shares of stock, so you will have to come up with some cash to pay the taxes on that $20.  The $20 you have to report is called “phantom income,” because you never actually received cash money. 

  When a company is first getting started, it’s okay to “give” stock (called “founders’ shares”) to the people who will make the business successful.  Because the company has no real value, neither does the stock, so there is no “phantom income”.  Because your company has an actual value, giving stock to your key employees will require them to report “phantom income” in an amount equal to the value of your company multiplied by the percentage they own.  For example, if your company is worth $100,000, and you give an employee stock equal to one percent of the outstanding shares, the employee will have $1,000 in “phantom income” and will have to pay taxes on it come tax time. You can’t really avoid “phantom income” in a situation like this, but here’s a way you can reduce its impact on the employee:

  • first,