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Independent Contractors: What’s the Difference Between an Independent Contractor and an Employee?

Many small business owners would like to know when they can hire an “Independent Contractor” vs. an “Employee.” This article is a modest effort to help clear things up a bit.

What IS an “Independent Contractor”?

First and foremost, and Independent Contractor is a business just like any other in Washington. That means the contractor must have, at minimum: (a) a Uniform Business Identifier (UBI) number, (b) a WA state business license (c) possibly also a business license in the city or town where it conducts business, and; (d) a special license for the type of work being done if a license is required for that trade.

The UBI number establishes an account at the state Department of Revenue – as a business, the Contractor pays Business and Occupation (B & O) taxes.

Let’s say Jane Doe considers herself an independent contractor. She’s an electrician, and a sole proprietor. She advertises her business, makes bids on jobs, is her own boss and sets her own schedule. She owns her own tools. She is a duly trained and licensed electrician. She has a UBI number and a state business license. Jane works in Seattle, so she also needs a Seattle Business license. Since her business is in King County, she should also be registered with a Personal Property account with the King County Assessor’s Office and may (or may not) owe personal property tax on business equipment. Jane’s business is subject to state B & O taxes on gross income. For federal income tax purposes, she may owe Self Employment (SE) tax (similar to tax withheld from a paycheck).

Now let’s look at John Doe. John also considers himself an independent contractor. He’s not an electrician, he is a yoga instructor in Seattle. His friend Mary runs a yoga studio, and John teaches classes there 3 days per week. Mary sets his schedule, and decides which classes he should teach. He does not advertise his services; instead, he relies instead on Mary’s marketing of the studio. He does not have a business license or a UBI number. Mary pays him cash. Both John and Mary are happy with this arrangement.

Is John really an independent contractor? No. Does it really matter, since he’s happy being called an independent contractor? Yes, it matters. If the Department of Labor & Industries (or the IRS) determines that John is not actually an independent contractor, that means he is Mary’s employee, and Mary (or her company), will be liable for paying John’s employment taxes that should have been withheld, will be liable for paying into the state worker’s compensation fund for employee John, and may owe other taxes and fees. Note: for Labor & Industries, a worker is presumed to be an employee unless it can be proven otherwise. This puts the burden on the business owner to show that the worker is listed and paid correctly.

Moral of the story: just calling yourself (or your worker) an “Independent Contractor” does not make it so.

Why is Jane and “independent contractor” and John is not? Because Jane meets the criteria that are used to define an independent contractor. If you are looking to hire an independent contractor, you must look for these criteria. The worker is an independent contractor only if she meets all 6* of them: (1) the worker is free from your “direction and control” (that is, you do not control the means and methods for how to get the job done); and (2) (a) the person performs a service that is outside the course of your business, or (b) the service is performed away from your location or job site, or (c) the contractor is responsible, in contract and in fact, for the costs of her own principal place of business; and (3)(a) she is engaged in her own business of providing the services you are looking to hire for, or (b) she has a principal place of business that qualifies for an IRS business deductio; and (4) she complies with IRS rules for filing a business tax return with the IRS, and (5) she has an active UBI number with the Washington Department of Revenue, and (6) she maintains her own set of books and records showing business income and expenses.

*In addition, those in certain construction trades must also (7) have a valid contractor registration per RCW 18.27 or 19.28. Jane also meets this test.

Washington’s Department of Labor and Industries wants people to understand the rules and the criteria for independent contractors, and has published a handbook to help explain things. It can be found at: http://www.lni.wa.gov/FormPub/Detail.asp?DocID=2134

The Handbook discusses the basic criteria listed above. The Labor & Industry criteria are similar to the ones used by the federal Department of Labor. It is important to understand these criteria, because they are what the relevant agencies will look at. Knowing what the agencies use to define “independent contractor” will help minimize problems for your small business. The last thing any business owner wants is the surprise of extra costs; so get educated about the difference between “independent contractors” vs. “employees”, and plan accordingly.

