Terminating S-Corporation Status

Have you decided that, following passage of the Tax Cuts and Jobs Act of 2017, you would be better off if your business were a C corporation instead of an S corporation? Are you regretting that you ever made that S election or wishing you had thought this through and acted sooner? Fret not … there is still time to terminate your company’s S-election and be taxed as a C-corporation for the entire 2018 year! As long as it is done by March 15th, the termination will be retroactive to January 1st and effective for the 2018 tax year.

First, you will need to make sure that at least a majority interest of shareholders (i.e. shareholders who collectively own more than 50% of the voting interest in the corporation) are on board because a majority is needed to terminate the S election. You should also check your Bylaws and Shareholders Agreement for whether a super majority or unanimous consent is required to terminate S election. Accordingly, your first step should be drafting a corporate resolution seeking the appropriate consent of the shareholders to terminate S status. Once that has been accomplished, the next step is filing the papers with the IRS, which basically consists of submitting a letter of consent to the IRS that demonstrates consent by the shareholders to terminate S status and includes a slew of required information. Finally, you should check with your state to see if there are any additional state filing or notification requirements. And of course, be sure to keep your accountant in the loop!

One note of caution is that once you terminate S status, you generally cannot re-elect S status for 5 years. So before you make the change, be sure to consult with your legal, tax, and financial advisors to be sure that this is the right move for the company and its shareholders.

 

Electing a Partnership Representative Under the New Law

As of this year, following implementation of the Bipartisan Budget Act of 2015, LLC’s, partnerships, and other pass-through entities must have a designated Partnership Representative. The Partnership Representative replaces the Tax Matters Partner. This is more than just a title change. The Partnership Representative has far more authority and responsibility than the Tax Matters Partner. Under previous law, the Tax Matters Partner was responsible for being the entity’s representative in the event of an IRS audit or any other contact with the IRS, but had limited authority to bind the other partners. As of January 1, 2018, that role has been eliminated and replaced with the Partnership Representative. The Partnership Representative will have significantly more authority to bind the other partners with respect to an IRS audit proceeding. That means that the Partnership Representative can have full and absolute discretion to settle with the IRS, pay the imposed taxes and penalties, proceed to litigation, agree to extend the statute of limitations, etc., all without consulting or even notifying the other partners.

Unlike a tax matters partner, the Partnership Representative need not be a partner/owner of the entity. In other words, the partners can designate a non-owner third party to be the Partnership Representative. Even if the partners have not formally elected a Partnership Representative, when the entity files its tax returns, it will be asked to provide the name of the partnership representative each year. Failure to do so could result in the IRS appointing a Partnership Representative for the partnership.

Accordingly, owners of pass-through entities should take action now, such as appointing a Partnership Representative by resolution and/or amending their partnership/operating agreements to address this and other related changes to pass-through entity law under the Bipartisan Budget Act of 2015 that came into effect this year. For example, beyond merely appointing a Partnership Representative, the partnership/operating agreement can dictate how the representative is appointed and replaced, and can provide for certain parameters, such as requiring the representative to keep the other partners in the loop. Agreeing on these terms now will be far easier than waiting until the company is faced with an IRS audit.

Did C Corporations Just Become More Attractive?

Pass-through entities, such as S corporations and LLCs, have been all the rage for small business owners for the past few decades. Pass-through entities offer all of the liability benefits of traditional C corporations but without that pesky corporate level tax. Now that the maximum corporate tax rate just plunged from 35% to 21% under the new tax law, might people start looking at C corporations in a new, more favorable light? Might people start forming C corporations or even converting their S corporations and LLCs to C corporations?

But wait, didn’t the law also provide significant tax relief to pass-through entities in the form of a 20% tax deduction? Well, yes, but with some catches. One catch is that, unlike the corporate tax rate cut, the pass-through tax deduction is set to expire in 2025. Perhaps it will be extended, but there’s no way to know for sure. (Then again, a future Congress could raise the corporate tax rate back to 35%.)

