WHEN A SOLE
practitioner commits to hiring an associate, that lawyer takes
on a management role. Sole practitioners or small partnerships
considering hiring new lawyers or other employees should first
consider the significant issues-such as employment laws, malpractice
insurance coverage and state and federal tax filing
requirements-associated with becoming an employer and manager.
Most of the
better known federal employment laws likely will not apply to a
small law practice, based on the threshold number of employees
required by statutory definition. For example, Title VII of the
Civil Rights Act of 1964, as amended, is triggered at 15 employees,
the Americans With Disabilities Act is triggered at 25 employees,
and the Age Discrimination in Employment Act is triggered at 20
however, many federal, state and local employment laws and
ordinances-similar in scope and effect to federal laws-which would
include a small law practice within their coverage. These laws and
ordinances, administered by state, county or local agencies, may
subject small firms to lawsuits or require certain employer actions,
such as postings on bulletin boards and the promulgation of written
policies. State and local laws often require small employers to
respond to charges of discriminatory employment practices, including
unlawful pre- employment inquiries, failure to hire, and sexual and
other types of harassment and discrimination.
sole practitioner also should examine for applicability other state
laws, including wage and hour laws concerning the timing and method
of payment of wages; the making of deductions from pay; the
requirement for lunch and break periods and related record-keeping;
disability, workers' compensation and unemployment insurance laws
concerning requirements for coverage; posting of notices and
reporting of relevant incidents; and laws concerning health
insurance continuation on termination of employment similar to the
provisions of COBRA.
federal laws will also be applicable to a small firm, including
the Immigration Reform and Control Act of 1986, which requires that
employers verify an individual's eligibility for employment by use
of the 1-9 form at the time of hire; the Fair Credit Reporting Act,
as amended, which requires written authorizations from employees or
candidates for employment before certain background investigations
can be conducted, and certain written notifications by employers
prior to taking "adverse action" based on such
investigations; and the Fair Labor Standards Act, or FLSA, which
would apply to a small firm to the extent that the firm is engaged
in "interstate commerce," and has an annual business of at
least $500,000. The FLSA is of primary concern with regard to issues
such as minimum wage and overtime payments to "nonexempt"
general principles of employment law must also be considered. For
example, the at-will status of employees must be maintained by
avoiding oral representations that may be considered promises of
long-term employment. Documents relating to the employment
relationship must be carefully drafted to avoid express or implied
agreements of employment for a term or of discharge only for cause.
health issues in the workplace must be carefully monitored, beyond
compliance with workers’ compensation statutes. For example, some
states have a negligence or intent provision relating to workplace
illness or injury that will increase an employer's liability.
Occupational Safety and Health Act, which covers employers
"affecting commerce," and similar state laws also may
apply. Such laws contain posting, reporting and complaint
procedures, in addition to setting standards for workplace
engage attorneys not as employees but as independent contractors in
order to avoid certain obligations, such as tax withholding,
disability, workers’ compensation and unemployment insurance
liability, must be certain that such attorneys are not properly
categorized as employees. This determination requires a careful
analysis of related state and federal law including, for example,
the "20-Factor Test" used by the Internal Revenue Service.
The central issue in this analysis is whether the employer has the
right to control both the results to be accomplished and the manner
and means by which the purported employee brings about that result.
practitioners and small partnerships already should have malpractice
insurance coverage. When new associates are added, the firm should
extend their coverage to these new lawyers.
small firms should contact the broker/agent that placed the
malpractice coverage and notify him or her of the addition of a new
attorney. An application form should then be submitted to reflect
the addition of a new lawyer to the firm.
application typically requires the following information: full name
of the law firm; effective date of coverage desired; policy number;
the name of the new lawyer; the new lawyer's number of years of
practice; his or her year admitted to the bar; the new lawyer's
area(s) of practice; and his or her status (i.e., partner, of
counsel or associate).
may also be requested to supply information about the new associate
with respect to his or her prior professional liability insurers,
policy numbers, claim limits and policy periods. If the effective
dates and carriers are not provided, the new lawyer should check
with his or her former firm to obtain the necessary information.
information typically requested includes whether the
employer/partner of the firm is aware of any professional liability
claim against the firm or any incident or omission which might
reasonably be expected to be the basis of a lawsuit or claim;
whether a carrier has denied, refused or canceled the firm's
malpractice coverage; whether the new associate has been denied
admission to practice, disbarred or suspended from practice or
formally reprimanded by any court or agency; and the employment
history of the new attorney for the past five years.
If the new
associate does not provide either his or her past employment history
or prior insurance coverage, there may exist the potential for
serious liability. It is prudent to consider obtaining a "prior
acts" exclusion endorsement which would exclude malpractice
coverage for the new attorney for acts committed prior to the
effective date of coverage under the firm's malpractice policy.
