THE FEDERAL SHUTDOWN: OPTIONS FOR GOVERNMENT CONTRACTORS WITH RESPECT TO EMPLOYEE PAYROLL

The negative impacts of the federal government shutdown on government employees and government contractor employees have received a great deal of attention.  However, the dramatic impact of the shutdown on private government contractor employers has received less press.  This article will discuss some of these impacts and provide some mitigating ideas.

Impact on Employers (FLSA Issue)

Based upon prior shutdowns, private sector employers can expect that they will be not be paid for services provided by “non-essential” employees on government contracts.  This will have a crushing effect on employers that supply predominately non-essential personnel, and in particular, firms employing fewer than 100 employees.  Most of these employers will not be able to afford to pay or to retain their employees due to reduced cash flow, and may be forced to terminate large numbers of their workforces as the shutdown drags on.  While the Congress is the principle culprit, the problem is dramatically compounded by The Fair Labor Standards Act (FLSA) (29 USC §201 et seq.; 29 CFR Parts 510 to 794).

The FLSA establishes standards for minimum wages and overtime pay for virtually all employers in the United States.  Under the FLSA, certain categories of employees are classified as “exempt” from the minimum wage and overtime requirements of the FLSA.  Many employees of small government contracting firms, including certain skilled computer professionals, are classified as exempt (salaried) and, therefore, are not entitled to overtime wages (time and one-half).  Whether such classification is appropriate is the subject of another article, although it is worth noting that many employers mistakenly misclassify employees as exempt, and can incur significant liability in back-pay, liquidated damages and attorney’s fees by making this mistake.  

Exempt Employees Should Not Work Partial Weeks

Under the FLSA, exempt employees must receive their full salaries for any week in which they perform any work at all.  29 C.F.R. §541.602(a).   If an employer fails to pay such full weekly salary to its employees, the employees can lose their exempt status and can be eligible for  overtime pay during the time period in which they were not paid their full salaries correctly, if they worked any overtime during that period.  29 C.F.R. § 541.603(b).  Indeed, if only some employees are not paid their full salaries correctly, then all employees in the same job classification working for the same managers who made the decision to pay some employees incorrectly lose their exempt status for the same period of time, and can be eligible for overtime.  Id.  In more normal business circumstances, this “group” loss of exempt status for mistakenly docking one employee’s pay for a partial-day absence, for example, can be an enormous problem for any business.  However, in the context of a government shut-down, when few employees are likely to work enough hours to be eligible for overtime (more than 40 hours per week), the problem may be less serious.

The flip-side of the “full-salary-for-any-work-during-a-work-week” issue is that FLSA does not require an employer to pay exempt employees at all during weeks in which the employees do no work at all.  However, even a few hours of work can trigger a full week’s pay.   Thus, diligent employees, who work from home on a company laptop or personal computer  to keep up with their workloads, answer a few emails, or  make a few business calls, will  trigger the full week’s pay requirement, whether they meant to or not.   This is a requirement that cannot be waived, no matter how voluntarily the employee may perform the work, and no matter what the employee says or signs.  Rights under the Fair Labor Standards Act cannot be waived except with approval by a court or the US Department of Labor.   Therefore, some employers are requiring their employees to turn in their laptops, cellphones, electronic devices and any work documents.  They are instructing their employees not to perform any work without written authorization. 

In contrast to salaried (exempt) employees, hourly (non-exempt) employees must be paid for all the hours they work, but do not have to be paid anything more than that.  During a shut-down, this makes it easier for companies to permit hourly employees to do small amounts of work that may be important to the business without incurring the cost of a full-week’s wages for the tasks  performed.  For morale purposes and to treat employees consistently across the board, however, some employers are instituting a no-work policy for all employees, since there will likely be no reimbursement from the government for services provided. 

The timing of the shutdown is problematic for employers, as exempt employees who worked on Monday, September 30, 2013, but not the remainder of the week, are still entitled to receive their full weekly salaries for the week of 9/30 to 10/4.  Furthermore, if the shutdown concludes mid-week and employees return to work, employers will be required to pay exempt employees their full weekly salaries for that week, as well. 

