Saturday, April 24, 2010

Will New Health Care Tax Credit Actually Reduce the Number of Uninsured Workers?

More than four million small businesses and tax-exempt organizations may qualify for a new tax credit that is a part of the recently enacted Patient Protection and Affordable Care Act, when its first provision goes into effect this year.

The credit aims to encourage small employers to start offering or continue offering health care coverage for their employees. Up to 35% credit (25% for tax-exempt organizations) on health care premiums is available for employers that (1) pay for at least 50% of the premium cost, (2) have less than the equivalent of 25 full-time workers (this means that an employer with 50 half-time workers may qualify) and (3) pay average annual wages of less than $50,000. The maximum credit goes to employers with 10 or fewer full-time employees with annual average wages of $25,000 or less. There is a gradual phasing out of credit for companies with wages between $25,000 and $50,000 and the equivalent of 10 and 25 full-time workers. Credit increases up to 50% (35% for tax-exempt organizations) in 2014. Credit is applied against income tax, not employment tax, so can only be used by employers that have generated taxable income in any given year.

For example, a company that employs 8 workers, pays $25,000 annual wage to each and spends $40,000 per year on health care insurance premiums may be eligible for a tax credit of $14,000 (35% of $40,000) to be applied in that year against its income tax.

In theory, this tax credit offers a good incentive for successful small businesses (not those operating at a loss but still providing health care insurance to employees) to pay for health care coverage. It will be interesting to see in 2011 how many businesses have actually claimed this tax credit for 2010. This number will show us whether or not this tax credit has achieved its purpose of reducing the number of Americans who do not have health care insurance.

Saturday, April 17, 2010

Reflections on New York Entrepreneurship Week

This week was the week of NYEW - a five-day conference organized by and for the entrepreneurs and start-ups. I attended the Wednesday session as well as two receptions on Tuesday and Thursday night. Let me tell you: the atmosphere in each location where I went was unbelievable: charged with energy, enthusiasm and motivation. I am an entrepreneur as well: I started my law practice three months ago, and am quickly realizing that running a law firm is just like running any other business, - you have to be a savvy and motivated business person first, and an excellent lawyer - close second.

OK, here is some of what I learned: entrepreneurs are a special breed of people who feed on challenge, innovation and are highly motivated to bring the product/idea to launch. They may not necessarily be the best managers, - once their company is established, many prefer to let others manage (hiring professional CEOs, CFOs, VPs of sales, marketing) and go explore and implement a new idea. Actually, venture capital firms that often have seats on the boards of companies in which they invest may very well fire a founder-CEO if they realize that the founder is not the best manager. Once the VCs or other investors invest, the main focus of the company is on maximizing the return on investment for all investors involved (including the founders).

An average company may go through several rounds of investment: first round(s) - seeding capital - would typically come from friends and family and angel investors, the later round(s) would be financed by VCs or private equity firms. So, how do VC choose the companies in which to invest? VCs look for a great business model, but most importantly, they look at the founders. They essentially invest in people who are building the company and hire those who will operate it in later stages of development.

It is believed that the best way to grow a company is through slow gradual success to ensure that the company is always prepared to enter the new stages of its development. If success is sudden and overwhelming, it can collapse the company and turn a success story into a disaster. For example, this may be the case if a start-up does not have sufficient inventory to meet the sudden high demand for its products or services. Another lesson that I learned is that if the market doesn't like the product initially, it never will, so the company is better off spending its money on modifying the product rather than on additional PR and marketing. So, it is important to remain flexible and be ready to change the business plan and/or the product at any time. Finally, VCs prefer to invest in "lean" companies rather than the "fat" ones. Translation: they prefer those companies that don't raise much or any money until they launch the product instead of the companies that have received early financing and have hired too many people, which may slow overall growth due to a shift in focus from implementation to management. And, of course, the valuation of the company is usually much higher once the product is launched.

In conclusion, I want to say that the NYEW events I attended made me an even bigger believer in start-ups and growing businesses - my prospective and present clients -because of the enthusiasm of their founders and the overall spirit of "yes, I can do it!", to which I fully relate.

Monday, April 12, 2010

Follow up about interns

On Tuesday, April 6th, I posted a note regarding the criteria used by the DOL to distinguish interns from employees. Today I read two articles in The New York Times about the widespread misclassification of interns across industries and across the states.

I agree, in the current economic climate, the unemployed are willing to work without pay just to gain the necessary experience, and some employers may profit from this. If the experienced professionals have hard time getting jobs, what about the students? I recently spoke with law students at a recognized New York City law school, who said that even the top students cannot find summer placements or jobs after graduation. The market has changed for sure, but this does not mean that employers can cease this opportunity to get free labor. According to the articles, the Obama administration has stepped up its efforts to crack down on those businesses that use interns as employees. So, to whose who have interns: you should review again the DOL criteria and make sure that the internships your firm is offering comply with ALL six criteria (including the one that requires that employers do not derive immediate benefit from the activities of the interns). Otherwise, - beware!

Tuesday, April 6, 2010

Interns OR Employees?

This time I would like to bring to the attention of business owners an important distinction between interns and employees. Since interns are not paid, it may appear tempting for young businesses to classify certain people involved in their business operations as interns rather than employees, thus avoiding employment-related taxes and fulfillment of the minimum wage requirements. I am listing below the six criteria developed by the Department of Labor that should help identify interns and help avoid businesses a costly mistake of misclassification of their employees.

All of these criteria need to be met in order to qualify students (including individuals participating in school-to-work programs, internships, transition, vocational education, work experience, etc.) as interns instead of employees.

1. The training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school (the student is under continued and direct supervision by employees of the business).

2. The training is of the benefit of the trainees or students. Such placements are not made to meet the labor needs of the business.

3. The trainees or students do not displace regular employees, employees have not been relieved of assigned duties, and the students are not performing services that, although not ordinarily performed by employees, clearly are of benefit to the business.

4. The employer that provides the training derives no immediate advantages from the activities of the trainees or students, and on occasion, operations may actually be impeded.

5. The trainees or students are not necessarily entitled to a job at the conclusion of the training period.

6. The employer and the trainees or students understand that the trainees or students are not entitled to wages for the time spent in training.

If all six criteria are met, the worker is an intern, gaining valuable hands-on experience. However, in practice, some of these criteria are hard to meet (for example, #4 above may be difficult to satisfy once the results of on-the-job training start to materialize). The Department of Labor has confirmed that in these difficult economic times their particular focus is on preventing employers from taking advantage of the unemployed, who are often willing to work for free just to get "a foot in the door". Therefore, extreme caution should be exercised when hiring interns or other unpaid personnel.