Succession Through Gifting: Impactful Gifts for Key Employees

Impactful Gifts for Employees

As we are nearing the holiday season, it is time to consider some of the ways you can give meaningful, impactful gifts to your employees. You may be thinking that gift cards to coffee shops or baskets of chocolates are standard and sufficient gifts for your key employees. But, there are gifts that will empower your key employees with ownership and impact in your company, and will actually return plenty of benefit right back into your business. Ownership gives our employees both the appreciation and motivation that they and your business needs going into 2018. Here are some ideas for giving the gift of ownership this year:

  1. Stock Options. Stock options are contracts between the employer and the employee in which the employer grants employees the right to purchase stock in the company at a predetermined price during a set time period in the future (i.e. “exercise”). This method provides an incentive for employees to work hard because stock options allow them to benefit from the increase in value of the company. In addition, this method provides some liquidity to the company upon exercise.
  2. Restricted Stock Awards. A Restricted Stock Award is a grant of stock in the company in which the employee’s rights in the stock are restricted until the shares vest. Vesting periods can be met by the passage of time, or upon a specific occurrence of a predetermined event often based upon either company or individual performance. If the employee does not meet the conditions the company set forth prior to the end of the vesting period, the shares can be forfeited. This method provides further incentive to employees as well as improving retention of those employees if their shares have the potential to be forfeited.
  3. Stock Appreciation Rights (SAR). This is a contractual right, granted to an employee, to receive a bonus equal to the appreciation in the company’s stock over a specified period. Like employee stock options, SARs benefit the holder with an increase in stock price; the difference is that the employee is not required to pay the exercise price (as is the case for an employee stock option), but rather just receives the amount of the increase in cash or stock.
  4. Equity Bonuses. These are performance bonuses paid in the form of equity instead of cash. This method provides an incentive to employees to meet performance goals while minimizing cash outlays by the company.
  5. Phantom Stock Units. Phantom stock is a promise from the employer to pay a bonus to the employee equivalent to either the value of company shares or the increase in that value over a period of time, upon the occurrence of a predetermined event (i.e. every five years, upon retirement, with change of ownership). There are several different equity or allocation formulas that can be used. The taxation of the bonus would be much like any other cash bonus–it is taxed as ordinary income at the time it is received.

Give gifts this season that will influence your employees in a positive way, and in turn will maximize your business’ potential in the new year.

How to Protect Your Business for Future Succession, Part Five: Using Independent Contractors

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A couple weeks ago, I asked you to consider whether your business is susceptible to employee risks. A popular alternative to hiring employees is entering into agreements with independent contractors. There are both positives and potential risks involved with utilizing independent contractors, and I want to be sure you are thoroughly informed before you staff positions within your company.

Advantages

There are several reasons a business owner might decide to staff their company with independent contractors. Perhaps, it is to simply save some money. Independent contractors might cost you more in hourly wages, but they don’t require the costs of benefits, an office space to keep them, equipment for them to use, and other contributions such as Social Security and worker’s compensation insurance.

Another reason a business owner might like to utilize independent contractors rather than employees is to work under a more flexible business structure. If the workload for your particular business fluctuates often, it will be more economical and efficient if your turnover for workers happens through independent contracts rather than employee turnover. Moreover, your independent contractors are likely to be specifically trained and experienced in the work they do for you, making your need to hire and train employees a worry of the past.

I’m not just here for business advice, though; I’m here to point out the legal threads that run throughout your business structure. Legally, there is a reduced risk of exposure to liability if you have agreements with independent contractors than if you hire employees. Employees, by definition, are protected by specific state and federal laws. This increases the possibility of legal action being brought against you by an employee due to violation of rights. Though we hope to be conducting our businesses in the most ethical and legal way, employee rights can come up against business practices and, in consequence, you as the business owner.

Some of the rights for “at-will” employees that you wouldn’t need to navigate with independent contractors are:

  • the right to receive at least the minimum wage and possible overtime compensation at a one-and-a-half rate,
  • the right to form a union, and
  • the right to quit before the work is completed.

Obviously, the laws that protect these rights for employees are here for a good reason. However, as a business owner, your agreement with an independent contractor is a common-ground to run your business efficiently with limited risks.

Disadvantages

Entering into agreements with independent contractors does not come without disadvantages and risks, however. You will have less control over the quality and quantity of work due to an inherent autonomy that independent contractors have. Employees, who agree to all the details of your business practices upon being hired, can be closely monitored. Independent contractors will essentially be free to work at their own pace, do things their own way, etc. Also, since independent contracts yield quick turnover, you may experience a significant level of disruption in your day-to-day business by having to account for the comings and goings of each contractor.

Now, for the fun part: legal risks that come with hiring independent contractors.

