Small Business

Bed, Board -- and Big Trouble


By Karen E. Klein Q: I am the owner of a small motel and I have a long-term resident who has been working for me in lieu of rent for 17 months. He helps out as a desk clerk, paints and cleans the rooms, mows the lawn, and works on plumbing as well as minor construction. We have had no problems, but I'm concerned he could someday take legal action and try to take over my motel. The property makes about $25,000 annually -- not enough to warrant my forming a corporation or limited liability company. I also do not have a lawyer because it is too costly. Do I need to ask him to sign a legal document that will exonerate me in case an injury occurs on the property? What else should I do? -- L.P., Sharon Springs, N.Y.

A: Many small business owners are reluctant to pay for things they deem to be "extras" -- technicalities such as formalizing their business structures or consulting with an attorney. Unfortunately, many of them find out later that the cost associated with defending against a lawsuit, or fighting off personal liability for an injury, can be far more expensive -- devastating, in fact. Reember, in our litigious society, disputes go to court more frequently than one might imagine.

MAJOR RISKS. In your case, you need to seriously consider the multiple risks associated with maintaining this informal relationship with your long-term resident, experts say. Your tenant's employment status and protection against liability if he is injured (which is a real consideration, especially if he's doing plumbing and construction work) should have been discussed and settled in writing when he first began living and working at the motel.

Approaching him now with waivers and statements for his signature will

require a delicate touch, so put some thought into how best to discuss this with him. Look at the conversation as an opportunity to manage risks and also to create a basis for limiting your worker's tenancy in the event that things don't work out, suggests Alan S. Gutterman, managing director of AKG Global Law & Business in Oakland, Calif.

"The first thing to consider is whether you may have made any promises to the 'worker' with respect to sharing of profits associated with the operation of the hotel," Gutterman says. "While it sounds like the worker's involvement is limited to services in exchange for the value of rent holiday, you should have the worker sign an acknowledgement stating that he is not a co-owner or joint venturer with you, nor does he have any interest in the revenues that you receive from the motel."

PAYROLL TAXES. Second, you need to nail down his employment status. Is he technically an independent contractor, or an employee? The answer to that question is very important in terms of your legal liability.

While it sounds like you engaged him as an independent contractor, it is possible that he may later assert that an employer-employee relationship existed between the two of you. If he is found to legally be your employee, you are obligated to make various tax withholdings and contributions for his Social Security and unemployment. You are also obligated to make certain payments under workers' compensation laws that apply in each state. If you do not make such payments, Gutterman says, you may be slapped with substantial fines based on the amounts that should have been paid over the entire period of the relationship.

You can reduce, although probably not eliminate, potential exposure for such fines if your worker will sign an acknowledgement of independent contractor status. "Such a document would make it clear that the worker is responsible for payment of all taxes relating to the consideration (i.e., free rent) received from the owner," Gutterman says. "Such an agreement is not foolproof, however, since the Internal Revenue Service and state agencies responsible for unemployment and workers' compensation benefits will base their determination of the worker's status on the actual interaction between

the parties. However, it is a helpful record to have in the event of a later challenge."

NO WAIVERS. Mark Terman, a partner at the Los Angeles law firm of Reish Luftman McDaniel & Reicher, says it is probable that your tenant would be classified as your "employee" under New York law. Check out the wage-and-hours laws posted at the New York Labor Dept. site under "working" and "employment laws."

If this man is classified as your employee, a liability waiver would not be enforceable if he were injured on your premises, and there is a good chance your general liability insurance would not cover this either. You should add this person to your workers' compensation insurance policy to cover "on the job" injuries. "This should solve your liability worries right away, and state law requires that you have this insurance covering all your employees anyway," Terman says.

The bottom line is that you've ventured into a relationship that could backfire on you in several ways. Consult with an attorney familiar with New York employment laws. The money you spend will be worth it if it saves you from potential liability. Have a question about running your business? Ask our small-business experts. Send us an e-mail at smartanswers@businessweek.com, or write to Smart Answers, BW Online, 46th Floor, 1221 Avenue of the Americas, New York, NY 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.


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