• TD Bank and SmartCEO gathered a group of attorneys to give CEOs an overview of the most tricky compliance issues, and how to stay on top of them.

  • The panel of expert attorneys discussed the most pressing legal and regulatory challenges facing CEOs.

Navigating the maze: A roundtable discussion on legal issues

TD Bank

Sponsored by TD Bank

Compiled by Alyssa Hurst

Photography by Zach Teris for David Michael Howarth Photography

This roundtable discussion was published in the January/February 2016 issue of SmartCEO. The following transcript reflects highlights of the discussion. It is not a complete transcript.

What you don’t know could land you in court. Between the Affordable Care Act, wage-and-hour regulations and the need to regulate employees’ activities on social media, many companies are one disgruntled employee away from major litigation. TD Bank and SmartCEO gathered a group of attorneys to give CEOs an overview of the most tricky compliance issues, and how to stay on top of them.

Roundtable panelists:

  • Edward Seglias, attorney at law, Cohen Seglias Pallas Greenhall & Furman PC
  • Sponsor: Michael Messina, vice president, commercial relationship manager, TD Bank
  • Alexander “Lex” Bono, partner, Duane Morris LLP
  • Tassos Efstratiades, partner, Obermayer Rebmann Maxwell & Hippel LLP
  • Sponsor: John Finley, vice president, TD Bank
  • Theodore M. “Ted” Schaer, CIPP/US, attorney at law, Zarwin Baum DeVito Kaplan Schaer Toddy PC
  • Julie LaVan, managing partner, LaVan Law
  • Marc S. Maser, shareholder, McCausland Keen & Buckman
  • Andrea Gosfield, Esq., senior associate, Griesing Law LLC
  • Nathan D. Fox, partner, Begley, Carlin & Mandio, LLP
  • Moderator: Cheryl Beth Kuchler, president, Ballantree Consulting
  • Sponsor: Michael MacFarland, regional vice president, TD Bank

Legal pitfalls: Your 5 key takeaways

  • Train, train, train on your policies. It’s not good enough to have a policy on a complicated compliance issue. If your policy is gathering dust and your employees aren’t familiar with it, noncompliance is the likely result. Make sure your policies are easily accessible to all employees and that you refresh their memories about them frequently.
  • Beware of restricting lawful employee activity. You want to protect your company on social media, but remember that the law protects employees’ free expression, including discussions of their employer.
  • Step carefully on employee classification. Just because your contract with an individual says they are a “contractor” doesn’t mean it’s true. If your so-called contractors are actually employees, it could cost you. This issue is currently an enforcement focus for the federal government.
  • Look closer on Affordable Care Act (ACA) compliance. Don’t assume the ACA doesn’t apply to you because you’re a small business. Make sure you get help in determining whether your employees’ hours collectively add up to the threshold for full-time equivalents set by the law.
  • Set clear rules for at-home work. If employees work unpredictable hours, it will be difficult to track their eligibility for overtime.

Click here to listen to the entire Roundtable discussion, or read an edited transcript of the conversation below. 

Common mistakes

What are some of the common mistakes that CEOs make when it comes to compliance with laws and regulations? What are some upcoming regulations that CEOs may not be aware of yet, but probably want to be?

Bono: I’ve had the good fortune, over about three decades now, of representing CEOs when they get in trouble with the SEC [Securities and Exchange Commission], with the Department of Justice, class-action lawsuits, derivative claims. And I had the privilege, as well, of serving as the first and only general counsel of Commerce Bank before it merged into TD Bank. So I have a lot of experience with some of the common mistakes, and what I like to describe as the … unholy trinity of mistakes. The three that I talk about are, first, it’s really imperative that the CEO set the tone at the top. Everything about the company — the company’s brand — gets dictated by the CEO. And if the CEO is setting a compliance-culture tone at the top, it will resonate all the way through; it will permeate the company, and it will send a message to those friendly regulators, law enforcers and class-action lawyers that are looking at you and trying to get into your pocket book. So the first thing I say is, you are responsible as CEO for setting that tone at the top of being committed to a compliance culture. It should be part of your brand.

