June 2017

A Look at Accounting Methods of Developers

Posted on June 27, 2017July 23, 2024 by Debra Barcuch

When considering publicly traded O&G stocks or Master Limited Partnerships (MLPs), investors should spend some time with the audited financial statements. Companies that are involved in exploration and development may either account for their oil and gas activities under the successful efforts method or the full cost method. This choice has a material impact on the balance sheet, net income, and how cash flows are presented on the financial statements.

With the Successful Efforts accounting method, the oil company:

Capitalizes costs only when the costs are associated with successfully finding or developing oil and gas reserves
Expenses dry holes and any other costs associated with failed efforts at finding or developing oil and gas reserves
Expenses production costs
Recovers any capitalized costs through depletion

With the Full Cost accounting method, the oil company:

Acknowledges that unsuccessful efforts are a necessary and unavoidable part of the business of exploration
Capitalizes all costs related to acquiring, exploring, and developing reserves
Expenses all production costs
Recovers capitalized costs through depletion
Performs the annual ceiling test: the capitalized amount carried on the balance sheet cannot exceed the present value of future cash flows (revenue net of future development and production costs) discounted at 10%. To the extent capitalized costs exceed the full cost ceiling, an expense is incurred to write off the excess.

Generally, in times of rising or high O&G commodity prices, the full cost accounting method will report higher net income because costs incurred in unsuccessful projects are capitalized. Consequently, the assets reported on the balance sheet will be higher assets. In times of falling or lower O&G commodity prices, however, the full cost method will report a lower net income and can have significant write downs because of the ceiling test. There are good arguments on both sides for choosing either the Successful Efforts method or the Full Cost accounting method. The key takeaway here is that during times of falling or lower commodity prices, companies that use the successful efforts accounting method may look artificially more successful than companies using the full cost accounting method. Be aware that you may not be comparing apples to apples when looking at the financial statements of companies that use different accounting methods.

Read the Footnote With Regard to Reserves

Another important disclosure, included with the annual financial statements, is the footnote discussing mineral reserves. This unaudited footnote is included with financial statements filed with the SEC, and it is generally the last footnote to the financial statements. It should outline (at least at a high level) how successful the developer has been at building reserves.

By carefully reading the footnote discussing the reserves and the management discussion and analysis section of the annual report, investors can learn where the drilling is happening, the biggest blocks of drillable acres, plans to complete or explore those areas and trends with regard to adding reserves. Understanding the plans of a developer to continue future exploration — such as where and to what extent — can support decisions on investment.

Continue Reading: Tax Benefits for Investing in Oil & Gas

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients.

Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

Prepare for a Management & Occupancy Review (MOR)

Posted on June 22, 2017July 23, 2024 by Debra Barcuch

decorative background with tiny houses arranged in rows

Over the past eight years and now into the era of the new Republican White House, scrutiny on affordable housing developers, owners and management companies has increased. Whether the reasons are to root out abuses of Section 8 funding or to justify cutting the US Housing and Urban Development budget, politics have put pressure on HUD inspectors to increase their review of funding recipients. Based on a recent presentation we attended on the return of the HUD Management & Occupancy Review (MOR), we outline ways that owners and managers of HUD-funded properties can prepare for a potential MOR.

Based on our experience with audits of HUD-funded properties and organizations, preparation and elements of a MOR are fairly similar. Let’s walk through the key areas of risk and review.

In the course of preparation, we recommend setting up a separate paper filing system and an online file to organize and store information relevant to a MOR, including a complete HUD 9834 form, your most recent REAC filing, audit of financial statements and disclosures, documentation on resolving any previous audit or MOR issues and general management documents such as leasing renewals (as requested in HUD 9834).

The top 10 risks that the MOR desk review will emphasize include:

PASS Score (physical property conditions)
FASS Score (financial condition)
Loan Payment Status (late payments, etc.)
Management Review Score (tenant complaints, staffing practices)
SOA (sex offender audit issues)
Overdue AFS (audit of financial statements)
OHAP watch list (program restructuring notifications)
FASS Referrals (financial restructuring)
EH&S (health and safety violations)
Management Condition (discrimination, falsification)

Any previous red flags, notifications or issues should be resolved — or documented as in process of being resolved —prior to another MOR. Findings that earlier issues have not been resolved can put a project/program/property on HUD’s radar as a bad partner. That puts future funding at risk.

After the desk review comes the on-site review. This review can include questions about transactions that occurred since the last MOR. If your project’s last MOR was in 2011, that’s a lot of ground to cover.

Even the best, well-run properties can experience grey areas that may be flagged. Items we have found during our financial statement audits include improper verification of income or handling of surplus cash. We have also noted contract issues in which an individual property or management company does not have its own separate HUD contract. Even wait lists can be scrutinized for possible discrimination.

The goal of any property should be to receive a “Superior” or “Above Average” MOR performance rating. This means the property/program is adhering to HUD policies and is operating a safe, fair and financially sound operation for providing affordable housing to the community. A “Satisfactory” rating means that there are some minor corrections to make. Anything below a rating of 70 is below average or unacceptable.

