Law

Construction Collections 101: Five Ways to More Effectively Pursue Collections

By QUINN MURPHY

Quinn Murphy

There are few commonalities in construction. The phrase “no two projects are exactly alike” permeates the industry and is on the tip of every bidding contractor’s tongue. The truth is, every project is just as unique as the conditions that surround it, and because those conditions are rarely identical, similarity is rare.

But if there is one commonality in the construction industry, it is contractors’ need to efficiently collect payment for work performed or labor/materials provided. Payment delays pervade the construction industry and have only gotten worse during the pandemic and globalization of construction supply chains. Creating a system to efficiently pursue payment is critical to long-term success in the industry. Collections can make or break a project and ultimately make or break a contractor. But many contractors don’t know where to begin with construction collections. The process is stressful, expensive and all too often unproductive, creating a very real sense that deciding when and how to pursue collections should be based on a “gut feeling,” reading the proverbial tea leaves or a random flip of a coin.

But the truth is, effective collections require planning, intentionality, discipline and partnering with collections professionals who are committed to these principles for the contractor’s sole economic benefit. While there is no “one size fits all” corporate collections policy that can be implemented across contractors, trades and industry professionals, there are common methods and tools that help contractors recoup payment and maximize net recovery. Here are five of these methods:

  1. Effective collections requires a plan, so have one.

Start to think of collections as an investment, for which a healthy return is both anticipated and expected. You wouldn’t invest in the stock market without a well-defined and thought-out plan, so don’t invest in collections without one either. Many contractors “trust their gut” about which payments to chase and which to let go. Resist this urge. You earn your money through experience and expertise; collections professionals do the same, so utilize that expertise to create a plan that you and your accounting folks can reasonably believe will recoup the money that rightfully belongs to you.

  • Set AR parameters for collections, then revisit them every six months.

Set well-defined parameters for which amounts you will pursue and which you will let go. Set these parameters before the frustration with non-payment sets in on any particular project. Perhaps a contractor may decide to pursue any receivable over $10,000 that is more than 30 to 45 days overdue. The particular parameters aren’t as important as the discipline of holding yourself to the policy without exception. Then revisit the policy every six months and adjust those parameters to maximize your net recovery.

  • Request payment bonds at project onset and send notices of intent.

For bonded projects, always request a copy of the payment bond at the onset to avoid delay if you need it later on. For non-bonded projects, state mechanics’ lien statutes can be confusing, often inconsistent and complex. There is no realistic way for a contractor to learn or adequately digest the legal nuance of precisely what is required under each state law where projects are located. Some states require notice of intent to lien, and some don’t. If you are a contractor operating in multiple states, make it a policy to calendar and serve a notice of intent to lien at the very onset of all projects. This will assure your compliance in states that require it and will have no negative impact in states that don’t.

  • Analyze collectability pre-suit.

Many a contractor has won at trial only to be told that the defendant has no assets and is effectively judgment-proof. We recommend you flip this analysis on its head and run asset searches through counsel on debtors before referring the matter to an attorney or collections professional. A dollar saved is no less valuable than a dollar recovered, so ask for pre-suit asset searches and collectability analysis to avoid throwing good money after bad. Focus on debtors that have robust bank accounts, largely unencumbered real property or expensive equipment that you can lien and sell to maximize recovery.

  • Should I use a collections agency or attorney? Both.

One common dilemma for contractors is determining when to send receivables to an attorney versus collections agency. As a general rule, collections agencies (operating on contingency fees) are better suited for smaller receivables and attorneys for larger ones. The reason is purely economic. If a contractor assigns a $10,000 receivable to a collections agency who writes a half-hour demand letter and collects, the contractor pays that collections professional $4,000 (40 percent) for writing the letter rather than $100 to $200 (one half-hour of time) for an attorney to do the same thing. On the other hand, a collections agency can chase smaller receivables longer without incurring any additional cost unless they recover. In the end, both are important partners in a contractor’s collections toolbox that should be utilized where they are most efficient and effective. As a general rule, most contractors refer receivables under $10,000 to collections agencies and over $10,000 to attorneys, but this should be tracked and revisited periodically to adjust allocation to the most productive debt collector.

No collections system is perfect. All are a work in progress. But by utilizing these five ways to more effectively pursue collections, contractors can recoup payments and maximize net recovery for years to come.

