Minimizing Your Risk Related to Administrative Tasks and Payroll

Thinking of adding an employee but not sure how to handle the day to day administrative issues related to pay and insurance?   Employees are a responsibility for any business.  When you take one on, they may be there to make you money, but in return you have an obligation to treat them right.  As a result there are a variety of administrative and bureaucratic rules to help make sure things go smoothly. One option to consider to avoid this extra burden is to hire a reputable payroll services.

On time payment and record keeping: While it may seem obvious, small business owners often forget that their employees expect to be paid on a regular schedule and may not care that the boss is on vacation and hasn’t gotten around to writing out the checks.  Services handle this for their customers automatically and will mail out checks or make the appropriate online deposits upon request.

Withholding: One major issue overlooked by many businesses is their obligation to withhold taxes and to pay them into the government.  Miscalculating these fees, or worse, withholding them and using them for other business purposes is a huge problem.  A common statistic is that one in three businesses are penalized for missing tax deadlines.   Additionally, If you have employees, you also have an obligation to send annual statements to both the employee and the government about wages paid and taxes.  By having a service handle this, the risk of common errors is greatly reduced, thereby lowering the employers potential to make costly legal errors.

Signage: If you have workers, you are most likely required to post signage at your work place advising your employees of their rights under the law regarding things like overtime pay and worker compensation.  Failure to display proper signage is a common error for employers and can lead to fines.  Most services will provide you with   appropriate signage and can be a resource for understanding what may required of you.

By no means is this an exhaustive list of your payroll obligations, but they do demonstrate that these tasks sometime take you away from doing core parts of your business.   For a relatively low fee, many services will perform these services for you, as well as many other parts of the hiring process, thus putting this highly bureaucratic process into the hands of people that handle it on a day to day basis and can handle it far more efficiently than you might be able to.  When evaluating services consider their experience level, their ease of use, the scope of their services, and their fees.

Considerate Contracts

While it may seem like a simple question, sometimes its worth reviewing just the same – when is a contract a contract? General speaking it is when two or more parties exchange mutual promises. Often the determining factor is whether the mutual promises of the parties are supported by consideration. Consideration involves the giving of something of value, rather than a mere promise. The reason that the courts and legislatures generally require some form of consideration is to insure that the promises being made are not merely a casual statement, an accident, or gratuitous – in short – to make sure the people making the agreement really mean it. Consideration looks at whether the parties have assumed an obligation on the condition of an act or forbearance of another. Except in cases of employment matters, Minnesota courts generally do not look at the adequacy of the consideration being offered – only whether some consideration has been exchanged. For written agreements, the court presumes valid consideration.

In contracts related to intellectual property rights this means that things like royalties might be subject to discontinuance even if the only thing the licensor does is grant a right to use the IP and it turns out the licensor in fact does not have the rights in the first place (assuming the licensor did not know that the rights were invalid). However, if the contract also goes on to provide that the licensor will discontinue use of the rights for their own use, this forbearance may be viewed as adequate consideration.

Piercing the Corporate Veil in Minnesota

piercing the veilThe term “piercing the veil” is a reference to a method of holding a company or individual responsible for the liabilities of a corporation or other business entity despite the company being a separate corporate entity with limitations on its liability.  Saint Paul attorney Jack Roberts on his Minnesota Business & Real Estate Law Blog recently had a great post laying out many of the issues related to piercing the corporate veil and some sound advice on preventing it from happening. Jack’s article can be found here.

Ringtone Copyright Royalty Rates


“Answer the phone, answer the phone” – that’s what my cell phone screams in the voice of my daughter whenever someone tries to reach me. I recorded it a while back and it amuses me and everyone around me every time it plays. What happens, however, when you record someone else’s creative work as your ring tone?

Under US copyright law, users of compositions must pay copyright owners when recording a composition. When the recording party and the copyright owner do not negotiate a license, Section 115 of the Copyright Act provides that the Copyright Royalty Board can establish a predefined rate which allows the recording party to record the composition without the explicit permission of the owner of the composition’s copyright. In traditional recording settings, this is often refereed to as a mechanical.

