As the marketplace continues to shift online, there is an emerging movement to create new ways to pay for goods and services through the internet. Processes such as Google Wallet, Apple Pay, Paypal, and the rise of cryptocurrency are evidence of this trend. Major banks have gotten in on the act too, with Wells Fargo, BB&T, and others developing a system called “Zelle” that allows account holders to make payments using a smartphone.

What legal protections exist for these new methods of payment?  And, how do business owners know that the payments they are getting are secure and legitimate?

At the outset, it is important to note that there is a difference between the new payment applications for smart phones (such as Apple Pay) and cryptocurrency. Advocates of cryptocurrency boast about its security, because it cannot be easily stolen or counterfeited. However, it is important to remember that while cryptocurrency is very trendy right now, it is not backed up by any government – it is a totally new form of currency. In addition, the sharp fluctuations in the values of cryptocurrencies indicate that they are a risky form of payment to accept at this time because no one really knows their value. Investing in a cryptocurrency, such as Bitcoin, is more similar to investing in a stock than actually procuring capital. The value of cryptocurrency, just like shares of a corporation, is subject to the whims of the market, making the future monetary value incredibly difficult to predict. They may go up and they may go down, making it extremely difficult to price goods and services. Of course, that is also true of the dollar (inflation/deflation do happen from time to time), but due to federal regulation of the dollar, it is less susceptible to dramatic shifts in valuation. Moreover, the fact that many forms of cryptocurrency exist and more are being created all the time makes it even harder to really assess the value. Finally, because cryptocurrency is so new, there is not a lot of legal precedent to show what protections exist.

In contrast, money transferred through the other applications mentioned above is backed by the government, and as such, is afforded more legal protection. However, it is important to note that while the internet has made it easier and faster to obtain goods and services, it has also made it easier for criminals to commit fraud because you don’t know who is on the other end of that internet transaction. Therefore, small business owners should exercise caution in embracing these new forms of payment. It is always important to read the terms and conditions for every digital payment method before signing your business up. Knowing what legal protection you are afforded before jumping in will save you a headache in the future if your business ever becomes the victim of a scam. Moreover, obtaining an insurance policy that protects your business against fraud is always a good idea. Finally, if you are in a business that does a lot of internet sales, look into available resources on how you can best protect your company. The FCC’s small business “Cybersecurity Tip Sheet” is a good place to start: https://apps.fcc.gov/edocs_public/attachmatch/DOC-306595A1.pdf

Digital payments are the new wave and many small businesses are benefiting from this shift. But, as the marketplace moves online, make sure that your company is legally protected from the growing threat of fraud. If you have any questions on the legal protections of forms of digital payment, reach out to the SBEC.

The production of hard cider, in recent years, has started to gain popularity. Similar to any business, individuals wanting to produce hard cider will have several questions, such as what kind of entity to become or even whether the cider that will be produce can be tax exempt.

Creating an entity is a huge step for your business. There are several types of entity options, some of which are sole proprietorship, general partnership, LLC, C-Corp, and S-Corp. While there are different types of entity’s, only the S-Corp,C-Corp, and LLC have liability protection.  When picking the entity that is best for your business, a range of questions must be asked. Some of the questions include: 1) do you want to have investors, 2) are all of the people involved in the business United States citizens, 3) how many individuals do you want involved in the business, 4) do you want the have different classes of stock, 5) pass through taxation vs double taxation, 6) leadership of the business, 7) what address will become public record, and 8) who will serve as a registered agent.

Another question many individuals might have when starting a hard cider business is whether the cider they produce will be eligible for a tax exemption. When a business starts producing hard cider from a commercial standpoint, it suddenly becomes, possible, but highly unlikely for a cider producer to be tax exempt. The 27 C.F.R. § 24.76 regulation sets forth two requirements that cider producers must meet in order to be exempt from federal taxation. Many small hard cider business are able to produce cider in accordance with the first requirement that cider be produced solely from the noneffervescent fermentation of apple juice without the use of any preservative method or material. The second requirement in the regulation is, unfortunately, where many small businesses cider are not able to comply because the location has to be “produced at a place other than a bonded wine premises” in order to be considered for tax exemption.

