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 mt@gertsburglaw.com and cm@gertsburglaw.com or by phone at 440-571-7773. 

Are your policies and documents protecting your business or getting you sued? Check 10 areas of your business for legal risks and get instant feedback from experienced attorneys right now by taking a short online quiz at bit.ly/CM6quiz. Or schedule a confidential, no-cost CM6 Vulnerability Check with Gertsburg Law Firm. CEO Alex Gertsburg will walk you through the minefields in your documents and key processes and tell you how to fix them yourself. Call 440-571-7774 or e-mail mc@gertsburglaw.com to schedule your CM6 Vulnerability Check today. Explore the full CoverMySix legal audit suite at covermysix.com.


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  • Next up: Can the Coronavirus Get Me Out of a Business Contract?
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  • Can the Coronavirus Get Me Out of a Business Contract?

    Limitations in place due to the Coronavirus have left many businesses wondering what their rights are when they are prevented from meeting contractual obligations. Find out more about enforcing force majeure in the wake of COVID-19.

     

    On March 9, 2020, Governor Mike DeWine took several actions to combat the spread of Coronavirus (also known as COVID-19), including declaring a state of emergency in Ohio. Shortly after that, the World Health Organization (WHO) declared the Coronavirus a pandemic, causing the governor to put even further protective measures in place. Not surprisingly, these actions have had a significant impact on business operations throughout the state and have left many businesses wondering what their rights are when they are prevented from meeting their contractual obligations.

    Due to the risks that Coronavirus poses to virtually all types of businesses, companies must consider the potential impact these preventative measures could have on their operations. Taking proactive measures to mitigate risk, assess contracts and insurance policies, and ensure adequate protection and coverage will decrease the likelihood of force majeure disputes. It will also assist parties asserting force majeure claims by showing they took reasonable steps to comply with their contractual obligations.

    Understanding Force Majeure

    So, what exactly does “force majeure” mean? Generally, it arises in the form of a contractual provision that excuses a party’s nonperformance when “acts of God” or some other extraordinary event prevents a party from fulfilling its contractual obligations. A force majeure clause defines what constitutes a force majeure event, as well as the effect that such an event would have on the rights and obligations of the parties.

    In considering the applicability of force majeure, courts consider whether the event qualifies as force majeure under the language of the contract—whether the risk of nonperformance was foreseeable and able to be mitigated, and whether the performance was truly impossible.

    Coronavirus’ classification as a pandemic by the WHO will trigger force majeure clauses that expressly account for such events. Clauses that are silent on pandemics or viral outbreaks are likely to be insufficient for a force majeure defense unless the courts liberalize the force majeure analysis to account for this specific incident. Ultimately, the courts’ reaction to this pandemic remains to be seen. However, if a force majeure clause clearly covers Coronavirus, parties seeking to invoke the provision will not need to establish the event was unforeseeable. They will, however, still need to show that they took steps to mitigate their damages, and that performance of the contract is truly impossible.

    While courts will likely reject a force majeure claim if the parties’ agreement does not contain a force majeure clause, parties seeking to excuse nonperformance may still avail themselves. Common law doctrines of impossibility or impracticability can excuse the performance of a duty, where the duty has become unfeasibly difficult or expensive for the party who was to perform.

    What happens if this pandemic constitutes a force majeure event?

    If the Coronavirus pandemic constitutes a force majeure event, the effects depend on the terms of the contract. The impacted party’s performance must be prevented, impaired, or delayed due to the force majeure event for the clause to excuse its inability to perform. Accordingly, the courts give consideration to what extent the force majeure event caused the impacted party’s failure to perform in order for the clause to apply.

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    Typically, a force majeure clause will also impose various obligations for the parties to follow. For example, the impacted party must usually provide notice to the other party after it becomes aware of the event and will likely be required to mitigate its damages. If the party invoking the clause fails to do this, they may be prevented from raising a force majeure claim.

    Lastly, the parties should consider whether the terms of the contract completely relieve a party from performance when a force majeure event occurs, or if it merely delays the performance until the conclusion of the event. If a force majeure event arises, the contract may provide the parties with certain remedies, including the right to terminate the contract without liability if the event continues for a specified number of days.

    Response to the Pandemic and Assessing Risk

    In the wake of Coronavirus, businesses (as well as consumers) should review existing contracts to assess their risk and exposure and consider adjusting the language in force majeure clauses in future contracts. For new contracts entered into after the onset of Coronavirus, the company should consider expressly addressing epidemics and pandemics, as well as matters arising as a result, such as restrictions on travel, quarantines, and shutdowns of commerce.

    If a company anticipates that it will not be able to perform under a contract due to Coronavirus, it should document support for a potential force majeure claim, including timing, size of the impact, and mitigation efforts. Further, the company should consider contingency plans and immediately put affected parties on notice. Effective communication during these uncertain times may very well be the key to mitigating these damages, which in turn will minimalize the risk and harm to all involved.

    This article is for informational purposes only. It is merely intended to provide a very general overview of a certain area of the law. Nothing in this article is intended to create an attorney-client relationship or provide legal advice. You should not rely on anything in this article without first consulting with an attorney. If you have specific questions about your particular situation, you should contact an attorney licensed to practice in your jurisdiction.

    Cindy Menta is an attorney at the Gertsburg Law Firm. Ms. Menta’s practice is focused primarily on landlord-tenant law and labor & employment. She can be reached at cm@gertsburglaw.com or by phone at (440) 571-7541.

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    The new site—which can be accessed at www.cose.careerboard.com—features intelligent technology that will do far more than wait for a quality candidate to search and find a job. Available jobs will be actively marketed to more than 400,000 potential candidates.

    “We know that talent drives organizations,” says CareerBoard President Richard Padgett. “This is a unique opportunity in that COSE is well known as an organization intensely focused on the needs of small business owners and there are job candidates who are specifically looking for that type of employer. This is an outlet for those business owners who don’t have a department dedicated to attracting talent to reach those people.

    The site is based on tried and tested CareerBoard software that delivers more than 1 million applications every month and has been specifically enhanced for COSE to provide features expected on a leading job site. The addition of proactive features such as smart alerts and behavioral intelligence tools, CareerBoard ensures qualified job seekers across the country and local employers find each other. And, with 40% of all U.S. job searches taking place on mobile devices, the enhanced COSE mobile site fully supports the needs of today’s job applicants.

    COSE and CareerBoard are also pleased to offer a special, discounted rate for COSE members. COSE’s small business members are able to place a 28-day ad for just $175 or a one-week ad for only $50.

    “There are no excuses for not being able to hire that next person who will be able to help you grow your business,” says COSE Executive Director Steve Millard. “We’re making it very easy for you to put together the right staff.”

    CareerBoard has been an online job board recruiting local talent for employers and a consistent source of local employment opportunities in Northeast Ohio since 1997. This partnership provides a cost-effective local online recruiting solution that is capable of delivering quality candidates in every job category. For more information about CareerBoard, visit www.careerboard.com.

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    COSE is proud to announce a partnership with CareerBoard that will help meet the job staffing requirements of small businesses.


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  • Next up: COSE MEWA Is a Return to Pre-Affordable Care Act Days
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