Second, you can set the tone at the top, but if you don’t make the investment in compliance — which is often looked at by CEOs as a black hole — … when you get hit with a multi-million dollar, or sometimes billion-dollar lawsuit … you’ll be regretting that you didn’t invest in compliance when you had the opportunity before. … It’s imperative to make an investment in compliance and not just talk about it. It’s great to talk — to send a message — but you have to make that financial commitment. And it’s hard, because I appreciate the financial stresses that CEOs and companies are under. You’re always looking at that balance sheet. If you’re a publicly traded company, you’re going quarter to quarter to make the numbers that the Street is looking for, and notwithstanding that, you’ve got to make that investment, or it’s a big mistake.

The third point is empowerment. Send a message, spend the money and empower compliance. I’ve seen situations where compliance is treated as a second-, third- or fourth-class citizen. That’s not a good message, because the people say, “Talk the talk, put the money out there, but we really don’t care that much.” And the compliance people sometimes are not held in the kind of prestige status that they should be. My advice would be to elevate your folks, empower them, and when you address the three pieces of the unholy trinity, you’re a long way to advancing the ball in terms of avoiding compliance mistakes.

Gosfield: I think CEOs typically … wait until they are in crisis mode, whether it’s facing enforcement action from the Department of Labor, where I worked as a trial attorney, or the Department of Justice or the SEC. CEOs, just like normal human beings, have a tendency to wait until there is a fire before putting it out, as opposed to being proactive. So I think one of the key takeaways that I’d like to offer is that CEOs should be looking to act early and often. And that means from the beginning. If you’re an entrepreneur, you’re starting a business, that means hiring a legal counsel that’s trusted and has the expertise in the areas that apply to your business. So if you’re not a public company, then maybe you don’t need an SEC expert, but if you are going to be a really nimble … think tank, then you probably need somebody with [intellectual property] and social media expertise. CEOs don’t know what they don’t know, and the laws can be extremely complex. …

A lot of times, what I think one of the biggest pitfalls can be, is there are policies put in place and then they are kind of left there a little bit stale. It’s written down on paper and the expectation is that every employee and every independent contractor is aware of the policies of the company, and won’t violate them. I think there has to be a real push for CEOs to hire trainers, whether they bring in their own legal counsel or they are hiring consultants to come in and make sure that everyone understands the policies that are put in place, because compliance really doesn’t mean anything if there isn’t a regular effort to refresh the employees on the policies of the company and the compliance efforts that the company needs to be undertaking.

And then, the law is not static. So to the point about acting often, … CEOs should be consulting their legal counsel on a regular basis. If they have good legal counsel, they should be making CEOs aware of changes in the federal regulations, let’s say, as they relate to wage-an-hour law … or updating their CEOs about changes in social media law. This environment is not static, nor is the law.

Efstratiades: I see it on the other end, often at the beginning of a transaction. There are regulations you have to be aware of, and CEOs may not think about getting advice at that point. And for instance, you decide to hire some foreign executives that are working for another company. You’ve got to think about the immigration laws that may be impacting you, and the regulations, and either call your counsel or a foreign consultant who can help you. …

Environmental issues that come up in a company should not be pushed under the rug. You have to deal with the environmental regulations right up front, and figure out a plan, how to deal with it.

The other thing about regulations: It’s not only the federal regulations; you also have to deal with the local regulations. And if you come into Philadelphia for instance, to purchase a building and start a Philadelphia branch of your company, you have to think about all of the local regulations in regard to the zoning, with regard to transfer-tax issues when you purchase property, which a lot of companies don’t think about at the outset of the transaction. They sign an agreement, they sign the letter of intent and unless they consult with local counsel in these cases, they may miss the point. So you know, another example is, … in today’s world we are all going global. A small- or medium-sized company decides to export some of its products and again, unless you go to the right consultants to figure out whether that’s something you can do, you may find yourself in trouble down the road.


Let’s dig a little bit into contracts. Specifically, contracts with new business partners and joint ventures.