Another catch is that there are significant limitations for certain services providers, such as doctors, lawyers, accountants, and engineers. If you are one of the specifically excluded professions and operate as a pass-through entity (e.g. an engineer providing services through a firm structured as an LLC), the 20% deduction begins to phase out after $157,000 in income for single taxpayers, $314,000 for married taxpayers. This could lead some people to consider splitting their businesses into two entities if, for example, one aspect of their business is offering engineering services (subject to the income exclusions) and another aspect of their business is offering architectural services (not subject to the income exclusions). They could end up with a C corporation for their engineering services and an LLC or S corporation for their architectural services.

However, before forming or converting your pass-through entity to a C corporation or splitting your business into two separate entities, keep in mind that there is still a corporate level tax, albeit a much lower one. Whether it’s 35% or 21%, if you are paying yourself all or most of your company’s profits, you will still probably want to avoid that corporate-level taxation. However, if your entity retains a significant portion of profits in order to grow the business, then a C corporation may make sense, especially if you fall under one of the professions subject to the pass-through exemption income restrictions.

The bottom line is that you should consult with your accountant to crunch the numbers and your lawyer to discuss the process. Which brings up another downside to converting – the fees you will have to pay professionals, along with any filings fees charged by your company’s state. Those costs need to be factored in. If the tax savings will be minimal, it may not be worth the costs of conversion. However, if you will be enjoying significant tax savings, it may be well worth the costs now to enjoy tax savings over the long haul.

Accommodating Your Employee’s Request to Switch to Independent Contractor Status

You run a small or  medium-sized business, you’re busy, and maybe you haven’t given much thought yet to how the recent changes to the tax laws might affect you or your businesses, when one of your best employees approaches you about switching from employee status to independent contractor status so that she can take advantage of the new tax laws. (My last blog post discussed why employees might want to make that switch.) Your first instinct might be to say sure, why not? For one thing, this is a loyal employee and you like the idea of accommodating her and helping her save money. Additionally, you have always known that there are financial advantages to businesses in hiring independent contractors over employees, most notably that you do not have to pay any FICA taxes on behalf of an independent contractor. And this employee in particular has a good salary and participates in your company’s matching 401(k) plan to the fullest extent. She also has her entire family on the company’s generous (and expensive) group healthcare plan. You also suspect she is planning to have another child and take advantage of the company’s paid maternity leave again. If she becomes an independent contractor, she would not be entitled to any of these employee benefits. Seems like a no-brainer to allow her to switch, right?

Not so fast. While it is true that you would no doubt welcome the opportunity to not have to withhold and pay FICA taxes for her, pay for her and her family’s health insurance, and pay for her to go on another paid maternity leave, if the IRS determines that, for tax purposes, she is really an employee, your company could end up getting hit with a hefty bill in back taxes, and even fines. That’s because under IRS regulations, just because you decide to make someone an independent contractor, doesn’t mean the IRS can’t later deem them an employee for payroll withholding purposes. If this is an employee who primarily works on-site for set hours utilizing company equipment and is under your (or another manager’s) supervision, then this is probably not someone who will be able to qualify as an independent contractor. However, if this person sets her own hours, spends much of her time working off-site, uses her own equipment for which she does not receive reimbursement, and generally works independent of any supervision, then independent contractor status might be something to consider.

But even if the risk of an IRS challenge to her independent contractor status is low, there could be other unintended consequences that result from reclassifying an employee as an independent contractor. Does this employee create anything for you? Does she work on the company’s website, write articles to include in the company newsletter, write software programs for the company or its clients, or work on inventions? As an employee, anything she creates within the scope of her employment is (generally speaking under most states’ laws) automatically deemed to be owned by her employer. Not so for independent contractors. Additionally, if she is subject to a non-compete, that non-compete will either terminate along with her employment status (e.g. if she was under an employment contract that included a non-compete provision) or at the very least will be a lot harder to enforce.

Accordingly, employers need to be careful. Any employer approached by an employee about switching should seek the advice of legal counsel to assess the risks and consequences of doing so.

Should You Quit Your Job To Take Advantage of the New Tax Law?

You love your job. You earn a good living. But what if quitting your job could actually save you money? Under the new tax law, there are people who could enjoy significant tax cuts by quitting their jobs and getting re-hired by the same employer as an independent contractor.

The Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017 and takes effect for tax years beginning January 1, 2018, offers some significant tax advantages to individuals who offer services through a pass-through entity, such as an LLC or S corporation. In a typical structure, the individual forms a pass-through entity, and then the entity is engaged as an independent contractor by a company in need of the individual’s services. Utilizing a pass-through entity to offer the owner’s services has been a common practice for a lot of professional service workers, such as computer programmers, architects, and web designers, because an entity offers liability protection, and a pass-through entity means that the individual does not have to pay taxes at the corporate level (avoiding the so-called double taxation). The new tax law just sweetened the deal even more by allowing many owners of pass-through entities to deduct twenty percent of their revenue from their taxable income.  That’s why working for your employer as an independent contractor through a pass-through entity instead of as a traditional employee could save some individuals a lot of money in taxes. (Certain professions, such as doctors, engineers, lawyers, and accountants, are subject to income phaseouts that start at $157,000 for single taxpayers, $314,000 for married taxpayers.)

But wait, there’s more! Not only did the deal get sweetened for people who offer services as independent contractors through pass-through entities, but it also made life a little tougher (or, at least, a little more expensive) for traditional employees. Employees who have been deducting their unreimbursed work-related costs will no longer be able to do so. That’s because the new law eliminates this itemized deduction. Depending on how much in unreimbursed expenses an employee incurs, that could be a significant tax deduction that will no longer be available to them starting this year.

So with the new tax laws being skewed in favor of independent contractors and against employees, should employees be turning themselves into independent contractors? Should, for example, an architect who is employed by an architectural firm consider approaching her firm about switching from being an employee to being an independent contractor? Since she’s not limited by the specified service businesses rules (architects were essentially specifically excluded), she could set up an LLC of which she is the sole member, her firm could pay her LLC for her services, and all the income received by the LLC would pass through to her. She would then be able to deduct 20% of her income. Additionally, she would not have to worry about those unreimbursed expenses not being deductible because she would be able to deduct any work-related expenses as business expenses. Sounds like a pretty good deal, right? Well, from a purely tax standpoint, it is! But there are some potential downsides that need to be considered.

By changing over to an independent contractor she would be giving up her status as an employee. This means that she would be giving up certain protections and benefits. For example, the Title VII anti-discrimination laws protect employees, not independent contractors. So if her firm terminated her employment while she was still an employee, she could file a Title VII violation claim against them if she felt she was fired for being a woman. However, once she is an independent contractor, she loses that protection. Additionally, if she has been enjoying certain employee benefits, such as group healthcare, matching 401(k) contributions, paid vacations, etc., she loses all of those too. She also loses FMLA and workers comp protection (if she gets pregnant or sick or is injured on the job) and unemployment protection and COBRA (if she loses her job). There are many benefits to being an employee over an independent contractor that would be lost to anyone making the switch.

With all that said, because the new tax law so heavily favors independent contractors over employees, employees will want to consider whether they should form a pass-through entity and operate as an independent contractor through their entity. Anyone considering doing so, should first speak with their accountant and seek legal advice to make sure that the pros outweigh the cons for their particular circumstances. Additionally, employees may be able to negotiate the terms of their switch with their employer, since switching could benefit the employer too.

In my next blog post, I will discuss the employer-side pros and cons and what an employer should consider if an employee approaches them about making the switch to independent contractor status. In the meantime, for more details on the tax implications of incorporating, or for other scenarios involving incorporation, see Kelly Erb’s post at Forbes.

‘Tis The Season To Be Wary

As we look forward to the upcoming holiday season, it is important to remember that with the joyous occasions there can also be some potentially disastrous pitfalls for employers that can quickly turn the holiday fun into complaints and lawsuits. This blog covers some of these liability risks and offers suggestions and guidelines for employers to help minimize these risks.

Part 1: Deck the Halls … With Some Carefully Considered Decorations

The upcoming holiday season can be an especially tricky time when it comes to religious discrimination. Many employees are celebrating and observing different religious holidays and some may not be celebrating any holiday at all. It is important for an employer to be sensitive to all of these varying beliefs, not just out of political correctness and tolerance, but to avoid a potential discrimination claim. When it comes to anti-discrimination laws, religion is a protected class in the United States. This means that it is against the law for an employer to discriminate in any way against an employee based on religion or religious beliefs (or lack thereof). An employer may not even realize that something at work is making an employee feel discriminated against and may be genuinely surprised when that employee complains or files a lawsuit.

