Due to the unpredictability of hourly legal fees, many small business owners don’t contact an attorney until after things go wrong – even when they already have one on retainer. We were recently reminded of why we set out to break this mould of traditional law firms. In the span of one week, two subscription clients came dangerously close to disaster. We’ll fill you in while being sufficiently vague to protect our clients.
Company A
“Company A” was running out of time to find a third-party provider for a large client. They’d vetted multiple vendors but hadn’t found a good match. To bridge the gap, Company A was about to make a shell contract with an out-of-state business, “Service Co”. The contract stated Service Co would provide the service, but both parties agreed Company A would actually perform the work themselves. Members of Company A were experienced, skilled providers of this service, and felt confident they could meet the client’s standards until they could find the right vendor to take over. However, the contract between Company A and its client required a third party provide the service in question.
Here’s a similar but unrelated example: Craft Store has a contract to buy yarn from Textiles, Inc. The contract states Textiles, Inc. must hire a third-party quality assurance company to inspect each batch of yarn it sells to Craft Store. To cut costs, Textiles Inc. has its own experienced employees perform the quality assurance in-house. Even if Textiles, Inc. holds its employees to a standard of accurate, honest reporting, it still violates the legally binding contract with Craft Store.
We knew Company A was in search of a service company for their client, and proactively asked about it during a routine subscription check-in call. Once we had the scoop, we advised Company A that going through with the contract was federal fraud which could land them and members of Service Co in prison for several reasons:
- Both parties would be defrauding Company A’s client by stating that Service Co was performing the work when they weren’t.[1]
- Because the two companies were registered in different states, that automatically elevated the issue to federal jurisdiction.[2]
Moreover, Company A would be breaching its contract with their client, and if discovered, likely lose their business – a substantially large portion of their revenue. With our counsel, Company A opted to have Service Co perform the work after all, fulfilling their legal obligation to their client, and subsequently strengthened the language in the insufficient contract.
[1] Va. Code § 59.1-507.1.
[2] 7 U.S. Code § 6b
Company B
A new staff member, “Taylor”, of “Company B” asked the owner during onboarding if they could be hired as an independent contractor instead of an employee. Taylor owed a very large sum of money to the commonwealth of Virginia in back taxes. Taylor claimed if Company B paid them as an independent contractor through their spouse’s LLC, Taylor could avoid wage garnishment from the state. Without this set up, Taylor wouldn’t be able to ‘afford’ to work for Company B. Not-so-fun fact: Virginia can garnish up to 100% of an employee’s wages until they recoup all back taxes.[1]
The owner of Company B wanted to hire Taylor and, being an empathetic person, help them out. Knowing they had unlimited access to their Dunlap Law attorney as part of their monthly subscription fee, the owner of Company B called us for advice. Here’s why we also helped this client avoid a potential felonious fiasco:
- It’s a lot more expensive for a business to have employees than independent contractors due to taxes, benefits, and other regulations.[2] Virginia can and does prosecute companies who misclassify the former as the latter.[3]
- Even though the associate asked to be classified as an independent contractor, they could still sue Company B for misclassification.[4] Why? Because independent contractors pay more money in taxes than employees and employees are entitled to benefits that independent contractors are not. Even if Company B could prove Taylor asked for and benefited from the misclassification, they would likely still incur hefty legal fees to defend themselves.
- Both the company and the employee would have been committing felony conspiracy fraud to avoid paying back taxes to Virginia.[5]
Good people sometimes unwittingly make decisions with dire consequences. Without the recurring subscription calls, we may not have found out until it was too late to help these two well-meaning clients avoid life-changing mistakes. By offering a flat, monthly fee that gives our clients unlimited phone and email access to their primary attorney, we are changing the landscape of the client-attorney relationship. Taking away the dreaded unknown of ‘how much is this going to cost me’ empowers our clients to get our input before they execute on important business decisions. In the case of these two clients, the ROI on their subscription is invaluable.
[1] Va. Codes § 58.1-3952; § 58.1-308
[2] https://money.cnn.com/2015/07/16/pf/independent-contractors-employees/
[3] Va. Code § 40.1-29
[4] Va. Code § 40.1-28.7:7
[5] Va. Code § 18.2-22; § 58.1-308
Photo by Larry Farr on Unsplash