LaVan: A lot of the pitfalls that business partners and shareholders will walk right into [are] that they often don’t put together their governing documents. And the governing documents may include things like the shareholders’ agreement [and] operating agreement. Those agreements define the partnership and what happens in the event of certain situations, such as in an LLC type of structure. You want to know whether that company is manager-managed or member-managed, and you want to know who is going to control the business operations and who is going to be responsible in that organization for making major financial decisions. … You also want to lay out meetings that should be taken throughout the year. You want to consider voting requirements and calculation of capital accounts. But most importantly, what business owners and partners want to consider is how they are going to transfer their interests when something happens, whether it be death, retirement or even dissolution. A lot of times, partners will get into a circumstance where they can’t agree, and if they don’t have an operating agreement or an agreement in place that defines how that company will get dissolved or managed in that particular situation, it can lead to litigation, and litigation is never the best solution and best way to go. As everyone knows, it’s very costly and it takes a lot of time.

Partners also need to think about avoiding things such as oppression and misappropriation. A lot of partners … get into a partnership and they will comingle funds from business and personal. They don’t even realize they are doing it, and that can lead to major issues from a criminal standpoint and from a civil standpoint. Other things to consider are, again, buy-sell agreements are very important, as we discussed, but mostly related to valuation. If you’re going to buy a partner out, you really need to have a value to that business, or you end up fighting or litigating over the value of the company, and that can be very costly and also very subjective.

Seglias: We deal with a lot of commercial contracts. So there are people negotiating across the table from each other, and in some sense, you can think of them as a business partner, but it’s obviously also an arm’s-length transaction. And when there is an exchange of goods or services for money, obviously there are a lot of risk factors that need to be taken into account. Contracts are at their core, at their essence, about allocating risk, … the obligations of those parties and what they assume in connection with a particular transaction. So it’s vitally important for anyone entering into a commercial contract to understand the allocation of risk — the risks that they are assuming and those that have been allocated to their business partner.

Kuchler: What are some good ways of figuring out risk and allocating risk? Any practical strategies for people?

Seglias: In the negotiation, I always think that [putting] more out on the table is better because it creates better understanding and hopefully less of a risk factor going forward, so that if there is an event that was unanticipated, the contract at least provides general guidance — if not specific guidance — on who assumes that risk and how it should be addressed by the parties. Because if they fail to address it in a commercially reasonable manner, the likelihood of litigation and fighting about it, particularly where it’s not exactly clear who assumed the risk, is going to be a greater factor. So in the negotiation, the major risk factors need to be identified. There needs to be some identification of who assumes that risk, and then how it will be handled in the contract.

Another common error that is made by CEOs is that somebody else in the company negotiates that contract. And if it’s a smaller company, they may not have general counsel to review that. So the CEO himself needs to understand the risk factors of a particular project or a particular transaction, because the last thing that he wants is a surprise later because his project manager didn’t consider certain risk factors that to him may have been very obvious given his experience. … As I said earlier, we deal with a lot of small business, and we act as their general counsel. Often, we help them negotiate these contracts, but they don’t bring every contract to us. And they need to allocate obviously, within their own organization, responsibility to various people for negotiating a good and strong contract, and a fair one, and one that takes into account the obvious or at least the reasonably anticipated risk factors. Then finally, I think following the old Ronald Reagan slogan, with the old Soviet Union: “Trust but verify.” You should trust your business partners, but you need to verify. And that makes for a better relationship.

Maser: I think the points are well taken that a contract is really an allocation of risk. When you’re setting up the arrangement initially, you have to put together strong operating agreements and shareholders’ agreements to identify transfer issues, to identify how management is going to handle it. But in the context of joint ventures in particular, where two parties are getting in together, … I think one thing that is often overlooked is the fact that [you always have to consider], how am I going to get out if in fact the business decides to disband. The exit strategy is so important. What are the relative rights of the parties when they leave, what is it they can take with them? … For example, if there were dissolution of a joint venture that has a lot of IP, does the exiting partner continue to be able to use that intellectual property, or is that property the property of one versus the other? So if you think about it, when two parties get together, they’re generally very interested in making this a very good marriage. They want to be successful. They only think about the positive things, but unfortunately we as lawyers, what we have to really instruct our clients to do is actually recognize what it is that you have to do in the event that the joint venture goes south.