Discrimination claims comes in all shapes and sizes. An employee may feel discriminated against because he is the only non-Christian in an office decked out in Christmas decorations. Or he may feel discriminated against because he was told to remove the mini nativity scene from his desk. Or maybe he takes offense to being invited to a Christmas party or partake in a Secret Santa gift exchange when he is Jewish. Or perhaps you have gone out of your way to represent all major world religions in your holiday decorations and, in doing so, have unwittingly offended your one employee who you did not realize observes no religion.

Outlined below are some measures employers can take to help ensure that no employee feels discriminated against on the basis of religion. Following these simple steps can decrease the likelihood of your company being hit with a religious discrimination lawsuit.

• Avoid religious decorations in the office. If you want to decorate your office in celebration of the season, stick to non-religious decorations, like winter scenes and snowmen. Avoid overtly religious symbols like crucifixes and nativity scenes. If you do decide to have some “moderate” religious decorations, like wreaths or Christmas trees, try to include symbols of other religions represented in the office, like a menorah or dreidel if you have (or think you may have) any Jewish employees. You may also want to consider having decorations during other non-religious holiday times (such as Valentine’s Day, Independence Day, and Thanksgiving) to lesson the appearance of a religious undertone during the Christmas season. Although there is no federal law that bans private employers from putting up religious decorations in the common areas, you do not want to be seen as “endorsing” a particular religion and risk offending people who do not subscribe to that religion. You also want to be careful about prohibiting employees, who might normally be permitted to display family photos and artwork, from decorating their own personal office spaces with religious decorations, as that could be interpreted as religious discrimination. Any policies about displaying holiday decorations in personal office spaces should be carefully considered before being issued.

• Avoid using the term “Christmas” (or any other religious holiday) with respect to any employer sanctioned event or program. For example, do not call your annual party a Christmas Party, your annual gift exchange a Secret Santa, or your annual bonus a Christmas Bonus. Instead, refer to them as a Holiday Party or End of Year Party, a Secret Gift Exchange or White Elephant Gift Swap, and a Holiday Bonus or Annual Bonus.

• If your place of business is closed for Christmas (as most offices and many retail establishments are), make sure to also respect the wishes of non-Christian employees to take off to observe their holidays. If your company is open for Christmas, make an effort to accommodate those employees who want to request the day off. While the law does not obligate you to accommodate all such requests if it would cause undue hardship to your company, reasonable accommodations should be made as much as reasonably possible to accommodate an employee’s religious beliefs. For example, if all of your employees observe Christmas and wish to have the day off, have and enforce a policy to decide which employees get the day off, such as one based on seniority or a lottery system, and perhaps offer those employee who must work on Christmas an extra two vacation days in exchange. You may find that by simply offering two extra vacation days, some employees are willing to work on Christmas.

• Be supportive of an employee’s unease. For example, if an employee expresses discomfort over any holiday decorations in the office, do not ridicule the employee for her concerns. Instead, listen respectfully to the employee and do your best to accommodate her concerns, perhaps by removing Christmas decorations from her work space and/or placing a decoration of her own religion in the office. If the employee sees that you are understanding of her religious (or non-religious) beliefs and are making an effort to accommodate her concerns, she will be less likely to feel discriminated against.

Part 2: O Holy (What a) Night!

The month of December is considered the “holiday season” because of so many holidays of various religions falling during December. Offices often use this opportunity to throw an annual office party in an effort to gather all of its employees together for a fun and festive occasion. A common feature at these parties is alcohol. It is served to increase the festive mood and “loosen up” stressed-out employees after a year’s worth of hard work. Unfortunately, when it comes to employer liability, alcohol is like a loaded gun aimed straight at the good cheer.

