Wednesday, July 1, 2015

Independent Contractor or Employee? It’s Not Always Clear.

The question of whether to treat a worker as an independent contractor or employee is an age-old question that has plagued many an entrepreneur. The classification affects how much you, as a business owner, pay in taxes, whether you need to withhold from your workers’ paychecks, and what tax documents you need to file. The consequences of misclassifying can include debilitating tax liabilities and failure-to-pay and failure-to file penalties. There are many examples of “successful” businesses that ran into problems or even were forced out of business entirely because it was determined that they had misclassified individuals (even exotic dancers) as independent contractors.
  
But how do you know when a worker crosses the line from independent contractor to employee? The IRS generally uses a three-factor test: Behavioral control (i.e., whether your control how the work is done), financial control (i.e., whether you direct or control the financial aspects of a worker’s job), and type of relationship (i.e., how the workers and business owner perceive their relationship). Not surprisingly, however, the application of these factors still leaves some businesses questioning their determinations.  And, when the decision-making is left to a court, the results are sometimes surprising.  This article written by Kevin McGowan and recently published on BNA does a good job of summarizing the findings of the U.S. Court of Appeals for the Sixth Circuit regarding the classification of an installer of satellite dishes, which was ultimately sent to a jury for resolution. Some of the relevant parts of the summary are:

A jury must decide if a technician who installs satellite dishes in Michigan for a satellite-internet-dish service firm is an employee entitled to overtime pay under the Fair Labor Standards Act or an independent contractor, a divided U.S. Court of Appeals for the Sixth Circuit ruled March 26.

In a 2-1 decision reversing summary judgment for Miri Microsystems LLC, the court said under a nonexclusive six-factor economic realities test, Michael Keller raised triable issues he was a Miri employee entitled to overtime pay

Miri, which provides satellite installation services in Michigan for HughesNet and iDirect, argued Keller was an independent contractor, who was paid flat fees for each installation and repair, remained free to work for other installation companies and controlled the number of days he worked and how many jobs he accepted. Keller's evidence indicated he worked six days a week from dawn until midnight.

The Sixth Circuit, however, said after reviewing the relevant factors—permanency of the relationship, degree of skill required, Keller's investment in the enterprise, his opportunity for profit and loss, Miri's right to control how work is performed and whether Keller's services were “integral” to Miri's business—disputed issues remain that require a jury's resolution.

In dissent, Judge Alan E. Norris agreed Sixth Circuit precedent supports use of the six-factor test for determining employee or independent contract status in FLSA cases. But he said he would affirm Keller was an independent contractor, given the absence of an employment contract with Miri, his ability concurrently to work for other companies and Keller's control over his own schedule.

Some business owners believe it’s always less risky to classify a worker as an employee, simply because the added compliance costs today outweigh the potential misclassification liabilities. Before making worker classification decisions, be sure to carefully review the existing guidance and consult with your professional advisors, who routinely counsel businesses of all sizes through such matters.

Wednesday, June 24, 2015

Bill Aulet’s 24 Steps to Becoming an Entrepreneur

Guest author, Alice Campbell, Business Analyst at Gray Plant Mooty (and MIT Alumnus)

Last month, an outstanding group of our entrepreneurial clients, together with members and guests of the MIT Alumni Club of Minnesota, gathered at our offices for a time with Bill Aulet, Managing Director of the Martin Trust Research Center for MIT Entrepreneurship. Since 2004, Bill has taught three or four courses each year on entrepreneurship at MIT's Sloan School of Management. He is also the author of Discliplined Entrepreneurship: 24 Steps to a Successful Startup, which has been translated into 11 languages. Bill has raised over $100 million in funding for his companies and directly created hundreds of millions of dollars of market value.

Bill’s presentation provided a snapshot of how he developed the 24 steps, following which he answered questions about all kinds of entrepreneurial activities and education. The energy at the event was palpable, and the event could have easily continued late into the evening. (Sorry to any attendee who planned an evening schedule around our projected ending time, which was off by about 90 minutes!)

Some experts think that entrepreneurship can’t be taught—that it’s a skill with which some people are born. But, for over 40 years, the Massachusetts Institute of Technology has been turning out ever larger numbers of graduates who already are or will become entrepreneurs. The 25,600 companies started by the entire pool of MIT alumni have generated approximately $2 trillion in revenue and have created 3.3 million jobs. If MIT were a country, it would be the 11th largest economy in the world—just about the size of the economy of Canada (but without all the great hockey players, eh?).