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Affordable Care Act Basics (“Obamacare”) for Washington State Residents

1.What IS it? The AFA is a federal law designed to help people get medical insurance coverage.  For employers who have 50 or more Full Time or Full Time Equivalent (FTE) employees, it is mandatory to provide affordable health insurance or else pay a tax penalty. For everyone else, it provides a route to obtaining insurance through “insurance exchanges”, which function as an open marketplace for you to shop for insurance.  If you can afford coverage but nonetheless choose not to obtain it, you will owe a tax penalty.   The tax penalties start small, but increase over time if you continue not to get insurance.  Of course, if you don’t get insurance, you will also have to pay out of pocket for your medical expenses, so it’s smart to get coverage.  See http://www.healthcare.gov

2.What do I do if I’m Self-Employed? Use the insurance exchange. WA is ahead of many states in getting set up. See http://www.wahbexchange.org/ and http://www.wahealthplanfinder.org/

3.What IS a health insurance exchange? It’s a way for health insurance companies and persons seeking coverage to connect (the federal government calls the exchanges “the Marketplace”). To get in, you have to sign up during open enrollment (currently October 1, 2013 to March 31, 2014). The insurance companies make their coverage options available to individual members of the insurance exchange. In WA, the process is arranged via the state government. The insurance companies get to sell coverage plans to a much larger customer base and thereby lower the underwriting risks, and individuals get to sign up for coverage if their employer (or spouse’s employer) does not already make it available.  There are a variety of coverage options, and like any marketplace, the coverage options may change with the amount of money the customer is willing to pay.

4.What do I do if I own small business that has less than 25 employees? Must I provide health insurance? No. But if you want to, great! If you want to provide insurance but think your company can’t afford it, the company may be eligible for tax breaks on the employer portion of the insurance premiums to help out.  Employers with 25 or fewer employees are generally also eligible to obtain policies for their employees via the “Small Business Health Options Program” (SHOP). In WA SHOP is available through http://www.wahealthplanfinder.org/

5.What is “affordable” health insurance? If your company provides insurance, it is “affordable” if the employee’s premium is no more than 9.5% of the employee’s household income. Because you may not know your employee’s household income, a good practice is to have the employee’s share be no more than 9.5% of what you pay the employee as reported on the W-2 issued by your company.

6.I’ve got a pre-existing condition; can I still get coverage? Yes!

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Got Employees or Thinking of Hiring? Here are Some Basics You Need to Know- Part 1

Interviews and New Hire Paperwork: Most employers are aware that there are some things they cannot ask in an interview.  For example, generally speaking, interviewers cannot ask about an applicant’s medical history.  Americans with Disabilities Act (“ADA”) 29 U.S.C. § 706 et seq. But it is permissible to ask if an applicant can meet the physical requirements of the job. (See also ADA).  So, for example, if the job description includes lifting 50 lbs or more on a daily basis, it is ok to ask if the applicant can meet that job requirement.  It helps to standardize the process with a list of questions to be asked of essentially all applicants, with some variation on questions focused on particular job requirements of each position.

When you are ready to hire the applicant, you are required to obtain proof that the applicant is legally eligible to work (i.e., citizens, and foreign citizens authorized to work in the U.S.), and complete federal form I-9.  This has been required since 1986, and the federal government has lots of helpful information regarding which documents are acceptable to prove both identity and eligibility to work.  See, e.g., http://www.uscis.gov/files/form/i-9.pdf.    As an employer, you are required do more than just take the applicant’s word that they are eligible to work.  The United States Citizenship and Immigration Service (“USCIS”) now has an “E-Verify” program to verify the applicant’s eligibility; participation in E-Verify is free.

Once you have the appropriate documentation, federal rules require the employer to retain copies for 3 years during the employee’s time with the company; if the employee is with your company for less than 3 years,  the documents must be kept for one year after the employee has left the company.  The documents do not get filed with the federal government, but the company must retain them in the event of an audit or review.

For companies in Washington State, take note that a New Hire Report form must be filed with the state’s Department of Social and Health Services (DSHS), within 20 days of hiring an employee.  The information is essentially the same as for an employee’s W-4 form (for the IRS).  The penalty for delaying or not filing the New Hire Report form with DSHS can add up: $25/month per employee. If the employer and employee conspire in the failure to file the document, the fee is $500.  RCW 26.23.040.

