As seen on Craft Beer & Brewing Magazine – KATHLEEN SPERO
There are five aspects to consider as you think about compensation for all the employees you’ll hire for your brewery. While I hope to shed some light on the compensation issues that breweries face, both federal and state laws govern this area of law, and state laws can be very diverse. Therefore, always consider consulting a legal professional regarding your specific situation.
Independent Contractor or Employee?
The first thing to consider is whether your employee is going to be an employee at all or whether the position is going to an independent contractor. This designation is a legal one, based primarily on who gets to make the decisions about how and when the work is going to be completed.
In general, an independent contractor is a consultant who is given an assignment and a deadline and is told to “make it happen.” How that happens—the timing of the activity, the means to accomplish the activity, and how much effort is put into accomplishing the activity—is generally up to the independent contractor.
In comparison, an employee is under the control of the company and is given a goal, a deadline, and specific instructions on how to get there. If the brewery controls the “how-to” of a worker’s day-to-day activities, is providing the tools and the workplace to complete those activities, and has a say in the means of how the work is completed, the worker is likely an employee rather than an independent contractor.
Independent contractors usually provide similar services to your competitors, so non-compete agreements are not allowed in any contract for services. Employees, on the other hand, can have limitations on “moonlighting” or working for others while employed with the brewery, and in some states, they can also have post-employment non-compete agreements in their contracts.
Correctly identifying a potential hire as either an employee or independent contractor is an important distinction to get right. While classifying a new hire as an independent contractor might save some money in payroll taxes, overtime, and worker’s compensation insurance, misclassification will open the business to potential liabilities from the IRS, the state, the Department of Labor, and the worker. Always consult with legal counsel in advance before designating a role as an independent contractor and have agreements in place to help justify the classification.
Exempt or Non-Exempt?
Let’s assume you have examined the position and determined this new hire will be an employee. The next question you want to ask is whether this role will be exempt, which is normally paid by salary and is ineligible for overtime (think “exempt from overtime” to help you remember); or non-exempt, which is normally paid hourly and is eligible for overtime.
There are two tests to determine whether the position is exempt. The first is whether the worker meets the base minimum salary requirement. The second is the “duties” test. Only certain types of jobs are allowed to be classified as exempt, and they usually exclude manual labor types of jobs.
There are four exempt classifications that could apply in the brewery context.
Executives & Managers
The first category for exempt classification is for executives, individuals whose primary duty is to manage the organization or a division of the organization, and who customarily and regularly direct the work of at least two full-time employees or equivalents. In addition, the position must have the authority to hire and fire subordinate employees or make recommendations about those areas. This may be your head brewer, taproom manager, or sales manager as well as your CEO or CFO.
Positions classified as exempt under the executive category must be paid a minimum salary of at least $455 per week under federal law. That said, many states have their own higher minimum-wage laws, and the highest minimum salary must be paid to the employee in order to maintain exempt classification.
The next category for exempt classification is for administrative staff. These individuals have a primary duty of performing non-manual or office work, with a high degree of discretion over matters of significance. This may be your human resources manager or office manager.
Positions classified as exempt under the administrative category must, under federal law, be paid a minimum salary of at least $455 per week or the higher minimum wage required by state law.
The third category for exempt classification is for licensed professionals, which would cover individuals who are performing work that is predominantly intellectual in character, that requires an exercise of discretion and judgment, and that is in a field of science or learning that requires prolonged study. This category might apply to your accountant, marketing manager, or graphic designer.
Positions classified as exempt under the licensed professional category must be paid a minimum salary of at least $455 per week under federal law or the higher minimum wage required by state law.
The final category for exempt classification is for outside-sales professionals. These individuals are those who spend 50 percent or more of their time away from the brewery engaged in sales and ordering activities. Making deliveries is not considered a sales and ordering activity, but visiting client accounts, providing samples, or other related activities can be included.
Outside-sales positions are special because there is no federal minimum salary that must be paid, and generally state minimum-wage laws also exempt outside-sales people. This is a role where you can pay by commission only, but keep in mind that several states have strict requirements about how commission agreements must be written and the timing of commission payments.
If the position cannot fit under an exempt classification, it will fall under a default non-exempt classification.
Equal Pay Laws
Depending on your state, your compensation structure may be impacted by an equal-pay law. These laws are non-discrimination laws that try to remedy gaps in pay due to gender or race. Laws in this area are varied and can be complex to navigate and document. Before you finalize any compensation offer, you want to be sure you know whether there is a statewide equal-pay law in place that would place limitations on how much you can offer and how flexible you can be in negotiations with an incoming employee.
In addition to salary, many breweries use bonuses as a way to provide incentive and extra compensation to employees. There are generally two kinds of bonuses: discretionary bonuses, which are determined after the fact; and non-discretionary bonuses, which are guaranteed bonuses that an employee earns based on the specific performance of pre-defined criteria. An example of a discretionary bonus would be an end-of-the-year bonus, where you as the employer decide who is eligible for a bonus and the amount of the bonus is at your sole discretion. An example of a non-discretionary bonus would be a performance bonus, where you guarantee the employee a bonus if (s)he meets certain production or profitability goals.
The regular rate of pay that is used for paid time off and overtime can be impacted by a bonus, so you want to determine in advance what kind of bonus structure you are providing and have something in writing to distribute to employees. Legal counsel can assist you with this.
Finally, rewarding employees with equity in the brewery is another popular way of providing compensation to employees. This is a way to retain talent on a long-term basis and provide an incentive for employees to contribute to the overall profitability of the company. Keep in mind, however, that providing equity forms a long-term relationship that can extend beyond the employment relationship. The employee can still retain that ownership interest even after being terminated for cause or a contentious end to the employment relationship, so you want to carefully consider vesting structures and buy-back options. There can also be considerable tax consequences for employees who receive equity, so in addition to talking to your attorney, talk to your accountant!
Bringing on staff is an exciting time, but beyond thinking about who will be the best fit for the role, you want to set up the proper legal structures and agreements to make sure you are compliant with federal and state employment laws. A little hard work in the beginning will reap benefits long term, so dedicate the time needed to do things right.
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