As seen on Craft Brewing Business –
This Brewery Compensation series is intended to provide guidance on the variety of compensation structures available as a brewery expands and brings on employees. While we hope to shed some light on these issues, this can be a complicated area, as each state has its own specific laws in addition to federal laws. Therefore, always consider consulting a legal professional regarding your specific situation. Furthermore, the laws in this area come from the federal government and individual state governments, so what is true in California may not be true in Colorado, for example.
To begin, let’s think of brewery employees as falling into one of three categories: brewing, sales and front-of-house (tasting room and/or restaurant). Each has a personality and structure unique to that category, and the type of compensation that works for one set of employees may not work for another. A brewery could begin with only one category of employee, but as the business expands, so should the variety of employees.
In this particular article, we will look at the issues specific to brewing teams (the other categories of employees will be addressed in articles to follow). These individuals are going to be the creative drivers in your business, but may also have variable hours and heavy manual work. You and your head brewer are likely to face some unique issues that are unlikely to come up in the other employment settings such as confidentiality, worker classification, bonus structures and/or possible ownership interest. Other issues apply more broadly, such as overtime and employee benefits.
Independent contractor or employee?
First consider whether the brewer is going to be an employee at all. In general, because of the nature of the work, head brewers are usually employees even if they are owners in the legal entity. However, if the brewer is highly experienced and working more as a part-time consultant, that might be the kind of relationship that calls for independent contractor status.
The difference between independent contractors and employees generally lies in who gets to make the decisions about how to reach the end goal. An independent contractor is generally given an assignment, a deadline and told to make it happen. How that happens is generally up to however he or she chooses to do it. An employee 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, the worker is likely an employee, rather than an independent contractor.
By law, there are a number of factors that can come into play when making this analysis. See this IRS article on the questions to ask. Also, keep in mind that independent contractors usually provide similar services to your competitors, so non-competes would not be allowed in the service contract.
Classifying a potential hire as an employee or independent contractor is an important distinction to get right. Misclassifying an employee as an independent contractor might save some money in payroll taxes and avoid worker’s compensation insurance costs in the here and now, but it will also open the business to potential liabilities from the IRS, the state, the Department of Labor and the worker (for back pay). Furthermore, should a claim be made or an audit conducted, everything could become unmanageable for a small business, so proactively avoiding this liability is for the best.
Let’s assume the worker is an employee. Will the head brewer will be paid a salary or by the hour? The federal government generally classifies workers into two categories here: non-exempt (who are entitled to additional legal protections such as overtime wages) and exempt (who can be paid a salary and exempt from certain laws).
There are two tests to determine whether an employee can be paid as salary.
The first is whether the worker meets the base minimum salary requirement. Under federal law, the salary must exceed $455 per week. However, states, like California, require a rate equivalent to two times the current minimum wage multiplied by 40 hours a week and again multiplied by 52 weeks. In California, the minimum wage is currently $9 per hour right now, so the minimum salary would be $37,440 per year. Each increase in the base minimum wage would cause this annual salary to be affected proportionally.
The second part of the salary test is the “duties” test. Only certain types of jobs are allowed to be classified as exempt, and they usually exclude manual labor type jobs. There are essentially three job categories that allow an employee to be exempt:
1. The first is for licensed professionals, such as doctors, accountants, or lawyers, which generally doesn’t apply to brewers.
2. High-level, autonomous administrative staff, such as marketing executives, and executive assistants who are given a high degree of independence with their work. Again, this exemption is not likely to apply to most head brewers because much of the daily work is not directly related to management of the business.
3. The executive category, which applies to employees that manage a “division” of two or more employees (including the power to provide meaningful input on the hiring, discipline and termination of those employees) as well as are allowed to operate with some modicum of independence. This is the category that head brewers can fall into, especially if there are other brewers working under and reporting to the head brewer.
