A Case Involving Uber Has States Revisiting Employee versus Independent Contractor Status

When it comes to employment misclassification, no industry is safe. Employee misclassification occurs when an employer improperly classifies a worker as an independent contractor rather than as an employee. Misclassification can be intentional and unintentional and it generally results in avoidance of employment taxes and other potential liabilities.

While misclassification is prevalent in the construction industry, the issue recently resurfaced in a case involving San Francisco-based Uber Technologies Inc., the increasingly popular transportation network company wherein drivers use their own personal vehicles to transport customers to and from their destinations. Uber drivers and customers use a mobile-phone application that allows drivers to indicate whether they are accepting rides and allows customers to locate drivers and pay their respective fares. Uber has always classified its drivers as independent contractors.

In a recent hearing, the California Labor Commission challenged Uber’s classification of its drivers and reviewed whether Uber drivers were actually employees. Uber looked to the drivers’ exclusive control over their schedules and which ride requests to accept to support their contention the drivers were independent contractors. To Uber’s dismay, the commission ruled Uber drivers were, in fact, employees, entitling them to various benefits, including health insurance, unemployment benefits and workers’ compensation. As a result, Uber also was forced to cover certain business expenses, including toll reimbursements and mileage. Of the labor commissions addressing the Uber issue, the California Labor Commission’s decision directly conflicts with rulings in five other states: Colorado, Georgia, Illinois, Pennsylvania and Texas. All of these states’ commissions held that Uber drivers were independent contractors.

As employee misclassification gains more visibility, more states are reevaluating how to properly classify workers. The North Carolina General Assembly, for example, is attempting to pass a law that would expressly define the factors that would determine whether a worker is an employee or independent contractor. A few of the factors being considered by the North Carolina Legislature in House Bill 482 include:

  • Whether the individual is engaged in an independent business, calling or occupation.
  • Whether the individual is paid a fixed price, a lump sum or upon a quantitative basis for the work performed.
  • Whether the individual is not subject to discharge because he or she adopts one method of doing the work rather than another.
  • Whether the individual is free to hire assistants as he or she may think necessary and whether the individual has full control over such assistants.
  • Whether the individual selects his or her own time.

In addition to the much-needed clarification, the bill also proposes a penalty provision, where repeated intentional misclassifications by employers of their employees as independent contractors will trigger a $1,000 per employee liability. The bill would also create a five-member investigatory team and an amnesty period that would provide an opportunity for employers to self-report their current misclassifications. The “temporary amnesty program” will provide misclassifying employers with
immunity from civil penalty and enable to re-classify their workers to their correct designation.

Other states, like Texas, who have already enacted a similar law, are successfully discovering and reclassifying misclassified employees. In 2013, the Texas Labor Commission conducted 6,158 audits—752 of which were in the construction industry. Of the 752 businesses, 37.6 percent were found to have at least one misclassified employee. A total of 3,638 employees—an average of about 16 per business—were misclassified as independent contractors. The construction industry had one of the highest percentages of misclassified employees among all industries.

An investigative series, “Contract to Cheat”, published in a number of Sacramento, Calif.-based The McClatchy Co.’s newspapers in 2014, revealed just how prevalent the misclassification issue is in the construction industry in high-development areas, such as North Carolina and Texas. The series resulted from a year-long investigation into U.S. Housing and Urban Development, Washington, D.C., and other government projects that were completed during the government stimulus era of 2009-13. Payroll records of 64 HUD projects with budgets of more than $1 million were released to the McClatchy investigators and revealed employee misclassification was rampant throughout the construction industry.

The series revealed, among other findings, that employers in North Carolina and Texas with government contracts, which general contractors accepted on the condition they would adhere to all government laws and ensure all their subcontractors would do the same, were misclassifying employees 35.2 and 37.7 percent of the time, respectively. Additionally, Florida, where, like North Carolina and Texas, the construction workforce includes a higher-than-average concentration of immigrant workers, also experienced misclassification of 15.5 percent of workers.

The McClatchy investigation estimated misclassification resulted in $467 million per year to North Carolina and $1.2 billion per year in Texas of lost tax revenue from employers and workers failing to pay employment-related taxes. Not only did employers fail to withhold mandated taxes, such as social security and unemployment taxes, but North Carolina independent contractors who attempted to comply with tax law underreported their income by 56 percent to the state and federal governments. In addition to abusing the tax system, the practice has made it more difficult for smaller, law-abiding employers to compete with employers who are strategically undercutting the competition, placing lower bids made possible by the illegal tax benefit of misclassifying employees.