There are many good property management companies in the Dallas/Fort Worth area — whether for-profit or nonprofit — that run tight ships and schedule regular audits or reviews. Our recommendation to them is third-party validation. Have a CPA firm with knowledge and experience with HUD-funded properties walk staff through HUD 9834 documentation or at the least review their answers and addendums.

Continue Reading: MOR Questions Your Audit May Not Catch

Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice. He provides consulting to clients in real estate, including HUD-funded properties. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Tax Benefits for Investing in Oil & Gas

Posted on June 15, 2017July 23, 2024 by Debra Barcuch

Business diagram shows change of the prices for oil

O&G exploration is still highly speculative, even with the advanced technologies available today. The unique tax benefits to this industry — designed as incentives for O&G development — can include a large direct deduction of all costs associated with development in the year they occurred. No other industry allows that timing of cost recovery. MLPs, for example, can deduct 70-80 percent of their costs to develop a drilling site, regardless of how successful it is. If it ends up being a dry hole, they can deduct 100 percent of the costs, but of course they’ve lost a lot of money on the investment.

The other unique tax benefit for O&G investment derives from the statutory concept of depletion. Every time you take oil or gas reserves out of the ground, you deplete the value of the asset.

When it comes to tax benefits for oil and gas investing, benefits vary by investment type. The most significant benefits apply mainly to direct working interest investments and to certain drilling partnerships. Direct investments in royalty interests receive a more limited benefit, as do Master Limited Partnerships (MLPs). Investors in O&G publicly traded stocks don’t receive a tax benefit directly, but may receive income taxed at long term capital gain rates via dividends or stock buy backs.

The following are the primary tax benefits that apply to direct working interest investments and partnerships (to a degree). CPAs like myself who are knowledgeable about tax compliance and reporting of O&G investment income can determine if your particular investments are eligible for these deductions.

Intangible drilling and completion costs (“IDC”)

IDCs include all the expenses incurred by the operator of the well related to the drilling and preparing the well for production. Such expenses may include the cost of the drilling contractor, wages paid to employees to oversee the project, survey work, site preparation, fuel, etc. IDC also includes the cost of casing and tubing in addition to certain other tangible items, so the term “intangible” can be a bit misleading. The costs of pumping equipment, flow lines, storage tanks, separators, salt water disposal equipment, and other production facilities or equipment is not classified as IDC and is required to be capitalized and depreciated.

With the exception of integrated oil companies and drilling projects situated outside of the United States, IDC can be fully deducted in the year in which they occurred. You must make the election to deduct IDC on the first return in which IDC is incurred by either deducting or affirmatively electing.

For cash basis taxpayers, if the contract with the operator requires the costs to be prepaid, IDC is fully deductible when paid, even if the actual costs are incurred by the operator in the following year.
Taxpayers can elect to capitalize and amortize over 60 months straight line (if IDC incurred on non-domestic oil and gas properties, it must be capitalized and amortized over 10 years – not eligible to be expensed).

In assessing the potential tax benefits available from a potential oil and gas investment, the investor should consider their alternative minimum tax (“AMT”) position. IDC is partially deductible for AMT purposes. Excess IDC (difference between IDC deducted and the amount that would have been amortized during the tax year had the election to capitalize and amortize been made) is added to AMT income and multiplied by 40 percent. All excess IDC above the product is considered preference IDC and is not deductible for AMT. For example:

Assume AMT income before any IDC preference add back is $500,000 and Excess IDC is $400,000; AMTI including Excess IDC = $900,000 x 40% = $360,000 amount deductible from AMT
$40,000 is the preference IDC add back, thus, taxable AMT is $540,000

The IDC deduction applies to working interests, either owned through drilling partnerships or direct working interests. It also applies to MLPs, but passive activity and publicly traded partnership tax rules limit its utility.

Depletion

Investors compute cost depletion and statutory depletion (also known as percentage depletion), then deduct the larger of the two amounts. Depletion is calculated on a property-by-property basis.

Cost depletion is computed by the units of production method (total volume produced during the year / total expected remaining volumes to be ultimately produced at the beginning of the tax year multiplied by leasehold cost.
- No income limitations apply
- Once all leasehold costs are fully recovered through depletion, cost depletion is zero
Percentage depletion is calculated by multiplying gross sales for the property for the year by 15%
- Allowable depletion is limited to taxable income for the property, thus, percentage depletion can reduce taxable income on a property to zero, but may not create a tax loss for the property.
- Overall income limit – 65% of taxable income; any allowable percentage depletion above the overall limit is carried over to future years
- Not limited to leasehold cost – thus may continue to deduct percentage depletion after all leasehold costs are fully recovered

This is the 100,000-foot view of O&G investing for the potential investor looking to diversify a portfolio while prices are low. To explore if these opportunities may be right for you, consult with your investment advisor. Cornwell Jackson can assist potential investors with analyzing the potential tax impacts of oil and gas investments and with the complexity of tax filing each year. Contact us with any questions.

Download the Whitepaper: Oil & Gas 101: Investing Basics

Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

How Does Terrorism Affect Manufacturing?