Accordingly, if you want to pay your head brewer a salary as executive exempt, make sure her or she has at least two employees under them, less than 50 percent of his or her time is spent on manual labor (such as pulling tap handles, moving kegs around, cleaning) and allow him or her independence in performing job duties. If the job duties will not add up to that job description, you may want to consider an hourly wage, possibly with additional bonus structures, rather than a salary in the beginning of employment. Members of the brew team under the head brewer do not likely fit the duties test, so these individuals should almost certainly be classified as non-exempt employees and paid overtime and provided breaks in accordance with federal and state law.
*Note: Some states do allow for alternative work weeks, i.e. four work days at 10 hours per shift versus five work days at 8 hours per shift. However, a procedure usually must be followed that includes filing documentation with the state and/or federal government. Therefore, the procedural cost often outweighs the amount of overtime trying to be saved, at least in a smaller operation.
Most states have specific rules on hours worked, including breaks. Have clear policies and good timekeeping protocols to avoid future claims by disgruntled employees post-termination. Employment lawsuits make up a large percentage of lawsuits filed across the country nowadays and most states incentivize private attorneys to serve as enforcers of employment laws by providing statutory fees and penalties for such technical violations.
As a way to supplement pay, many breweries incentivize their brewers through bonus structures. There are essentially two different kinds of bonuses: discretionary and non-discretionary. Discretionary bonuses are determined after the fact; for example, an end-of-year bonus just because. Non-discretionary bonuses that are used to incentivize future behavior are part of the employee’s pay package and must be paid when earned as defined by the employer.
Be cautious because determining whether an employee has earned a bonus based on the often subjective standards can be complicated. Therefore, it is highly encouraged (and even required in some states) that legal counsel be sought to memorialize all terms of the bonus in writing prior to the bonus plan being implemented. The employee should also sign a copy of the proposed comp plan acknowledging the understanding of the terms to avoid future debate over clarification of poorly stated terms.
Many brewers are seeking a piece of the action for the talent contribution. While it might seem like a good idea to provide ownership in lieu of pay (i.e. sweat equity), be cautious! We are seeing more and more cases in which a brewer who parts way with the employer (either voluntary or by force) begins seeking financial records, wants a valuation for the consideration given, and/or forces buy-out or dissolution under the entity’s operating agreement based on remaining a hostile member of the entity, even after separation.
Confidentiality and intellectual property
Brewers are often the creative drivers of a brewery, with access to a variety of information regarding recipes, techniques, branding and supplies. Much of this information has a value to the business only if it is kept within the business, so take particular care with protecting the business’ confidential information from being exposed or taken elsewhere.
Confidentiality and intellectual property agreements cover a wide range of issues from trade secrets (like recipes and account lists) to processes and procedures developed for the business. In addition to the employment agreement and compensation structure, have a separate agreement addressing what kinds of information the brewer should keep confidential, under what circumstances and with whom he or she can share the information. In addition, include possible consequences for revealing information without your permission.
If the brewer comes up with a new recipe while on the clock in the brewery, using the brewery’s ingredients, something should be in place stating the brewery’s ownership of the creation. In general, the employer owns the rights to something an employee creates while on the job. However, if the head brewer is an independent contractor, the contract should spell out explicitly that any beers made on the brewery premises with brewery products and processes, are assigned to the brewery from the beginning. Even if the brewer is an employee, your contract should reiterate that any new beers or products developed for the brewery are owned by the business. On the flip-side, that agreement should also note ownership of recipes that an employee may come up with at home not using brewery supplies. Lastly, the contract should also set out, for clarity, any inventions or creations that the brewer previously created and that do not belong to the brewery that may be assigned based on obtaining a job with the brewery. This avoids any mix-ups or confusion in the future about who owns what.
Compensation plans can be flexible, within the parameters provided by the state and federal governments, so weigh the factors that are important to the business and the brewer together. One type of compensation plan may not fit every type of brewery or every brewer, so try, when possible, to keep the lines of communication open with your employee. If possible, consult an employment lawyer to make sure all the bases are covered and the compensation plan is compliant.
This in-depth feature was contributed by the big brains of Jessica M. Hardacre-Gianas, Esq and Alicia M. Altenau, Esq., attorneys with The Original Craft Beer Attorneys. If you haven’t yet, check out their new book.