If one of your employees becomes intoxicated at your office party, you could be held liable for any injuries that employee causes to himself or others. An extreme example, but one that, unfortunately, does happen, is if one of your employees drinks at your holiday party, drives home, and kills himself or someone else in a drunk driving accident. There is a possibility that your company could be held liable for that person’s death. Even if your company is located in a state that does not impose liability on employers serving alcohol to adults (so-called “social host” liability), your company could still be held liable for third party injuries on the theory that the employees are acting within the scope of their employment.

Another issue that often accompanies alcohol consumption is inappropriate behavior. Claims of sexual harassment are often an unfortunate outcome following an office party where the alcohol was flowing a little too freely.

There are steps you can take to prevent these kinds of tragedies and inappropriate behaviors from occurring and minimize your company’s liability. The obvious one is to not serve any alcohol. However, if you decide to serve alcohol, there are measures you can take to decrease the risks. Some suggestions are outlined below.

• Have someone in a supervisory position be in change of serving alcohol, rather than allowing employees to self-serve. Better yet, hire a professional bartender.

• Designate some or all supervisors as non-drinkers to be on the look out for inappropriate behavior and have a plan of intervention for such supervisors to follow if they see someone behaving inappropriately or appearing intoxicated. Ideally, there should be at least a couple of designated non-drinkers to keep an eye on things and take care of anyone who has had too much to drink.

• Instruct those serving alcohol to refuse to serve anyone who is visibly intoxicated and to report it to a designated non-drinker.

• Limit the number of drinks each person can have by giving each person two drink tickets with the employees’ names on their tickets. Instruct employees that ticket-swapping or “purchasing” a drink for someone else is prohibited.

• Limit the amount of time alcohol is served (e.g. have a cocktail hour before dinner and then do not offer any more alcohol once dinner is served).

• Check personnel records to ensure that no one under 21 is permitted to drink. (This is particularly important from a liability standpoint as most states, including Pennsylvania, do impose liability on “social hosts” who serve alcohol to those under the legal drinking age.)

• Arrange transportation to take employees home, either with designated drivers, car services, or a van.

• Hold the party on a Sunday afternoon or during lunch. (Times when people are less likely to overindulge in alcohol).

• Make the party a family affair by including spouses and children. People tend to be less likely to act inappropriately when their family is present.

• Be sure to have plenty of non-alcoholic beverages and food available.

• Lead by example. Even if you don’t have designated non-drinkers, encourage supervisors and all members of upper management to set the tone by either voluntarily not drinking or drinking in moderation. 

• Send a memo to all employees in advance of the party warning them not to drink too much and advising them of the measures the company is taking to ensure everyone’s safety, such as providing for free transportation home. Remind them that while the party is a time to have fun, it is still important to maintain a level of professionalism and the company will not look kindly upon anyone who drinks too much. You may even want to consider having employees sign a form promising to moderate their drinking and behavior and releasing the company of liability.

• Check your company’s general liability policies to determine what, if any, kind of coverage you have for this kind of event. Many policies specifically exclude coverage for events where alcohol is served. If your policies do not cover your holiday party, you may want to consider purchasing a “special events” or “dram shop” policy to cover the event.

Taking the time now, before the decorations go up, bonuses are paid, and the holiday party is planned, can make the holiday season fun and safe for your company and for all of your employees.

The Basics of US Employment Law Part V: Overtime Pay

This final blog in the series on United States Employment Law Basics discusses the how to determine which employees are entitled to overtime pay. The determination is based on whether an employee is “exempt” or “non-exempt”. Only non-exempt employees are entitled to overtime pay.

The concept of “exempt” versus “non-exempt” is an important one in United States employment law. One of the biggest issues employers often face is the determination of whether a particular employee or class of employees is exempt or non-exempt. The terms “exempt” and “non-exempt” relate to whether an employee is covered by the Federal Labor Standards Act (the “FLSA”) or whether he is “exempt” from coverage. Being covered (i.e. being non-exempt) provides employees with certain protections beyond federal and state law and subjects employers to additional requirements, one of the most important being overtime pay.

The FLSA provides that “non-exempt” employees who work more than a certain number of hours per week are entitled to “overtime pay”, which is generally one and a half times their normal hourly rate. Accordingly, it is generally advantageous to employers to have their employees to be considered “exempt” so that they do not have to pay them overtime and abide by the other FLSA requirements.