Given the myriad rules, it is extremely helpful to use a checklist; work with an HR consultant or lawyer for more information and to develop a checklist that works for you.  Also consider using a payroll service; such services can help manage the paperwork, freeing you up to focus on the main work of your business.

Non-Exempt v. Exempt Employees: You have undoubtedly heard the terms “non-exempt” and “exempt” employees.  This refers to whether the employee is covered by various wage and hour rules, including the federal Fair Labor Standards Act (“FLSA”).  Generally, employees who are paid on an hourly basis (not a fixed salary), are “non-exempt”, which means the wage and hour rules for minimum wage, calculating overtime, break times, etc. apply to these employees.  In contrast, many salaried and managerial employees are “exempt”, and are generally not subject to the same set of rules.  For example, managerial employees are not statutorily entitled to overtime pay (you can, of course, negotiate in the manager’s employment contract to provide comp time, vacation, sick leave, personal leave, etc., but those are provided by contract, not required by statute).

Work Environment: Even in “at-will” employment states like Washington, it is illegal to discriminate against employees on the basis of race, creed, color, national origin, families with children, sex, marital status, sexual orientation, age, honorably discharged veteran or military status, or the presence of any sensory, mental, or physical disability or the use of a trained dog guide or service animal by a person with a disability. See, e.g., Washington Law Against Discrimination. See RCW 49.60.180 et seq. There are some exceptions “if the particular disability prevents the proper performance of the particular worker involved.”  RCW 49.60.180(1).  The goal is to avoid discrimination while also recognizing a business’s legitimate needs.  It can be a delicate balance, so when in doubt, consult an HR professional or your lawyer.

Employment Contracts and Handbooks: Many employers have written employment contracts setting out some details of the terms of employment, such as the job description, salary, leave time accrual method, non-solicitation, non-disclosure and non-compete clauses, etc.  Many employers also have employment handbooks, which serve as a guide to the employer’s standards of behavior and job performance.  Not all employers use formal written contracts or handbooks; it really depends on the needs of the employer, the sensitivity of the job or position, and other factors.  If you are interested in using an employee manual, note that an employer can be bound by certain promises made in the handbook.  When a manual sets expectations that employers have of employees, it can also set expectations that employees have of the employer. It is wise to consult with an HR consultant and/or lawyer when considering using written employment contracts and handbooks.

This is just a fraction of some of the rules governing employment. Stay tuned for Employment Basics – Part 2.

Disclaimer: This article is for general information only and is not to be construed as legal advice.  Consult an attorney for guidance regarding your specific situation.

©2012 Law Office of Susan K. Fuller, PLLC

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Keeping Your Business Healthy With Legal Checkups

What is a “legal checkup”? It’s an annual checkup for your business.  Just as with your personal health, things change and checkups catch issues before they turn into serious problems.  A legal checkup is important in keeping your business healthy.

A.      Review Your Entity Status

Is your company’s “entity” status still the right form for you? If you are not incorporated, should you be? If already incorporated, have you been holding annual meetings among the owners? Have you documented action taken during the meetings? When you have a lawyer review your company’s documents, those loose ends can be addressed.

Thinking about adding a new member to the ownership team? Your entity documents should address this – Is a procedure specified?  There should be.  And if there is, the procedures must be followed or else there may be objections later on if disputes arise among the owners.  Think of documents such as your company’s by-laws (if a corporation) or operating agreement (if an LLC) as a contract between owners.  It may need to be updated to reflect new owners, changes you want to make in structure, etc.

If you are a single-member LLC, and are thinking of bringing in another owner, you need an operating agreement in place.

If your company is an LLC and you are planning to be taxed as an S-Corp, does your existing operating agreement reflect this?  There are a few things that can happen to cause your company to inadvertently lose its S-Corp status, and your operating agreement can help protect against that.  Your lawyer can address these issues and help keep your company protected.

B.  Licensing

Has your business changed, such that you are working with different kinds of customers?  If so, you may need a new license for the type of work you are now doing.