Quinn Murphy, heads both the construction and receivable recovery industry teams at Sandberg Phoenix & von Gontard P.C. He represents contractors in non-payment claims in all 50 states and in helping contractors create internal collections policies that maximize net recovery. Murphy can be reached at qmurphy@sandbergphoenix.com.

To Litigate or Arbitrate, that is the Question: When in Doubt, Mediate

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By RICHARD STOCKENBERG

The decision whether to litigate or arbitrate a construction contract dispute is a judgment call. It all depends, but what is clear is that mediation offers a viable alternative to reach peaceful resolution without the need to resort to either.

What are the Differences?

Litigationis a public court proceeding utilizing and enforcing rules of evidence and procedure with attorneys representing the litigants. The decision maker is either a jury or a judge. The decision is binding and enforceable and is subject to review by a higher court.

Arbitration is a private proceeding that is voluntary, officiated by a single arbitrator or, in some cases, by a panel of three arbitrators. While there are rules governing procedures, arbitration does not follow the strict rules of evidence. The decision is binding with only limited rights of appeal. Attorneys are not required but are generally used.

Mediationis a non-binding settlement process facilitated by a neutral mediator, usually an attorney experienced in construction law. While mediation is generally voluntary, some courts will require litigants to engage in the process, though neither side is required to settle – just to make a good faith effort. Selection of the mediator is by agreement of the parties.

Contract Provisions

While parties cannot be required to surrender their rights to litigate, when a party signs a contract agreeing to arbitration, courts will typically enforce the clause.

In prior iterations, the American Institute of Architects family of documents required disputes to be resolved by arbitration using the services of the American Arbitration Association. However, to afford the parties options, the forms were modified to require the parties to check the box selecting either arbitration or litigation. Unless the arbitration box was selected, litigation became the default procedure.

Contractual Protection: Sharing the Risk of Escalating Prices for Material

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By RICHARD A. STOCKENBERG

Dick Stockenberg

Lump sum construction contracts are designed to provide for the comfort of certainty, or at least relative predictability. But in times of uncertain and volatile economic conditions when prices for materials are neither certain nor predictable, an enhanced level of risk is introduced into the equation, resulting in a need to head to shore to seek the comfort of a safe harbor.

During periods of escalating prices, not even an owner with an ironclad lump sum contract can be assured it has the best deal it can get. For example, when contractors are unsure that they can procure materials for the duration of the project at the same price as contained in their bids, it will not come as a surprise that savvy contractors have built into their bids a “material escalation factor” that is perhaps more than is needed. In that case, the owners may be paying more than necessary.

To avoid such a dilemma, an option that may work for some owners, but not others, is to pre-purchase materials, especially if there is storage space available and insurance coverage.

Another source of possible relief is to provide for a line-item contractual contingency fund to be drawn upon when material prices exceed a defined level.

Contractors and subcontractors sometimes qualify their bids to allow for adjustments when there are unusual price increases in materials, equipment and energy. In such case the bidder, in order to receive an adjustment, will have to reveal how it priced these commodities, and most importantly it needs to assure that the price escalation qualification language found in the bid finds its way into the contract. This is particularly important for subcontractors who often have subcontract language saying that their bid does not become a binding contract document.

However, in reality there is no perfect solution that will eliminate all risk for all parties. As a matter of principle, risk should be borne by the party who can best control the risk. But when it comes to price escalation for materials, it can be generally said that parties who sign construction contracts have little, if any, control over such escalation. Fortunately, stakeholders in the construction industry are not totally averse to risk; if they were, they would find employment elsewhere.

ConsensusDocs’ Response

ConsensusDOCS is a consortium of 40-plus trade associations formed for the purpose of agreeing on fair and equitable – but not perfect – contract terms, especially as those terms deal with how risks are shared, not shifted. These documents do not contain one-sided clauses designed to purposefully shift risks downstream. Instead, they are drafted to find a balance that is equitably apportioned.

ConsensusDOCS is believed to be the first, if not only, publisher of a standard material price escalation clause (ConsensusDocs 200.1). This material escalation clause allows users to list specific materials affected for their project, and it may adjust the contract price by referencing an agreed-upon objective market index. In fact, only commodities specifically identified can potentially be adjusted up or down, and the parties may limit the extent of the adjustment.

The new language is intended to be completed and executed contemporaneously with the construction contract. Because it is intended to be flexible and to cover many different kinds of materials, calculation methods are suggested, e.g., established market or catalog prices; actual material costs; material cost indices. 

