Spotlight on Key Business Legal Issues for 2012

It's a new year and with it comes change. With the upcoming presidential election and evolving technological advancements, there will be plenty of challenges ahead.

Here are eight issues that might result in legal issues for businesses during 2012:

1. Online piracy of intellectual property. Debate is heating up about the protection of intellectual property on the Internet.  After much protest, Congress has delayed hearings about two proposed laws, the Stop Online Piracy Act (SOPA) in the House and the Protect IP Act (PIPA) in the Senate.

SOPA and PIPA would criminalize certain Internet behavior such as streaming copyrighted content and enabling the sale of counterfeit goods.

The laws have vehement supporters (including entertainment companies, media businesses and the U.S. Chamber of Commerce) who argue that more policing the Internet is necessary to protect intellectual property, jobs, consumers and more. There are also plenty of fervent opponents (Google, Facebook, YouTube and other tech companies) who argue that passage of such laws will thwart entrepreneurs and stop the growth of the Internet. That, in turn, will hurt the economy and result in fewer jobs.

The Obama Administration announced that it opposes key elements of SOPA and PIPA, although it believes that "online piracy is a real problem." The announcement called for "sound legislation this year that provides prosecutors and rights holders new legal tools to combat online piracy originating beyond U.S. borders..." while maintaining the innovation and creativity of the Internet.

White House opposition of SOPA and PIPA makes passage in their current form improbable. Whether there will be new or revised laws introduced remains to be seen, but during 2012, you can count on more discussion of online piracy and Internet free speech as well as what constitutes fair use and parody.

2. Taxes will be an overriding theme in the upcoming  election. The uncertain federal tax law will be in the news and on the minds of business owners and executives. Many favorable tax provisions expired last year and Congress will have to vote to reinstate them. (The two percent payroll tax cut was only extended through February so lawmakers will soon decide whether to allow it for the rest of the year.)

Taxes will be heavily debated by presidential candidates and the outcome of the election will set the stage for 2013 when major tax hikes will kick in -- unless Congress acts. Among the changes:   Capital gains and dividend taxes are scheduled to go up. The estate tax exemption is scheduled to go down with the maximum estate tax rate going up. In addition, individual tax rates are set to go from 10, 15, 25, 33 and 35 percent to 15, 28, 31, 36 and 39.6 percent.

3. Privacy concerns will grow.   As we've learned in recent years, more technology leads to less privacy. Companies will continue to be challenged by complying with privacy laws and minimizing security risks. Data breaches of financial, heath and intellectual property information can be devastating for businesses, as well as their customers, clients, members, patients, etc.

4. Social media will continue to evolve.  The popularity of social networking sites is soaring with people posting a vast amount of personal information, images, videos and opinions.  Businesses routinely use Facebook, Twitter and YouTube sites to market their products and services. Not-for-profit organizations use them to help spread their missions.

The vast social media world has connected people like never before but it has also resulted in negative implications. Trade secrets and private memos are leaked.  Employees badmouth their bosses. Embarrassing photos are posted.

In many lawsuits, opposing attorneys increasingly seek discovery of Facebook, Twitter and other social media accounts (although some courts have ruled there must be a reason to believe the information is relevant before it is divulged). Businesses must continue to navigate the opportunities and the liabilities that social media creates.

5. More businesses will migrate more critical information to cloud computing platforms. Unfortunately, while this can reduce a company's IT costs, it can also inject considerable operational risk that may not be fully understood by business owners and executives.

For example, how will your organization respond if a third party or employee steals data or another type of data breach occurs? Do you have a backup in place in the event the cloud data center fails?

This year, we are likely to see companies attempting to gain more control over information stored in the cloud.

Keep in mind that moving to a cloud platform complicates the e-discovery process. Electronically stored information is routinely requested in civil and criminal proceedings. Before migrating data, there must be a clear understanding of the processes that the cloud computing company has in place to respond to e-discovery requests. In the event your company is required to produce information, the cloud company should provide data in a timely manner that creates no doubt that it is complete and accurate.

6. Mobile devices -- and the risks they create for businesses -- will be everywhere. Today's smart phones and tablet computers store massive quantities of data and can access corporate servers with ease. In fact, many of today's phones and tablets are able to store more information than earlier generation laptops. This increased capability brings increased risks. Information from phones and tablets, or the actual devices, can be stolen. While many companies collect, store, and transmit information on smart phones and tablets, they don't always take adequate steps to secure the devices or institute precautions when employees use their own devices for job-related functions.

In 2012, businesses will increase their awareness of mobile risks. More businesses may install security software on smart phones and tablets and require company-issued devices to be monitored in the same way they monitor desktop computers in the office.

7. Lawmakers will focus on the regulation of "crowd funding." One way for start-ups to raise seed money online is to go to certain Web sites to seek investors. They describe their ventures and solicit money. The problem: Technically, businesses engaging in crowd funding have to comply with SEC regulations or qualify for an exemption. This year, Congress is expected to resume discussion of laws that could allow entrepreneurs to use crowd funding to raise a small amount of money without violating securities laws. You will hear more debate in 2012 over the question: Should entrepreneurs be allowed to informally seek financing without taking the legal steps required to protect investors from potential fraudulent behavior?

8. Lawsuits and government actions against employers are likely to keep going up. For the last several years, the number of employees initiating illegal EEOC discrimination and harassment actions against their employers has been increasing. This trend is likely to continue in 2012. Today's employees are more aware of their rights and willing to file charges. In addition, the definition of disability was expanded in 2009 and the aging workforce means there are more employees able to file age discrimination claims. On top of these claims, employers may face Labor Department claims and lawsuits charging they are not in compliance with overtime and other wage laws.