Posted on June 14, 2017 by Debra Barcuch

It seems that a day doesn’t go by without a terrorist attack taking place somewhere in the world.The violence recently perpetrated in Manchester, UK, and on London Bridge and close by Borough Market are still fresh in our minds. Unfortunately, one or more other events will have likely happened before you read this article or shortly after.

These attacks are eroding public confidence in security and will gradually affect the global economy, if it hasn’t already. In particular, tremors are being felt throughout our domestic manufacturing sector. Where will it all lead? This article will examine some of the main repercussions for manufacturers on both the global stage and in their own plants and warehouses.

View of the Global Economy

This list is not all-inclusive, but the following are four significant ways that terrorism can affect the global economy:

1. Market uncertainty. You don’t have to be anywhere near a terrorist attack to experience a financial downturn. Cataclysmic events and uncertainty caused by terrorism are known to roil the world’s economic markets. One dramatic example is the immediate and sustained decline following 9/11.

However, as such events become increasingly frequent, they seem to have less of a long-term impact. In the face of recent attacks, the stock markets both abroad and in the U.S. have shown some resiliency. Nevertheless, when there is a belief that there is no longer a safe place to do business, terrorist events affect the broader picture and will likely have a cumulative effect.

2. Destruction of property. While other effects of terrorism are difficult to measure, physical destruction can often be quantified. Manufacturing plants, transportation systems and physical property are destroyed at an enormous cost. The infrastructure in the surrounding area will be strained as businesses struggle to cope with the aftermath.

Notably, resources that normally would be focused on producing goods and services are diverted and allocated for other purposes, such as spending on the military and improving security. Overall, the impact is almost certainly negative, although some observers suggest that military spending leads to an economic boost.

3. Governmental reactions. A bunker mentality among governments and citizens usually sets in after a particularly destructive attack or series of attacks. This could create a domino effect of expanded budget deficits, additional taxes and increasing inflation. In extreme circumstances, government controls may have to be initiated and nationalization of industries may even have to be implemented.

Loss of personal freedoms is often a byproduct. In addition, during militarization the private economy may suffer and recovery can take a long time.

4. International divisiveness. Typically, terrorist attacks both here and abroad encourage increased nationalism and skepticism about foreign involvement. At the same time, they tend to discourage tourism and trade in ways that hinder the global economy. This trend toward a populist movement is exemplified by political events such as Britain’s plans to leave the European Union and erodes some of the positive results of foreign cooperation that have been built up the last few decades.

View of the U.S. Manufacturing Sector

Manufacturing is critical to the U.S. economy and the economies of many other nations. Accordingly, the manufacturing supply chain could be damaged by terrorist attacks taking place in far-flung locations. The supply chain encompasses vendors supplying raw materials, warehouses and distribution centers, and retailers who deliver the goods to consumers. Without an uninterrupted flow, the entire system could crumble. The chain is only as strong as its weakest link.

If manufacturing firms in the U.S. aren’t yet attuned to the dangers being posed by terrorist acts around the world, they need to wake up to the new reality, and fast.

Following are some of the issues to address.

1. Adopt access security. Targets of terrorist attacks are often located in high-profile areas with a heavy concentration of people. The terrorists usually want to make a dramatic statement and inflict the most damage possible. Therefore, not only are transportation systems likely targets, but so are office buildings, factories and corporate headquarters. Manufacturing warehouses and plants can’t be ruled out. For these reasons, your firm must adopt security measures for accessing the premises, even if it doesn’t produce goods historically tied to political or governmental functions.

2. Find alternative delivery sources. Direct threats to a designated property aren’t the only concern. If an airport is threatened and delays ensue, deliveries may be delayed. The same possibilities arise for shipments by rail or sea. With delays lasting weeks, the interruptions can irreparably harm the business, especially if property is damaged.

3. Develop contingency plans. Because this situation is akin to the developments following a natural disaster, such as a hurricane or flood, similar preparations should be made. If the firm is not located in a region prone to such natural disasters, or exposure is limited, it may not have adequate emergency and contingency plans in place. The threat of terrorist acts should change this thinking.

4. Perform risk analysis. If your firm hasn’t done so already, consult with security experts to conduct a risk analysis for terrorism, especially if your firm is in a densely populated area. Include provisions for finding secondary and tertiary suppliers, emergency procedures for factory production and other methods for thwarting disruptions to the supply chain (for example, backup storage sites). Make sure that workers are properly trained in emergency procedures should an attack take place.

Keep in mind, you will need to be prepared to act swiftly and decisively. The sooner you move, the less your workflow will be affected. For instance, if you rely on deliveries to a nearby airport, rail hub or port, continue to monitor activities. Be among the first to move cargo through alternative means — not the last.

To gain more attention to their activities, terrorists often target transportation systems, physical property and infrastructure. As a result, terrorist acts affect exports and imports with a direct connection to the manufacturing sector. You can’t run and hide from the potential problems or ignore them either. Coordinate your security measures accordingly.

The Cyber Threat

Not all terrorism attacks involve bricks and mortar.