The document can also be incorporated into subcontract agreements and others, such as design/build and construction management at risk.

Safeguards are built into the language. For example, documentation for adjustments is required. The number of increases/decreases can be limited; however, the Associated General Contractors has noted that using a cap eliminates some of the benefit of a contractor eliminating contingency in submitted bid amounts.

The new form also addresses time extensions in the event of project delay caused by scarcity or delivery delay. Adjustments to time and money are not allowed for impacts caused by the contractor or its subcontractors or suppliers.

Also, the clause can function as a de-escalation clause when prices go down, thus allowing for mutuality to the owner’s financial benefit.

In addition to the duty of both the contractor and the owner to mitigate damages due to price escalation, the contractor is not allowed to include overhead and profit in any price adjustment.

Like the entire family of contract documents published by ConsensusDOCS, the new price escalation clause represents a consensus of a broad spectrum of construction industry stakeholders. Whether the ConsensusDOCS form is used, parties at all levels should consider some form of contractual protection extending the entire length of the contractual food chain, starting with the owner and extending down to the lower tier subcontractors and suppliers.

Richard A. Stockenberg, founder of The Stockenberg Law Firm LLC, limits his law practice to construction law. He can be reached at richard@stockenberglawfirm.com.

COVID-19 Causes Breaches to Construction Contracts: Which Party Bears the Risk?

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By TYLER SCHAEFFER

Tyler Schaeffer

The COVID-19 pandemic has been extremely unpredictable in its effects on businesses. On March 16, 2020, at the very beginning of the pandemic, the Dow Jones Industrial Average plunged 2,997 points – the largest single-day point drop in history. By the end of 2021, however, the stock market had fully recovered and reached new record highs. At the beginning of the pandemic, the concern focused heavily on rampant unemployment and need for increased government benefits. More recently, the job market has been measured by the number of available jobs that remain unfilled. 

One of the most noteworthy – and perhaps not immediately predictable – consequences of the COVID-19 pandemic was its exposure of the fragility of our global supply chains; many businesses and industries experienced unprecedented delays in obtaining needed products and supplies. The breakdown in the supply chain coupled with drastic changes in consumer demand caused wild inflationary swings in the pricing of certain products and commodities. These swings in the availability and affordability of certain goods and services caused many businesses finding themselves unable to fulfill contractual obligations made before the beginning of COVID-19. 

 Which party bears the risk of pandemic-caused inability to fulfill the terms of a contract? Parties may allocate the risk of unforeseen circumstances in what is known as a “force majeure,” or escape clause, in the contract. “Force majeure” is a French term that means “greater force.” A force majeure clause allocates the risk if performance becomes impossible or impracticable especially because of an event or effect the parties could not have anticipated or controlled at the time of contracting. 

If the contract does not allocate risk through a force majeure clause, the common law provides several related defenses that may excuse performance due to unexpected causes: impossibility, commercial impracticality and commercial frustration.

  • Impossibility is the most stringent standard and excuses a party’s performance only when its performance is rendered impossible by an act of God, the law or the other party. Unforeseen difficulties, however great, will not excuse performance.
  • Commercial impracticality will excuse a party when an occurrence of a superseding, unforeseen event prevents performance, not within the reasonable contemplation of the parties at the time the contract was made and that goes to the heart of the contract.
  • Lastly, commercial frustration may excuse performance when the contract’s principal purpose is frustrated without fault by the happening of some event, the nonoccurrence of which was a basic assumption on which the contract was made.

Should a company find itself unable to fulfill its obligations under a contract due to COVID-19, looking to a force majeure clause as well as the defenses listed above provide potential avenues to escape liability for the COVID-caused breach of contract. Although COVID-19 has been with us for two years, the caselaw providing guidance on the applicability on typical force majeure clauses and these defenses is not fully developed and often has limited applicability to the specific facts in such cases. As such, none of the options above provide a sure-fire solution to an otherwise innocent party unable to meet its contractual obligations due to COVID-19.

The complications caused by COVID-19 have also inspired many companies to revisit and rethink the negotiation of their contracts to include greater protections for the risks of pandemics and their collateral consequences. Concepts such as pandemics and government shutdowns will surely be expressly appearing in future contract escape clauses. Additional rights for cancellation and for delay based on such events will also be appearing in such contracts. On the other hand, parties to contracts concerned about the other side’s potential delay or inability to perform due to unknown consequences of a pandemic will also wish to obtain protections in their contracts. There are many new and creative contract options for both sides to consider in a post-COVID-19 world.