Bono: I think that Marc is absolutely right. The exit strategy is something we were talking about in the context of mistakes. The exit strategies are frequently overlooked in smaller companies that don’t have their own in-house legal team because everybody is excited about this great opportunity that’s coming down the pike. … There are three or four things that we always recommend that CEOs think about for these exit strategies. One is rather than going to litigation, put into your contract the dispute-resolution provision that requires you to go to mediation where you sit down with businesspeople and maybe a business mediator instead of a judge or, God forbid, a jury of your peers deciding your business fate. So we recommend dispute resolution with mediation. We recommend that you waive a jury trial, because I haven’t seen many businesses that fare very well before juries. Maybe my experience is limited, but that’s not the current atmosphere. Third is, put in a limitational liability — no punitive damages, no consequential damage. You get X, and you can negotiate that up front while everybody is a friend, because when it breaks down, they are going to be after blood. Everyone is going to be after blood, and it’s going to get extraordinarily expensive. And who wins? I win at the end of the day as your lawyer if you hire me, but I’d rather you spend the money and not hire me for the litigation and hire me for the next ten deals down the road.

Employees and social media

I’d like to take us into the employee landscape because there are several hot topics there that we have been alluding, to including social media, wage-and-hour law changes, and of course affordable care.

Schaer: I’d like to kind of take a different spin on the social media aspect, and that is in the area that I practice in, which is cyber liability and data security. Today, you cannot open the newspaper, you can’t look at television without hearing about a data breach or a breach of a company’s security, whether it’s the banks in Panama, whether it’s Target. It is a problem. It’s not a question of if for most businesses, it’s a question of when. And social media is one of the great avenues which cyber threat actors are using to expose businesses and expose their data to breaches. Everyone is familiar with the term “phishing” and “spear phishing.” Threat actors today are using social media of employees who are posting information about themselves, and about the officers and their co-employees, to give great information to threat actors, who are then turning around and taking that information and developing very sophisticated phishing schemes in order to defraud businesses of wire transfers, of confidential information, and general data breaches to attain the crown jewels of any company, which is their confidential client information. …

So businesses today have to have a very … consistent policy on social media, and it first starts with training. Social engineering training with employees is critical — having your employees understand what the rules are, what they can post on the internet, what they can’t post on the internet, … the consequences of posting prohibitive information, the consequences for distributing information about trade secrets and the confidential information that’s within the database of each individual company. Without consistent policies and clear policies to employees, you leave areas open. And when you leave areas open, you leave portals open, and when you leave portals open, you read about yourself the next day in the newspaper, being the next victim of a data breach, and then you need all of us at this table.

Fox: I think everything Ted said was completely on point, but I think CEOs need to also realize how quickly this landscape of social media is changing. If a CEO is only concerned about Facebook, you’re probably five to seven years behind, because there are new and different apps and avenues, which could be accessed within your company. You have exposure, both your direct terminal on your computers, your wireless network, employees’ mobile devices if they are connected to your Wi-Fi. I think the point about policy is well taken, and that needs to be … part of your internal compliance efforts. That needs to be gone over … regularly, even quarterly, just because of the changes. And I would recommend any CEO have a team to do that, probably their lawyer. That’s in-house or outside counsel, their HR person. Also, you should have a good IT person on board to help draft that policy and make sure it is up to date and it’s not going to be something that’s ignored or left to sit.

Many CEOs want to also be concerned in a startup about what this may do to a company culture, and think that’s important because different employees will have different job functions, and you probably want to have within that policy or via individuals’ employment agreements, different provisions, because if someone is in a sales function or arguably doing something for the company on social media, you may want to allow them to do that, but you should also let them know you are monitoring that. And I think that’s something that needs to be recognized here. This is going to be an ongoing and changing landscape, and probably changing ever more quickly.