The risk of a cyberattack is just as prevalent and may be even more lethal. Take for example, the recent cyberattacks in London against the British Parliament and in Ukraine, Russia, and other countries against banks, energy companies and an aircraft manufacturer.

Cyberterrorism knows no political or geographical boundaries. A strike can come from anywhere and pierce and bring down defense systems of corporations, transportation systems and even an entire country.

In particular, manufacturing firms store data essential to their operations and their supply chain. If that data is wiped out, it could take months to get the operation up-and-running again. Make sure that your firm is protected by the latest technology and continue to install updates as necessary.

Prepare: E-Verify May Soon Become Mandatory

Posted on June 8, 2017 by Debra Barcuch

With so much focus in Washington on stemming illegal immigration and the erosion of job opportunities for U.S. citizens, chances appear better than ever that the E-Verify system will become mandatory. President Trump’s 2018 budget proposal includes funds to upgrade the system so that it can handle greater capacity, that is, if Congress authorizes requiring businesses to use it.

California’s View of E-Verify

Often following the beat of a different drummer, the state of California has passed its own laws limiting the use of the federal immigration status verification system known as E-Verify.

In 2011, California passed the Employment Acceleration Act, which prohibits state agencies, cities, and counties from requiring private employers to use the federal system in most cases. Exceptions include where the use of E-Verify is mandatory by federal law, or when using the system is a condition necessary to receive federal funds. Previously, in some areas of California, city contractors and businesses within city limits were also required to use E-Verify. Voluntary use for private employers is permitted.

Effective January 1, 2016, Assembly Bill 622 set forth stiff civil penalties of up to $10,000 for each separate occurrence of misuse of the E-Verify system. Violations include actions such as:

Using the system to verify the status of existing employees,
Using the system to verify the status of job applicants before an offer of employment has been made, and
Failing to give an individual a Tentative Nonconformation notice, as soon as reasonably possible, when such notice has been received after attempting to verify status.

Given the fact that violations can quickly result in significant penalties, California employers using the E-Verify system should review their practices to ensure compliance.

Background: E-Verify is currently a voluntary federally administered electronic system designed to help employers verify the work eligibility and citizenship status of job applicants and employees. Its purpose is to alert users when the Social Security number supplied by an individual is already in use by someone else. After an initial pilot phase that began in 1996, it became available to employers in all states in 2001.

Where Verification is Mandatory

Today, nine states — Alabama, Arizona, Georgia, Louisiana, Mississippi, North Carolina, South Carolina, Tennessee, and Utah — require that most employers use E-Verify. Federal contractors also must use the system. A handful of other states require that public employers or contractors doing business with state or local governments use E-Verify.

Even so, only about 10% of employers use the system. Of those, 60% do so because they are required to by law. Yet about 90% of employers recently polled by the Society for Human Resource Management (SHRM) said they would support a mandate to use E-Verify or a similar system, subject to certain changes in the existing program.

What Employers Want

High on employers’ wish list of possible changes to the E-Verify system is that using it would take the place of the Form I-9, “Employment Eligibility Verification,” the paper-based system created for the same purpose. Current users of E-Verify are still required to collect I-9s from employees, just like everyone else.

Additional changes sought by employers point to issues they would face now if E-Verify were made mandatory in its current form, including:

A strong “safe harbor” protecting employers from accusations of wrongdoing if they use the system in good faith,
Removal of any potential liability for employment-based discrimination charges in conjunction with its administration of E-Verify, and
Provision of a set time period for resolving work authorization disputes.

Another concern with E-Verify in its present form is that its usefulness is limited. That is, it determines whether information entered into the system — such as name, date of birth and Social Security number — already exists in the government’s database and corresponds to someone who is eligible to work. “What it can’t do is give employers certainty that the people standing before HR are who they say they are,” according to SHRM.

Instead, SHRM proposes the use of a network of “identity verification centers.” These centers are similar to the ones companies use when individuals need to request a new password to gain access to their online accounts. The requester must provide personally identifiable information to prove who they are (such as answers to preset security questions). In an employment setting, employers would be told whether an employee or job applicant has cleared that hurdle.

Also, currently employers that use E-Verify must later verify that the person they just checked out is indeed employed by the company. One reform being proposed is that the system be streamlined by dropping this requirement.

Pending Legislation

The latest version of the “Accountability Through Electronic Verification Act,” was proposed by Senator Charles Grassley (R-Iowa and chairman of the Senate Judiciary Committee) and co-sponsored by nine other senators in January. If passed, it would make E-Verify permanent (though under current law, it must be reauthorized by Congress every two years). It would also address several of the concerns of groups like SHRM.

Here are several of the key provisions of the proposed measure, as described on Congress’ website.