Hopefully COVID-19’s effects on businesses will soon be a thing of the past. But, before memories of this time fade, businesses would be wise to ensure they protect themselves contractually from the risks of a severely disruptive pandemic or similar event in the future. Any contracting parties unable to fulfill their contractual responsibilities due to COVID-19 or wishing to negotiate a new contract with an escape for unforeseen circumstances caused by the pandemic should contact their attorney to explore available options.

Tyler C. Schaeffer is an attorney with Carmody MacDonald and concentrates his practice in business litigation. He works closely with businesses including construction companies in disputes, including contracts, business tort, financial restructuring and bankruptcy, and consumer protection. Contact Tyler at tcs@carmodymacdonald.com or (314) 854-8645.

This column is for informational purposes only. Nothing herein should be considered legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.  

What’s Your Marketing Budget for 2022 and How Do You Measure ROI?

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By STEPHANIE WOODCOCK

Stephanie Woodcock

The average B2B company spends between 6 percent to 7 percent of its overall revenue on marketing costs. According to a study conducted by Deloitte and Duke University’s Fuqua School of Business, each industry varies based on different growth strategies. The energy industry, for instance, spends 3 percent of its total revenue on marketing and the construction industry spends 2 percent.

Based on these numbers, a small construction company with an annual revenue of 3 million dollars should be spending $60,000 on marketing.

To determine our own 2022 marketing budget, we need to know our growth objectives. Let’s start with what we have in common:

We all want qualified leads, repeat clients, better cross selling, greater market share, market recognition and brand loyalty. 

For those of us who want to grow in 2022, a quick overview of our numbers helps. What is our annual recurring revenue? And by what amount do we want to increase that revenue? The difference is the growth delta.

Typically, a company will spend 40 percent of that growth delta in effective marketing to achieve certain goals. Isn’t that fascinating? Many of the companies I see who want to grow miss the big picture. They buy more equipment, onboard an expensive CRM program, get better computers but neglect to realize their website has a slow load speed, is not optimized for mobile, is not SEO friendly and has no value proposition to set them apart from their competition.

Companies typically spend money on items that count the money rather than make the money because it’s easier to measure than make. 

I was recently asked in a new client meeting, “How do you measure ROI (return on investment)?” Great question. 

ROI is based on whether you meet your key performance indicators (KPIs) with your marketing strategy and implementation.

You can’t determine your KPIs until you know your marketing objectives.  A KPI of 4 new clients a month may be good for one company but not good for a firm that wants to increase market share with 10 product lines.

What is your KPI? How do you want marketing to move the needle for your business?

Here’s where so many company owners differ, stating:

I want to grow my company XX amount. 

I want to increase my brand presence and enhance my company image.

I want to grow the company through more product lines or services.

I want to increase customer loyalty.

I want to impress existing customers with technology enhancements.

Your marketing budget should be based on determining your objectives and putting real numbers to those objectives. Finding the right strategy and a good workable budget depends on which of these objective(s) you want to meet.

Now the good part. How do we get in front of those new clients? What’s our strategy?

We find the events where they are. We use the marketing channels they pay attention to. We get in front of them with inbound and outbound marketing. 

Measuring the ROI is no easy task because our key performance indicators are so dependent on the quality and accuracy of our strategy. 

I once had a client who spent the bulk of his budget being a platinum sponsor in a customer-rich association. He attended every meeting, spent beyond his annual platinum sponsorship and knew the value of each customer attained through that association. Event marketing was his main strategy to reach his KPIs. 

I had another client who needed website leads nationwide. He had a new product on the cusp of an emerging market but needed brand recognition. His marketing budget was devoted to revamping his website, optimizing it for higher Google rankings and investing in paid search.

I have another client who writes articles and sends them out in press releases, magazines and online newsletters. She creates her own tribe of followers through thought leadership articles and can charge top dollar for her services because she has personally helped construct its value.

We can be successful with a variety of strategies. The key is to BE where the customers are or where they are going to be. 

Your marketing team’s focus should not be on improving the measurables to prove their own success and better measure ROI. Rather, they should be focusing on tactics that will make an impact.