If you want a few of the benefits of MIT’s classes without the >$60k per year cost, MIT is one of the founders of www.edX.org, a website at which some of the finest universities have put courses online as massive online open courses (MOOCs). MIT’s entrepreneurial courses are well-represented among the MOOCs, including:

Entrepreneurship 101: Who is your customer? 
Entrepreneurship 102: What can you do for your customer?

Out of the 54,856 students who took Entrepreneurship 101 online, MIT selected 47 to participate in the inaugural MITx Global Entrepreneurship Bootcamp last summer. A similar number have confirmed for this August. If you thought MIT was hard to get into for an undergraduate degree (7.9%), the competition for bootcamp was even more brutal (0.086%), or slightly more than 100 times less likely.

Thursday, June 18, 2015

To Click or Not to Click

Late last year, CBS News offered a ‘’test” to determine its readers’ ability to spot emails that were used in phishing scams.  The object of the online quiz, conducted through Intel Security, was for readers to correctly identify the legitimate and phony emails from among 10 samples.  In May, CBS published its results.  Of the 19,458 persons participating from throughout the world, 80% missed at least one of the fake emails.  Only 3% of the participants got a perfect score.   

“Phishing” is the use of emails to obtain personal information (such as user names, passwords, account numbers or credit card details) for illegal or improper purposes.  While some of these will actually ask for information, most simply want the user to click on a link that activates malware allowing the phishing party to access information without the user’s knowledge.  

Early phishing scams involved massive distributions with the knowledge that even a small percentage of responses would be worthwhile.  Relatively quickly (and after broad public warnings), most recipients learned to look for things such as poor spelling, bad grammar and unknown/unusual URLs as tip-offs to nefarious activity.

While some of these scatter-gun approaches are still used (such as purported requests from the IRS to update information in order to facilitate online filing of a tax return or the payment of a refund), they are generally of a much higher quality due to the sophistication of both phishers and users.   The widespread use of social media/networking sites has enabled phishing to target particular individuals, groups or entities through the use of personal information available at such sites.  It should come as no surprise that such “spear phishing” has a much higher rate of return than the mass-distribution method.  Who isn’t more likely to respond to, or at least look at, an email from one’s own bank, credit card account or the resort where you recently stayed for a weekend?

What the CBS News study tells us is that it is more than likely that everyone has fallen for a phishing email at some time without knowledge.  Given the entrepreneurial bent of the phishers, it is also likely that the opportunities for being hooked will continue.

But there are things that everyone can do to reduce this possibility.  Install and maintain up-to-date security software.  Look closely at email addresses and text for anything out of the ordinary.  Even with spam/phishing editors – seriously, this is a currently available service– you may still note misspellings, poor grammar or funny sentence structure.  Do not EVER respond to an email requesting personal or financial information, and resist the urge to click on any link unless you are confident about the source of the email.  If you know that you have been scammed, you should forward the subject email to spam@uce.gov and to the company or institution that was impersonated in the email.  You can also file a complaint with FTC at ftc.gov/complaint.

Unfortunately, the high level of phishing traffic negatively affects the success of well-intentioned persons wanting to market via cold-call emailing.  How legitimate promotions may be perceived must be considered in light of the various ploys used for illegitimate purposes.  Case in point: the most frequently mistaken email in the CBS News/Intel test was actually from a legitimate source, but was perceived as likely fraudulent because it included free “click on” ads.

In deference to the subject matter of this article, I planned to insert no links, but relented and added links for the government complaint references.  I cannot speak to the other links that may appear, but am reasonably certain that the editor(s) of Entreview are not inclined to implement or use any method of misdirection or inappropriate information capture (assuming they were technically capable), so you should be safe to click away. 

Friday, June 12, 2015

News Flash!!! Congress Enacts Privacy Legislation

We can all breathe easier now that Rand Paul has finally stopped talking.

On June 2, Congress passed the USA Freedom Act (the Uniting and Strengthening America by Fulfilling Rights and Ending Eavesdropping, Dragnet-collection and Online Monitoring Act). The National Security Agency (NSA) will no longer be in the business of the massive collection of telephone metadata (the collection of phone numbers and date/time of calls, not content) that had been authorized under the U.S. Patriot Act. Legal authority for the bulk collection by the NSA of such phone data expired on June 1, 2015. 

The USA Freedom Act represents a rare collaboration, with support from the most liberal Democrats as well as conservative Republicans. It allows the NSA to continue such bulk collection of our phone metadata in the name of national security for six more months. Telecoms, such as Verizon and AT&T, will then be required to collect and retain this data unless and until requested by a court order.

I feel much better knowing that the NSA will not maintain a record that I called my mother’s dentist this morning to confirm her 7:00 am appointment. And I feel no less safe allowing AT&T to hold on to this information for national security purposes. Way to go Congress.