Employers must: (1) use E-Verify to check the identity and employment eligibility of any individual who hasn’t been previously vetted through E-Verify not later than three years after enactment of this Act (2) re-verify the work authorization of individuals not later than three days after their employment authorization is due to expire, and (3) terminate an employee following receipt of a final E-Verify nonconfirmation. The information provided by the employee must then be submitted to DHS, to assist in enforcing or administering U.S. immigration law.
The system may be used to verify the identity of individuals before they are hired, recruited or referred if the individual so consents.
The bill eliminates the Form I-9 process and sets forth the design and operation requirements of the E-Verify system.
U.S. employers must begin to participate in E-Verify within one year of enactment of this Act; and employers using a contract, subcontract or exchange to obtain labor to certify that they use E-Verify.
The failure of an employer to use E-Verify shall be treated as a violation of the Immigration and Naturalization Act requirement to verify employment eligibility. It also creates a rebuttable presumption that the employer knowingly hired, recruited or referred an illegal alien.
The bill increases civil and criminal penalties for specified hiring-related violations, and establishes a good faith civil penalty exemption/reduction for certain hiring-related violations.
State and local governments may not prohibit employers from using E-Verify to determine the employment eligibility of new hires or current employees.

There’s no guarantee that E-Verify will become the law of the land, and if it does, chances are there will be a lag time before it takes effect. Still, it’s a good idea for companies to review their work-status vetting procedures, as well as the possible implications of what a more foolproof E-Verify system might have for your workforce.

Underperforming Employees May Be Salvageable

Posted on June 7, 2017 by Debra Barcuch

7It’s easy to spot underperformance, but correcting it is a different matter. The fact is, effectively managing your workforce, especially problem employees, just doesn’t come naturally to most people. Here’s some guidance to potentially help turn around an employee who is missing the performance mark.

Tackling the Problem

When an employee is underperforming, begin the performance management process with these two steps:

Clearly define the nature and degree of the underperformance.
Determine whether you’ve done the best job possible in helping the employee to be successful. For example, is the employee aware that you consider his or her work subpar? Have you put it in writing as well as had discussions with the employee?

Staff members who aren’t sure whether they’re on the right track often wait for feedback, rather than proactively seeking guidance. That means you need to act at the first sign an employee isn’t meeting expectations, rather than hoping the situation will remedy itself.

If the individual has worked under other supervisors in previous jobs within the company, a quick meeting could be productive, before talking with the employee. Describe the issues you’re having, and ask the previous supervisor whether the same type of problems were present in the past. If the answer is “no,” that may help set the agenda for your discussion with the worker. The conversation might proceed along these lines:

Clearly and specifically state your performance concerns. For example, in a manufacturing plant, you may need to advise an employee that he or she is habitually falling below the daily production goal.
Let the employee know that your objective is to work together to find a solution.
After discussing the specific performance issues, ask how you can help the employee turn around the situation, with some possible suggestions in mind. There may be issues you aren’t aware of, such as tools that are in disrepair or missing, or poor lighting in the employee’s workspace. So be open to his or her input.
Provide the employee with any written materials you may have — or can put together — about the employee’s tasks and expectations. For example, are there manuals, guides and checklists about how to do the job properly?

If the employee attributes the performance concerns to lack of clarity about expectations, or an inability to prioritize tasks, the remedy might be as simple as regular monthly, weekly or even more frequent meetings to go over what needs to be accomplished before the next meeting.

The discussion could also reveal that the employee, while generally qualified for the position, needs some training to fulfill all the requirements of the job.

Accepting Criticism

How well the worker responds to the initial part of the performance discussion will influence how you wrap it up. If he or she is concerned, cooperative and motivated to improve, you can end with the remedial plan you devise. If, instead, the employee is defensive and unrepentant, giving no indication of a willingness to change, it may be time to describe the consequences of a lack of improvement.

The outcome of the meeting needs to be a concrete and detailed performance improvement plan with milestones. The plan itself may be as simple as a schedule for check-ins and progress assessment meetings.

Job Descriptions

To determine the milestones, go back to the written job description to see if it’s clear enough. Depending on the job, measuring progress may be easy, such as by seeking a higher output rate for a standard unit of product or service. Of course, it’s not always that easy, and it may require some serious thought. Whatever you decide, don’t leave this unaddressed. It’s not enough to say “I’ll know good performance when I see it.”

The clearer the job description, the easier it is to hold employees accountable for specific performance metrics. Take a look to see if it provides a framework you can use for measuring progress. If it doesn’t, it should be revised. An example of a metric for progress that’s harder to measure — let’s say, for an office assistant –— might be something like this: Within the first 90 days of employment, complete cross-training with the receptionist so you can efficiently fill that position as needed.

Follow-up discussions to look at performance improvement should be just that — discussions, not lectures. Before offering your assessments, seek the employee’s own opinion of his or her progress. You may see more improvement than the employee does, and that can give you an opportunity to encourage him or her with a little praise.

The worst mistake you can make in an employee turnaround effort is to lay out a detailed remediation plan, then neglect to follow up and review progress with the employee. That’s especially true if you promise adverse consequences for a lack of improvement and then nothing happens. Failing to follow up wastes everyone’s time, and the employee may either conclude you weren’t serious to begin with, or that he or she has improved enough.

