REPORT FROM COUNSEL
SPRING 2009 ISSUE
The Firm Congratulates Susan Peterson on Her Selection as a 2009 Rising Star by Minnesota Law & Politics
You represent the firm's commitment to our principles of honesty, integrity, professionalism and service.
Susan is a member of the firm's Estate Planning Department which together boasts more than 25 years of experience advising individuals and families.
She builds strong relationships with clients, and in turn, clients have great confidence in her regarding their most personal information and concerns.
Her practice is heavily concentrated in the following areas:
* Drafting wills and trusts
* Incapacity planning
* Family business succession planning
* Contested probate administrations
* Guardianships and conservatorships
* Charitable gifting
* Medical assistance planning
IT'S TIME TO REVIEW YOUR WILL OR TRUST . . . AGAIN
On January 1, 2009, the federal estate tax exemption will rise from $2 to $3.5 million per individual. This change could negatively and unintentionally impact married people who have "A/B" Wills or Trusts.
An "A/B" Will or Trust estate plan is a plan that uses the estate assets to create and fund two trusts at death--the "A" trust, for the benefit of the surviving spouse, and the "B" trust, for the lifetime benefit of the surviving spouse but for the ultimate benefit of children. The mechanism used to determine how much passes to each of the "A" and "B" trusts is a formula clause. Typically, the formula clause provides that the amount of federal estate tax exemption in the year of death is the amount that funds the "B" trust.
"A/B" plans are popular estate plans because they eliminate unnecessary estate taxes. However, with the estate tax threshold rising to $3.5 million, many of these plans won't work as intended. A surviving spouse could be disinherited. This happens because, if the estate of the first spouse to die is less than $3.5 million, his or her entire estate would pass to the "B" trust. The surviving spouse would earn income off assets held in the "B" trust but would inherit nothing.
Most people do not want to disinherit a spouse. People who have "A/B" plans may prefer to leave everything outright to the surviving spouse instead of to one or more trusts or may prefer a different kind of plan that is not tied to the federal estate tax law. In that event, their Wills or Trusts need to be changed.
If you have an "A/B" estate plan and have concerns about the suitability of your plan given the upcoming change in the law or any other questions regarding estate planning, please contact one of the attorneys in our estate planning department--Susan Peterson, or Lori Skibbie.
MINNESOTA NOW REQUIRES CERTIFICATION FOR CONSTRUCTION INDEPENDENT CONTRACTORS
By Janet C. Ampe, Esq.
Attention Construction Contractors!
A new law, which took effect on January 1, 2009, requires all construction workers who are working as independent contractors to acquire a certificate issued by the Minnesota Department of Labor and Industry or else they will be classified as employees by default. The distinction has significant financial ramifications for construction companies. The new law applies to workers on both public and private projects, whether residential or commercial.
Why Is this Happening?
As many companies have learned, by classifying a worker as an independent contractor instead of an employee, they may avoid many expenses, including:
* Retirement Savings (401k) Plans
* Health/Dental/Life Insurances
* Paid Time Off (vacation/sick leave/holidays)
* State and Federal Unemployment Taxes
* Workers' Compensation Insurance
* FICA and Medicare payments and withholdings
Workers classified as independent contractors give up substantial rights in addition to the above benefits, including some of the following:
* Protection by governmental agencies against wage payment violations
* Overtime compensation
* Coverage under the FMLA and other employee leaves
* Certain discrimination protection
Given the many benefits to companies and the relative lack of power individual workers have to demand employee status, many companies have been mistakenly misclassifying workers as independent contractors when they should be classified as employees, at the expense of the workers and Minnesota's tax coffers.
According to a report issued November of 2007 by the Minnesota Office of the Legislative Auditor, an estimated 14 percent of Minnesota employers erroneously misclassified at least one worker in 2005. Real estate, rental, and leasing industries were listed as the biggest problem areas, with an estimated misclassification rate of around 33 percent. In the construction industry, misclassification appeared notably higher in the roofing, drywall, and residential remodeling areas. The report stated that the various state departments capable of investigating misclassification--the Department of Employment and Economic Development (DEED), the Department of Labor and Industry (MDOLI), and the Department of Revenue (MDOR)--were not effective in deterring misclassification, partially because they were poorly coordinated in their efforts.
Further, a November 21, 2007 article in The Wall Street Journal indicated such misclassification was a nation-wide problem that contributed to the nation's "tax gap" (taxes that are owed each year but never paid). The article detailed a plan by the Internal Revenue Service to begin information-sharing efforts with twenty-nine states, including Minnesota, in an effort to reduce rampant misclassification. The new requirements could flow from these efforts.
What Is Required Under the New Law?