For example, if you are an interior designer, do you provide products to your customers? You may need a reseller’s license, otherwise you may be liable for sales tax for what is sold to your customers.

If you are in the construction trades and worked for another company (even as an owner), do you have the right license?  Do you now need a General Contractor’s or Specialty license in your own name? You may not be sure of what you are supposed to do.   Your lawyer can address this in a checkup.

Have industry requirements changed? Are you in compliance?  For example, for painters and remodelers, 2010 marked a big change, with the implementation of “RRP” rules (Renovation, Repair and Painting), applicable to work on buildings constructed before 1976.  The rules include specific precautions to contain possible lead dust. Washington’s Department of Commerce is enforcing the EPA’s rules on RRP and there can be hefty fines for non-compliance.  Sure, you may have your RRP certification, but do you have the right paperwork to give your customers?  You are working hard and don’t have time for the paperwork, but these things can be streamlined.  Your lawyer can help set up a process to make compliance easier.

C.  Contracts

Are your company’s contracts up to date?   Have there been any changes in caselaw or statutory law that might affect them?

Do you have a risk exposure that you were not previously aware of?  For example, if you are an engineer or an architect, did you know that recent decisions by the courts affect how well your contracts might protect you?

Do your contracts address issues that you are concerned about?  You may have learned from business experiences over the past year or two of a few issues that might be better addressed in your contracts – such as payment schedules, etc.

There are many other issues which come up with contracts, including making sure you know of important automatic renewal dates (is there a vendor you’re unhappy with? Don’t get locked into another contract term by failing to notify the vendor by the deadline); warranties and maintenance schedules (was a vender supposed to update your equipment annually? Has it done so?)

Who writes your contracts?  Is it a form that gets filled in a by a salesperson? What terms can the salesperson change?  Do you have an internal review process to make sure you are tracking what the salesperson is committing the company to do?

Determine whether there are business relationships not covered by a written agreement, but which should have a written agreement.  For example, are there long-time customers you started with on a handshake basis?  Family members with whom you initially felt squeamish about discussing business terms and contracts? Things happen. It’s prudent to get those relationships formalized in a written contract.

D. Leases

Leases are contracts, and have a full set of complications of their own. If your company is planning to lease space, it may need guidance on key issues. How long is the lease term? Is it automatically renewed or not? How much notice will you want to give in case you want to relocate?  Should the lease be assignable in case you don’t want to or can’t stay the entire lease term (otherwise you might be on the hook for the balance due on the rest of term if you terminate the lease early)?

If your company has a lease, review it to determine compliance with its provisions – e.g., must your company maintain certain kinds of insurance?  Who is responsible for basic maintenance of the premises?  Who keeps the sidewalk clear?  What is the condition of the property and is there anything that should be reported to the landlord for it to fix?  (notice requirements).  Think of it this way – if someone tripped and fell, who could be held liable? Depending on who had maintenance responsibility in the area where the customer fell it might be the landlord, or it just might be you.

E. Document Retention Policies

“Document Retention Policies” sound dry but are very important and can protect your business when a conflict arises.  Should your company have a document retention policy? What types of documents are used in the course of daily business? (are you a consultant with access to your client’s confidential information?).  Do you have to keep records relating to your employees even after the employee left? If so, how long?

These and many other issues are the kinds of things lawyers look at to keep their clients protected. You hate staying awake at night worrying about the things that can go wrong; good preventative maintenance relieves the worry and helps protect the bottom line.

Schedule a legal checkup today.  Contact the Law Offices of Susan K. Fuller, PLLC to get started.

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Why Your Small Business Needs A Lawyer On Retainer

You’ve owned a business for the last few years.   Things are going reasonably well; the company took a bit of a hit during the last couple of years, but things are stable.

Nonetheless, there are a few things keeping you up at night.  You wake up worrying about the employee who was upset at getting fired – will he sue?  Will he go work for a competitor and try to steal your clients away?  What about that customer who is disputing a valid bill – the amount is too big to write off, but the conversation is one you just hate having.  You’d like to expand operations or update some of your old equipment, but are not sure you can afford it, and are concerned that the seller wants a personal guaranty.   These questions or others like them keep you up at night, and eat at you during the day.   What to do?