When Your Best Efforts Fail

Doing all the right things to try to turn an underperforming employee into a valued worker is no guarantee of success, of course. After you’ve given it your best shot, you may decide the employee just isn’t right for his or her current role. Is there another area in the company that seems like a better fit? If so, explore the possibilities with other managers and then with the worker.

If the employee simply isn’t salvageable to work for your company at all, act promptly. The former employee will probably be better off finding a job that’s more suitable to his or her skills and interests. And in the end, your workforce will likely benefit by higher production and improved morale. Be sure to document all of the steps you took to try and turn the situation around, and consider consulting legal counsel to ensure you’re in compliance with all applicable laws.

House Proposes Swapping Comp Time for Some Overtime

Posted on June 6, 2017July 22, 2024 by Debra Barcuch

The fate of overtime rules continues to remain uncertain.

The “final rule” that was slated to go into effect on December 1, 2016, was put on hold indefinitely after a district judge in Texas blocked its implementation (for details of the rule, see box below). The judge found it likely that the Obama administration overstepped its authority with that rule, which the Trump administration opposes.

In the meantime, the Republican-controlled House of Representatives passed legislation that would authorize time off in lieu of compensation for overtime. That bill has moved to the Senate. The White House has voiced support for it.

Background Information

Under the Fair Labor Standards Act (FLSA), unless exempted, eligible employees must be paid time-and-a-half their regular pay rate for time worked beyond 40 hours a week. The white collar exemptions exclude certain executive, administrative and professional (EAP) employees and outside salespeople.

To be exempt from the overtime rule, the Department of Labor (DOL) requires most employees to meet each of the following three tests:

1. Salary basis test. The employee must be paid a predetermined and fixed salary that isn’t subject to reduction because of variations in the quality or quantity of work performed.

2. Salary level test. The amount of salary must meet a minimum amount. Currently, this figure is $455 per week for EAP employees (the equivalent of $23,660 annually).

3. Duties test. The employee’s job duties must primarily involve executive, administrative or professional duties as defined by the DOL regulations.

In addition, there is a relaxed duties test for certain highly compensated employees who receive total annual compensation of $100,000 or more and are paid at least $455 a week.

The regulations on overtime pay date back to 1940. Although they have been updated periodically, the last time was in 2004. The DOL issued its latest revisions in 2015, after several years of lengthy discussions. Now it’s back to the drawing board (see What Was in the Final Rule? below).

Introduction to the Proposed Bill

Under the House-passed measure, employers may let workers opt to accept extra time off instead of receiving overtime pay. Employees could accrue up to 160 hours of comp time during a 12-month period in lieu of overtime wages. Any unused comp time at the end of that period would have to be converted to overtime pay within 31 days. Employees would have to be paid at the greater of:

1. Their regular pay rate when the time off was earned, or

2. Their final regular rate received.

The accrued comp time, titled the Working Families Flexibility Act, could be used within a “reasonable” period after making a request for time off provided it doesn’t unduly disrupt the employer’s operations. Employees must provide adequate notice and employers would make necessary accommodations.

Employers could elect to cash out comp time that exceeds 80 hours or discontinue the swap policy by giving 30-day notice. Similarly, employees could choose to end their participation after giving notice within 30 days.

Finally, if the rules in the proposed bill were violated, employers might have to pay affected employees the amount owed for each hour of accrued comp time plus an equal amount as damages, minus any compensatory time the workers used. These provisions are subject to change.

Proponents of the proposed bill claim the measure would provide employees with the flexibility they want without creating hardships for employers. They note that the policy would be strictly voluntary. In addition, allowing employees to defer payment of comp time is essentially like getting an interest-free loan.

“This bill is about freedom, flexibility and fairness,” said Rep. Virginia Foxx (R-NC), chairwoman of the House Committee on Education on the Workforce. “It gives workers the freedom to choose what is best for themselves and their families. For some workers, money in the bank may be the best choice for them, and nothing in the bill would take that away, but other workers would seize the opportunity for time off with their family.”

Employees’ Interests

However, detractors are concerned about the interests of employees. “The bill weakens protections under the Fair Labor Standards Act at the moment that we ought to be strengthening the law,” Rep. Robert C. Scott (D-VA) reportedly argued on the House floor. “Under the bill, employers could withhold overtime pay for a long time, which otherwise would be a violation of the FLSA, and it undermines the 40-hour workweek mechanism,” he added

Different proposals for revising the overtime rules have been tabled during the past two decades, but this effort has some momentum with the support of the White House behind it.

What Was In the Final Rule?

The final rule, which is now in limbo, makes several significant changes to the overtime rules, including:

The standard salary level used to determine whether employees and computer professionals are eligible to receive overtime is increased from $455 a week ($23,660 a year) to $913 a week ($47,476 a year) for full-time workers.
For the first time, employers would be able to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level.
The total annual compensation threshold for a highly compensated employee would rise from $100,000 to $134,004 ($913 a week instead of the current $455 a week).

If new proposals emerge from the ruins, they may contain similar provisions or take a completely new approach.