We can become so consumed with trying to measure the data and determine ROI that we forget to use common sense and our instincts. Marketing in this industry takes instinct. Our buyers take a long time to become customers.

It’s easier for me to measure the ROI of an email marketing campaign than it is to measure the value of an event sponsorship or a print ad. The three work together, so which strategy gets the marketing credit?

Together we learn how to carefully curate the best value for our customers with the right marketing channels. 

My favorite strategies for the construction industry are content, email and event marketing. Content marketing delivers 3 times the leads versus tradition advertising. It also has a longer sales cycle because you’re often developing brand awareness with customers before they are “now” buyers. Traditional advertising works as well strategically in the right environment. 

The research backs me up. In a 2019 survey of 1,000 senior-level B2B marketers, the most effective B2B marketing channels were reported as:

1.) In Person Events (41 percent)

2.) Content Marketing (27 percent)

3.) Email Marketing (14 percent)

4.) Paid Social and Search (6 percent)

5.) Organic Social and Search (3 percent)

But I’m getting ahead of myself. Once you answer some of the questions above and find a budget line for marketing, contact me to discuss strategy and ROI.

Stephanie Woodcock is president of Too Creative, a St. Louis-based design and marketing agency. She can be reached at stephanie@toocreativestl.com.

Is Your Insurance Company Refusing to Pay Out a Claim?

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How the Law’s “Good Faith” Measure is On Your Side

By MEGHAN M. LAMPING

Responsible business owners and companies understand they face risks every day. To manage – and potentially mitigate – those risks, companies purchase insurance. In exchange for sometimes hefty premium payments, companies expect their assets to be protected in the event of a claim for damages or a lawsuit. 

In fact, companies turn to their insurance carriers for help in many situations. Companies may look to their insurance carrier if they experience property damage or are dragged into a lawsuit alleging claims of negligence or unworkmanlike performance. In these types of situations, companies expect their insurer to step in and either pay out a claim for damages or settle a lawsuit. When an insurance company balks at paying out a claim or settling a lawsuit on the company’s behalf, that company is, understandably, frustrated. 

But there are some mechanisms built in the law to encourage insurance companies to treat their insureds fairly, act promptly and in accordance with the policies of insurance they issue.  Insurance companies owe their insureds certain duties and obligations under the law and the policies of insurance issued. When insurance companies do not act properly, they can then find themselves facing additional liabilities. 

For instance, in Missouri, an insurance company can be liable for causing damages to its own insured if it “vexatiously” refuses to pay claims covered by its policy. Damages, including attorneys’ fees and monetary penalties, can be awarded when an insurer’s refusal to pay a claim is determined to be “vexatious and without reasonable cause.” The statutory protections exist, in part, to incentivize insurance companies to pay legitimate claims without litigation. 

Additionally, an insurance company can face tort liability, including punitive damages, if it unreasonably refuses to settle a claim or lawsuit against its insured. In Missouri, an insurer runs the risk of a legal liability where, in bad faith, it assumes control over a legal proceeding against its insured and refuses to settle a claim within insurance policy limits after the insured has demanded that the claim be settled. Missouri courts describe “bad faith” as “the intentional disregard of the financial interest of the insured in a hope of escaping responsibility imposed upon the [insurer] by its policy.” Again, the purpose of these laws is to encourage insurance companies to settle cases or claims covered by the policies. 

To be sure, the penalties and awards of damages ordered against insurance companies, where liability is found, are not insignificant. Litigation against an insurance company is expensive and courts often recognize this burden when they award litigants tens or hundreds of thousands of dollars in attorneys’ fees. Damages awarded to an insured – apart from attorneys’ fees – can similarly be significant. In 2013, a Missouri court of appeals affirmed a jury’s verdict of more than $6 million in favor of an insured over its insurer where the jury “apparently believed the refusal to pay the claims or make a determination of coverage was unreasonable.” In another Missouri case, an insurer was ordered to pay its insured more than $900,000, including punitive damages, for denying a claim and defaming the insured by claiming – incorrectly – that the insured had burned down his own house.   

It’s obviously important to mitigate risks in business by having the proper insurance coverage. It’s also important to remember insureds have legal protection when working with insurance companies not acting in good faith. Specifically, the existing applicable laws and stiff penalties associated with running afoul of the purchased protections. 