Accrued Leave Benefits, Unpaid Leave or Termination

Many employers are requiring exempt employees to use up any accrued leave during the shutdown, which is permitted by law.  This does not help a company’s current cash flow problem, since money is still being paid out to employees when no revenue is coming in.  However, at least it holds the promise of greater attendance (and therefore, greater productivity), when the shut-down ends and there is plenty of work again.  Even so, as the shutdown continues, many employees will exhaust their accrued leave.  In that event, the employees must still be paid their full salaries for any week in which they perform any work.  Some employers have leave policies that permit employees to carry a negative leave balance, and this can help during the shut-down, since it extends the time the employee can be required to be at work and forego vacations when the shut-down is over.   In more normal circumstances, of course, such policies can pose problems, since employers are unlikely to be able to recoup the unearned leave they paid out, if the employee terminates before he or she has “earned back” the time.  At the very least, it is wise for negative leave policies to restrict the circumstances under which employees can incur negative leave balances, as well as provisions for how employees will repay the money if they resign before they have earned back the leave.  Some employers are allowing employees to donate and pool accrued leave to help fellow employees.  This can help even out large leave balances across a spectrum of employees and produce greater productivity when the shut-down ends, but still leaves the employer with the same cash flow problem that the shut-down created in the first place. 

Employers with benefits policies may also be required to continue paying the costs of the employee benefits (including health care), depending on the terms of their plans.  Employers should check their plan’s definition of an “eligible employee.”  Often this depends on how many hours the employee works.  If the employees’ hours drop below the plan’s minimum, this may be a triggering event under COBRA.  In that case, the employer may not have to continue paying employee premiums; however, the cost of continuing coverage would be shifted to the employees just at a time when they could least afford to pay their premiums.   There may be no good answer here.   At the very least, leave policies should be amended to accrue leave based on hours actually worked, not more general definitions of “service.” 

Employers who have “at will” employees have the option of terminating such employees, but that may trigger payment of accrued leave in a lump sum (causing even greater cash flow problems), as well as shifting the cost of benefits premiums to the employees under COBRA.   Furthermore, the employer may lose the goodwill of the employee, and may have more difficulty re-staffing its contract when the shutdown ends. 

Employees who are terminated for lack of work will be eligible for unemployment benefits if they remain unemployed for more than a week or two.  This may cause the employer’s unemployment insurance tax to rise.  However, employees who suffer a dramatic cut in hours can also be eligible for benefits after a few weeks, so the advantages of termination compared to lay-off or furlough may be little to none.

Reclassify Employees as Non-Exempt

What is the solution for dealing with exempt employees?  One creative option that is being recommended to employers is to prospectively (not retroactively!) convert its “exempt” employees to “non-exempt” (hourly) employees for the duration of the shutdown and until the first full week of work thereafter.  The employer will have to notify the employees of the conversion, specify each employee’s hourly rate, and pay overtime to any employees that work more than 40 hours in a given week in the interim.  Upon the resumption of the first full week of work after the shutdown ends, the employer can re-convert its employees to exempt status and return them to their previous salaries. 

This option is not without some risk and should be implemented in close consultation with an attorney to ensure that it is appropriate for the employer, that state laws do not prevent this solution, that proper notices are given, and that overtime wages are paid.  Employees who do any work at all must be required to keep accurate track of their hours, and must be paid overtime if they work more than 40 hours in a given week.  Employers should also make sure that their handbooks contain provisions required by the US Department of Labor regarding paycheck deductions in order to minimize any possible liability in the event of inadvertent errors in pay processing.

Other Shutdown Issues

This article does not cover all of the problems currently being experienced by government contractors.  Employers must understand that each state has its own laws regarding hours and wages, and the FLSA does not solely control how employers should pay their employees during the shutdown.  Some larger employers may be subject to the federal WARN Act, which creates an entirely new set of rights and responsibilities for employers affected by the shutdown.  Furthermore, employers must take into consideration the fact that employees may not agree with or appreciate the solutions that work for the employer (for example, the mandatory use of vacation benefits), and there may be other unintended consequences of the employer’s actions.   

This article was prepared by Gross & Romanick, P.C, in consultation with Beth Wolffe, Esq., of The Wolffe Law Firm.    

2013 © Gross & Romanick, P.C.

      

  

Your Neighbor's Tree and Your Rights

Northern Virginia is a hotbed for disputes between neighbors relating to trees and vegetation.  This is an unfortunate result of suburban development into forested areas, as well as the proliferation of planned subdivisions containing trees that have reached (or are nearing) adult maturity.  Our firm regularly receives calls from home owners asking the same question: What are my rights with respect to my neighbor’s trees?