There are very specific (and often complex) rules to determine whether an employee or class of employees is exempt. In the most general of terms, professional employees (such as lawyers, accountants, doctors, and business executives) are usually exempt. These are the kinds of professions where long workdays are common, salaries are competitive, and higher education is usually a job requirement. It is assumed that individuals with a higher education level have more bargaining power and therefore do not need the protection of the FLSA. On the other end of the spectrum are the unskilled laborers, such as a clerk in a store or a maid in a hotel. These kinds of workers are generally paid by the hour, often at minimum wage, and do not need to be college-educated. These workers are typically covered by the FLSA. However, just because a worker receives a salary (as opposed to an hourly wage) does not automatically mean that he is exempt. There are a lot of companies that pay all their employees salaries, but just because you pay your file clerk a salary does not mean you can get away with not paying him overtime. It is a common mistake to assume that salaried workers are exempt and that only hourly workers are entitled to overtime pay and other FLSA benefits. Although hourly workers are often non-exempt and salaried workers are often exempt, the manner in which an employee is paid is in no way determinative of whether the employee is FLSA-exempt. Figuring out whether an employee or class of employees is exempt often involves a great deal of factual and legal analysis in consultation with your legal department or outside counsel.

The Basics of US Employment Law Part IV: Healthcare and Retirement Plans

It is widely known that unlike many countries in Europe, the United States does not have universal healthcare coverage for its citizens. This issue has been at the forefront of many political debates and was even the subject of the 2007 Michael Moore documentary, Sicko. Even with the passage of the Affordable Care Act, most US citizens must still pay to receive healthcare coverage.

Under the current system in the United States, without universal free healthcare, the burden of providing healthcare coverage  falls largely on employers, including many small businesses. Much like the vacation time I discussed in my last blog post, even though healthcare coverage of employees is not mandated, most companies offer their employees some form of healthcare coverage. In fact, it has come to be expected that if you are employed, you (and your family) will have the option of joining your employer’s healthcare plan. However, this does not mean that all employers pay all the costs of covering their employees. Many companies ask that the employees pay all or a percentage of the insurance premiums and other costs for their (and their families’) coverage. There are also a wide range of healthcare plans for employers to chose from of varying degrees of quality and price. One of the benefits employees look for when choosing a job is the type of healthcare plan and coverage an employer offers. Therefore, even though healthcare coverage is not required, many employers, especially larger ones, offer generous healthcare plans in order to attract high quality employees.

Additionally, employers with 20 or more employees who offer healthcare coverage are subject to a federal law known as COBRA, designed to make sure there is no break in healthcare coverage when an individual is between jobs. COBRA requires employers with 20 or more employees to allow former employees to stay on the employer’s healthcare plan for a certain period of time after the employment relationship has ended. COBRA does not normally mandate continuation of any payments the employer may have been making towards the coverage. Accordingly, even if an employer covers 100% of the costs of its employees’ healthcare, it does not have to cover any costs of former employees’ healthcare under COBRA and can require former employees to pay for up to 102% of the costs (the extra 2% being meant to cover the employer’s administrative costs of keeping the former employee on the plan). Many states, including Pennsylvania, have similar laws known as “mini-COBRA” that apply to employers with fewer than 20 employees.

In addition to healthcare plans, many (if not most) larger companies and many smaller companies offer their employees some type of retirement savings plan. The most common type of retirement plan is known as a 401(k) plan, named after the section in the Internal Revenue Code governing the taxation of this type of retirement plan. In addition to offering a 401(k) plan for its employees to contribute money to, employers will sometimes offer a “matching” contribution. For example, an employer might offer to match up to 3%, meaning that if the employee elects to contribute 3% of her salary to her 401(k) plan, the employer will match that contribution with an equal amount of money contributed to the employee’s 401(k) plan. As with healthcare coverage, retirement plans are a benefit employees look for in deciding whether to accept a job offer. Employers seeking to attract and retain top quality employees generally find it necessary to offer their employees a competitive benefits package that includes both a group healthcare plan and a retirement plan.

The Basics of US Employment Law Part III: Vacation Time

This blog in the US Employment Law series focuses on vacation time.