A bonded wine premises is defined as a facility “on which [Cider] production operations are conducted and other authorized operations may be conducted.” 27 C.F.R. § 24.10. Many small hard cider business, regardless of whether it is registered as a LLC, C-corp, or S-Corp, will be producing cider to sell to the general population, and for this reason the facility will be classified as a “bonded wine premises.” Since the facility would be considered a “bonded wine premises” the small hard cider business will subsequently be subject to both federal and state tax. Additionally, in order to comply with the necessary  regulations set out by the Tobacco Tax and Trade Bureau (“TTB”) a small hard cider businesses facility would have to be a bonded winery.

As the popularity of hard cider is on the rise, there has never been a better time than the present to start your business. there are many questions to starting a business. Once all of the questions posed above are answered, you are now ready to make an appointment with the Elon Small Business Clinic to begin the process of creating an entity.

Deduction for Qualified Business Income of Individuals

The new Tax Act allows individuals to deduct 20% of their qualified business income (“QBI”) earned through a partnership, S Corporation, LLC or sole proprietorship with a few exceptions.  QBI includes income from most domestic businesses; however, for taxpayers with income above $207,500 (or $415,000 for joint filers) income from businesses in service fields (e.g., health, law, accounting, consulting, financial services, brokerage services, or any other trade or business where the principal asset of such trade or business is the reputation or skill of its employees or owners) is not eligible for the deduction. So, for high income taxpayers in these specifically excluded fields, there will not be a benefit from this change.

For taxpayers with an income above $207,500 ($415,000 for joint filers) who are not in a specifically excluded field, the allowable deduction is a formula that can get quite confusing. The deduction is either the lesser of (a) 20% of their QBI or (b) the GREATER of either 50% of W-2 wages paid by a pass-through entity, or 25% of such W-2 wages PLUS 2.5% of the unadjusted basis of any tangible depreciable property that is used in the production of qualified business income. So much for the thought that taxes will be so easy you can just fill it out on a post card and send it in.

Limitations on Use of Excess Business Losses

The Act imposes a new limitation on “excess business losses” that prevents individual taxpayers from offsetting more than $250,000 ($500,000 for joint filers) of allowable net deductions (e.g. depreciation, property taxes, and insurance) from entities against businesses against other income not allocable to a business. Excess losses are carried forward as part of the taxpayer’s “net operating loss carryforwards” in subsequent taxable years, and are therefore usable against future income although subject to limitations.

Business Income Tax Rate and AMT

The corporate tax rate has dropped from 35% to 21% for C-corporations. The double taxation that C-corporations face is still in place. The amount that a corporation can claim as a “dividends received deduction” (DRD) from another corporation has also been reduced from 80% to 65% if the corporate payee (person being paid) owns 20% or more of the corporate payor (person/entity paying). If the corporate payee owns less than 20% of the corporate payor the deduction goes from 70% to 50%. While the corporate tax rate has dropped, due to the drop in the amount of reduction from DRD’s, this change essentially makes the tax a corporation pays on dividends received from another corporation to remain close to the same. The new law also repeals the corporate AMT. In the past this tax would apply a 20% rate as part of a parallel tax system that limits tax benefits to prevent large-scale tax avoidance, and corporations would have to pay whichever was higher (ordinary tax or AMT tax).

Expenses

With business expensing the new Act allows taxpayers to immediately expense (rather than depreciate over a period of years) 100% of the cost of certain tangible property that has a depreciable life of 20 years or less and that was acquired and placed into service after September 27, 2017 BUT BEFORE January 1, 2023. While this seems great for business owners, it won’t last forever. 100% of expensing allowance is reduced by 20% per calendar year for qualified property placed into service in taxable years beginning after 2022, eventually going down to 0. This is not available for intangible property.

