Many employers outsource some of their payroll and related tax duties to third-party payroll service providers. They can help assure filing deadlines and deposit requirements are met and greatly streamline business operations.  Some of the services they provide are: Administering payroll and employment taxes on behalf of the employer, where the employer provides the funds initially to the third-party. Reporting, collecting and depositing employment taxes with state and federal authorities.

 

Employers who outsource some or all of their payroll responsibilities should consider the following:The employer is ultimately responsible for the deposit and payment of federal tax liabilities.  Even though the third-party is making the deposits, the employer is the responsible party.  If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer's account.  The employer is liable for all taxes, penalties and interest due.  The employer may also be held personally liable for certain unpaid federal taxes.

 

If there are any issues with an account, the IRS will send correspondence to the employer at the address of record.  The IRS strongly suggests that the employer does not change their address of record to that of the payroll service provider as it may significantly limit the employer's ability to be informed of tax matters involving their business.

 

For the employer's protection, employers should ask the payroll service provider if they have a fiduciary bond in place.  This could protect the employer in the event of default.

 

Employers should ensure that their service providers are using an EFTPS (Electronic Federal Tax Payment System) so the employer can confirm payments made on their behalf.  Everyone should use an EFTPS as Treasury regulations require electronic payment for payroll taxes over $200,000 in a calendar year.  An EFTPS maintains a business's payment history for 16 months and can be viewed on-line after enrollment.  In addition, an EFTPS allows employers to make any additional tax payments that their third-party provider is not making on their behalf such as estimated tax payments.  The IRS recommends employers verify EFTPS payments as part of their bank account reconciliation process 

 

An EFTPS is secure, accurate, easy to use and provides an immediate confirmation for each transaction.  The service is offered free of charge from the U.S. Department of Treasury and enables employers to make and verify federal tax payments electronically 24 hours a day, 7 days a week through the Internet, or by phone.  For more information, employers can enroll online at EFTPS.gov, or call EFTPS Customer Service at (800) 555-4477 for an enrollment form.

There have been recent prosecutions of individuals and companies who have, acting under the guise of a service provider, stolen funds intended for payment of employment taxes.  For more information, visit the IRS Web site at IRS.gov and type in the key words "employment tax investigations."  
Remember, employers are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes. 
  

Protecting Your Business from the Heavy Penalties
of the Michigan Sales Representatives Commission Act
 
In 1992, the Michigan Legislature enacted the Michigan Sales Representatives Commission Act (SRCA).  The SRCA provides special protection for sales representatives against manufacturers and suppliers who improperly refuse to pay sales commissions earned by their sales representatives.  Lawmakers included heavy penalties against violating principals to ensure that sales representatives in Michigan are paid the full commissions to which they are entitled, especially when those commissions fall due after the termination of the employment relationship.

 

According to the SRCA, the terms of the contract between the principal and sales representative determines when a commission becomes due.  However, if the time when the commissions become due cannot be determined by the contract between the principal and sales representative, the past practices between the parties will control.  In the event that there are no past practices between the parties, commissions are due based on the custom and usage prevalent in the business that is the subject of the relationship between the parties.  When an agency contract between a principal and a sales representative is terminated, all commissions that are due at that time must be paid within 45 days after the date of termination.  Commissions that become due after the termination date must be paid within 45 days after the date on which the commission became due.

Following the termination of the principal and a sales representative contract, an agent may be entitled to commissions even if he did not personally complete the sale if his efforts were the "procuring cause" of the sale.  In Reed v. Kurdziel, which is the seminal case discussing the "procuring cause" doctrine, the court stated:
 
It would appear that underlying all the decisions is the basic principle of fair dealing, preventing a principal from unfairly taking the benefit of the agent's or broker's services without compensation and imposing upon the principal, regardless of the type of agency or contract, liability to the agent or broker for commissions for sales upon which the agent or broker was the procuring cause, notwithstanding the sales made have been consummated by the principal himself or some other agent. In Michigan, as well as in most jurisdictions, the agent is entitled to recover his commission whether or not he has personally concluded and completed the sale, it being sufficient if his efforts were the procuring cause of the sale.
 
Michigan law does not precisely define what constitutes a procuring cause or support any hard-and-fast rules skewing the analysis in favor of either the sales representative or the principal. Whether an agent was a procuring cause generally turns on the facts of the case and the nature of the agency agreement. The analysis essentially involves a qualitative balancing between the pre-termination efforts of the sales representative and the post-termination efforts of the principal. 

A manufacturer or supplier who intentionally fails to pay the commissions within the time requirements of the SRCA is not only responsible for the actual damages for failure to pay the commissions, but the sales representative is also entitled to two times the amount of the withheld commission, up to $100,000, for punitive damages. In addition, if the sales representative has to bring a cause of action pursuant to the SCRA to recover unpaid commissions from a principal, the court will award the prevailing party reasonable attorney fees and court costs.   To have intentionally failed to pay a commission so as to be liable for double damages under the SRCA, a principal need not have failed to make the payment in bad faith.  Rather, a deliberate failure to pay a commission when due, regardless whether the principal reasonably believed the commission was not due, subjects the principal to liability for double damages.

The SRCA also contains a non-waiver provision that states any provision in a contract between a principal and a sales representative purporting to waive any right under this section is void.  The apparent intent of this provision is to prevent manufacturers and suppliers from contractually neutralizing the double damages and attorney fees provisions of the SRCA.  

Although the non-waiver provision of the SRCA prohibits a principal from contractually neutralizing the provisions of the act, a principal can protect itself from the effects of the SRCA by making sure that they have a carefully drafted contract between the principal and the sales representative.  These contracts should, at a minimum, specifically describe the requirements for earning a commission and explain under what circumstances the commission is to be paid to the sales representative, define when the commission is due to the sales representative after it has been earned, and the procedure for payment of commissions following the termination of the contract.  

In the event of a dispute regarding commissions potentially owed to a sales representative, a principal should seek legal counsel early in the dispute process to avoid liability and heavy penalties under the SRCA. 

 

 

 

Craig Gerard has recently been appointed as a Board Member of the Greater Lansing Estate Planning Council. The Greater Lansing Estate Planning Council is an organization that promotes cooperative efforts in estate planning among the business, professions and institutions represented by accountants, attorneys, financial planners, insurance agents and trust officers. If you are interested in learning more about the organization or would like to attend a Greater Lansing Estate Planning Council meeting, please contact Craig at (517) 853-1510 or by email at csg@thegallagherlawfirm.com.