Do what the big companies do – call your lawyer.  The big companies have a General Counsel on staff.  Your company is not as big as that, but if you’ve been smart, you’ve hired a lawyer on retainer to help you answer the questions that keep you up at night.  When you have a lawyer on retainer (often a monthly fee) you will usually not get a separate bill for each phone call.   The point of a retainer is to know you have a lawyer who will be available to you, without worrying about how much each call will cost.

A “retainer” is, technically, a fee paid to a lawyer to secure the lawyer’s availability for the client.  Typically, the amount of the retainer is proportionate to your needs.  So, for example, if your regular needs are about 1-2 hours per month (one or two questions, with some minor research the lawyer might need to do, and discussion of the answer), the retainer will be approximately equivalent to 1-2 hours of the lawyer’s hourly fee.    The goal is to have a retainer that realistically reflects your company’s needs.   Retainers may be adjusted periodically as you and your lawyer see how your needs are being met over time. However, note that in Washington State, a “retainer” is, strictly speaking, not compensation for legal services.  Your lawyer may charge a fee for work such as filing or defending a lawsuit, and other non-routine matters.  In many instances, a flat fee can be negotiated to address your company’s ongoing needs.

The advantages of a retainer become clear once you realize you have an open line to a trusted adviser.  First, you have a fixed monthly cost you can plan for.  Budgeting is clear and predictable.  Second, you can finally get those worrisome things off your chest and someone to help handle them for you.

Third, you will notice you start thinking more proactively about you business.  You can get that employee handbook updated; instead of using the contract you got from some competitor as your model, you can get your contracts reviewed and tightened by someone who knows your business, and finally get an explanation of what all that boilerplate means  (your old competitor’s contract won’t help you.  A lawyer on your team will).

Fourth, if you do get threatened with legal action or if some alarming issue suddenly pops up, your lawyer is already there and already knows your business.

Fifth, if your lawyer sees an issue requiring the assistance of someone with specialized technical knowledge (a tax issue?  Permitting authorities threatening to shut you down?), he or she usually has the resources to track down the right specialist to help out.

Think of the lawyer on retainer as your company’s own General Counsel, who takes the “counsel” part very much to heart.  Your attorney may know an excellent banker who is looking for good candidates for an SBA loan; or she knows a CPA who has a gentle touch for those who are loath to deal with the books; an HR specialist who can consult on how to set up your employee files and keep you advised on the latest L&I category changes and posters you have to display; a good commercial insurance agent who can shop around for the right policies for your business and its key personnel.   Your General Counsel can do more than simply bail you out of a crisis; your General Counsel can help your business thrive.

It’s a complicated world for small businesses, but with a lawyer on retainer you have a knowledgeable and trusted adviser looking out for your interests.  Do what the big companies do, and have a General Counsel there to help you out.

Located in Seattle/Greater Puget Sound area?  Call the Law Office of Susan K. Fuller, PLLC for an appointment.

© Copyright 2011 Law Office of Susan K. Fuller, PLLC

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If You Sell Things, You Need To Know About the Uniform Commercial Code

What is the Uniform Commercial Code (UCC)? It’s a statute which governs sales of goods (and a few other things).  Every state has a version, and Washington’s is RCW 62A.

So what kind of stuff does the UCC apply to? It applies to sale of goods, to real estate transactions, commercial paper (e.g., promissory notes), secured transactions (e.g, collateral); warehouse receipts and documents of title.  If you are in a business that uses these items, the UCC applies.  It is what drives the language of contracts for these things whether you realize it or not.

For example, the UCC requires a sale of $500 or more to be in writing:  “a contract for the sale of goods for the price of five hundred dollars or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.”  RCW62A.2-201(1).   In short, you cannot walk into court and ask a judge to enforce an oral agreement to sell or buy any item worth more than $500.  Gotta be written.

Does the UCC apply to an agreement to provide services?  Basically, no. You can orally agree to provide, say, construction services to a customer.  If the customer then breaches the oral contract, you can try to sue.  Suing can be difficult for other reasons, but the UCC won’t stop you.

