Can Businesses Avoid Minimum Wage Requirements by Bartering Services?
If you're considering bartering services for the financial benefit of your business, make sure you're following these legal guidelines, as well as these tips to ensuring your business is protected.
In an effort to protect their bottom lines, business owners give much consideration to the costs of running their day-to-day operations. As part of this consideration, business owners often pay particular attention to staffing requirements and employment expenses. This may result in experimenting with alternative hiring arrangements, such as utilizing independent contractors and engaging in the practice of bartering services. Though hiring independent contractors and engaging in bartering can be effective ways to save on staffing costs, it is incredibly important that those hired are properly categorized and compensated.
Because the line is often blurred between independent contractors and employees, it is essential that employers understand the difference to avoid trouble down the road. This is particularly true when they are considering bartering services. Employers must also properly report any “income” received as part of the bartering service. Otherwise, the employer may run afoul of minimum wage laws or income reporting requirements and be subject to government investigations and litigation, which can have catastrophic results for the business.
Is it Permissible for Businesses to Barter Services?
The idea behind bartering is that an independent contractor offers a business owner goods or services in exchange for something from the business. For example, a gym may offer a contractor a gym pass in exchange for the contractor performing certain repair work at the gym. These situations are often contractual, short-term, and leave each party with a benefit- though actual money does not change hands. Because no employer-employee relationship exists, these arrangements are not generally subject to minimum wage laws.
The value received from the bartered services or goods, however, may need to be reported by both parties. Barter exchanges (organizations whose members contract with each other to exchange goods or services) are required to file a Form 1099-B for mostly all transactions. Contractors that do not barter through a barter exchange, but who trade services, are not required to file Form 1099-B. However, they may be required to file Form 1099-MISC. Further, if a business owner utilizes bartering, he or she will be required to report the fair market value of goods or services received. Generally, this income is reported on Form 1040, Schedule C, or Form 1040, Schedule C-EZ. (See generally, IRS.gov). Accordingly, if moving forward with such an arrangement, the parties should consult with a tax professional to ensure that the value received through bartering is properly reported.
Though bartering of services is permissible in certain situations, in employer-employee relationships, employees are always entitled to be compensated for the hours they work. The U.S. Department of Labor and the U.S. Supreme Court require all employees subject to the FLSA to be paid at least the federal minimum wage. (See DOL Fact Sheet 13). Similarly, Article II.34(a) of the Ohio Constitution requires every employer to pay their employees at least minimum wage. Notably, Article II provides that “[w]here an employer is found by the state or a court to have violated any provision of this section, the employer shall within thirty days of the finding pay the employee back wages, damages, and the employee's costs and reasonable attorney's fees. Damages shall be calculated as an additional two times the amount of the back wages…” Accordingly, failure to comply with these minimum wage requirements can be costly to the business owner.
The wages paid pursuant to this rule must also be in the form of monetary compensation. Specifically, Ohio Revised Code § 4111.01, also known as the Ohio Minimum Fair Wage Standards Act, provides that a “wage” is “compensation due to an employee by reason of employment, payable in legal tender of the United States or checks on banks convertible into cash on demand at full face value, subject to the deductions, charges, or allowances permitted by rules of the director of commerce under section 4111.05 of the Revised Code.”
The only statutory exception to the Act is a provision allowing an employer to deduct the reasonable cost of furnishing the employee board, lodging, or other facilities. See R.C. 4111.01 and R.C. 4111.02; Manifest Sols. Corp v. Watkins, No. 13CV-894, 2014 Ohio Misc. LEXIS 18000, at *16 (Oct. 6, 2014). However, this exception does not extend to bartered services.
In short, bartering with employees is a violation of the minimum wage requirements under Ohio law. Further, incorrectly designating an employee as an independent contractor when utilizing bartering services can result in significant damages and/or fines to the employer if the employee is not adequately compensated. If the impermissible arrangement occurred over a prolonged period of time, or involved many employees, the result could be devastating to the overall success of the business.
How Can Business Owners Protect Themselves When Considering Bartering Services?
Because business owners can be subject to severe fines and/or sanctions for mislabeling their employees when bartering, they should meet with an attorney to ensure that they are properly categorizing their staff and complying with minimum wage laws. If they are bartering with a properly categorized independent contractor, then the business owner will not have to pay minimum wage for such services. Instead, they will be bound by the contractual agreement, and may have to file other tax forms to account for the value received from the services. In such situations, it is recommended that the business owner meet with a tax professional to ensure that the income received from the arrangement is adequately reported.
For more on the importance of properly classifying employees and contractors, see How to Avoid a Giant Bill by Misclassifying Employees as Independent Contractors
This article is meant to be utilized as a general guideline for bartering for services. Nothing in this blog is intended to create an attorney-client relationship or to provide legal advice on which you should rely without talking to your own retained attorney first. If you have questions about your particular legal situation, you should contact a legal professional.
Mark Turner and Cindy Menta can be reached at firstname.lastname@example.org and email@example.com or by phone at 440-571-7773.
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