Though not currently being considered by state legislatures, the opportunity to create a third classification may present itself in the future. Canada has employed the use of a third, intermediate category: the dependent contractor, which is technically a subset of the independent contractor classification. The dependent contractor is a hybrid classification that includes benefits of the independent contractor and employee classifications. Dependent contractors enjoy some of the protections provided to an employee, such as health insurance, severance protections, unemployment benefits, and workers’ compensation, but they still enjoy the flexibility of schedule and control otherwise held by independent contractors.

In Canada, the classification hinges upon the number of clients the contractor has. A dependent contractor—like many contract construction workers—has only one client and depends on that client for income and sustenance of their business. A contractor with more than one client is an independent contractor because they are not exclusively dependent upon any one client. Were a state to create a dependent contractor classification, legislators would then be tasked with determining which select employee benefits employers would be required to provide dependent contractors versus full-time employees.

Although Uber is appealing the California Labor Commission’s decision, the commission’s ruling is important because it has sparked a renewed discussion of employee misclassification across not only the transportation services field, but also in the construction industry, where, as discussed above, it has long been an important issue.

As more states review employee misclassification, it is imperative employers, employees, and contractors alike be aware of any changes to state and federal employment laws. While employers are frequent targets of employee misclassification enforcement efforts, “independent contractors” may also be held liable, especially when they willfully comply with intentional misclassification. An employer should never assume that paying a worker by the hour, or any one of the other factors set forth above, guarantees the worker should be classified as one classification or another. If you are concerned about your business’s employment practices, consult an employment law attorney in your area who can best advise you on your state’s employment laws.

Preferential Payments and Their Impact on Your Business

For a roofing contractor, there is perhaps no better feeling than receiving that last payment draw or retainage check at the end of a long project. Issues with the general contractor, concerns over change orders and pesky building inspections seem to disappear along with the check as it slides into the ATM. You breathe another sigh of relief when the check clears and the funds hit your account. You quickly pay your crew and suppliers and cross your fingers that you turned a profit. Just as quickly, you close your file and move onto the next job.

Months or years later, you receive an ominous letter in the mail bearing a green certified sticker. Peeling open the envelope, you find a letter, advising you that the contractor or developer you worked for 10 jobs back has filed bankruptcy. Not your problem, right? You read on and see the bankruptcy trustee is demanding you return the last payments that contractor made to you or risk being sued in federal court. Assuming you even made money on the job, those dollars are long since spent. What now?

This situation is all too real for thousands of roofing contractors around the country. How can a bankruptcy trustee take your hard-earned money or, worse, require you to pay back money on a job where you didn’t even make a profit? It all comes down to Section 547 of the Bankruptcy Code. When a company files for bankruptcy, a trustee is often assigned to administer that company’s assets and liabilities. In certain circumstances, the code allows a bankruptcy trustee to seek return of “Preferential” payments made to creditors within the 90-day period before the date the bankruptcy petition was filed (the “Preferential period”). This is also known as “clawing back”; the bankruptcy trustee is essentially attempting to take back payments made during the Preferential period while the company was insolvent. As unfair as this may seem, bankruptcy trustees in many instances are entitled to pursue these payments and commonly institute federal lawsuits against their claw-back targets

Your Defense

What can the target of a claw back demand do? Fortunately, the code provides several defenses to these actions. For the purpose of this article, I’ll focus on the most common, the “ordinary course of business” defense. In effect, the bankruptcy trustee may not claw back payments made in the ordinary course of business or financial affairs of the debtor (the company in bankruptcy) or made according to business terms (often a written contract). While it seems simple enough, the manner in which the court determines the normal course of business is something all contractors should be aware of.

To determine if a payment was Preferential and can be clawed back, the court may look at whether the parties’ business dealings changed during the Preferential period as compared to before the Preferential period. Here, seemingly innocuous changes in the parties’ behavior can often be all it takes for the court to mark a payment as Preferential and require the creditor to return it to the bankruptcy trustee.

One of the most common scenarios occurs when the debtor (typically the owner or general contractor or whoever owes you the money) makes late payments. For example, consider a situation where the contract between the parties called for payments to be made within 30 days and in fact all pre-Preferential period payments were received within the allowable timeframe. The debtor then begins making late payments, 35 days, 45 days, etc., and shortly thereafter files for bankruptcy. Under this scenario, the court may determine these late payments were made outside the normal course of business and thus you as the creditor would be forced to pay the bankruptcy trustee back for each such payment. However, if you could perhaps show you previously worked on other jobs with this debtor and late payments were not uncommon, you may succeed in defeating the attempted claw back.