In 2007, the Supreme Court of Virginia entered a landmark ruling on tree disputes in the case of Fancher v. Fagella.  In that case, a homeowner in a townhouse community brought suit against his neighbor in the Fairfax County Circuit Court alleging that the invasive root system of a tree on his neighbor’s property was damaging his property.  The homeowner asked the Circuit Court to order the neighbor to remove the tree and to pay for the costs of restoring his property.  Based on previous tree cases decided in Virginia, the Circuit Court refused to order the removal of the tree.  However, the Virginia Supreme Court reversed this decision and established a new legal standard by which tree cases are to be decided by Circuit Courts in Virginia. 

The Supreme Court ruled that encroaching trees and plants may be regarded as a nuisance when they cause actual harm or pose an imminent danger of actual harm to adjoining property. If such harm or threat of harm exists, the owner of the tree or plant may be required to remove or cut back the encroaching branches or roots of a tree and compensate the adjoining property owner for damages.  The Supreme Court also reaffirmed the existing “self-help” law in Virginia which permits an adjoining landowner, at his/her own expense, to cut away any encroaching vegetation to the property line, whether or not the encroaching vegetation constitutes a nuisance or is otherwise causing harm or possible harm.

It is important to note that a Court will only order a property owner to remove or cut back encroaching branches or roots after “weighing the equities” of the case.  The Court will consider the relative benefit an injunction would confer upon the aggrieved neighbor in contrast to the injury it would impose on the property owner.  If the aggrieved party can be made whole by exercising self-help to the property line and receiving an award of damages from the tree owner, the Court may not order removal of the tree.

If you have a tree dispute with a neighbor, the attorneys at Gross & Romanick, P.C. can assess your case and provide you with a thorough cost-benefit analysis of your various options, including filing a legal action. 

Should Your Business Buy or Lease Its Location?

(Note:  This is a “guest article” co-authored by Verity Commercial, LLC and Gross & Romanick)

A common question asked by business owners to their attorneys and real estate advisors is whether it is wiser to buy or lease property for their business.  Much to their dismay, we usually answer with the infamous “it depends”, as the answer to the question hinges on a multitude of factors, both qualitative and quantitative, that are unique to each client. 

 

Some of the qualitative factors to be considered by the business owner include the following:

·               Long term business goals

·               Potential for business growth and expansion

·               Need for capital financing

·               Anticipated return on already invested capital

·               Previous costs of occupancy

·               Resources applied to occupancy

·               Risk aversion

Some of the quantitative factors to be considered by the business owner include the following:

·               Initial cash outlay

·               Fixed and variable costs

·               Anticipated appreciation

·               Tax treatment (consult accountant)

There are definite advantages and disadvantages to owning property versus leasing property.  Some of the advantages of owning the real estate in which the business operates include the following:

·               You are your own landlord

·               Greater business stability

·               Control over variable costs of operation (maintenance, repairs, insurance, utilities, etc.)

·               Potential for long term gain with appreciation

·               Ability to lease space to third parties

·               No annual increase in occupancy cost

·               Deduction of depreciation (consult accountant)

At the same time, there are definite advantages to leasing property, including the following:

·               Smaller up-front cash outlay

·               Limited responsibility for property management

·               Greater flexibility to relocate/expand/contract

·               Deduction of rent as business expense (consult accountant)

·               No risk of depreciation

·               Can negotiate an option to purchase

It is important that you consult with your attorney and real estate advisor before making a decision with respect to buying versus leasing.    

The law firm of Gross & Romanick has extensive experience in real estate leasing and purchasing transactions. 

Verity Commercial is an experienced leasing and sales brokerage firm, which can be reached at 703-435-4007 or ktraenkle@veritycommercial.com. 

Purchasing Your Place of Business: The Importance of Establishing a New Entity

At one time or another, most commercial business owners will consider purchasing the real estate in which his or her business operates.  Such a major financial commitment requires careful consideration of the economic advantages and disadvantages of owning commercial property, both short-term and long-term.