Why does the UCC matter? As you can see, the UCC protects buyers and sellers alike. To buyers, it provides assurances (warranties) to buyers about the quality of the goods – and a right to sue if the goods don’t meet the right standards.  To sellers, it provides a right to sue if the buyer breaches the contract, and provides a lien process to protect interest in collateral.

Examples of UCC warranties include (1) Warranty of title – that the seller has the right to sell the item.  RCW 62A.2-312;  (2) Implied warranty of merchantability (made to the standards applicable in the industry)  RCW 62A.2-314, and (3) Implied warranty of fitness for particular purpose. RCW 62A.2-315.  These warranties protect consumers, which after all, includes nearly every business. Businesses buy goods for their own use all the time.

But the UCC also protects sellers. For example, if you own a business and buy equipment with financing, the lender can file a lien statement to protect its stake in the collateral. The lien can come up when you seek loans for other items.  Likewise, if you are selling an item and providing financing for the buyer to purchase it, you may be entitled to file a lien to protect your stake in the item.

These are just a few simple examples of what the UCC addresses, so check with your lawyer to make sure you understand your rights and obligations.

© Copyright 2011 Law Office of Susan K. Fuller, PLLC

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Architect or Designer — What are the Rules?

Homeowners and owners of commercial properties alike are concerned about the costs of building and/or renovating their properties, and are keen to make sure they stay within the rules and comply.  After all, nobody wants to build or repair a building and find out later that compliance issues are holding up the sale, remodel, or other transaction regarding the property.  This article is for those in the design and construction trades who want to know when an architect’s stamp is required, and likewise for owners to be similarly informed.  Nobody likes surprises, especially if they result in scuttling a project.

On June 14, 2011, the Design Professionals Council of the Master Builders Association of King and Snohomish Counties hosted a panel from the Washington State Department of Labor & Industries and the Washington State Board for Architects to discuss recent changes to the rules for licensing architects (RCW 18.08).  There are a number of changes which were discussed by the panel, but this article instead focuses on changes the panel emphasized were intended to clarify the point at which a licensed architect’s stamp on a set of plans is required on a project. The changes took effect on July 1, 2011.

A Bit of Background

The relevant rules are at Revised Code of Washington (RCW) 18.08.410 (5), (6) and (7).  Before July 1, 2011, the rules governing architect licensing generally did not apply to or prevent “any person from doing design work…for the erection, enlargement, repair or alteration of a structure or any appurtenance to a structure, if the structure [was] to be used for a residential building of up to and including four dwelling units or a farm building or is a structure used in connection with…such residential building…such as a garage, barn, shed, or shelter for animals or machinery…[nor did the rules prevent] any person from doing design work…for construction, erection, enlargement, alteration, or repairs of or to a building of any occupancy up to four thousand square feet [4000sf] of construction.”

Given the occasional ambiguities of the English language and the realities of how things play out in the field, this version of the statute resulted in some confusion over the years, particularly on two issues: (1) whether residential projects of 4 units or less had to involve an architect if the project would be more than 4000sf, and  (2) whether sub-projects on commercial buildings  (such as tenant improvements) needed an architect if each individual project was under 4000sf, even if the total square footage of the area being worked on exceeded 4000sf.

The amended version of RCW 18.08.410 basically answers thusly:  (1) no, and (2) yes.

What Are the Changes and What Do They Mean?

RCW 18.08.410(5), (6) and (7), effective July 1, 2011, now say the rules governing architects do not apply to or prevent “any person from doing design work …for the erection, enlargement, repair or alteration of a structure or any appurtenance to a structure regardless of size if the structure is to be used for a residential building of up to and including four dwelling units…

As to non-residential projects, the architect licensing rules do not affect or prevent “any person from doing design work ….for construction, erection, enlargement, alteration, or repairs of or to a building of any occupancy up to a total building size of four thousand square feet; or…where the project size is not more than four thousand square feet in a building of greater than four thousand square feet and when the work contemplated by the design does not affect the life safety or structural systems of the building.  The combined square footage of simultaneous projects allowed…may not exceed four thousand square feet.”

