By Adam Stone, contributing writer
Tight times often force business owners to look for ways to keep costs under control. Because labor costs often present an employer’s biggest expense, many businesses look first to cutting payroll as a possible source of savings.
Employers can cut headcount, if possible, or pare back full-time positions to part time as circumstance allows. Other employers follow another intriguing and time-honored strategy: keep work in the family. Think of it as the “Aunt Sally phenomenon.” She’s got time on her hands, so she comes by a couple afternoons a week to work the register, keep the books tidy or help out with the mail.
Money-Saving Advantage
Under some circumstances, Aunt Sally’s willingness to help out may, in fact, allow an employer to save a few dollars. It may be possible, for instance, to pay a relative a substantially lower wage for the same work.
Suppose a relative is willing to accept $10 an hour for a job that normally pays $20 an hour. “There is no law against that,” said Erika Monterroza, spokesperson for the State Labor Commissioner’s Office, as long as the pay rate is above minimum wage.
Even under such conditions, it is best to tread with care. For example, don’t pull out your billfold to pay Aunt Sally cash at the end of the day. “If there are employees who are paid in cash and are not given an itemized statement of their deductions, that would be an issue,” Monterroza said.
The Trouble With Helpful Relatives
One problem with the Aunt Sally strategy: it might violate the law. If they are not careful, business owners who rely on the casual assistance of family or friends might unknowingly violate the California Labor Code, which could prompt a visit from an inspector from the Division of Labor Standards Enforcement (DLSE).
Employers using family or friends to perform work may violate state labor codes by not paying minimum wage, for example, or failing to follow state statutes that require overtime pay.
“If you have someone doing work for your organization, that person is an employee,” said CalChamber employment law attorney Jessica Hawthorne. That means everyone who gets paid, even Aunt Sally, falls under workers’ comp regulations and all other relevant labor codes.
Facing the Consequences
The state takes labor-code violations seriously. In one recent case, a small clothing store in Corning, Calif., faced a $1,000 fine for allowing a “homeless-looking” man to sweep the floors in exchange for a $10 gift offered by the owner. An inspector cited the owner for violating Labor Code section 3722, employing a person without workers’ comp coverage.
State authorities later dropped the charge, dismissing it as an example of overzealous application of the law, though the law specifically authorizes such a penalty. Still, the DLSE actively looks for violations and will pursue action against employers. Business owners may find themselves under scrutiny for a number of reasons, Monterroza explained.
“Sometimes it can be something as simple as a complaint from a competitor, or there may be an employee complaint, or it may be a spontaneous inspection, if someone is in the area and stops by to look at similar businesses in that industry,” Monterroza said.
The most common labor code violation employers face is failing to carry proper workers’ compensation insurance. Monterroza provided data on a series of 21 inspections in the Los Angeles garment industry conducted December 10-11, 2008. An overtime violation cost one business $1,000 and two minimum wage breaches drew $2,600 in fines.
Workers’ comp violations, on the other hand, cost business owners $39,000 in the same series of inspections. The insurer is supposed to have an accurate headcount. If you employ more staff than the number listed on the policy, you are out of compliance.
Under Labor Code 3722, the state can immediately issue a stop work order and a $1,000 per employee fine until proper workers’ comp coverage is in place for all employees. Fail to observe the stop order and an employer faces time in the county jail up to 60 days, a fine up to $10,000, or both.
As for the actual violation — the failure to carry appropriate coverage — penalties are even more severe. Under Labor Code section 3700, failing to carry workers’ compensation coverage is a criminal offense, a misdemeanor punishable by imprisonment in the county jail for up to one year, or by a fine of up to double the amount of the premium that would otherwise have been due. Simply put, the employer can be fined twice the unpaid premium, not less than $10,000.
A second conviction draws jail time of up to one year and/or a fine of triple the amount of the premium, not less than $50,000.
In fact, the only penalties greater than those issued for workers’ comp violations were fines relating to itemized deductions, to the tune of $133,000.
Higher Price
If an employer is found to be in violation of workers’ comp regulations, the Division of Workers’ Compensation will most likely talk to other agencies (the Franchise Tax Board, the IRS and the DLSE, to name a few) and the associated penalties could cause costs to skyrocket, Hawthorne explained.
In addition to these state penalties, insurers themselves are apt to take action.
If Aunt Sally was working without coverage, “then your workers’ comp carrier will require you to go back and pay for her coverage retroactively, and sometimes there is interest associated with that,” Hawthorne said.
Even more daunting is the prospect of Aunt Sally getting injured without coverage.
“If they [the employee] sustain a significant injury, and the insurance company is hit with an $80,000 claim, the company is going to do everything in its power to not have to pay,” said Frank Sanderson, a manager with employment advisor TOC Management Services in Redding, Calif.
Working the Margins Not Advisable
Faced with such stiff penalties, why would any employer take a chance and allow family members to help out?
For one thing, there is a sense of need. “With the recession, people are trying to get creative, and creativity around wage and hours means you are probably going to be in violation of something,” Sanderson said.
Creativity in this case can mean working the margins. Perhaps Aunt Sally is classed as an intern: They work nonstandard hours and wages, right? But only if they are drawing college credits.
Maybe that relative is a “volunteer” for the business, except that there is no such thing.
“That is great if you are a church or a nonprofit,” Sanderson said, explaining that for-profit enterprises can’t use volunteers, plain and simple. Anyone who does work for a business is an employee and thus subject to all relevant codes and restrictions.
Bottom Line
It’s tempting to bring in relations to cut labor costs, but it can be a risky endeavor. To stay on the right side of the law, “you hire them like you would any other employee,” Hawthorne said.
“Hiring Aunt Sally is no different from hiring Joe Dirt to do the same work,” she said.