WHAT SHOULD A SMALL BUSINESS OWNER DO?

The changes and adjustments listed above are just the big picture of some of the larger changes in the new tax bill. There are skeptics who do not believe the new tax bill is doing much, if anything, for the middle class and small business owners; others see it as an opportunity to expand their business based on the new tax cut. These tax changes look promising especially for owners that have employees, since their tax deduction cap may be defined by 50% of what their payroll expense is.

With these changes, pass-through entities will want to reevaluate the benefits of changing their entity to a C Corporation. Converting from a pass-through entity to a C corporation will make the most sense for businesses that generate a fair amount of revenue but do not regularly distribute earnings, particularly if they benefit from “immediate expensing” as noted. You will also want to consider the potential impact of future tax law changes on any conversion of entity. Shareholders of S corporations should be cautious of this with the new Act.

This is a big decision to make and, while the small business owner can switch back to a former entity type if a C-corporation is still not right for you (for a fee in North Carolina), no one should make this change without first consulting an attorney and a CPA or tax advisor. The highlights here are by no means every change that can affect small business owners as each business is unique in the way they operate, the amount of income they have, and the expenses they incur while operating their business.

The need for data security is fiercely growing. The ability to respond to a breach of data security is growing just as quickly. In 2017, 5.3 million North Carolinians were impacted by data breaches. This means about 50% of all people living in this state have been a victim of unauthorized access of private sensitive information. Even strong entities such as Target, Yahoo, Facebook, and Gmail have found themselves, and their users, victims of data breach. With it being almost impossible to feel entirely secure with consumers’ information (or your own), legislators are beginning to focus their attention on how entities must respond in the event of a breach rather than just how to prevent it. North Carolina may be taking significant steps to implement stricter standards that require entities to inform those affected by the breach through the proposed “Act to Strengthen Identity Theft Protections.” For businesses, a breach of data can be a real problem.

There are several dangers of a data breach to businesses. A data breach can leave intellectual property in the hands of others. This is very dangerous because it limits a company’s ability to have trade secrets and to compete in the market. Additionally, consumer trust is inhibited in the event of a breach. Consumers will be hesitant to use a service if the provider allowed their information to be subject to fraud or identity theft. The definition of data breach will be expanded under the proposed Act. The current definition of a data breach does not include ransomware attacks as a breach, but under the proposed Act it would. Meaning, when hackers hold entities computer systems ransom, the entities would be required to notify those whose data is potentially affected. This could substantially alter data security investigations and breach notifications.

The proposed Act will require entities who discover a breach to reach out to those potentially impacted significantly faster than the current standard. Currently the deadline for notification of consumers after a discovery of a data security incident is 30 days. Under the new act the deadline for consumer notification of a data breach would become 15 days– cutting the time in half. Requiring businesses to act fast will place a heavier burden on them, but will allow for those affected to respond more quickly and a larger opportunity for them to mediate the damage. For small businesses that do not have a lot of capital, to be a victim of data breach can be harmful to their business. Having only half the time to investigate and inform their clients of the breach and its extent can become costly. Under the proposed Act, in the event that there is a breach of data to a credit reporting agency, such agency would be required to provide five years of free credit monitoring to affected customers. The current law in place only calls for one year of free credit monitoring.

North Carolina is ahead of the game in regard to such data security provisions. Businesses, as well as consumers, should be aware of these proposed changes.

 

If you think you have fallen victim of a data breach:

1. Contact the affiliated company – necessary to ensure they resolve the problem.

2. Change PIN numbers and passwords – to make it harder for others to access your accounts.

3. Call your bank … quickly – freeze any accounts that are potentially affected. Hours (even minutes!) could cost thousands of dollars with the proper information in the wrong person’s hands.