So What Does This Mean For Me?

Here are the practical effects:

(1)   If you are a homeowner, or are hired by a homeowner, to design the construction or remodel of any size (so long as it is 4 units or less), you are not required to have the plans stamped by an architect;

(2)  If you own a non-residential (commercial) building and plan to renovate it, you will not need an architect if the total square footage will be less than 4000sf; however, beware that this comes with a caveat: if the life safety or structural systems will be affected by the work, you will need an architect even if the total area at issue is less than 4000sf;

(3)  Non-residential projects larger than 4000sf require an architect’s stamp.

The upshot is to eliminate some confusion that has bedeviled the industry, and to more clearly express the intent of the legislature.  Regardless of whether one agrees or disagrees with where the line is drawn as to when an architect’s stamp is required, it is important to know where the boundaries are. Local building officials will be better able to enforce what the law requires be submitted to them, contractors working with customers can give sound advice, designers will know what limitations they must work within, and property owners can plan accordingly.

Of course, individual situations vary, so it is important to consult with your design professionals, construction team, and permitting authorities; this article is intended as a general overview only, and is not to be construed as legal advice.

© 2011 Law Office of Susan K. Fuller, PLLC

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How to Get Your Customer To Pay — Without A Lawsuit

Every business owner has customers who refuse to pay for work done.  Nine times out of ten, you can solve it on your own.  But for those few, discussing it rationally does not work.  Trying to negotiate a solution does not work.  What can a small business owner do? Simple – check your contract, and call your lawyer.

Here are a few tips to keep in mind so that you–and your lawyer – will have significantly better leverage to persuade the customer to pay the bill.

  1. Hire a lawyer to write a good contract, and to enforce it if needed. Most often, you will recover more than your lawyer’s fees, and more than you would have gotten without your lawyer’s help.  At minimum, a letter from a lawyer gets the attention of a customer who is ignoring you.
  1. With or without a lawyer, make sure you have a written contract.  Do not rely on a handshake or oral agreement.  When the relationship breaks down, you will both remember things differently. You can also include clauses in the written contract that will protect you later on.
  1. Consider whether to include an “attorney’s fees “clause.  An attorney’s fee clause usually indicates the prevailing party will be entitled to recover their attorney’s fees if there is a dispute over the contract. This means the “loser” has to pay the attorney fees charged by the “winner’s” lawyer.  This can significantly raise the stakes for the customer who refuses to pay a valid invoice.  But beware –if your customer is in the right, and you end up as the “losing” party, you may have to pay the customer’s attorney’s fees (even if you try to have the attorney’s fee clause favor you alone, Washington law says it works to the benefit of the prevailing party.  No one-sided advantage allowed).  Either way, having an attorney’s fee clause in a contract forces both sides to seriously evaluate their positions.  It is a powerful device that often gives that extra incentive to settle matters.

Why does it work? Because parties often decide it is better for them to cut a deal and limit their losses rather than risk being liable for the disputed amount plus two sets of lawyers.

  1. Work with your lawyer.  You delegate your tax work to an accountant; legal issues are just as complex and are likewise best handled by a professional.  Your lawyer has the training and insight to find the cases and statutes that apply, and can help you navigate a frustrating situation.

Example: Homeowners built a new house. Their designer envisioned a unique built-in cabinet and prepared a design. A specialty fabricator was hired to execute and install the design.  A contract was written up between the Homeowners and the fabricator – with an attorney’s fee clause included – and the Homeowners made a down payment.  For a while, the project seemed to move along well.

But before the piece was completed, the Homeowners stopped the work and refused to pay the fabricator for work done so far.  Inquiry by the fabricator got little response other than “it doesn’t look like what we expected”.  Explanation of why the piece could not be judged in its unfinished state fell on deaf ears.  The Homeowners simply refused to pay.

So the fabricator got her lawyer involved.  The lawyer wrote to the Homeowners pointing out they were in breach of contract and what the consequences are of that.  The Homeowners called their own lawyer.  The two lawyers discussed the facts, the relevant legal standards, and the looming attorney fees clause.  Result? Homeowners paid nearly the entire disputed bill.