Meghan M. Lamping is an attorney at Carmody MacDonald and focuses her practice in the areas of general civil litigation. Contact Meghan at mml@carmodymacdonald.com or (314) 854-8676.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

New Bankruptcy Law Provides Welcome Changes for Small Contractors

Chapter 11’s New Subchapter V Helps Achieve Successful Restructuring

By ROBERT E. EGGMANN and THOMAS H. RISKE

Thomas Riske
Robert Eggmann

Shortages of materials and skilled labor continue to put increased pressure on some small construction contractors and subcontractors to consider bankruptcy reorganization. Unfortunately for them, the hope of re-emerging in Chapter 11 is often unsuccessful because the rules are complicated, challenging and not traditionally well-designed for their needs.

Last year, the federal Small Business Reorganization Act (“SBRA”) became law, added a new “Subchapter V” to Chapter 11 that streamlines bankruptcy procedures for small contractors and provides new tools designed to achieve more successful restructuring.  Subchapter V should be welcome news for many small contractors facing financial difficulties, although individual circumstances will dictate whether this is the right course of action.

Eligibility

A person or entity must be engaged in commercial or business activity with an aggregate liability below $2,725,625. At least half of the debt must have arisen from the business. The CARES Act provides for a temporary increase of this threshold to $7.5 million that is scheduled to roll off in 2021.

Creditors’ Committee

In Subchapter V, no creditors’ committee is appointed unless a court orders otherwise, making it the exception and not the rule and saving the small business money.

Appointment of Trustees

The SBRA created a new type of trustee, a Subchapter V trustee, to be appointed in every case. The trustee’s duties include appearing at the first status conference and hearings that concern major case milestones, facilitating the development of a consensual reorganization plan, and making payments to creditors under the plan. 

Disclosure Statement

No disclosure statement is required unless a court orders otherwise, which removes a common source of protracted battles among the parties involved.

Reorganization Plan

Only the small business debtor may file a plan of reorganization under Subchapter V and must do so within a shortened 90-day timeframe from the order for relief. The rules for the contents of a Subchapter V plan of reorganization are more debtor-friendly. Notably, a loan secured by a principal residence can now be modified if the proceeds of the loan were used for the business.

Plan Confirmation

There are two ways to have a plan confirmed:

  1. Consensual. Subchapter V strives to help the debtor and creditors reach a consensual plan. Confirmation of a consensual plan terminates the trustee and the debtor receives a discharge upon confirmation, two important incentives for debtors.
  2. Cramdown. A plan can still be confirmed if some or even all classes of creditors don’t accept it, so long as the plan doesn’t discriminate unfairly, and is “fair and equitable” to impaired unsecured creditors.  A “reasonable likelihood” of repayment must be demonstrated, and the plan must provide remedies to protect creditors if payments are not made.

Voting

Voting rules change significantly under Subchapter V. As mentioned above, a debtor can now confirm a plan with no votes from creditors.

Absolute Priority Rule

In Subchapter V there is no absolute priority rule, allowing debtors to retain ownership without adding new value – provided the reorganization plan does not discriminate unfairly and funds the repayment of creditors in three to five years by committing all projected disposable income.

Robert Eggmann and Tom Riske both serve as Chapter 11 Subchapter V trustees in the Central and Southern Districts of Illinois, respectively.They practice in the financial restructuring and bankruptcy department at Carmody MacDonald P.C. in St. Louis. Contact any of Carmody MacDonald’s attorneys at 314.854.8600.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

Could an Employee Incentive Program Help You Hire and Retain Skilled Workers?

By Brennan  P. Connor

Brennan Connor

Attracting and retaining quality employees is a concern of all businesses but, in today’s economy, is of particular importance in the construction industry. According to a recent press release from the U.S. Chamber of Commerce, more than half (52 percent) of contractors say they will hire more employees in the next six months, up from 46 percent in Q1 2021. However, according to the same press release, 88 percent of contractors surveyed stated they are currently having moderate to high levels of difficulty finding skilled workers.

One way contractors and construction business owners can attract potential employees and retain existing employees is to adopt an employee incentive plan. Awards made under an employee incentive plan can provide employees with additional income and/or equity ownership, motivate employees by tying such awards to the employer’s financial results and incentivize employees to remain with their employer until such awards vest and are paid out. 