LaVan: There’s another side to this, and it is related to employees’ rights. So the employers do have to consider that … the employees have the right … to basically unionize. And if there is a social media policy that a company has that restricts certain things that employees can do, for example their free time, then the NLRB [National Labor Relations Board] can essentially come after that employer and fine that employer or start diving into their policies. So you have to be careful on what you can restrict those employees from doing, and that includes things such as, you can’t restrict your employees from going and talking about the employer on social media. So they can vent essentially. … Where they have to be careful is venting about other employees. So the social media policies often are combined with other policies that the corporation has, such as anti-harassment policies. So just considering those and being careful. … Really think about the policy. Make sure you draft it carefully and get a really good understanding of what that policy means.

Efstratiades: Connecting this to our prior question, because everything is connected in law, if you go into a joint venture with a company that has a strong social media component, you’ve got to do your due diligence. Due diligence is the biggest component of a transaction. You’ve got to figure out whether their policies are good, and whether they have any potential breaches. … Have a consultant who knows about those issues work with you and your lawyers, and deal with that up front so you don’t get into a transaction that’s going to create problems for you in the future.

Schaer: We hope that in these podcasts, there’s some takeaway for every CEO, and here’s the takeaway: When it comes to social media, when it comes to cyber liability and data privacy and data security, it’s no longer the problem of just your IT department. … It’s in the C-suite. When these breaches occur, when employees go beyond the confines of social media policies and expose you and your company to liability, it affects your bottom line; it affects your shareholders; it affects your books; it affects the very viability of your company. So you can’t put your head in the sand any longer and say it’s the IT person’s problem. It’s your problem as the CEO.

Gosfield: There are several businesses that use social media as their primary marketing tools, and to that extent, they really need to take ownership of their social media accounts. So I think we are all kind of familiar with individual employees having social media accounts, whether it’s the Facebook account or the Twitter account, but more and more, we are seeing businesses creating their own social media accounts, and their employees acting on behalf of the business as an agent to post advertising or promotions. These all present legal challenges and compliance issues that CEOs need to be thinking about. So again, this is connected to a former point made: CEOs need to be very aware of the projects and the undertakings of every employee — to the extent that social media policies aren’t just written down maybe in an employee handbook. CEOs might want to consider if you have an employee that’s coming on, it’s part of the job description what you can and cannot post — what intellectual property and what brand logos and trademarks you can put out on behalf of the company and what you cannot. Those things, when they are expressly articulated up front to employees, [lead to] … less of a risk of exposure for the corporation.

Bono: The wildcard in social media, from what every client is telling me and from what we are seeing ourselves at our law firm, are the loveable millennials. The loveable millennials have grown up with iPads, iPhones, devices, and they are constantly on them. Walk around the floor, and I see some of my colleagues who are on their phone, and I hope they are working on our client’s stuff, but it’s really a wildcard. And what we encourage CEOs, just reiterating what we have heard before, is there has to be transparency. Transparency with your employees who are there; transparency with applicants who are coming on board; and transparency with everyone looking over your shoulder, particularly the Department of Labor and the NLRB. It is a primary focus right now of the government regulators, and attorneys general are looking at it as well, so [it is a] big risk factor. How to deal with social media — I can’t stress enough: clear written policies, great training of managers and employees, uniform enforcement of whatever discipline you put in. You can have discipline. You have to be careful about how you execute discipline, but it has to be across the board. So you can’t treat someone in the C-suite differently than you would treat someone who’s working in the janitorial suite. And the last thing is: Make sure you publish everything. Get it out there internally to everyone, and sometimes put it on your website.

Schaer: I think the point that Alex and Ed made in the contract section was very important and … when you are dealing with new business partners … you really need to make sure that your counsel is looking at risk transfer in those agreements and taking a look at your partners to make sure they have the type of cybersecurity and data-transfer security that you expect, and don’t expose you to liability… [You should] say, “Hey what is it that you do on your social media? What is it that you do in your data privacy? Because if you’re exposing me, I need to know and I need to understand how to deal with that risk.” That’s writing indemnity and defense language in your agreement that adequately handles these issues of social media and cyber liability, or more importantly … making sure your business partners have the type of cyber liability insurance and naming you as an additional insurer, so in the event of a data breach, or in the event of a social media problem, you have the protection of the business and you’re not fighting it out in front of juries, … and you’re well protected with an indemnity agreement.