The new law is currently limited to construction and remodeling contractors, and gives all workers the default status of employees, making their wages subject to applicable employment taxes. If a company wishes to classify a worker as an independent contractor, the company must require the worker to apply for status as an independent contractor with the MDOLI and obtain a certificate of exemption.
The Application Process: Required documentation includes the following (copies of documents are acceptable; the applicant must retain the original. Documents must be legible.):
- A complete, signed and dated application;
- Application fee of $150;
- Business and individual name and contact information
a. Including assumed name certificate, if any;
- Social Security number;
- Federal tax ID number, if any;
- The services for which the individual is seeking certification;
- Audit, letter, report, determination, opinion or ruling by any State or Federal Court for agency relating to the status of the applicant is an independent contractor or employee
a. Include an explanation of why status should be granted;
- Credentials and or training completed by the applicant related to the services, including apprenticeship and degrees;
- Whether the applicant employs individuals, and if so documentation relating to unemployment insurance and workers' compensation coverage;
- Information about whether the applicant has been employed during the last two years, and related explanation;
- 11. State and federal tax documents related to the services for the previous two years, including the following:
a. income earned in tax paid and owed;
b. itemized deductions;
c. self-employment tax paid or owed;
d. federal unemployment tax paid or owed;
e. withholdings from wages;
f. schedules for depreciation and amortization;
g. reporting of cash payments received;
h. expenses for business use of the home;
i. wages or payments received or paid;
j. Minnesota tax ID number, if any;
k. up to five executed contracts for services and contract templates;
l. rental lease agreements, if any;
m. documents establishing ownership or control of equipment and/or vehicles necessary for the services;
n. authorization to verify the application and its contents;
o. a color photocopy of a current photo identification document;
p. a sworn statement the applicant is a US Citizen or authorized to work in the United States, and has and will continue to comply with federal immigration laws;
q. and at least five of the following:
i. commercial liability insurance policy or bond;
ii. workers compensation policy;
iii. business are building permits held or applied for;
iv. contracts with vendors, suppliers, subcontractors or others;
v. bills or invoices from and payments made to vendors, suppliers, subcontractors or others;
vi. bank/accounting statements showing receipts and expenditures and profit and or loss;
vii. trade or professional memberships or affiliations;
viii. marketing or advertising materials;
ix. documentation of payments to other independent contractors;
x. documentation of legal compliance with workers' compensation or unemployment insurance.
r. a sworn statement the applicant meets allof the below nine conditions that certify the worker as a genuine independent contractor:
i. Maintain a separate business with the independent contractor's own office, equipment, materials, and other facilities;
ii. Hold or apply for a federal employer identification number (EIN) or file business or self-employment income tax returns with the IRS based on work performed in the previous year;
iii. Operate under contracts to perform specific work for specific amounts of money and under which the independent contractor controls the means of performing the services or work;
iv. Incur the main expenses related to the work the independent contractor performs under contract;
v. Be responsible for the satisfactory completion of work the independent contractor contracts to perform;
vi. Receive compensation for work performed under a contract only on a commission, per-job or competitive bid basis;
vii. Realize a profit or suffer a loss under contracts to perform work;
viii. Be responsible for continuing or recurring business liabilities or obligations; and
ix. Have the success or failure of the independent contractor's business depend on the relationship of business receipts to expenditures.
If any of the above criteria are not met, the worker will be classified as an employee, and the employer will be liable for all employment taxes.
The Commissioner of the MDOLI (the "Commissioner") must either grant or deny the application within 30 days and, once granted, the certificate remains in effect for two years, unless revoked or cancelled. Certificates are not transferable, and may not be altered or falsified. The Commissioner may revoke a certificate if it determines the individual no longer meets the conditions set forth above or if the individual fails to cooperate with an investigation. If the Commissioner denies an application or revokes a certificate, the individual has 30 days to make a written request for a hearing.
What Are the Penalties for Non-Compliance?
Workers are prohibited from performing services as independent contractors without holding a current certificate and from misrepresenting their status as an independent contractor. Companies are prohibited from requiring any worker to obtain independent contractor status through coercion, misrepresentation or fraudulent means, or to misrepresent that an individual is properly working under the statute. Companies are required to obtain a copy of any independent contractor's certificate prior to allowing that individual to perform services. Any violation of these provisions is subject to a penalty of up to $5000 per violation.
In addition to fines, the new law grants the Commissioner a wide array of additional powers in enforcing these provisions. For example, the Commissioner can issue subpoenas, take possession of any necessary material, or enter any public or private territory, without notice, to investigate suspected violations under the statute. The Commissioner also may adopt, amend and repeal rules for use in carrying out the goals of the statute. In addition, the law requires the Commissioner notify the Commissioners of Revenue and of Employment and Economic Development of suspected violations, enabling the various departments to work together to ensure enforcement of the law.
When Do Contractors Have to Comply?