So now that my privacy rights have been restored and our spying and intelligence-gathering capabilities have not been compromised, Congress can focus on privacy legislation important to the business community, such as passing a federal data breach notification law.

Not likely. Ten years ago Senator Patrick Leahy (D-VT) first introduced federal breach notification legislation, and each year bills have been introduced and considered. But nothing has passed.

While Rand Paul, Edward Snowden, and other privacy advocates may find some vindication in the USA Freedom Act, the reduced role of the NSA has probably not been a key agenda item at corporate meetings.  

When faced with a data breach, a business must immediately respond to the breach as well as navigate a patchwork of federal and state data privacy and security laws and regulations. A decade of proposed federal legislation has failed to enact a comprehensive data breach notification law and Congress has yet to make life any easier for a business responding to a data breach.

Corporate directors and officers have however taken notice of the increase in data breaches. Privacy and data security issues have moved from the server room to the board room. Businesses facing Chinese, North Korean, Russian, and other foreign and domestic hackers are looking for more—not fewer—tools to prevent nefarious activities on the World Wide Web and to protect against potential data breaches. They worry about the real impact of a data breach on their business and potential exposure to damages and liabilities. 

In today’s world, it is not a matter of if your business will be faced with a data breach but when and how often. No need to tell Target, Home Depot, or Sony how damaging a data breach can be. Computer forensics, legal, and public relations costs can be excessive and have a serious impact on the bottom line. 

So while the business community waits for Congress to pass meaningful data privacy and security legislation, a business should take steps to mitigate the risks and costs related to a data breach, including:
  • Appoint a person to manage privacy compliance and a board committee to focus on data protection
  • Adopt a data security plan tailored to the company’s risk profile
  • Hold information and training sessions to increase privacy awareness at all corporate levels
  • Create an incident response team and plan to be ready in the event of a data breach 
  • Review insurance coverage regarding security incidents and data breaches 

By taking such proactive measures and demonstrating attention and care to privacy and data security matters, a business can be better prepared for a data breach. The business will also be better positioned to defend itself against any government investigation or lawsuit challenging the efforts made by the business to implement adequate data security.

And someday—we hope—we will finally have a comprehensive federal data breach notification law. 

Wednesday, June 3, 2015

A Successful Pivot for Peter Pan

My twice-annual trip to New York City last weekend (Mecca for musical theatre junkies like my family and me) reminded me about the power of the pivot.

For the uninitiated, a pivot is when the people running an enterprise recognize that the business model they are using just doesn’t work. Not surprisingly, this can be rather common with a startup. Rather than continuing to bang their heads against the wall, the team will pivot away from the existing model and toward a new business opportunity (often, but not always, related to the original business). 

A few examples of well-known companies that have pivoted successfully:

  • Twitter began as a network where people could subscribe to podcasts. Once iTunes entered the market, company employees were given two weeks to come up with new ideas.  The winning one was status updating via a “micro blog.” (I can’t help wondering if I gave that example in 140 characters or less)[Editor: No!]
  • Stewart Butterfield, a founder of a business originally focused on building a “never-ending online gaming platform” (sounds a little like Purgatory, if you ask me) managed to salvage the popular photo-sharing tool built for the platform and turn it into Flickr.
  • Even Starbucks didn’t start with the plan to own a shop (or two) on every corner of the planet. It originally was focused on selling espresso makers and coffee beans.
  • While Nintendo may be well known today for Donkey Kong, Zelda, and those ever-popular plumbing brothers, Mario and Luigi, it actually has existed for centuries and pivoted many times. Believe it or not, it once made vacuum cleaners, produced instant rice, and even owned a short-stay hotel chain (called a “love hotel”—use your imagination…)!

I’ve definitely seen some successful pivots by entrepreneurs in my career working with them. Of course, I’ve also seen a few businesses that pivoted over and over again (sort of like a ballerina) and never were able to find the right business model.

I’m sure readers (unless they’ve already stopped reading) are asking themselves, “What does this all have to do with a trip to NYC?” Well, it was a typical trip for us (six musicals in four days). It was easy to like “Something Rotten,” the clever new show (nominated for 10 Tony Awards) about a couple of playwrights living in Shakespearean times who decide to create the world’s first musical to compete with The Bard.  But I was surprised how much we all liked “Finding Neverland,” especially given the negative critical reaction to it.  To me, this show, based on the Johnny Depp film of the same name about where J. M. Barrie got his inspiration for “Peter Pan,” is a rare example of a pivot that actually worked.