Maser: Just based on personal experience with one of our clients, what is critical, and what I have found is lacking in many cases, is the fact that there’s adequate insurance that the companies actually obtain, to cover them in the event that there is some kind of personal identity breach. And I think it’s very important that they, with their insurance consultants or with counsel, take a look. Because you usually find that in many cases, personal identity breaches are covered through endorsements, and the amount of coverage is quite limiting. So given the fact that cybersecurity breaches are on the up and up and actually very prevalent, I think it’s important to go and talk to your insurance person, as well as your legal counsel to ensure that [you’re] covered.

MacFarland: From a bank’s perspective, there are thousands of attempts every day to breach the bank’s firewalls and information. In fact, we hire hackers to attempt to get into our own organization to determine what those gaps are, and our customers are dealing with these same issues. And that protection on the front end is critical. One of our most popular products is in the treasury-management space, called Positive Pay. And if any of our CEOs listening have been through a situation where their checks or ACHs or their accounts have been breached, the time and effort, the financial loss that impacts cleaning up those issues is substantial. So there are products, there [is] due diligence … on the front end that needs to be done, protections that need to be put in place early to avoid the headaches and the costs associated with these particular issues.

Wage and hour

The other interesting topic is wage-an-hour law. How do CEOs ensure that they’re classifying their workers correctly?

Gosfield: Right now, we are looking at an environment where federal agencies, including the Department of Labor and the IRS, are really cracking down on employers concerning potential misclassifications of employees, or individuals who are essentially employees under the law, as independent contractors. There is a legal test and it is not black and white, just like nothing in the law is black and white. But there are several questions that employers or CEOs should be asking themselves when they are looking to classify their employees. This is a multi-factor economic realities test. Essentially, it used to be just a control test. So the basic test when a manager or employer was figuring out if an individual is an employee or whether to classify them more as an independent contractor, was how much control does the business have over this individual. That test changed with the advent of the Fair Labor Standards Act. So really, employers need to be asking themselves several questions, and … those questions need to get at whether or not the individual is reliant on the company to make their living, or whether they can make a living elsewhere. Typically, independent contractors would not be beholden to your corporation for their entire existence or dependence, so they would be available to work for others. And there are many factors that kind of go into them, control just being one of those factors. So I think one of the issues that CEOs need to be thinking about … is really, really fine-tuning and reviewing their classifications of the employees. That can be a very costly thing if they misclassify and then get dinged by one of the federal agencies for not being compliant.

So some of the risks associated with misclassification essentially would be the cost of back wages or insurance benefits that an independent contractor should have been due, because they were misclassified as an independent contractor where they should’ve been an employee.

Bono: We look at the classification a couple of different ways. I agree with Andrea 100 percent. The economic realities [test] is a little amorphous. It’s what is generally used on a federal level, and the [Department of Labor] has issued some guidance, so it’s always good to look for what the government is telling you they think a test is. And I think they list six or seven factors, and Andrea alluded to some of them. So for CEOs, make sure you are looking at the economic realities test on a federal level. On a state level, we look at what we call an ABC Test. It’s very similar to the economic reality test, but there are only three components to it, and again, it depends what jurisdiction you are in, so that will vary from case to case. [The] IRS has a 20-factor analysis that they go through; National Labor Relations Board has still another test. Bottom line is, … CEOs, I wouldn’t want to be in your shoes right now without good labor employment counsel. And I had to ask one of my partners, Mike Cohen, for some guidance on this, because this is a really rapidly evolving area. Again, the loveable millennials are driving it to some extent, because they want a different work environment than what past generations have been interested in. But I couldn’t agree more with Andrea. [There are] severe consequences economically if you get caught with a misclassification, and it’s generally [that] you have somebody who looks like they are a cost-effective, very efficient contributor to your organization, but you could wind up with a real big bill because you weren’t giving them benefits. … It really grows exponentially when you start getting the benefits multiplied by the number of people in that misclassified category.

