THIS ISSUE'S HEADLINES

New Rhode Island Law Limits Non-Compete Agreements

What Investors and Developers Should Know About Opportunity Funds

Unexpected Risk in Utilizing Independent Contractors


NEW RHODE ISLAND LAW LIMITS NON-COMPETE AGREEMENTS

Rhode Island recently joined a growing list of states with laws limiting the ability of employers to use non-compete agreements in the workplace. Employers often insist that employees sign non-compete agreements which would restrict an employee’s ability to work in the same field and geographic area as the employer for a limited period of time, such as six months to a year after the employment relationship ends. Although courts have always required such agreements to be limited in scope and reasonable in their effect, many employers continued to insist that their employees sign such agreements anyway, even if the terms were overly onerous on the employee.

This summer, the Rhode Island General Assembly passed the “Rhode Island Noncompetition Agreement Act” (Act). The Act is primarily aimed at protecting so-called “non-exempt” employees, graduate students, underage workers, and workers earning less than 250% of the poverty level (i.e., $31,225 for 2019). A non-exempt employee is generally one who is eligible for overtime, is paid hourly (not salary), and earns less than $455 per week. Clearly, the Act is intended to relieve lower-paid and younger workers from the effects of non-compete agreements and to permit non-compete agreements only where they are truly and reasonably necessary to protect an employer’s legitimate business interests, such as in connection with the sale of a business or where the employee is highly compensated.

However, the Act is not all bad news for employers. The new law does not apply to independent contractors. Also, it allows employers to insist that a former employee not solicit other employees, customers or clients or use the employer’s trade secrets. Employers should familiarize themselves with the Act and take a look at how they are using non-compete agreements to ensure compliance with the Act when it becomes effective in mid-January, 2020. For further information on this new law or other business or employment matters, please contact PLDO Partner Brian J. Lamoureux at 401-824-5100 or email bjl@pldolaw.com.

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WHAT INVESTORS AND DEVELOPERS SHOULD KNOW ABOUT OPPORTUNITY FUNDS

Opportunity Zones (“OZs”) investments were sanctioned by changes to the Internal Revenue Code included in the Tax Cuts and Jobs Act of 2017. The purpose was to encourage investment in economically depressed areas by providing investors with tax incentives for certain investments in certified “opportunity zones” designated by the various states and approved by the Internal Revenue Service. Reportedly, there are now over 8,000 designated OZs throughout the United States, including several in Florida, Massachusetts and Rhode Island.

Investing in OZs, directly or through a fund, offers a number of tax incentives, all of which are related to federal capital gains tax on the investment. To assist potential investors, PLDO partner and business attorney, William F. Miller and Attorney Joshua J. Butera have co-authored an advisory, What Investors and Developers Should Know About Opportunity Funds. The advisory describes the nuts and bolts of the program, explains an Opportunity Fund, and provides insight into considerations investors should be aware of before making an investment. For further information, please contact Attorneys Miller and Butera at 401-824-5100 or email wmiller@pldolaw.com or jbutera@pldolaw.com.

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UNEXPECTED RISK IN UTILIZING INDEPENDENT CONTRACTORS

A small business recently engaged PLDO with a dilemma that took an interesting twist. The business had engaged certain individuals as independent contractors rather than as employees. Unfortunately, this Rhode Island-based business failed to obtain Form W-9s for several of the workers, or to ensure that the workers had filed a Form DWC-11-IC, designating the worker as an independent contractor for purposes of workers’ compensation payment obligations, with the state’s Department of Labor and Training (“DLT”).

Accordingly, no party was paying for workers’ compensation insurance for these independent contractors. The significance of this is that an employer failing to provide the required workers’ compensation insurance may be fined $1,000 per day for each day without workers’ compensation insurance. An employer may also be subject to a felony charge, and upon conviction, face a $10,000 fine and two years in prison.

An independent contractor must file a DWC-11-IC for every business for which they provide “like services,” and an independent contractor must also ensure that all independent contractor they hire must also have a DWC-11-IC on file. As clarified on the RI DLT webpage:

If a homeowner hires an independent contractor such as a landscaper, the landscaper does not need to have a form on file because the homeowner is not in the business of landscaping. However, if you, as an independent contractor hire the landscaper as part of your business, you should be sure that the landscaper has a DWC-11-IC form on file with DLT, which will remain in effect, unless withdrawn, for every time that particular independent contractor works for you. Also, should that landscaper hire independent contractors to work for him/her, forms should be completed for each independent contractor hired. See http://www.dlt.ri.gov/wc/ICmain.htm.

However, this was not the end of the matter. While one of the independent contractors at issue in this small business’ case indeed did provide a W-9 and did have a Form DWC-11-IC on file, DLT nonetheless treated the worker as an employee and subjected the business to a fine. The rationale used by DLT was that the services that the independent contractor had formed a corporation to provide were entirely unrelated to the services provided to PLDO’s new client, who paid the worker through that worker’s business. DLT’s position was that the “Purpose” and “North American Industry Classification (‘NAICS’) Code” descriptions the business listed with the Secretary of State were unrelated to the services this worker’s business provided to PLDO’s new client, such that DLT deemed the worker to be a misclassified employee.

Based upon the guidelines for classifying workers as independent contractors contained in sources such as the IRS Publication 15-A, Employer’s Supplemental Tax Guide (avail. at: https://www.irs.gov/pub/irs-pdf/p15a.pdf), there is a strong argument that this worker could have been properly classified as an independent contractor, despite the fact that the worker was being paid through a business that was formed to provide entirely different services. However, before the matter could be contested, DLT agreed to a global settlement that made it cost-ineffective to object to DLT’s rationale as to this particular employee. Nonetheless, businesses should be aware that failing to obtain the proper forms is not the only pitfall of classifying workers as independent contractors. In at least one state, the relevant workers’ compensation agency will treat workers as employees despite their being paid through a company they own, if that company’s filing with the Secretary of State shows it to have been formed to provide services other than those provided to the business that subsequently engages the company. For more information, please contact Attorney Joel K. Goloskie at 401-824-5100 or email jgoloskie@pldolaw.com.

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