Another typical scenario deals with unusual debt-collection efforts by a creditor. In this situation, if the court determines that you as the creditor undertook atypical debt-collection practices (for example, refusing to deliver supplies until payment of outstanding invoices is made), it may consider it evidence that the Preferential period payments made in response to the collection efforts were made outside the ordinary course of business. Once again, if you could show the court that this scenario typically occurred on other jobs with this debtor you may still defeat the claw back.

Protect Yourself

So what can we learn? Claw back situations should be a very real concern for roofing contractors as they often do not manifest themselves until months or years after a particular job or contract was completed. Although there is no fail-safe mechanism to prevent claw back scenarios, roofing contractors can protect themselves in several ways, including continually monitoring the financial condition of those they contract with, requiring payment on delivery of service or materials, keeping detailed records, strictly adhering to the ordinary course of business, and requiring a letter of credit when the entity with whom they contract is utilizing a bank or financier.

Contractual Risk Shifting, Workers’ Compensation and You

During the process of negotiating construction contracts, contractors often use certain clauses to shift the risk of loss onto subcontractors who may have less bargaining power. How do they do this? Most commonly through the use of indemnity and waiver of subrogation clauses. While these clauses apply in a variety of situations, they are particularly concerning with regard to workers’ compensation insurance.

All states have mandatory workers’ compensation statutes. These statutes make employers strictly liable for employee injuries on the job. Strict liability means liability without fault. Therefore, an injured employee of a subcontractor can recover damages from the subcontractor’s workers’ compensation carrier even if a third party is 100 percent at fault for the injury.

What Is Subrogation?

Subrogation arises when an innocent party incurs damages attributable to the fault of another. This most commonly applies when an insurance carrier pays an insured loss and subrogates to the rights—or “stands in the shoes”—of the injured party in recovering against the responsible party. This doctrine is based on equitable principles, primarily to prevent the at-fault party from escaping liability. Makes sense, right? Then how does a subcontractor waive subrogation?

Here’s a sample waiver of subrogation provision:
Subcontractor hereby waives all right of recovery against the Contractor, the Owner and their respective officers, directors, employees, agents and representatives with respect to claims covered by insurance obtained pursuant to insurance requirements under this Subcontract. The Subcontractor agrees to cause its Workers’ Compensation, General Liability and Automobile Insurance carrier to waive their rights of subrogation against the Contractor, Owner and their respective officers, directors, employees, agents and representatives.

Here’s an example:
A subcontractor’s employee is injured by the sole negligence of the contractor. The subcontractor’s workers’ compensation carrier pays out statutory damages to the injured employee. Pursuant to the waiver of subrogation clause, the subcontractor and its carrier have no right to recover the losses from the contractor.

What is the practical effect? The subcontractor suffers the consequences of the contractor’s sole negligence. How? The subcontractor’s experience modification rate (EMR) goes up. What else goes up with the EMR? Premiums!

What Is Indemnification?

Indemnification requires one party to pay damages to another, sometimes without regard to who was actually at fault. These types of clauses often include language requiring the subcontractor to “defend and hold harmless” the contractor, which puts the additional burden on the subcontractor of incurring fees and expenses for the contractor’s legal defense. There are generally three types of indemnity clauses: broad, intermediate and limited.

A broad indemnity clause requires the subcontractor to pay loss or damage regardless of who is at fault, even if the damage is caused by the sole negligence of the contractor. This is the most onerous type of indemnity clause because it shifts the entire risk to the subcontractor.

Here’s a sample broad indemnity provision:
Subcontractor shall indemnify, defend and hold harmless the Contractor, Architect and Owner against all liability claims, judgment or demands for damages and expenses, including, but not limited to, reasonable attorneys’ fees, arising from accidents to persons or property arising out of or resulting from the performance of the work.

An intermediate indemnity clause requires the subcontractor to pay loss or damage for its own sole or partial negligence. Some intermediate indemnity provisions require the subcontractor to pay the entire loss or damage while others only require the subcontractor to pay its pro rata share of the loss or damage.

Finally, a limited indemnity clause only requires the subcontractor to pay loss or damage that is the sole responsibility of the subcontractor.

How do indemnity and subrogation interplay? When the subcontract has abroad indemnity clause and a waiver of subrogation clause.