Gosfield: We have a client right now who just acquired a business, and the classifications were incorrect. So we are sorting through hundreds of employees that have been classified as independent contractors, and this person’s thought was, “Well, I acquired the business, and it was running fine and there were never any consequences to the business. So why can’t I just keep it that way?” And the why is, as was alluded to before, the severe consequences of misclassification.

Seglias: For years, this area of the law was always known as labor and employment. I think in today’s day and age, those terms ought to be switched around, because it’s really more about employment. Labor, in the traditional sense, is often thought of as something between the employer and the union bargaining agent for the employees, but the employment issues are just dwarfing the labor issues at this point. Just to point out two others in this fast-moving world of labor employment: overtime and classifying those who are entitled to overtime. And it was pretty easy to distinguish previously between salaried and non-salaried employees. So you’d have the salaried employee who wasn’t entitled to overtime, and then you’d have the hourly employee who, if he worked more than 40 hours in a week, would be entitled to that. Well, that’s changing as well. … If you’re forcing somebody who is salaried, but maybe not a CEO or the C-suite, maybe that person is entitled to overtime if they work an additional five hours a week. Family leave is another area where we are really starting to push the boundaries beyond what we have known more recently, where under the Family Leave Act, you get 12 weeks. Part of that is paid; part of it is not. Well, there is a bigger push toward that now too, because maybe the family decides or believes that there should be more pay. They need to spend more time with the newborn, and so that is creating greater pressure on employers as well. And so we can see that whatever we thought was true about the employment environment is probably, as we speak, changing in some direction, and more in the direction of the employee.

Fox: Today, a lot of employees like to work from home, and so you can run into classification issues there. We have that with our clients who encourage that and whatnot. But you have to realize you can run into potential exposure if someone is working from home. They say they are working 12 hours and they are supposed to be working eight hours, and it becomes very hard to track what exactly is a working hour versus what is not. That’s something just to be considered and realize that is another potential area of exposure. …

[Have] a policy in place and make sure [it is] spelled out that working from home does not mean spend 12 hours on Tuesday working from home and you can leave Friday after four hours, unless you have a way of monitoring that, because it also creates other employee-relations issues. So again, it’s all about having a clear policy in place.

Maser: So we are talking about the independent contractor-employee relationship and I think often what you find is, especially when you’re dealing in the transaction space, that [companies are] going to hire a person who wants to be classified as an independent contractor, and therefore, you put together a consulting agreement. And a lot of times the CEO [says], “Well, this is a consulting agreement. It describes a consulting agreement, so that’s the relationship … we are going to have.” And that’s not necessarily true, because as Andrea and Lex have mentioned before, it’s all about the circumstances and whether or not you are an independent contractor. If I put my tax hat on, as Lex had mentioned, there [are] revenue rules that actually list 20 certain factors that are not necessarily exclusive, but are generally those factors that are used from a tax — from an IRS — perspective to determine independent contractor versus employee. But if you fail, at least from the tax, to be an independent contractor, [and] in fact that person is … determined to be an employee of the company, you can have employment tax withholding costs, you have unemployment, comp, tax costs; you have penalties and interest. All those types of additional economic burdens are going to be placed on the employer for failing to actually initially classify that person as an employee and do the proper withholdings. Federal income tax withholdings is another important one to mention. So it’s very important … if you want to have this person be treated as a consultant, at least from a tax side, what we tell the person often times [is] to set up your own entity. Have your own separate [employer identification number]. Get your own insurance. Get your own business cards. Those are the types of things on a practical basis that can be used to try to at least paint the best picture that this person is going to be considered an independent contractor.

Efstratiades: The issue of having a consultant with an agreement and not really thinking about the issues of independent contractor versus employee is very, very serious. It’s not only the transactional level, but also later on, a company, a CEO may decide to hire somebody who is valuable to them and that person says, I want to come in on a 1099. So they take the last employment agreement that the lawyer prepared for them — and I’ve seen it happen — and they just change the word “employee” to “consultant” and they put the guy on a 1099, and then they’re in trouble down the road. So it’s something that is a common mistake that CEOs have to be well aware of.