These eight items are only some of the legal issues you will hear about in 2012. Businesses must comply with a myriad of complex, ever-changing laws and navigate an evolving technological landscape. Legal claims from customers, employees, vendors, competitors and the government can result in costly losses and harm your company's reputation. Becoming aware of potential legal dangers can help you effectively manage them.

As always, we encourage your comments.

No Single Factor Determines a Worker's Status

Does your firm use outside workers for some jobs? This can result in significant tax breaks if the workers are properly classified as independent contractors rather than employees.
Key point: If a worker is an employee, your company must withhold federal income tax and employment taxes from his or her wages. In addition, your business is responsible for paying the employer's share of federal payroll taxes. Conversely, if a worker is characterized as an independent contractor, your company isn't liable for these payroll tax obligations.
In addition, employers aren't required to offer independent contractors the same fringe benefits that regular employees receive, which can result in extra savings.
However, it's not always easy to distinguish independent contractors from employees. There are several factors the IRS and courts examine but it often boils down to a "control" issue. If you control how, where and when the worker does the job, he or she is usually classified as an employee.
Here are two cases heard in U.S. Tax Court that illustrate some of the traps that taxpayers can fall into on the employee-versus-independent-contractor issue:
Case #1: Tax Court Disregards Contracts
An Ohio trucking firm had written contracts with drivers to operate as independent contractors. The company filed 1099 Forms with the IRS for each of the drivers working under the contract. Nevertheless, the corporation:
Hired drivers, oversaw all work performed by them and confirmed
    Under Section 530 of the Revenue Act of 1978, an employer can claim independent contractor status for misclassified workers and not owe employment taxes if it can show:
There is a "reasonable basis" for the classification.
The business consistently treated workers as contractors.
    Here are the ways to qualify for Section 530 relief:
    1. The classification is a long-standing practice of a significant segment of the industry or profession.
   2. The employer was audited regarding the employment tax treatment of workers and the classification was allowed to stand.
    3. The employer relies on an authoritative court decision or IRS ruling to support its position.
   4. The employer based the determination on the sound reasoning of a paid tax professional.
the work had been completed.
Directed, supervised, paid, disciplined and discharged the drivers.
Decided which days that drivers would work and which loads they carried.
Determined when repairs to the trucks were necessary and was responsible for truck maintenance. The drivers had no investment in the trucks.
Based on these facts, the Tax Court ruled that the drivers should be treated as employees, despite the existence of the written contracts, because the company exerted significant control over their activities. (Peno Trucking, Inc., TC Memo 2007-66)
Footnote: The trucking firm argued that it should be entitled to "Section 530 relief" based on its consistent treatment of workers as independent contractors and the fact that two prior Workers' Compensation requests by drivers were denied by the state due to their written contracts. (See right-hand box for an explanation of Section 530 relief). But the Tax Court stated the Workers' Comp cases did not evaluate the employment relationships "through a common law analysis." Case #2: Are Workers Liable for Taxes if an Employer Wrongly Classifies Them?
What happens if an employer misclassifies a worker as an independent contractor and doesn't withhold income taxes or FICA? Does that mean the person is not liable for the taxes? One Florida woman found out the hard way that the answer is "no."
She worked as a seamstress at a retail bridal gown shop. The shop classified the woman as an independent contractor and paid her $11,210 during the year in question. The shop did not withhold income or employment taxes from its payments to her. The seamstress also received unemployment compensation of $208 that year from the Florida Agency for Workforce Innovation.
The woman also failed to file a tax return for the year. So the IRS filed one for her as a self-employed person with its "Substitute for Return Program" and sent her a tax bill. Later, the IRS agreed that the seamstress was an employee, rather than an independent contractor. The woman contended that the bridal shop, which failed to withhold taxes from her wages, was solely liable for the tax bill.
The Tax Court stated that it was "unfortunate" the employer classified the seamstress as an independent contractor and not as an employee.
But, the court added, "that does not alter the fact that the first principle of income taxation is that income must be taxed to (the person) who earns it" and "misclassification of an employee does not relieve the employee of his liability for filing a correct tax return." (Natalia Ravelo Escandon, TC Memo 2007-128)
These two cases are two in a long list of court filings against companies that hire independent contractors. In some cases, workers sue for benefits they claim they were eligible for, including health insurance and retirement plan contributions.
To make matters worse, the IRS continues cracking down on companies that hire independent contractors. If the tax agency "reclassifies" a worker as an employee, your company could be slapped with hefty bills for back taxes, interest and penalties. Audits by state agencies are also common and frequently occur when independent contractors apply for unemployment or Workers' Compensation.
Unfortunately, no single factor determines a worker's status. In the trucking company case described above, the Tax Court looked at these seven questions:
1. What degree of control is exercised by the business? Under this test, the court examined how much control the company exerted over the way the services were performed. But exercising control is not required in an employer-employee relationship, the Tax Court noted, as long as the company has the right to direct a worker if necessary.
2. Which party invests in "work facilities," used by the individual? "The fact that a worker provides his or her own tools generally indicates a non-employee status," the Tax Court explained.
3. Does the individual take any financial risk? "A worker's opportunity to earn a profit and assume risk of loss may indicate a non-employee status," the Court stated.
4. Can the business discharge the individual? "Generally, an employer's right to discharge an employee indicates an employer-employee relationship," the Tax Court noted.
5. Is the work an integral part of the company's regular business? An employer-employee relationship is supported when workers perform a service essential to the success of a business operation.
6. How permanent is the relationship? The Tax Court stated that "a transitory work relationship may point toward a non-employee status."
7. What kind of relationship do the parties believe they are creating? Entering into a written agreement that states a worker is an independent contractor indicates a non-employee relationship. However, a contract alone is not enough. "If an employer-employee relationship exists, characterization by the parties as some other relationship is immaterial," according to the Tax Court.