4. Call the credit bureaus – to ensure that no one has fraudulently obtained credit in your name.

5. File a police report – for your records. Make sure to include all damages in the report and get a copy.

6. Get a copy of your credit report – for your records should any future changes occur.

Social media, two words that consume today’s society. Just as individuals can take advantage of platforms such as Facebook and Twitter small business have the same opportunity. As a small business owner, social media can be one of the best marketing tools available.

There are two main questions to consider when thinking about using social media: why do it and how can I make it effective? First we’ll look at why:

When a business is just starting money can be tight and social media provides a free avenue of marketing. Sending out a tweet or posting to Facebook can be a cost-effective way to get a promotion out to customers, as there is no cost outside of the time spent. While it does not cost to advertise on these platforms, as little as $5 a day can help a business owner tailor their advertisement to the appropriate target market.  Although, spending money to maximize the target market is not required, but it may become beneficial in the long run as customers will be more tailored to the business.
Social media can also allow a business owner to offer better customer service. Many times customers have question, comments, or concerns about a product or a service being offered by a business. When using Facebook or Twitter, the customer has the opportunity to communicate directly with the business on a public format that allows others customers see the quality of customer service provided. Additionally, when businesses provide information to customers about a product or service, the business adds value to what they are doing as they are positioning themselves as an expert in the industry.
Now for the how question:

The true advantage of social media is the ability of business owners to put their own voice into a promotion for the business.  Social media, when used correctly, can help a business grow, but the business needs to tailor their voice to the image they want to project. Social media can be helpful or harmful depending on the image that you project and whether or not that corresponds to the business environment you are trying to create. For example, a law firm may be doing themselves a disservice by posting playful photographs on their social media accounts if they are trying to project an image of a hard work ethic for their clients. On the other hand, a photo of a satisfied client with a quote may go a long way towards boosting the business or an article link that clients may find to be useful. Similarly, a local brewery may benefit from photographs of events (such as tastings or live music) in their space, but they may do themselves a disservice if they post a rant about how frustrating it is to work with the city on permits or another political matter.
Another key point is to understand that not all social media platforms are the same. Thus, what may work on facebook may not work on instagram and vice versa.
In addition, to be extra effective on social media, try to figure out which platform your customers use the most and focus on that one. For instance, if your customers are more likely to use facebook, concentrate your efforts there and expand to others if the opportunity is right.
Finally, social media is massive and it is hard to get noticed. If you really want to boost your social media presence, you have to make strong content on a regular basis and be active. Thus, a restaurant posting pictures of the daily specials or a staffing company posting job openings would be good ways to use social media.
In conclusion, social media is a powerful tool and it is important for all small businesses to have a presence, but before you make the plunge, consider how it can best serve you. Know your customers, know your market and think about ways to tailor your social media presence towards your business goals.

Net Neutrality has been a heavily debated topic on the news and social media for the last several months. One issue that hasn’t received as much attention is how the repeal of net neutrality could impact small business owners. Before tackling this issue, it is important to understand the history of net neutrality. In 2015 the Federal Communications Commission, or FCC, voted in favor of classifying internet services under Title II of the Communications Act of 1934. This reclassification prevented internet service providers, or ISPs, from blocking user’s access to the internet or prioritizing faster access for higher paying users. ISPs were required to report these actions to the FCC as well as geographic information relating to peak times users accessed the internet.

In December, 2017 the FCC voted to overturn these regulations, once again classifying internet access under Title I of the Communications Act. Opponents of the repeal claim that allowing ISPs to act unchecked will harm the everyday user. Without Net Neutrality ISPs will be able to reduce internet speeds for lower paying customers, or outright throttle user’s access to certain websites. Those in favor of the repeal argue that the lack of restrictions will foster competition between ISPs and allow internet service providers to be able to focus on implementing better internet connectivity. One definite outcome of the repeal is that ISPs will be able to provide faster services for higher paying customers, effectively creating a fast lane for users willing to pay extra.