[Name not stated]: One final point maybe on this issue, and it particularly relates to overtime and wage-an-hour issues. There are two recent U.S. Supreme Court cases that came out that essentially dealt with the same issue, which is overtime to employees who … show up early, in the Tyson case, to put on uniforms, or the Wal-Mart case, they came early because the employer required them to do certain things, and they were not paid overtime for that 15 minutes before or after they clocked out. [In] both of those cases, the Supreme Court found in favor of the employees, and both of those companies have huge liabilities now. … But they are big numbers in the overtime, back overtime wages that they owe these employees. So that 15 minutes, if you are not a salaried employee, can make a big difference if it’s years of accumulation of that overtime, which hasn’t been paid as compensation to those employees.

Affordable Care Act

There are a number of new regulations related to the Affordable Care Act (ACA) that companies and CEOs need to comply with. What kind of recommendations do you have for CEOs listening in?

Bono: I see five pitfalls, and dealing with the Affordable Care Act is like getting the Rosetta stone and trying to translate hieroglyphics. It’s a massive statute that has so many permutations to it, and the regulations are still being written to interpret it. So it’s, in short, a morass. But five pitfalls that are out there are, first, if you miss the five coverage requirements. The act requires five coverage requirements, and I’ll thank my healthcare lawyers for helping me with this, to drill this down. You have to offer the minimum essential coverage, which is a defined term within the act, and we could spend half a day talking about that too. It must be affordable, and there’s a formula that’s created so that you can determine if the cost is affordable. I think it’s 9.5 percent, less the number of employees’ income in the household or something to that effect. Third is the much-covered preventive services without extra costs like copays or cost sharing. Fourth, it must limit the out-of-pocket expenses for beneficiaries, and not have any kind of lifetime limitations. We see people miss in one of those five categories. If you miss, there are penalties imposed by the act and again, there’s a formula based on a monthly one-twelfth of $2,000, and one category times a number of full-time employees. It’s a difficult nightmare that you have to deal with. The other pitfall we see is there is a grandfather provision, and by that the Affordable Care Act gives you the ability to continue to use a healthcare act if it qualifies, which is another issue. But if you have an act that gets grandfathered in, you don’t have to make any changes. The issue that you run into is if you modify that act, you could then take the grandfathered provision out. So you could lose the protection you have from the Affordable Care Act if you change what you’re in. So if you’re looking to give better benefits, cost-effectiveness, it’s kind of … a Trojan horse, the grandfathering, because they give you the grandfathered coverage, but they can take it away if you make any kind of changes to it.

[For] reporting requirements, you have to report to the IRS on two different forms. Most people’s accounting departments are good at that. And the last thing I talk about is the pitfalls as you run into the formidable HIPAA [Health Insurance Portability and Accountability Act], which protects employees’ privacy concerning their medical issues. So those are the four things that jump out to me. There are tons of them beyond that with this act. I hate to say this, but it’s a lawyer’s paradise because it’s going to create so much litigation; it’s going to create so much interpretation; it’s going to create so much regulatory and law enforcement activity. So, looking forward to Affordable Care Act CEO nightmare.

MacFarland: The administration of all this is very cumbersome to these companies, and having a good employee-benefits provider and partner who can help navigate this and help work with your counsel to understand the legal issues is critical, and keeping up with that documentation is a full-time job on its own.

Efstratiades: And some of the smaller businesses … say, “Well, I know that if I have less than 50 full-time employees, I don’t have to comply,” and that test is a difficult one. They cannot really decide that question without a consultant helping them out, because there are all kinds of issues about employees being deemed full-time.

Bono: I just want to say, Tassos’ point ties back to the last conversation we had about who is an employee and who is a contractor. And you get a double-whammy effect of the ACA, plus the new changing landscape for who is an independent contractor. It’s an area fraught with dismay for CEOs, I hate to say.


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