One of the key differences between United States employees and employees in most of Europe is the amount of vacation time employees have come to expect. American employees think that four weeks vacation is extremely generous. Europeans, on the other hand, commonly enjoy four or more weeks of vacation even at entry-level jobs, and many European countries mandate a minimum amount of vacation time.

In the US, there are no federal laws mandating how much paid time off an employee must receive. Absent a collective bargaining agreement or other employment contract, most US employers do not have to offer any paid time off to their employees. However, some local laws mandate a certain amount of paid time off, including my home city of Philadelphia, which requires employers with a minimum number of employees to offer a certain amount of paid sick leave. There are also laws governing unpaid time off, such as the federal Family and Medical Leave Act. So employers should be sure to check with their legal counsel about their particular requirements.

It is also important for employers to understand that although they may not be legally required to offer any paid time off, a certain amount of paid time off has come to be expected in the US as a matter of practice. One might say that vacation time in the US is largely governed by custom. Most salaried (i.e. non-hourly) employees expect to receive one to two weeks of paid time off per year. This paid time off may be in the form of some combination of vacation time, sick days, and personal days. As employees advance in their careers, they expect to receive more vacation time. In general, it is customary for employees to receive between two and four weeks of vacation time per year, depending on their level of experience and years of service, with more senior executives enjoying more generous paid time off packages. Most entry-level jobs provide up to two weeks vacation. Six or more weeks of vacation time is generally reserved for the most senior executives – those who have worked hard, proven their loyalty, and are being rewarded towards the end of their career.

A common problem multi-national companies face is when they bring over an employee from Europe to work in the US office. The European employee often expects to continue to receive her four to six weeks of vacation. This, however, may not go over too well with her US colleagues working in the same office at the same level, but who are only getting two weeks of vacation. Employers need to be sensitive to this potential land mine.

The Basics of US Employment Law Part II: At-Will Employment

This blog on US employment law focuses on the concept of “at-will” employment.

One of the key elements of United States employment law is the idea that an employer can fire an employee at any time without notice and without cause. In other words, an employee is employed at the will of the employer and can be fired at the will of the employer without the employer needing a justification for the firing. This is what is known as being an “employee-at-will”.

There is no federal law that mandates at-will employment or that protects employees against being employed at-will. At-will employment is governed by state law. Most states, including Pennsylvania, are “at-will” states, meaning that these states have embraced the concept that an employer may fire an employee without cause. When an employee is employed “at will”, an employer is free to fire that employee “without cause”. In other words, an employer can fire an employee even if the employee has adequately performed his duties and has done nothing wrong. Perhaps, for example, the employer wants to reduce its staff for business reasons. Or perhaps a particular employee is doing an adequate job, but the employer knows of someone else whom the employer believes will do a better job. Or perhaps, even, a particular employee is doing an outstanding job, but the employer’s son needs a job and there isn’t enough work for both of them. Or maybe the employer just does not like the employee’s personality. Although a particular state may have more protective laws, under federal law, none of the foregoing would be illegal reasons for firing someone, and most “at-will” states would allow an employee to be fired for any of those reasons.

However, as discussed in Part I of this series, an employer cannot fire an employee on the basis of race, gender, age, or any other classification protected by federal law (or applicable state and local law). So while an employer may fire an employee to replace her with his own child, or because he did not like her personality, he could not fire her simply because she is a woman, or because she is old, or because she is Muslim. As one might imagine, even if the employer’s motivation behind the firing were perfectly legal (e.g. the employer wanted to downsize or make room for his relative), a terminated employee might not see it that way and may try to claim that the firing was motivated by prohibited discrimination. Therefore, even if your business is in an at-will state, it is still a good idea to document disciplinary actions taken against any employees and to have a valid business reason for firing someone.

It is also important to keep in mind that just because your business is located in an at-will state does not mean that all your employees are automatically at-will. If an employee and the employer enter into an employment contract, that contract can override the at-will status. This can happen if, for example, the contract provides for a set term of employment or requires cause or notice for termination. Employers need to be wary when they give the employee anything in writing or even verbally (such as an offer letter, a verbal job offer, or even an employee handbook) that they are not inadvertently creating an employment contract with terms that could override the at-will status.