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Pay Per Click Marketing for Roofers

Homeowners never know when Mother Nature is going to cause significant damage to their roof. Every house is only one bad storm away from thousands of dollars in repairs. In today’s market the majority of homeowners turn to Google, Bing and other search engines to find roofers that can come to the rescue.

I specialize in Pay Per Click (PPC) management. PPC is a form of Internet advertising in which advertisers pay a fee each time their ad is clicked.

PPC can be a powerful tool to generate new business. It is the only way to guarantee that your website appears when a potential customer searches for a term relevant to your business. However, it can also be an expensive waste of money if your account is setup incorrectly. Whether you decide to manage your PPC campaign in-house or outsource it, you need to follow these tips to make the most from your marketing budget:

Set up the Campaign Correctly

The first tip is also the most important. Make sure your campaign is set up correctly so every single website visitor you get is a realistic prospect for your services. PPC can be a black hole if you are paying the search engines for irrelevant terms, like “roofing equipment”. Also, if your account is not set up correctly, you could be paying for clicks that are completely out of your service area.

Remember, even if you get a bad click, Google still gets paid! Make sure your campaign is laser-focused, so that the keywords, location, device and time of day is most likely to turn into a sale.

Highlight Offers and Specials

For all of your ads you need to make sure you highlight specials and features about your company that will separate you from your competitors. The basic fundamentals are always going to remain the same, but you need to give customers a reason they should be excited to do business with you.

Pay Google and Bing Directly

If you outsource your PPC, it is best to work with a company that has the search engines charge you directly. PPC agencies charge a separate management fee for their services. If you pay a lump sum, then the PPC company does not have to tell you how your budget was divided. Keep in mind the average PPC management fee is about 20 percent of your total spend on Google, Bing and other search engines.

Also, if a PPC agency spends less on clicks for a particular month, then you should be the one to keep the money!

(PPC requires an in-depth knowledge of Google AdWords. It is deceptively easy to create a campaign in-house but I recommend working with an expert to make sure you are maximizing your marketing budget.)

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Essential Ladder Rack Features

As a roofing professional, you rely very heavily on your ladder for work. Keeping that ladder secure during transportation should be a priority. If you recently purchased a new work vehicle or a new ladder and are in the market for a secure storage solution for your ladder, it’s important to understand all of your ladder rack options before you make an investment.

At first glance, a ladder rack is just that—a piece of equipment that attaches to the roof of your van or truck to aid in the transportation of your ladder. But did you know that different ladder racks have different elements that may benefit you as a roofing professional?

Take a look at some of the most important features to consider when shopping for a ladder rack for your work vehicle:

  • Ergonomics: You use your ladder on a daily basis, if not more! Overtime, all of that loading and unloading can really take a toll on your back, shoulders and overall body. Even if you’re in fantastic physical shape, if you twist wrong or lose your balance while unloading a ladder, you could get seriously injured. An ergonomic ladder rack is ideal for professionals just like you. These types of ladder racks allow users to lower the ladder down to an easily reachable height. No more straining to reach your ladder!
  • Security: When you choose a ladder rack, you will want to make sure that it’s one that will keep your ladder secure during transportation. The last thing you want is to deal with a lawsuit because your ladder fell off your vehicle’s roof while driving. Look for ladder racks with lockable, gripping mechanisms to ensure safe transportation of your ladder.
  • Durability: No one wants to invest in a ladder rack just to have it rust out in a few years. Like with most products, the cost of a ladder rack is often directly correlated with its quality. A high-quality ladder rack may have a high sticker price but, in the long run, its durability and reliability will prove to be more cost-efficient. However, if you’re just looking for a short-term solution, a cheaper ladder rack maybe a better fit for your situation.
  • Versatility: Sometimes you may need to transport things other than your ladder on the roof of your work vehicle because of their size. If this is the case, you may want to consider a roof storage solution that has the ability to secure ladders and cargo. Look for a utility rack that features heavy-duty tie-down cleats to secure loads on the roof while traveling. Ladder racks come in all shapes and sizes with many different features available. So if you’re in the market fora new ladder rack, do your homework before you buy to ensure you’re getting the right product for your trade.

Lessons Learned During a Merger

In August 2014, I purchased the assets of a fourth-generation, 133-year-old roofing contracting company with which I had been competing locally for a few years. As a relatively new contractor in the area (I had been in business just under nine years), I wanted a larger share of the commercial roofing market. The clients I hoped to inherit with this acquisition would help me to accomplish that goal.