  1. Written Agreements. If you do not have written agreements with people who are contracted to work for you, then put that on your very urgent to-do list. I am faced too often with my clients suffering the consequences of simply shaking hands with a person doing work for them. Even if this contractor is your best friend, or even your spouse, do not go for too long without putting a written agreement in place where you describe some of the most important policies to your business: work flow expectations, rate and amount of pay, non-disclosure or non-compete clauses, termination of relationship, etc.
  2. Many businesses that hire contractors are businesses where workers are exposed to the possibility of injury. Since independent contractors are not covered by your worker’s compensation insurance, independent contractors must be required to maintain their own coverage, or an injury may lead to a lawsuit against you for the contractor to recover damages.
  3. Depending upon your business type, you may be hiring contractors to create work that can be copyrighted, such as writing or creating graphics, then your company may not own the copyright on the work done by the contractor unless you have a written agreement specifically signing that ownership over to you.
  4. State and federal agencies, including the IRS, favor the traditional employer/employee relationship or the less than traditional business relationship with independent contractors. In addition, the insurance company providing your workers’ compensation coverage has the right to audit your books and records on an annual basis. In either case, if you do not have sufficient information to evidence your business relationship with your independent contractor (e.g. written agreement, insurance certificate, etc.) that person will be deemed an employee and you will incur unexpected liabilities in taxes, penalties, interest or additional premiums.

As a small business attorney, I am in the business of educating you about your risks and helping you to minimize them before it is too late. If you want more information about how to minimize these risks with your independent contractors, don’t hesitate to contact me as soon as possible. Prevent problems now, so that you don’t have to recover from them later.

How to Protect Your Business for Future Succession, Part Four: Reducing Employee Risk

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Risk-management is something that I deal with on a daily basis for my clients, old and new. It is invaluable for a business owner to be prepared for any issue that may arise before it actually arises. Some problems come up unexpectedly, and owning a business is truly learning many lessons the hard way; however, there are many safeguards that I recommend my clients put in place to avoid the potential fallout that may come from employee issues.

Have documented and executed policies in place. My office drafts and finalizes many different employee liability documents for both LLC’s and Corporations alike. Here are several of the most common documents I see and recommend to any of my clients who have employees.

  • Employee Handbook. An employee handbook is the most flexible document that you, as an employer, can keep, revise, and distribute as you hire new personnel. Policies included in practically every handbook are:
    1. terms of employment (wages, hours, etc.)
    2. the company’s pay schedule and holidays
    3. PTO policy, employee benefits, overtime pay
    4. sexual harassment policy, drug and alcohol policy
    5. standard of conduct (personal technology use, dress code, etc.)
    6. disciplinary procedures, termination policy

Employee handbooks can also be fitted to suit your company uniquely. For example, if your employees all regularly use company vehicles, there should be a policy in the handbook so that every employee is held to that policy.

  • Employment Agreement. In some cases, an employee handbook is not appropriate for the normal transaction of business for your company. Many business owners opt to have employees sign “employment agreements,” which are more brief and specific in nature. Employment agreements will be tailored to the particular job title and individual, but will include at least the following:
    1. Date of employment
    2. Wages, hours
    3. Job title and description
    4. Confidentiality policies (one for employment terms, one for company information)

Much like an employee handbook, you as the employer have come flexibility with employment agreements to tailor them to your business. Is vehicle use part of this person’s specific job requirements? Include a policy. Will this person have a company-distributed laptop? Include a policy.

  • Miscellaneous policies. It’s always possible that a specific issue or concern will arise in your business, and instead of editing and re-distributing all of your employee contracts, you might want an outstanding document that outlines a specific policy. For example, for many years you may not have needed a vehicle use policy because you, as the owner, were the only employee using a vehicle. If that suddenly changes, and you are needing one or more of your employees to drive a vehicle for business, write up a single document policy and have them sign it.
  • Employee acknowledgements. Once employees have been given time to review any of your documented policies, they should sign and acknowledge that they have read and agree to the terms set forth. You should always keep signed copies of these documents for your records.

With business growth comes a lot of liability, especially if you are hiring employees. Step out in front of any issues you foresee, such as a sudden need for company vehicles or employees becoming lax about showing up to work on time. If you wait too long, you may end up with complaints and maybe even a lawsuit on your hands, costing your business a lot of time, money, and reputation.

Remember: Complaints don’t just come from outside your business, but inside too. Be attentive to your clients’ needs as well as your employees’ needs; protect yourself from any fallout arising from internal conflict or maybe even an ugly termination situation.

Protecting Your Business for Future Succession: a Recap

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This year, I’ve hoped to inspire to look ahead at the growth and succession of your business. Let’s take a look back at the recent tips for protecting your business for future succession:

Part One: Choosing a Business Entity

  • Both Illinois and Missouri have several options for forming a business entity. Your business is going to fall under the umbrella of an LLC or a Corporation, both requiring different forms to file and different structures through which to run the business and protect the business’ assets.

Part Two: Choosing the Right Insurance

  • At Sparks Law Office, P.C., we are all about minimizing risks. One surefire way to do so is by making sure you and your business are covered by adequate insurance. Whether you have clients, employees, contractors … your business depends upon the time you take to be proactive.

Part Three: Performing a Business Audit

  • A business audit is another proactive measure to ensure that your business is accountable to it’s own bookkeeping, and the value of your business is upheld to the highest standard possible.

Keep a look-out for our upcoming posts about business succession in parts four and five!