It is unclear what the lasting effects the repeal of Net Neutrality may have. However, the repeal may have a negative impact on small business owners. Allowing ISPs to provide preferential service to certain users could damper a small business’s ability to compete with larger companies. A small business may not be able to afford the same connection speeds as a larger corporation. A lower internet speed could damage a business owner’s ability to connect with customers or deliver web-based content in a timely manner. Slower internet speeds would make uploading content such as pictures and videos a far more time-consuming process, thus damaging the ability for a small business to communicate with clients. These hindrances on internet connectivity will lead to an inability for smaller business to compete with larger businesses, who have the financial resources necessary to secure a faster connection.

Small business owners should keep on the lookout for potential changes to their connectivity to the internet, and statements by the major internet service providers.

 

 

What is the “Save Local Business Act” and what does it mean for small and large businesses?

“Save Local Business Act” (H.R. 3441) is Congress’ second attempt at drafting legislation to reverse the 2015 ruling from the National Labor and Relations Board (“NLRB”) that uplifted a decades-long standard in determining joint employment.  In a case called Browning-Ferris Industries (“BFI”), the NLRB determined that a joint-employment relationship existed because Browning-Ferris had a right to determine employment terms, thereby requiring the company participate in the labor union’s collective bargaining meetings. In its finding, the NLRB expanded the then-existing and well established “direct control” standard to a broad “indirect control” standard. Browning-Ferris Industries of California, Inc. v. NLRB, 362 NLRB No. 186 (Aug. 27, 2015).

The expansion of the rule, which broadened the interpretations of the Fair Labor Standard Act (“FLSA”) and the National Labor Relations Act (“NLRA”) has created uncertainty throughout businesses nationwide. The NLRB has yet to clearly define the indirect standard leaving federal courts struggling to find a uniform interpretation.  In a surprise ruling, the Fourth Circuit broadened the rule even further by looking to the relationship between the companies rather than the relationship between the employer and employee. In doing so, it created the following non-exhaustive factors test to determine whether companies are “disassociated”:

1. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate the power to direct, control or supervise the worker, whether by direct or indirect means;

2. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate the power to — directly or indirectly — hire or fire the worker or modify the terms or conditions of the worker’s employment;

3. The degree of permanency and duration of the relationship between the putative joint employers;

4. Whether, through shared management or a direct or indirect ownership interest, one putative joint employer controls, is controlled by or is under common control with the other putative joint employer;

5. Whether the work is performed on a premises owned or controlled by one or more of the putative joint employers, independently or in connection with one another; and

6. Whether, formally or as a matter of practice, the putative joint employers jointly determine, share or allocate responsibility over functions ordinarily carried out by an employer, such as handling payroll; providing workers’ compensation insurance; paying payroll taxes; or providing the facilities, equipment, tools or materials necessary to complete the work.

Salinas v. Commercial Interiors, Inc., No. 15-1915 (4th Cir. 2017).

Though many cases disputing the new standard have involved unions, the rule is not narrowly applied to union contracts alone. Even small businesses that have no relation to union contracts may be subject to the new standard and could be subject to liability in the event terms of employment are violated.  It is not clear whether the NLRB realized the implications of its determination, but businesses in all industries are weary to enter into contracts for fear of qualifying as a joint employer.

Save Local Business Act adds a new and narrow definition of “employer” to the NLRA and FLSA, and clearly defines the joint employment standard under both federal statutes.  The Act provides that two or more employers only may be considered joint employers if:

[S]uch person directly, actually, and immediately, and not in a limited and routine manner, exercises significant control over the essential terms and conditions of employment (including hiring employees, discharging employees, determining individual employee rates of pay and benefits, day-to-day supervision of employees, assigning individual work schedules, positions, and tasks, and administering employee discipline).