I had no formal business training, nor knowledge of how to make such a merger work. I started my company with very little industry experience back in 2005; I had a working knowledge of roofing and a desire to be my own boss. Things had gone well, so I trusted that my instincts would guide me through the merger. I was operating on nothing more than a gut feeling that this merger would be a good thing and a blind assumption that I would be able to handle whatever challenges might come my way.

I began the dialogue with the company’s owner in early 2013 and it took until August 2014 to close the deal. There were plenty of challenges created by this process—definitely some things I handled well and some I did not.

The primary goal of this acquisition was to retain the company’s customer base, thus growing my own. Relationships were in place that went back years, even generations, and maintaining those relationships was of utmost importance. I had a plan in place to personally visit with or reach out to all of these customers within the first two weeks. I thought this would be one of the main challenges—certainly the most important thing to get right—but, surprisingly, it was one of the easiest things to achieve. The previous owner assured these customers I would continue to take care of them well and I think these customers’ trust and loyalty already was so solid that the accounts transferred over to me almost without question. As planned, I personally met most of my new customers within the first couple weeks, continued to serve their needs with the same people and took care of them with the same high level of service to which they had become accustomed. I am proud to say, after six months, we have retained 100 percent of these customers.

I am fond of saying, “I don’t know much, but I know exactly what I don’t know.” It’s the tenet to which I attribute what modicum of success I have had. I knew that I did not know how to manage a process like this! It was definitely a good move on my part to work with a consultant. It did not answer all the questions, nor did it eliminate all mistakes, but the insight and advice of someone who had been through similar processes was invaluable.

Before we closed on the deal, I told myself that despite what problems, issues or frustrations might arise, I would treat the first five months as an observational period rather than a time to implement changes. I was patient and held true to that timeframe. Trust takes a while to establish and people take a while to know. I am glad I waited to learn what I needed to know before making any significant changes.

The biggest challenge the merger created was in dealing with the significant increase in my employee count and all the associated human-resource issues that resulted. I had kept my business pretty light on hourly employees in the field, whereas the company I purchased had close to 30 full-time roofers. I had written an employee handbook prior to the merger but many of the policies had not yet been questioned or tested. Of course, in the first few days after the merger, I had a wave of guys coming at me with issues and problems with the new systems to which they would be subjected. I modified a few policies based on legitimate concerns and to ease the transition while I held firm on others. I should have had clearly defined and time-tested policies in place, so I would have been better prepared for the questions I was asked.

In hindsight, I think the biggest mistake I made was to agree to keep this sale completely confidential until the deal was confirmed and I had officially taken over. This meant the first time I met any of the employees they were already on my payroll. There had been no opportunity to meet existing employees, interview the office staff, or gain any insight into systems and processes prior to the day of the merger. I basically had to jump right in! That could have been avoided and would have prevented a lot of stress and at least one early layoff I had to make.

I should definitely have hired, if only temporarily, an additional office person to assist with the mountain of paperwork that was created. We used a Small Business Administration loan to finance the purchase, which added significantly to an already overwhelming workload. A backlog of paperwork was created that took a few months to sort out.

Although I do not consider the merger process completed, we are definitely over the hump and, despite a few challenges, it has turned out as I hoped it would. Our commercial revenues have increased as forecast and I feel good about the fact that, had I not purchased this business, the employees I gained would be unemployed right now. Instead, they are part of a growing company that aims to provide long-term security for them and their families.

Twice in the same day earlier this month I was asked, “What one thing have you learned from the process of buying another business?” I did not have a clue how to answer that question. Certainly I have learned a great many individual lessons and become the wiser for it, but I’m not sure how to boil it down to one thing. I guess it can be summed up with my favorite cliché:
“That which does not kill you makes you stronger.” Mistakes are inevitable, and they are good. If you are afraid to make them, you will accomplish nothing. You will learn way more from one mistake than you will from 10 good decisions. People will not notice your mistakes nearly as much as you think. So don’t hesitate; make the call; learn from it if you can; and move on.

On a personal note, I owe a very heartfelt and big thank you to Horace Thompson King III (Tommy) for being such a pleasure to work with and for making a difficult process much easier than it could have been.

Perseverance Will Keep You Ahead of the Competition

I have never climbed a ladder to inspect a job my company bids on, but that has never been an obstacle to winning roofing contracts. I know a great many roofers who have climbed the proverbial “ladder” to the top of a company they now run from the windowed corner office. A lack of hands-on experience has never been an obstacle for me. In fact, just ignore that I’m a woman working in a predominately male construction industry and I will also ask you to disregard that I’m paralyzed from the chest down. That has not been an impediment either—as difficult as that may be to believe.