Are You Ready for MOR? Affordable Housing Audit Tips to Meet HUD Standards

Posted on June 6, 2017July 23, 2024 by Debra Barcuch

decorative background with tiny houses arranged in rows

In 42 states including Texas, HUD Management and Occupancy Reviews (MORs) have not been conducted on Section 8 properties since 2011. After a series of lawsuits and protests brought by the Performance-Based Contract Administrators (PBCAs) who perform MORs on behalf of HUD, it looks like things have been resolved for now. MORs will be conducted in these states once again. Some may have already occurred in the second half of 2016. They may be annual or more frequent, but they are always random and with little notice.

The purpose of a MOR includes:

Maintaining housing for target populations
Protecting FHA insurance funds
Ensuring satisfactory management
Ensuring good physical and financial health of properties
Reviewing compliance with HUD rules
Proper administration of subsidy contracts

At-risk projects are more likely to get notification of a MOR, but in many cases a PBCA has approval to conduct a review on 100 percent of the portfolio under its jurisdiction in the state. If your property or organization has not already received notification of a pending MOR, it still makes sense to prepare as though it’s already happening.

The reason for this is the extensive paperwork and reporting required during a MOR. However, if your organization has conducted a thorough financial audit, you already have much of the information available to prepare and share during a MOR. Some of the primary items include:

General physical appearance of property and security
Follow-up and monitoring of project inspections
Maintenance and standard operating procedures (SOPs) in place
Financial management and procurement processes
Leasing & Occupancy compliance
Tenant/management relations
General management practices

Prior to a MOR field visit, the PBCA will conduct what they call a Desk Review, which includes looking at the project’s previous MOR findings. Any issues with the physical property, timely reporting of financials or audit findings along with the history of operating expenses will be noted. In a side-by-side comparison of HUD’s primary MOR document, “Management Review for Multifamily Housing Projects”— known as HUD 9834 — the items listed for review are very similar to a general financial audit of a HUD-funded organization.

It, therefore, makes sense to prepare for a MOR not only by reviewing and answering the questions listed on HUD 9834, but also by reviewing and using your audit findings to make improvements. With some early preparation, you can be ready for MOR.

Continue Reading: Prepare for a Management & Occupancy Review (MOR)

Can You Monitor Your Employees Communications?

Posted on June 5, 2017July 19, 2024 by Debra Barcuch

Employers have many reasons to monitor employee communications from time to time, including staying out of legal trouble. For example, if any kind of illegal discrimination or employee harassment is going on, and you allow it to continue by ignoring possible evidence of its occurrence, you could lose a lawsuit.

Or if employees are defaming your company through public social media postings — or revealing proprietary information about your products, services or strategic plans — your business could sustain serious competitive injury.

The point is simple: There are times you need to keep tabs on what employees are communicating, and doing so doesn’t make you a sinister “big brother.” The fact that there are so many ways employees can abuse communication systems makes the task of staying on top of it a bit trickier. For instance, your right to monitor employee emails sent from company-owned computers via the company’s email system is fairly straightforward. But, of course, that’s only part of the problem.

What’s in Your Employee Handbook?

You may be concerned about messages an employee is sending using a personally owned smart phone. Can you monitor those messages? The answer begins with the policy you lay out in your employee handbook. As noted, in deciding employee privacy cases, courts typically consider whether the employee had a reasonable expectation of privacy. Such an expectation disappears when you spell out your policies clearly and in detail, then secure an acknowledgement that the employee has read and understood them.

Among other provisions, these policies generally should:

Explain their purpose in terms conveying that employees all ultimately benefit from the safeguards in place. That is, the policies are intended to protect the company (and, therefore, employee paychecks) and possibly to shield all concerned from defamatory communications that other employees could initiate.
Articulate which modes of communications are subject to employer monitoring, including emails and other forms of electronic communication on company-owned devices, including cell phones, and
Spell out the steps you might take pursuant to the policy.

Your rights to monitor employee communication, when employees have been put on notice that you’ll exercise them, might be greater than you expect. According to the Small Business Administration (SBA), “no specific laws govern the monitoring of an employee’s social media activity on a company’s computer” if you’re looking for unauthorized posting of company content.

The SBA cautions, however, that there have been rulings against employers who fired workers for complaining on social media sites about their workplace conditions. That is generally considered “protected speech” under the National Labor Relations Act. The SBA’s advice: “Provide employees with a social media policy and be sure to include information about what you consider confidential and proprietary company information that should not be shared.”

Employer Exemption

What about monitoring employee emails and telephone conversations? Although the Electronic Communications Privacy Act of 1986 (ECPA) prohibits the intentional interception of “any wire, oral or electronic communication,” it does include a business use exemption that permits monitoring of email and phone calls.

The SBA states, “Generally, if an employee is using a company-owned computer or phone system, and an employer can show a valid business reason for monitoring that employee’s email or phone conversations, then the employer is well within his or her rights to do so.” And as noted, if employees have been given a heads up and demonstrated they understand the policy, you’re in a strong position.

However, the SBA advises employers to be aware that the ECPA “draws a line between business and personal email content you can monitor – business content is OK, but personal emails are private.”