Before designing and adopting an employee incentive plan, employers need to consider the related legal and tax implications, particularly when awards under an employee incentive plan are considered “deferred compensation” by the Internal Revenue Service. Below is a summary of different types of employee incentive plans and a high-level overview of the tax considerations when adopting a plan that features awards of deferred compensation.

Overview of Different Types of Employee Incentives

There are a wide variety of employee incentives that employers can consider when designing and adopting an employee incentive plan. Popular employee incentives include, but are not limited to, the following:

  • Phantom Stock – an unfunded, unsecured promise to pay the value of stock in cash, in the future. This is designed to replicate company stock without giving away actual stock.
  • Stock options – a right to purchase stock at a set price.
  • Stock appreciation rights – a right to receive the excess of the fair market value of granted stock over the exercise price for such stock.
  • Cash bonus – additional cash compensation which is generally tied to achievement of certain financial metrics by the employer and/or the employee.

Employee incentive plans may – and typically do – provide that awards granted under the plan shall vest over a period of time and then be paid out at a later date or upon the occurrence of certain events, such as retirement, change in ownership of the employer and others. In other words, the award is earned in one taxable year and then vests or is paid out in a later taxable year or years as deferred compensation.

If an individual’s employment terminates before his/her award vests or is paid out, the award is generally forfeited.  Accordingly, employees receiving awards of deferred compensation have an incentive to remain with their employers until their award vests or is paid out. Employers should be aware, however, of important tax considerations which arise when granting awards of deferred compensation. One of these tax considerations involves the requirements of Section 409 of the Internal Revenue Code.

Section 409A

Internal Revenue Code Section 409A governs all awards of deferred compensation and imposes penalties on employees and employers for noncompliance. While a detailed breakdown of all the requirements of Section 409A is beyond the scope of this article, employers should be aware that to be compliant with Section 409A, an award of deferred compensation:

  1. Must be made pursuant to a written plan.
  2. The plan must specify the form of distribution of the award, such as lump sum or installments.
  3. The award may only be paid out upon the occurrence of certain events, such as: an employee’s separation from service, disability or death; a fixed time or schedule; a change in control of the company’s ownership or a substantial portion of its assets; or an unforeseeable emergency.
  4. The award may not be accelerated/paid early, except in highly specific circumstances.

Noncompliance with 409A results in the employee being subject to income tax in the year the deferred compensation award becomes vested, regardless of when deferred compensation is scheduled to be paid. An additional 20 percent excise tax is also imposed on the employee plus any applicable penalties and interest, while the employer may be subject to penalties and interest for failing to timely report and withhold taxes for a noncompliant deferred compensation award.

While deferred compensation awards can help contractors and construction companies attract and retain employees, employers must take the requirements of Section 409A into account when designing and implementing an employee incentive plan to avoid unintended and adverse tax consequences.

Brennan P. Connor is an attorney at Carmody MacDonald in St. Louis. He focuses his practice in the areas of taxation, business law, estate planning, and real estate. He can be reached at bpc@carmodymacdonald.com or 314-854-8706.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

COVID-19 Pandemic Increases Coworking Space Demand, Spurs Flexible Lease Options

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Despite the COVID-19 pandemic uncertainty, markets have demonstrated that the demand for coworking or flexible workspaces will continue to grow. Commercial real estate firm Jones Lang LaSalle predicts 30 percent of the office market will be flexible by 2030. Employers are now seeking to reduce costs and office density, while employees are demanding more flexibility in their work schedules following a year of working from home.

In response, many companies are embracing hybrid work models. According to PricewaterhouseCoopers, 87 percent of executives anticipate shifts in their real estate strategy over the next year. Some organizations have turned to consolidating offices and providing memberships to coworking and flexible spaces to better support remote workers or employees who wish to work outside of the office one to two days a week.

Opportunities for New Construction

This increase in hybrid and remote work structures provides opportunities for mid-size cities such as St. Louis, following the exodus of workers from larger metropolitan areas such as New York and Los Angeles. With workers relocating to smaller markets, employers can still retain the best talent by utilizing coworking spaces. This shift has led to new development in the St. Louis area. Recently, the St. Louis Cardinals partnered with The Cordish Companies to develop a 30,000-square-foot coworking space in Ballpark Village; it will include a mixture of individual workstations, private offices and suites. This is the third location for The Cordish Companies’ coworking brand, with locations in Baltimore and Kansas City’s Power & Light District.