No, I have not allowed this long list of potential challenges to be an obstacle (for long!) to my business success. Doing so would just not make good business sense.

When I see an obstacle in business, it’s a boulder in the road and my business sense shifts into full gear: Get over it, around it, smash through it or phone a friend with a crane. I never choose another path. I never give up. I simply don’t allow an obstacle to loom larger than my own determination.

The unwavering willingness to “get the job done” is a common thread I share with many hard-working roofers. However, there is a secret weapon that separates those who marginally succeed and those who are, well, let’s just say “comfortably successful”. I call it perseverance.

Many industry people are silently nodding their heads in agreement saying to themselves, “yeah, that’s me”. But are you too comfortable? It takes more than true grit to persevere in the highly competitive roofing business world of today.

Not only do we face the ever-present competition, there are increased regulations, greater safety standards, high costs for workers’ compensation, not to mention the shrinking pool of qualified professional roofers. We have a lot that challenges us!

Today, perseverance will cement your future success because if you don’t stay ahead of the curve, boulders, like the newest technology, higher industry standards in energy efficiency, new and improved environmentally responsible products and guaranteed safety standards, will stop you. These boulders require greater perseverance, as does meeting customer demands for knowledge and understanding their needs.

To persevere in the roofing business, you have to continue to challenge your team (and yourself) at every turn. Encourage learning and invest in employee training and professional development. As a business owner, I take the lifelong approach to learning in my business. When I had questions and was hungry to learn more about how to run a successful business, I reached out to the community for answers. I discovered allies, like The Women’s Business Development Center that provides workshops, business counseling, networking and access to knowledge that empowered me. No matter where you are in business, you have to keep learning and growing to persevere. Even the largest of boulders look small in the rearview mirror once you have overcome them.

In 1999, I was a young sailor in the U.S. Navy when Hurricane Floyd blew into Virginia where I was stationed and hurled me off a balcony that was just 1-story up. That gust changed my physical world forever. But I had something that storm could not steal from me: perseverance—a willingness to overcome challenges and a commitment to succeed. There are blockades up for each of us, but there are also ways around them, over them and through them if you refuse to accept failure as an option.

My military training has always helped me to stay “mission focused” with a commitment to excellence. The Navy also gave me a strong work ethic and the ability to work under pressure. It taught me to put an emphasis on teamwork and gave me the leadership skills to build a great business. I seek out opportunities to not only learn and grow, but also to become involved in communities of knowledge, such as The Bunker, the nation’s first veterans incubator for small businesses.

Although being a woman- and service- disabled veteran-owned business can bring advantages over many competitors, I still have to earn each and every opportunity. We have been successful at this by building relationships with our customers and earning their trust by performing projects on time, on budget, and with the quality and safety expected. In addition, just as importantly, we bring determination, knowledge and truckloads of professionals who gladly climb all kinds of ladders for me.

Single Insurance Policies that Insure All Parties on a Specific Construction Project Offer Benefits and Risks

With the use of wrap-up insurance policies on the rise for commercial construction projects, many contractors and subcontractors have questions about how these policies work and what unique concerns and questions they present.

Generally, wrap-up insurance refers to single insurance policies written to insure all parties involved in a specific construction project—providing coverage for the job-site risks of the owner, construction manager, general contractor, contractors, subcontractors and design firms—instead of the individual parties each purchasing and carrying their own insurance policies. Wrap-up insurance policies are most commonly used on very large commercial or public projects. Many project owners and general contractors have found that using these policies is an effective risk-management technique for handling loss exposures related to single and multiple-site construction activities.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

Benefits

There are two primary types of wrap-up insurance policies: Owner Controlled Insurance Policies (OCIPs), in which the project owner is the primary sponsor, and Contractor Controlled Insurance Policies (CCIPs), which are controlled by the general contractor. Additionally, owners and general contractors can cover multiple projects under a single program in Rolling Controlled Insurance Policies (RCIPs). Typically, wrap-up insurance policies include general liability, workers’ compensation/employer liability, excess liability and builder’s risk as standard coverages, but many owners also add coverage for project environmental liability and project design team errors and omissions.