In the recent decision DC Circuit decision Recording Indus. Assn. of Am. v. Library of Cong., No. 09-1075 ruled that the Copyright Royalty Board’s decision that royalties paid for use of compositions as ring-tones should be be paid as 24 cents per recording (penny-rate) rather than as percentage of the wholesale rate (the RIAA argued the rate should be 15% of the whole rate charged). The court affirmed the reasoning of the Copyright board who found that “that a single penny-rate structure is best applied to ringtones as well as physical phonorecords and digital permanent downloads” because of “the efficiency of administration gained from a single structure when spread over the much larger number of musical works reproduced.”

The basic reasoning – which I agree with – was that a flat penny rate is the fairest and simplest method of compensating individual songwriters. This is usually true for most creatives. Keeping licensing of copyright and trademarks as simple as possible reduces disputes over the method of calculations.

Does theTwitter ToS dedicate everything you post to public domain?? – NO!

I use to say that it was a myth that if it was on the Internet it was free to use. While still a myth, photojournalist Daniel Morela may have reason to question whether this in fact still true.

Morla was recently sued by Agence France Presse (AFP) for “antagonistic assertion of rights” for accusing AFP of violating his copyright in several photos taken following the January earthquake – Morela has counter sued for copyright infringement. AFP has asked for summary judgment that it did not infringe on Morela’s copyrights (complaint). AFP’s claims are interesting because, in part, they note that since Morela used Twitter to distribute the photos (which he did not – he used Twitpic), the Twitter Terms of Service (ToS) granting Twitter the right to distribute the photos should be extended to AFP as well. Besides the fact that AFP appears to have little understanding of the facts of their own case, this reading of the Twitter ToS is a little odd.

The Twitter ToS provide that:

    You retain your rights to any Content you submit, post or display on or through the Services. By submitting, posting or displaying Content on or through the Services, you grant us a worldwide, non-exclusive, royalty-free license (with the right to sublicense) to use, copy, reproduce, process, adapt, modify, publish, transmit, display and distribute such Content in any and all media or distribution methods (now known or later developed).

    You agree that this license includes the right for Twitter to make such Content available to other companies, organizations or individuals who partner with Twitter for the syndication, broadcast, distribution or publication of such Content on other media and services, subject to our terms and conditions for such Content use.

While it is possible that AFP is making the argument that the second clause which allows Twitter to make the content available to partners and that they in fact are partners, it is clear from anyone’s reasonable reading that this scenario is not what is intended by this agreement.

The much sparser Twitpic ToS has a similar clause, but its sparser writing style makes the intent of these types of clauses much more clear. The Twitpics Terms of Services specifically notes:

    By uploading your photos to Twitpic you give Twitpic permission to use or distribute your photos on Twitpic.com or affiliated sites

    All images uploaded are copyright © their respective owners

While I believe that AFP’s arguments are weak (though other claims raised by AFP may have more merit), they do help to illustrate that Creatives that use various forms of social media or SaaS solutions related to the creation or distribution of their work should be aware of, and understand, the ToS for those sites. Otherwise, you risk obscure boilerplate agreements giving away your work for free – or at least claims to that effect by multinational corporations.

Who can Sue when a Freelancer is Discriminated Against?


Freelancers take note: Under Minnesota Law if you have formed an LLC or other business entity and you experience discrimination at the hands of one of your clients, as an individual you cannot make a claim under Minnesota’s Human Rights Act (Minn. Stat. § 363A.17 (2008)), which authorizes parties to a business contract to sue for business discrimination in the performance of that contract.

The Minnesota Supreme Court reasoned in Krueger v. Zeman Construction Co. that the focus of the statue was the relationship of the parties, not on the individual subject to the discrimination. As a result, the court argued that an individual employee, even one that is a single member owner of an LLC, is not the intended beneficiary of the statute and therefore they cannot file a lawsuit in their individual capacity.

While I generally believe freelancers should consider business entities like LLC over that of sole proprietorship, this case provides a stark example of how there are some disadvantages to forming a separate legal entity and an evaluation of the advantages and disadvantages should always be considered.

Audit & Record Keeping Provisions

Whether you have partners, or are contracting for royalties from another party, one of the most common provisions in any licensing & partnership contracts is one that provides a means and method of keeping financial records of the project or business. The exact language will differ slightly depending on the specifics of your circumstances, but common terms will include what types of books are kept, how and when audits may occur, and a description of what is to happen in the event of a problem with the records.