Typically, bringing in a “show doctor” or having extended re-writes and preview periods is a recipe for failure (“Spider-Man: Turn Off the Dark” anyone?), but Harvey Weinstein, the producer of “Finding Neverland,” seems to have gotten it right. You can read more of the details here.  In short, Weinstein discarded the $20 million version of the musical (which originally premiered in Britain) and brought in a completely new creative team, including Tony Award-winning director Diane Paulus. The details are fascinating to me because I love musicals and the entrepreneurial spirit that led Weinstein to successfully pivot the way he did. 



Thursday, May 28, 2015

What: Andreas Killen, 1973 Nervous Breakdown: Watergate, Warhol, and the Birth of Post-Sixties America (Bloomsbury, 2006).

Why:  A review of the remarkable year when everything changed.

Just before the holiday weekend, the evening news ran a short story about the number of people expected to be traveling by car, despite a rise in the price of gas over the prior several weeks. This led me to reflect—as these things are wont to do—on a period in my life when you had to wait in long lines for gas, with no assurance that any would be left when you reached the pump.  Yes, I’m talking about 1973, the year I got my driver’s license, just in time for the Arab oil embargo and the resulting gas shortages. It was also the year of these songs, in case you were wondering. 

It turns out things were indeed as bad as I remember. And Andreas Killen, in his book 1973 Nervous Breakdown, reminds me that they were, in fact, much worse. As a child of the sixties, I have always had a vague feeling that sometime in the early seventies everything seemed to change. Killen designates 1973 as the year that happened. “By any standard,” he writes, “1973 marked a genuine low point in US history.”

In addition to the oil embargo, in 1973 the Vietnam War ended (much to my relief, as I was approaching draft age), coming to a grinding halt, not (as they say) with a bang but a whimper, becoming the first war popularly regarded as having been lost by the US. Add to that the beginnings of a “startling political crisis” arising out of the Watergate affair. On top of all that, the economy tanked, signaling “the end of the greatest prolonged boom in the history of capitalism.” The result?  “Any one of these events alone would have challenged America’s image of itself; together they shook the national psyche to its very core.”

With the benefit of hindsight, it seems that perhaps the greatest outcome of the resulting cultural reboot, arising from the loss of confidence in the government at the same time the economy stagnated, was a shift of faith to the private sector.  With this shift came renewed and reinvigorated entrepreneurial activity, which has blossomed ever since.

Thursday, May 21, 2015

What’s New in Town: The Spring Edition

Last fall, I wrote this post about new activities in the Twin Cities area. Since that time, Twin Cities entrepreneurs have been busy on some new things. So…just in time for the Memorial Day weekends of busy entrepreneurs, here’s my second installment: 

Trapped Puzzle Room.  Last weekend, a small group of puzzle lovers, including fellow entreVIEW author Dan Tenenbaum, had an opportunity to test out TRAPPED, a new team-based puzzle room experience in Uptown. *TRAPPED is scheduled to open to the public on Friday, May 29. Groups of 5-9 players are placed in a locked room filled with a series of intricate puzzles and a story surrounding them. The puzzles build upon one another, such that as the players solve one puzzle, they come closer to escaping the room. If the players haven’t escaped the room within an hour (you do get hints along the way if you get really stuck), they are freed and debriefed about the clues they missed. TRAPPED plans to initially offer players three different experiences: The Apartment, The Library, and The Workshop. Puzzle rooms are becoming wildly popular worldwide and can provide a great teambuilding experience with family, friends, or co-workers. Cost per person is $24.

Betty Danger’s Country Club. If you’ve driven through Northeast Minneapolis lately, you may have seen a Ferris wheel looming on the skyline. (Except it’s not technically a “Ferris wheel” — it’s “The Danger”). On the ground, you’ll find Betty Danger’s Country Club. Betty Danger’s is truly a one-of-a-kind experience — it’s part country-club and amusement park, features a plethora of outdoor-seating options, and specializes in cuisine that is Mexican and Hamptons-inspired. (Yes, that’s right, Betty Danger’s boasts that it is located in the “Village of Mexampton,” a combination of the two locales.) On the premises there is an 8 1/2-hole mini-golf course and, as previously mentioned, The Danger, a vertically-revolving patio complete with open-air dining cars. A typical ride on The Danger lasts 20 minutes and offers great views. A complete experience at Betty Danger’s will set you back a bit, but it’s definitely something I suggest you place on your summer to-do list.  

* Full disclosure (we are securities lawyers, after all), while TRAPPED was a really fun experience independent of any tie to Gray Plant Mooty, it is a client of our entrepreneurial services group!