The new law went into effect July 1, 2008, although it does not affect workers and companies until January 1, 2009. Starting January 1, 2009, all workers in the construction industry will be required to hold a current independent contractor exemption certificate and perform work pursuant to the requirements governing certification. According to the MDOLI's website, the application will be available on the website beginning September 1, 2008, and the processing of applications will begin on September 1, 2008. Applications may be submitted by mail or fax. Individuals applying for or renewing a contractor or remodeling license may simultaneously apply for the Independent Contractor Exemption Certificate, and the combined fee will be $150.
Where Do We Go from Here?
The statute requires contractors take action or risk significant fines. We recommend the following steps:
* Audit the workforce to ensure workers are properly classified.
* Implement hiring department procedures to be sure certifications are obtained and properly maintained. This may require setting up a separate filing system.
* Apply early for certification, if required, to avoid backlogs in the approval process and expensive delays on the job.
As with any new law there are sure to be some growing pains with compliance and enforcement. Henningson & Snoxell, Ltd. will continue to monitor this new law and its effects on the construction industry. If you have any questions about the independent contractor certification program, do not hesitate to contact one of our business law attorneys.
HENNINGSON & SNOXELL, LTD. EXPANDS CONSTRUCTION PRACTICE
Henningson & Snoxell, Ltd. is pleased to announce that Craig A.B. Freeman has joined the firm's Construction Law group. He concentrates his practice representing contractors in construction law and mechanic's lien enforcement.
In these challenging economic times, contractors are finding it more difficult to collect their service fees from owners. Craig assists contractors and subcontractors by drafting work authorizations and contracts that will protect the client's interests should legal action be required, filing mechanic's liens or breach of contract claims to protect their interest when payment is not made, and handling every aspect of litigation, from mediation to trial, that may arise. Once a judgment is secured through the foreclosure of a mechanic's lien, a constitutional lien under Act 1 Section 12 of the Minnesota Constitution, or a standard money judgment, Craig will pursue all legal remedies until the judgment is satisfied.
His clients include closely held businesses and franchise contractors or subcontractors who specialize in disaster restoration and new construction. From constructing a new building to removing and replacing drywall and extracting water from a damaged existing residence or commercial building, Craig's clients know that they can call on him to represent any legal issues that may arise during the course of their project.
Craig is admitted to practice in Minnesota state courts. He is a member of the Minnesota State and Dakota County Bar Associations.
Born in Pella, Iowa and raised in the Twin Cities, Craig received his B.A. from the University of Iowa and his law degree from the University of Iowa College of Law. Following law school, Craig clerked for the Honorable David L. Knutson of the First Judicial District Court of Minnesota. He practiced law with another Twin Cities firm before joining Henningson & Snoxell in 2008.
BANK VIOLATES TRUTH IN LENDING ACT
A husband and wife who operated a day-care business out of their home decided to take out a new mortgage on the home. Over the 10 years that they had owned the business they had taken corresponding deductions and depreciation on their tax returns to account for the business run from the home. As calculated for tax purposes, approximately 17% of the home was devoted to the day-care business, even though during the hours when the day-care business was open about 52% of the home's square footage was devoted to that use.
The homeowners came to realize that their lender had dramatically increased their monthly payments and had sent the loan documents to them when it was too late by law for them to change their minds (more than three days after they signed the papers). They sued the bank under the federal Truth in Lending Act (TILA), asking that the loan transaction be rescinded. Among other things, TILA requires lenders to provide particular disclosures to borrowers of "high-rate" loans when points and fees exceed 8% of the amount borrowed. The bank had not made these disclosures to the borrowers at least three days ahead of the transaction, as required by TILA.
The bank's response was two-pronged. First, it argued that TILA did not even apply to the case because of an exemption in the law for extensions of credit primarily for business or commercial purposes. Second, the bank took the position that the points and fees that the homeowners were required to pay could not count toward the 8% threshold because the homeowners had folded those costs into the loan instead of paying them up front in cash. A federal trial court sided with the homeowners on both points, allowing their case to go to trial.
Regarding the bank's claim that the "business purposes" exception in TILA should apply, the key fact was that, properly calculated, only a small percentage of the home was devoted to the business, thus defeating any attempt to argue that the loan was primarily for business or commercial purposes. As for the fact that the points and fees were financed, not paid in cash, this method of payment was of no consequence for purposes of meeting the 8% threshold. The applicable statutory language says only that the points and fees must be "payable" by the consumer at or before closing. The borrowers did bear the costs of the points and fees at the time of closing, no matter whether they were being paid then, deducted from loan proceeds, or, as happened here, added to the amount to be financed over time.
Working in favor of the borrowers on both points was the fact that TILA is a remedial statute to be construed and applied so as to achieve its goals of assuring the meaningful disclosure of credit terms and avoiding the uninformed use of credit.