Still, businesses cannot depend on the Act alone in solving the joint employment issue.  Congress failed once before attempting to pass legislation soon after BFI was decided. Though the Act has passed the House with much garnered support, it is expected to face serious obstacles in the Senate.  However, all is not lost in the event the legislation fails.  BFI has been appealed and is currently waiting to be heard in the U.S. Circuit Court. Also, the NLRB is gaining some new faces under the Trump Administration and has already rolled back its interpretation of the indirect standard test.  Before the Board takes action, it will wait to see if Congress is successful passing the Act.  It is also waiting to see if BFI is overturned.  In the event the Act is struck down or BFI’s ruling holds, then the NLRB is expected to promulgate a new rule that clearly defines joint employment that is similar to the original direct standard.

If you own a business and are concerned about whether your business relationships may qualify you as a joint employer, please contact the Small Business Clinic at (336) 279-9217 or businessclinic@elon.edu.

Deciding on an entity type is a decision that can have a big impact on a new business. One of the many reasons that entrepreneurs decide to pursue forming a Corporation or LLC is to protect themselves from being held personally liable for the liabilities of their company. Unfortunately, once the business officially becomes a Corporation or LLC it may still face liability if it does not observe certain formalities.

Some of the formalities that Corporations and LLCs should observe include:

Having Bylaws or Operating Agreements that set forth how the company is operated.
Holding regular meetings and keeping record of the meeting minutes.
Maintaining a bank account for the company and never comingling personal and company funds.
Conducting business under the company’s name and making it clear to third parties who they are doing business with.
Filing taxes appropriately.
Small businesses and individual owners might find these formalities especially onerous. Where there is a single person in a company, he or she may wonder if it is necessary to hold a meeting with themselves and keep minutes of that meeting. While it may feel odd, this formality could prevent the owner from being held personally liable for business liabilities.

In the short term, a business may save a few minutes by not following these formalities. However, in the long term, individuals may find themselves liable for debts and legal claims that could have been avoided.

If you own a business and are interested in discussing the formalities necessary to limit personal liability, please contact the Small Business Clinic at (336) 279-9217 or businessclinic@elon.edu.

 

Now more than ever, consumers are relying on the internet for their retail needs rather than brick and mortar businesses. Major retailers and e-commerce giants such as Amazon and eBay are capitalizing on this trend in spades, but Small and Medium Sized Businesses (SMBs) are not far behind. In the United States, the Federal Trade Commission (FTC) is the primary agency that regulates e-commerce activities. However, there are also state, local, and international laws that may be relevant to your SMB.

If you are a small business owner or considering starting a small business, and you intend to offer your products and services strictly online, it is important that you know the rules, regulations, and standards you have to comply with before you start selling online.

Taxes

Tax issues in e-commerce are centered on what you are selling and where you are selling it from. Every state and country has standards when it comes to taxes, so understanding your target market is important.  For instance, in North Carolina SMBs engaged in e-commerce will need to register for a Sales Tax Permit, when they have a nexus or presence in the state that creates the tax obligation.  A tax professional will be able to give you insights on how you need to charge taxes based on your business’s location, to help you apply for a tax ID, and to advise you on whether you qualify for a sales tax exemption and reseller certificates.

Trademarks, Patents, and Copyrights

Depending on the product you intend to sell, you may want to apply for a trademark, patent, or copyrights. The United States Patent and Trademark Office (USPTO) defines them as the following:

Trademark: A word, phrase, symbol, and/or design that identifies and distinguishes the source of the goods of one party from those of another

Patent: A limited duration property right relating to an invention, granted by the USPTO in exchange for public disclosure of the invention.

Copyright: Protects works of authorship, such as writings, music, and works of art that have been tangibly expressed.

Taking this step before you begin selling your goods online is not strictly necessary. However, if you intend to use a logo, create a unique product, or author a book you should consult a lawyer that specializes in this area of law.  Taking this step will also allow the lawyer to research your use of your trademark, your product, or you literary or musical composition to protect you from liability for infringing on the rights of another person.