We advise our business clients to approach the real estate acquisition as a separate venture from operating the existing business.  While it is true that purchasing one’s place of business can provide stability to the business and directly benefit the bottom line of the business in many ways, it is also a long-term investment with a unique set of liabilities, benefits and risks.  Accordingly, we generally advise that the business owner establish a new legal entity to acquire the real estate and lease it to the business under commercially reasonable terms.

On the most basic level, separating the business from the real estate entity minimizes the risk that losses incurred by one entity will negatively impact the other entity.  If the business begins to operate at a loss, the owner can scale back or close the business and lease the property to another company (hopefully, at a profit).  In most cases, creditors of the business will not be able to seize the owner’s interest in the real estate entity.  Similarly, if the real estate declines in value or an accident occurs on the property resulting in significant liability to the owner, the business will not suffer as a direct result. 

There can also be tax advantages to separating the business entity from the real estate entity, most notably that the business can deduct its rental payments to the real estate entity as a business expense. We always advise our clients to consult their CPAs before establishing the real estate entity to determine the best way to experience tax savings.

If you are considering purchasing your place of business, it is important that you consult an experienced attorney to discuss how to protect your business from your new investment, and vice versa. The attorneys at Gross & Romanick, P.C. have many years of experience advising business clients on real estate matters and can assist you throughout the process.  

Personal Injury Rewards and Your Insurance Policy

One of the most difficult parts about suffering an injury from automobile accident is determining whether your insurance company, which paid for your medical bills, is entitled to reimbursement from you out of the settlement or payment after judgment.  Laws on this issue vary from jurisdiction to jurisdiction, and it is very important to understand what laws apply to you and your policy.  In addition, a recent United States Supreme Court decision may have clouded the waters even further.  Figuring out what the applicable insurance regime is and how to comply with the correct set of rules is a very important part in the process of making yourself whole.

In some jurisdictions, when a health insurance company pays your medical bills, the health insurance company has a right to recoup its expenditures on your medical bills from any compensation you receive from your personal injury claim.  This recoupment is called “subrogation."

If your insurance policy is written under Virginia law, your health insurance company does not have a right of subrogation.  A Virginia statute prohibits insurance policies that allow an insurance provider to subrogate “any person's right to recovery for personal injuries from a third person.”  Virginia’s “anti-subrogation” statute applies only to insurance policies arising under Virginia law.  However, even in Virginia there are federal laws, such as ERISA and national labor contracts that are superior to the Virginia “anti-subrogation” statute, and would, therefore, permit the insurance company to recoup its payments toward medical bills. 

Insurance policies written under the federal Employee Retirement Income Security Act (“ERISA”) allow subrogation.  ERISA also applies to health insurance plans which are self-funded, allowing employers to pay for medical treatment of their employees themselves instead of using an insurance provider.  Under ERISA and in jurisdictions with similar laws, insurance companies have a right to subrogation.  Therefore, if an insurance policy arises under this type of regime and the personal injury victim receives compensation, the health insurance carrier or the self-funded employer is entitled to subrogation.

Unfortunately, there are rare circumstances when these subrogation rights may result in the personal injury victim owing money even after receiving a damage award from a settlement or through a trial, which is what happened in the recent Supreme Court case United Airlines v. McCutchen.  In that case, an airline employee received his health insurance through his employer’s self-funded ERISA plan.  The policy was silent as to whether the airline should help pay for the employee’s legal fees in the personal injury case.  The employee won a monetary award, but the award was less than the amount he netted from the case after he paid his attorney’s contingency fee and litigation costs.  However, applying equitable principles of law, the Supreme Court interpreted the policy’s silence on the subrogation issue  to effectively reduce what the airline could recover based on a pro rata share of the legal fees and remanded the case for further proceedings.  The Court did not want a beneficiary of an insurance policy to become a collection agent for the insurance company absent a clear provision allowing such agency in the policy.

In response to this case, to avoid having their subrogation amount reduced to cover pro rata legal fees, many insurance providers are editing their policies to protect their full subrogation rights without an equitable apportionment of legal fees and costs. 

If you are injured in a traffic accident or other type of accident, it is imperative that you hire an experienced law firm, such as Gross & Romanick, P.C.  We will help you to navigate your insurance policy and enforce your rights.  Call us at 703-273-1400 or send us an e-mail to law@gross.com.  Visit our website at www.gross.com and download our Personal Injury App to your cellphone or iPad.