Records
While there are a variety of record-keeping methods, typical contract provisions regarding record-keeping will simply provide that the books are complete and accurate. In most cases it is understood that the books will be kept in accordance with “generally accepted accounting principles.” Furthermore, in some circumstances, state statutes may regulate how the books are kept.

Audits
Once it is decided what and how records are kept, one of the most important elements of a record-keeping provision is one that allows audits of the records. This is useful in keeping everyone on their toes, and it provides a means by which everyone can feel comfortable that everyone is being treated fairly. However, it is important to remember the difference between an audit and the right to inspect the records. While the right of a party to inspect records is often unequivocal and required by statute, the right to audit can be more easily limited. Audit provisions typically address when an audit may occur, who can ask for one, and who will pay for the audit. Often the number of times a party can request an audit during a specific time period is limited and how much notice is needed before an audit can occur also varies. Audit provisions usually provide that the party requesting the audit bear the cost of the audit.

Resolution
The last element of a record-keeping provision is one that spells out what happens in the event that an audit uncovers a problem. This element should lay-out how corrections will be handled in the event that the audit uncovers either overpayment or underpayment of funds. In addition, the provision can also provide that in the event that there is an underpayment in excess of a certain amount (5-10%), the cost of the audit shifts to the responsible party.

Providing an orderly way to handle potential disputes over money is a great way to resolve disputes before they start.

Tax Deductions for Creatives

As Tax day approaches its important to take into account targeted deductions that benefit Creatives. One such deduction is the Domestic Production Activities Deduction (AKA Section 199 deduction) which was meant to encourage U.S. job creation. The deduction was created in 2004 as a part of the American Jobs Creation Act of 2004 and is one of those nice benefits that is targeted at small businesses operating as sole proprietors, partnerships, LLC, or S Corps.

So What?
For many creative based businesses, this deduction may provide a significant deduction on gross income, based on the amount of W-2 wages spent in the production of their work. The deduction specifically singles out wages paid out in the sound recording, software (including websites), and film (excluding porn) industries, as well as producers of personal tangible items (clothing, books, etc.) for an additional tax credit against profits.

What to do?
Simple – if you are engaged in one of these categories, had a profit, and paid W-2 wages, make sure that your tax preparer is aware that you may have this additional 6% deduction available to you, or if you prepare your own taxes, be sure to look though the instructions for Form 8903 .

IRS Circular 230 Notice:
United States Treasury Regulations require me to disclose the following: Any tax advice included in this document is not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

Forum Selection in Creative Commons Licenses

Users of Creative Common’s licenses beware!

Chang v. Virgin Mobile USA, LLC
2009 WL 111570 (N.D.Tex. January 16, 2009)

Texas plaintiffs posted a photo to a popular picture sharing website using a Creative Commons licenses. The photo was then down loaded by an Australian company who used the photo inconsistent with the Creative Commons 2.o license and Plaintiff’s wishes. Plaintiff sued Defendant in a Texas court and Defendant moved to dismiss for lack of jurisdiction. While many factors were considered, of particular note is how to court pointed out that the license did not require the license to take place in Texas.

In fact, the Creative Commons license used specifically does not contain either a forum selection clause or a choice of law clause that would outline where cases should be heard and under what state law a dispute will be analyzed. T he Creative Commons FAQ specifically notes that the selection of jurisdiction in the license

These clauses are commonly used in most transactions to provide some guidance to the parties to know where and under whose laws a dispute will be heard – to avoid problems such as the one in the Chang case.

While I understand the passion for Creative Commons licensing, it is this type of outcome that highlights for me why licensing parties should take a step back and make sure they really understand what they are doing when using these licenses. It also raise the question in my mind of whether licensors should consider making some additions to these terms such as adding in something stating the residency of the licensor, that the license is entered into under the laws of licensor and that all disputes will be heard in the licensor’s state/forum.

Business and the Law Seminar

This evening I had the pleasure of giving a presentation at Women Venture to several women working to develop and start new businesses. I gave a presentation entitled Business and the Law which covered a variety of issues related to protecting the business owner’s rights and managing their liability risks.

While it is easy to focus on the doom and gloom of the big picture economy, hearing the plans of these business women highlights the importance of not allowing the stories in the news to prevent businesses from moving forward. Opportunities do exist -people simply need to keep an eye out for the right situations. People wiling to take the risk at this point will be well situated when better economic times come along.

For more information on Women Venture and their programs, go to www.womenventure.org.

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