If the firm
does not obtain such endorsement, its malpractice policy could be
charged with providing coverage to the new associate employee for
his or her acts, errors or omissions committed prior to employment
with the firm-and costs would increase accordingly. Prior acts
coverage, however. would be acceptable if the firm feels that the
new lawyer would not present any risk of increased malpractice
information on the insurance form must be accurate, because both the
employer and the new employee are warranting that the answers to the
questionnaire are true and are deemed incorporated into the original
lawyers’ professional liability application. Any misrepresentation
found in this new attorney form application could result in a
carrier's denial of a claim or a rescission action, as the responses
are incorporated into the original application.
application is submitted as a midyear addition to the policy, it is
likely that the premiums will not change at the time the new
associate is added. Be advised, however, that at renewal time, the
insurance premium will be subject to recalculation.
Considerations The addition of a W-2 employee brings new taxes and
filing requirements, regardless of the firm's structure as a
partnership or other entity. For example, each new employee must
file a W-4 Employee's Withholding and Allowance Certificate. This
form must be kept in the permanent payroll file, and a duplicate
must be mailed or faxed to the state's new-hire notification unit.
Further, if state withholding allowances are different from the
federal withholding allowance, a separate state certificate- such as
New York's IT-2104-must be completed.
1-9 Employment Eligibility Verification, commonly known as the
"immigration form," verifies that the employee is eligible
to work in the United States. This form must be kept with the
personnel file for inspection in the event of an audit.
employers also must make federal income tax and FICA withholdings.
Social Security tax withholding is equal to 6.2 percent of gross
wages and Medicare tax withholding is equal to 1.45 percent of gross
wages. The combined rate of 7.65 percent is deducted from the
employee's gross pay.
Social Security is limited to the first $65,400 of salary per
employee. Medicare does not have a limit. Employers must match the
Social Security and Medicare portion when making their weekly,
semiweekly, monthly or quarterly deposits. Federal income tax
withholding is based upon IRS tables factoring pay period wages and
W-4 withholding allowances.
Social Security/Medicare deposit requirement is determined based on
the prior year's liability. For example, if an employer has annual
federal payroll tax liability over $50,000, it would file
semiweekly. If an employer has an annual federal payroll tax
liability under $50,000, it would file monthly. If an employer has
federal payroll tax liability of less than $500 in any quarter, it
can be paid with the quarterly tax return Form 941, when filed.
also are required to file the Form 941 Quarterly Return. Form 941 is
filed on the last day of April, July, October and January. Form 941
is a recap of the quarterly payroll information, including items
such as gross wages, total federal payroll tax liability and federal
is used to make scheduled deposits at federal depository banks.
Unless the firm's quarterly liability is less than $500, the firm
must use deposit coupons or electronic federal tax
payments-known as EFTPs-and cannot remit directly to the IRS.
Most of the better
known federal employment laws don’t apply to a small practice,
but many federal and state laws do.
be made electronically by phone or computer. Congress mandates that
by July 1998 employers must make their federal deposit
electronically, rather than via Form 8109 deposit coupons.
must annually provide employees and the IRS with Form W-2 Wage and
Tax Statements by Jan. 3 1. The W-2 is a summary statement of wages
paid to, and taxes withheld from, an employee for use in filing the
personal income tax Form 1040. Form W-3 must be filed by Feb. 28
with the Social Security Administration, or SSA. This is a
transmittal of wage and tax statements to the SSA.
Miscellaneous and 1096 Transmittal must be filed by Feb. 28 with the
IRS. These forms furnish the IRS and recipients with a summary
statement showing nonemployee compensation paid to any noncorporate
entity, and to any attorneys, in excess of $600.
the annual federal unemployment insurance return, is due annually,
on Jan. 31. Taxes are due on the first $7,000 of each employee's
annual wages and are remitted to the IRS quarterly via the Form 8109
or EFFP payment systems. If state unemployment insurance is paid
timely, the rate of tax is 0.8 percent of gross wages. States impose
additional filing requirements. For example, New York requires
periodic returns (the WT-1 Coupon Voucher), quarterly wage filings
(WT4A or WT4AE or WT4B), unemployment insurance filings, disability
insurance and workers compensation. Practitioners should check all
applicable state laws.
benefits, such as vacation, sick and personal days and health
insurance, are for the most part discretionary and clear-cut, but a
change in retirement funding has occurred.
in 1998, if one spouse actively participates in an
employer-sponsored plan and the other does not, the latter may make
a fully deductible IRA contribution, provided the adjusted gross
income on the joint return is $150,000 or less. The deductible
amount is phased out when adjusted gross income reaches $160,000. In
a change designed to treat self-employed individuals the same as
employees, beginning in 1998 any owner of a partnership, limited
liability company, limited liability partnership or S corporation
who receives a matching contribution to a 40 1 (k) plan will not
have that amount designated as a salary deferral. Prior to this
change, matching contributions for owners were considered salary
deferrals with respect to the $9,500 annual deferral limit.
As a small
firm grows, significant legal issues arise with respect to new
employees. Because of the complexity of federal, state and local
laws, and other requirements, a prudent sole practitioner or firm
should engage advisers to help determine the ultimate cost of
such hirings, in terms of both time and capital, and to avert