The benefits of using wrap-up insurance are numerous, especially for the owners or contractors who sponsor them. A successful wrap-up insurance program can significantly reduce risk for owners or contractors, giving them more control over insurance coverage for all the parties and avoiding unpleasant surprises about the extent of coverage parties have. Under the traditional model, owners or general contractors establish minimum insurance requirements for subcontractors and require them to furnish a certificate of insurance specifying coverage areas and limits. However, because all insurance policy terms differ slightly, there is no guarantee that a given subcontractor’s insurance will be adequate, or still in force, at the time of a loss. Furthermore, contractors and subcontractors normally have to build their insurance costs into their contract costs, and this increases bid amounts.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control. When sub-contractors no longer have to increase their bids to factor in insurance costs, owners claim they can utilize the cost savings to fund the costs of the wrap-up insurance. And the potentially more streamlined process for handling claims can make prospective litigation less time-consuming and costly.

Risks

OCIPs and CCIPs, of course, come with their own set of risks and drawbacks for owners, contractors and subcontractors, and the parties who are asked to enroll in these policies do not always look upon them favorably. Some subcontractors and contractors have found that enrolling in wrap-up insurance policies is administratively burdensome and that the resulting decrease in volume of insurance purchases for their companies can increase the costs of other insurance they must purchase. Additionally, subcontractors should make an effort to understand the limits of coverage; it may differ from the coverage in the policies they have been accustomed to using. This should be done at the procurement stage, before a project begins, and not later, after project contracts have been signed.

Those investigating the level and limits of coverage will want to determine how responsibility for any injuries, losses or damage will be addressed and confirm that the responsibility is outlined in the building contract or the written wrap-up policy. One potential source of misunderstanding is builder’s risk coverage. Often, builder’s risk insurance is carried by the builder. With wrap-up policies, owners and general contractors may be particularly concerned with the scope of the builder’s risk coverage. For example, if a wrap-up policy excludes property damage occurring during construction but the builder’s risk policy excludes faulty workmanship, a potential gap in coverage would exist. The wrap-up insurer might take the position that it won’t pay for what is essentially a builder’s risk claim. To prevent such an outcome, owners may find they need to add coverage to the builder’s risk policy to cover faulty work or at least repairs.

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Emerging Trends in New LLC Acts

Although the Limited Liability Company (LLC) is still a relatively new form of unincorporated business structure, LLCs are now outpacing newly formed corporate filings in most states and are quickly becoming the predominate form of new business entities across the country. The appeal of the LLC is obvious; it combines the corporate- style limited-liability benefits to its owners with the pass-through taxation benefits of partnerships. With these benefits, it is no surprise that contractors across the country are now choosing LLCs in lieu of corporations or partnerships when selecting their business structure.

Every state has now adopted an LLC act, but these acts vary significantly from state to state. Despite the growing popularity of the LLC structure, many states are still operating under old acts implemented more than 20 years ago, and many of these acts have not been significantly revised. Instead, they have been amended on an as-needed basis in an attempt to keep up with emerging LLC developments and case law. This has created piecemeal and disorganized acts governing LLCs.

To solve these problems, states across the country have been extensively revising their LLC acts or implementing completely new acts. Currently, 11 states and the District of Columbia have formally enacted new LLC acts based on the Revised Uniform Limited Liability Company Act (RULLCA). These states include Alabama, California, Florida, Idaho, Iowa, Minnesota, Nebraska, New Jersey, South Dakota, Utah and Wyoming. In addition, South Carolina has been considering adopting the RULLCA. Other states, like North Carolina, which hasn’t officially adopted the RULLCA, have enacted new LLC acts and looked to states that had already adopted the RULLCA for guidance.

These new LLC acts are reshaping the LLC landscape. Contractors of existing LLCs and those wanting to form LLCs should be aware of the potential impact changes to their state’s LLC act can have on their company. Contractors need to be aware that the LLC act they initially filed under—and have been operating under—may now be significantly different or may no longer even be applicable. Failing to review newly revised or implemented acts may lead to unintended or adverse consequences, especially in states that are already operating under a new LLC act.

While a state-by-state analysis of new LLC acts is beyond the scope of this article, there are several trends emerging from states that have already enacted new LLC acts. These trends may soon be universally applicable and it is beneficial for the contractor operating or considering an LLC to be aware of them.

The Operating Agreement

Arguably, one of the most significant and widespread trends emerging from the new LLC acts is that many of the acts are eliminating the requirement that the operating agreement be in writing. Under many of the old LLC acts, an operating agreement was commonly defined as a written agreement between its members. Under many of the new acts, however, an operating agreement can now be a written, oral or implied agreement between its members. This is a broader definition of what qualifies as an operating agreement and essentially allows any type of agreement between members to become part of the operating agreement governing the LLC.