Modifying Existing Spaces & Leases

More than just an office, coworking and flexible spaces are also a favorite amongst small business owners seeking collaboration, flexibility and growth. St. Louis-based coworking spaces such as CIC@Cortex, ThriveCo, OPO Startups or RISE Collaborative Workspace, offer members part-time and full-time private offices, collaborative spaces and business amenities such as Wi-Fi, furniture, coffee bars and community events space. A touted benefit of a coworking space is the opportunity to meet other individuals. Many members have found success establishing new clients and business connections due to the relationships they have built in the shared space. With month-to-month memberships, companies and individuals can try different locations to find the best fit without worrying about long-term leases. Coworking spaces such as ThriveCo also provide tailored concierge services that grant access to virtual assistants, business consultants, graphic designers and more. Accountants are also available in some coworking spaces to promote business development and success.

ThriveCo’s co-owner Katie Silversmith says her firm has seen an increase in interest during the pandemic. ThriveCo reported a waitlist for new members seeking offices in this coworking space.

According to Coworking Insights’ 2020 Future of Work Report: What the Future Holds for Coworking & Remote Work, 71.5 percent of workers who used coworking spaces prior to the pandemic will continue to do so, while 54.9 percent of remote workers who had not previously used coworking spaces are considering joining one as a remote or hybrid work model option.

Conclusion

With the future of office space continuing to evolve, industry sources project a substantial growth in flexible workspace supply and demand. Investors are expected to incorporate more flexible leasing options in their real estate operational models. Therefore, we anticipate a growing need to negotiate contracts for redeveloped spaces and renegotiate existing leases to reflect the changing market. Following the opening of St. Louis’ first coworking space in 2010, more than one dozen distinct coworking locations have developed across the greater St. Louis area, each with its own unique atmosphere and amenities. While still a developing market, one-third of commercial real estate portfolios could include coworking or flexible space by 2030.

Ashley N. Dowd is an attorney at Carmody MacDonald in St. Louis and focuses her law practice in the areas of banking, real estate, corporate and business law. She can be reached at and@carmodymacdonald.com.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

Can Employers Legally Require Their Employees to Get a COVID-19 Vaccine?

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Candace Johnson

As the COVID-19 vaccine becomes more widely available, many employers are asking if they can require employees to receive the vaccine and the risks in doing so.

Employers may require employees to get a COVID-19 vaccine as a condition of employment, subject to limited exemptions, which are outlined below.

Religious Beliefs – Employees may request an exemption from a mandatory vaccination requirement based on their religious beliefs. Title VII of the Civil Rights Act covers protected groups, including those with religious beliefs. Employers must provide accommodations for employees with “sincerely held” religious beliefs.

Disability – Employees may also request an exemption from a mandatory vaccination requirement based on a disability. If employees have a qualifying medical reason to not get a vaccine, employers must accommodate such requests under the Americans with Disabilities Act (ADA). 

In these situations, employers and employees should work together and sufficiently communicate to determine whether a reasonable accommodation can be made. When considering an accommodation, employers should evaluate:

  • The employee’s job functions.
  • How important it is to the employer’s operations that the employee be vaccinated.
  • Whether there is an alternative job the employee could do that would make vaccination less critical.

Confidentiality – Also pursuant to the ADA, employers should not disclose which employees have or have not been vaccinated. Under the ADA, employees’ health information must be kept confidential.

Because exceptions must be made in certain circumstances, if an employee refuses to be vaccinated, employers should endeavor to find out why.

If employers are hesitant to implement mandatory vaccines, they can alternatively strongly suggest the vaccine and focus on steps they can take to encourage and incentivize employees to get vaccinated. Such incentives could include:

  • Make obtaining the vaccine as easy as possible for employees.
  • Cover any costs that might be associated with getting the vaccine.
  • Provide paid time off for employees to get the vaccine and to recover from any potential side effects.

In the end, navigating the COVID-19 pandemic has been challenging for both employers and employees. Therefore, communication is critical to keeping employees safe and healthy.

Candace Johnson is an attorney at Carmody MacDonald and focuses her practice in the areas of labor and employment, real estate, and general civil litigation. Contact Candace at cej@carmodymacdonald.com or (314)854-8647.

This column is for informational purposes only. Nothing herein should be treated as legal advice or as creating an attorney-client relationship. The choice of a lawyer is an important decision and should not be based solely on advertisements.

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