Privacy

SMBs engaged in online sales have to worry about safeguarding customers’ personal information, as online businesses are prime targets for data theft. SMBs should develop and provide a privacy policy that consumers can access on their websites. The Payment Card Industry (PCI) Security Standards Council, provides the security standards and regulations for handling and storing your customer’s financial data.  Compliance with PCI standards is vital to the future of your business.

Small business owners also have to be cautious of regulations concerning the privacy of minors. Children’s Online Privacy Protection Act (COPPA), restricts the collection of any personal information from a child under the age of 13.  COPPA regulations may also require a small business owner to utilize age verification tools before checkout, depending on what is sold.

Terms and Conditions

Another way of limiting liability in e-commerce is for SMBs to provide a terms and conditions section, giving notice that buyers are entering into a contract when they purchase goods from your website.  The terms and conditions should provide the shipping and delivery policy, and the return policy.  So that customers know when and how to expect their packages, the shipping and delivery policy should specify timeframes, costs, and any discounts or promotions that are relevant to the goods. The return policy should state whether or not sales are final. If returns are permitted, the return policy should state who bears the cost of return shipping and restocking fees where applicable.

The considerations mentioned above are not comprehensive, but these are things all SMBs need consider before selling products online.  If you are a small business owner or considering starting a small business, please consult with a lawyer and the other relevant professionals to guide you on your way.

If you own a business (or plan to start one), please contact Elon Law’s Small Business and Entrepreneurship Clinic at (336) 279-9217 or businessclinic@elon.edu if you have any questions about navigating the rules, regulations, and standards that govern your online business. 

On August 11, 2017, Governor Roy Cooper signed Senate Bill 407 into law. The bill, entitled the Employee Fair Classification Act (“Act”), will affect North Carolina business owners and their employees. The bill is designed to address the issue of when an employer wrongly classifies an employee as an independent contractor. The Governor said, “This law is an important step in helping workers who are treated unfairly as independent contractors when they are actually employees, and by leveling the playing field for companies who are obeying the law and doing things the right way.”

According to the National Conference of State Legislatures, “[e]mployee misclassification is the practice of labeling workers as independent contractors, rather than employees.” Misclassifying their employees allows a business to avoid obligations like paying unemployment and other taxes on employees and from covering employees on workers compensation and unemployment insurance. Employee misclassification saves a business money through reduced labor costs, but the practice causes employees misclassified as independent contractors to be without the legal protections usually afforded to employees, such as wage and hour laws, workers compensation, and unemployment benefits.

The Act addresses the employee misclassification issue by confirming the creation of an office within the North Carolina Industrial Commission (created by former Governor Pat McCrory by Executive Order in 2015) to investigate companies and discourage the misclassification by employers. To combat the practice the North Carolina Industrial Commission (“Industrial Commission”) utilizes the Employee Classification Section on the Commission’s website to encourage employees to complain of misclassification. These complaints are then provided to the North Carolina Department of Labor, North Carolina Industrial Commission – Compliance and Fraud Investigative Division, North Carolina Department of Commerce – Division of Employment Security, and North Carolina Department of Revenue. Each of these agencies conduct independent investigations to determine whether violations of their operating statutes have occurred. If the agency finds that a violation has occurred, the agency will ensure the necessary enforcement actions under the respective statutes, including fines and penalties.

This newly signed law is a step in protecting employees’ legal protections, but it also means that small business owners must be ever vigilant in ensuring that they are complying with all employee classifications rules. Businesses that misclassify employees to save on labor costs are very likely to be subject fines and penalties. Small business owners that are unsure if they are classifying their employees correctly should seek counsel to help ensure proper classification.

If you own a business (or plan to start one) please contact Elon Law’s Small Business and Entrepreneurship Clinic at (336) 279-9217 or businessclinic@elon.edu if you have any questions about the Employee Fair Classification Act.