Although this change provides greater flexibility within the business because companies no longer need to adhere to a strict operating-agreement structure requirement, it also opens the door for increased internal litigation. Under these new LLC acts, internal disputes among members are likely to increase when operating-agreement terms are ambiguous or when members claim there was an oral or implied operating agreement.

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To Lease or Buy Equipment

As the economy continues to improve, more construction businesses are making capital investments to fuel their growth. When business owners and managers consider acquiring equipment, they often think of their payment option as a “lease versus buy” decision. In any economic environment, when preserving owner or shareholder capital is an important goal, financing equipment through a lease or loan will enable your business to preserve its cash.

Whether you finance equipment through a lease or loan, each has its advantages. In evaluating your options, it is important to look at each alternative to determine which will best balance usage, cash flow and your financial objectives. To help determine the most appropriate option, consider the following questions:

1. How long will the equipment be required?

Generally speaking, if the length of time the equipment is expected to be used is short term (36 months or less), leasing is likely the preferable option. Equipment expected to be used for longer than three years could be a candidate for a lease or a loan.

2. What is the monthly budget for the equipment?

As with any ongoing business expense, consider the monthly cost for a piece of equipment and how it fits into your budget. In general, leasing will provide lower monthly payments.

3. Will the equipment become obsolete while it is still needed for the operation?

Protection against obsolescence is one of the many benefits of equipment leasing because the risk of obsolescence is assumed by the lessor. Certain lease financing programs allow for technology upgrades and/or replacement within the term of the lease contract.

4. Is the equipment going to be used for a specific contract or can it be used for other projects?

Often, the business objective of equipment is for it to be revenue-producing. If a piece of equipment has limited use within a specific contract and won’t be used for other projects, it’s not ideal for it to be idle while you continue to make payments on it. It makes sense to stop the equipment expense when the income from it ceases, which you can do with a lease.

5. How much cash would be required upfront for a lease and for a loan?

Leasing can often provide 100 percent financing of the cost of the equipment, as well as the costs for transportation, delivery, installation set-up, testing and training, and other deferred costs (sales tax). Loans usually require a down payment and don’t include the other cost benefits. Ask how much of a down payment is needed and assess the availability and desirability of allocating company capital for that down payment.

6. Can the company use the depreciation or would the company get a greater benefit from expensing the lease payments?

The tax treatment of the financing arrangement is an important consideration in choosing between a lease and a loan. A loan provides you with the depreciation tax benefit; with a lease, the lessor owns the equipment and realizes the tax benefit, which is usually reflected in a lower monthly rent payment for your business, as well as the ability to expense the payment.

In many instances, if your business cannot use the tax benefit, it makes more sense to lease than to purchase through a loan because you can trade the depreciation to the lessor in exchange for better cash flow.

7. How will a working capital facility be impacted?

Many businesses have an aggregate line of credit through a bank that they can use for inventory purchases, improvements and other capital expenditures.

Depending on the lending covenants, it is often possible, as well as preferable, to preserve your bank working capital by leasing equipment through an equipment finance provider.

8. How flexible does your business want the financing terms to be?

A lease can provide greater flexibility because it can be structured for a variety of contingencies, whereas, with a loan, flexibility is subject to the lender’s rules.

If your business has continuing use for the equipment at lease termination, extended rentals, purchase options, trade-ups and return options are available. The lease term allows your business to match all expenses to the term of the equipment’s use, including income-tax expense, book expense and cash expense. Most importantly, as mentioned previously, the expense stops when the equipment is no longer required.

With the current low-interest-rate environment, now is a good time to finance equipment, in general, through a lease or loan. Again, the benefits of the type of financing is dependent on a number of variables and not necessarily the economics alone.

9. Do you anticipate the need for additional equipment under your financing agreement?

If your business is planning for growth, you can enter into a master lease that will allow you to acquire multiple pieces of equipment under multiple schedules with the same basic terms and conditions. This provides greater convenience and flexibility than a conditional loan contract, which must be renegotiated for additional equipment acquisitions.

10. Who can help me evaluate what’s best for my business?

Whether you finance equipment through a lease or loan, each has its advantages. When making the decision between a lease and a loan, it is highly recommended you consult with your accounting professional, as well as draw on the resources of your equipment financing provider, to enable you to secure the best possible terms for your lease and/or loan.

These are some of the key considerations that should go into the lease versus loan decision-making process. Find a lease/loan comparison and online tools.