In the end, even after paying her lawyer, the fabricator recovered more than she was able to get on her own from the client who tried to ignore her.  Moral of the story –  a written contract and a lawyer are valuable investments in your bottom line.

© 2011 Law Office of Susan K. Fuller, PLLC

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Uh-Oh, My Company Has Been Sued – What Do I Do Now?

You just received a “Summons and Complaint”.  After recovering from the surprise, you see your company is being sued by a customer complaining your product did not work, or that they were harmed by the product, or that they slipped and fell in your store…or any number of other scenarios you can think of in which your business is being accused of doing something wrong.

There are two things to do right away:  (1) contact your lawyer, and (2) send a copy to your insurance agent.

1. Contact Your Lawyer

If your company already has a lawyer, let him or her know of the lawsuit, and send them a copy.  There is usually a 20-day deadline for responding to the Complaint, and you don’t want to miss the deadline.  If you miss the deadline and don’t even have a lawyer filing a Notice of Appearance on your behalf, you risk the Plaintiff getting a default order against you.  Best to avoid that.

2. Insurance

But even if you don’t have a lawyer, make sure your insurance carrier gets notified of the lawsuit. Usually the most efficient way is to have your insurance agent get it to your carrier.

Why get the insurance carrier involved at all?  Because when you opened your business one of the things you did was get Commercial General Liability (“CGL”) and/or other insurance.  This situation- a lawsuit – is something insurance is designed to address.

It is important to get the insurance carrier involved early in the lawsuit for many reasons, not the least being that for situations covered by your insurance policy, the carrier may provide you with a lawyer to defend you.  If that happens, you will not get a bill for that lawyer’s service – it’s part of what you get with your insurance.  This is a huge cost-saver for you.  The sooner you get the insurance carrier notified, the sooner a lawyer can be appointed to defend your company.

3. Reservation of Rights – What is it?

Sometimes when an insurance carrier agrees to pay for the defense of your company it does so with a “Reservation of Rights”  (“ROR”).   This basically means that if it eventually turns out the issues in the lawsuit are not something covered by the insurance policy, the insurance carrier “reserves its right” to stop funding defense of your company against the lawsuit, and/or reserves its right to refuse to fund a possible verdict against your company.  Because the insurance policy is a contract, the terms of that contract govern what is covered, and not all situations are covered by the policy.  Being defended under an ROR is not cause to panic.  Simply because an insurer defends your company under an ROR does not mean it is denying coverage.  But situations vary considerably, and it is important to have an adviser you can trust.

Note:  RORs are nearly standard in construction defect lawsuits.  If you are in the construction trades and your company gets sued for defects related to its work, chances are very high that if your insurance carrier defends you, it will do so with a Reservation of Rights.

All of this leads to back to step #1:

Call Your Company’s Attorney  (a/k/a “Personal Counsel”)

Lawsuits are confusing, and it is important to know you have someone watching out for your best interests. That is what your lawyer does.  If the insurance company appoints a lawyer to defend you in the lawsuit, that is great.  That person will work very hard on your behalf.

But it is important to know there are some limits on what the lawyer hired by the insurance carrier to defend you can do.  The insurance defense lawyer is required to focus on defending you against the allegations in the lawsuit, and their duty of loyalty is to you, the defendant/client. Because of this, he or she is prohibited by Washington law from addressing questions about what is or is not covered by your insurance policy.   Therefore do not be alarmed, surprised or disappointed if the insurance defense lawyer cannot address your coverage questions – the law does not allow them to do so.

Instead, your company’s attorney or personal counsel is the one who can address coverage issues.  An ROR can have serious implications, and it is important you understand from a trusted adviser what it means and what, if anything, you need to do to make sure your company is protected.

For the vast majority of situations, working with your insurance carrier is simple and straightforward.  The majority of cases are also defended without the carrier “reserving its rights”.   But there are situations that can be complicated and anxiety producing. Indeed, “Insurance Coverage” law” is a specialty in its own right.  Always remember you do not have to manage it alone.  Have a trusted attorney with you throughout the process.

© 2011 Law Office of Susan K. Fuller, PLLC