“BYOD” Policies

The latest frontier in discriminating between legitimately personal communications and employment related ones involves employees using their own laptops and smart phones pursuant to a “bring your own device” (BYOD) policy. There are practical advantages to BYOD policies, including employee convenience and also savings in the company’s IT budget. On the other side of the equation, employees using their personal devices can give them a false sense of impunity with respect to what company-related sensitive or offensive information they convey on them.

If you do have a BYOD policy, consider expanding the scope of your privacy policies to accommodate it. The policy could:

State that you reserve the right to access, monitor and delete information from personally owned devices under specified circumstances,
Stipulate which employee-owned devices can be used for work purposes and are eligible for tech support,
Require the use of “mobile device management technology” to create an electronic barrier between personal and business-related data,
Limit employee job categories eligible for using personal devices,
Establish data security protocols, including standards for passwords, and
Set a schedule for deleting business-related data maintained on personally owned devices.

The law governing employee privacy at a time of rapid evolution of communication technology isn’t entirely clear on all counts, can vary by jurisdiction, and is constantly changing. That’s why it’s prudent to consult with an attorney with relevant expertise as you develop your policies to balance your legitimate interests with those of employees.

OSHA Updates and Revises its Outreach Training

Posted on June 2, 2017July 22, 2024 by Debra Barcuch

The Occupational Safety and Health Administration (OSHA) has updated its Outreach Training Program, including the courses for the construction industry. Meanwhile, the Government Accountability Office (GAO) has given the courses a thumbs-up in a study, saying they’re well-designed and operating efficiently.

The GAO compared OSHA’s design and evaluation efforts for its training program with leading practices in GAO’s training guide (which OSHA isn’t required to follow) and federal internal control standards. Based on its finding, the GAO stated that it won’t issue any recommendations for OSHA.

The agency’s report stated, “OSHA took steps to design the Outreach Training Program so that workers receive consistent and quality training by using data to identify the content of the training, developing training materials, and issuing detailed requirements for training providers.”

OSHA created its specialized training program to help ensure safe and healthy working conditions. Using a “train-the-trainer” model, the program authorizes someone who completes the curriculum to conduct training courses for employees in certain industries.

The training isn’t a requirement. However seven states require workers to complete OSHA’s 10-hour construction safety training course before being allowed to work on state-funded construction projects. The seven states are: Connecticut, Massachusetts, Missouri, Nevada, New Hampshire, New York and Rhode Island.

The construction training program teaches workers about their rights, employer responsibilities, and how to file complaints as well as how to identify, abate, avoid and prevent job-related hazards. It includes 10-hour and 30-hour versions. The longer course is geared to supervisors or others with safety program responsibility.

Recent Updates

The updated program closely resembles the previous training, with instructors delivering the 10-hour or 30-hour courses at vocational schools, union facilities and factory floors. Among some of the revisions are:

Class time is shortened to 30 minutes from 60 minutes. This means that if a 10- or 30-hour class is held over many days, participants are required to meet for at least 30 minutes a day.
Prerequisites for taking a trainer course include five years of safety experience in the industry covered by the training. In order to substitute education for two years of experience to meet this requirement, students must have a bachelor’s degree or higher.
Construction-specific updates:
Minimum teaching time is 2.5 hours.
A new elective, Foundations for Safety Leadership.
To stay current on relevant OSHA matters, authorized trainers must complete the Update for Construction Industry Outreach Trainers course every four years. The Trainer Course in Occupational Safety and Health Standards for the Construction Industry may also be used to maintain authorized status.

OSHA has also clarified some issues:

Time spent on testing and other paperwork or recordkeeping activities doesn’t counts as “contact hours,” and
Students must be sent home after 7.5 hours of class time, and they can’t return until at least 8 hours later (so, if a class ends at 10 p.m., the students can’t return before 6 a.m. the next day.

The curriculum follows a robust topic design that is constructed to ensure that each individual receives similar training no matter what the work situation.

Specific Course Work

Overall, the training modules must cover a specific set of topics with an allotted time devoted to each topic. Although there’s a small degree of flexibility, typically at least two OSHA-specific electives are delivered in the 10-hour course and six in the 30-hour course.

The required 10-hour Construction topics include:

1. Introduction to OSHA,

2. Personal protective equipment and lifesaving equipment,

3. Health hazards in construction, and

4. The Focus Four Hazards, which covers:

Falls,
Electrocution,
Struck by (for example falling objects, trucks or cranes), and
Caught In or Between (for example trench hazards or equipment).

The elective topics include:

Cranes	Stairways
Excavations	Ladders
Material handling	Hand and power tools
Scaffolds

The required 30-hour curriculum mirrors the 10-hour version but is more in-depth. Elective topics are expanded to 12 hours.

Disadvantages of the Program

Nevertheless, OSHA Outreach Training isn’t meant to be the only training for employees. There are several other important considerations.

Critics note that the Outreach Program doesn’t offer any additional indemnity or level of compliance over other training alternatives, despite frequent employer assumptions that it does. Firms providing the training to employees are still legally responsible for workplace accidents and fatalities. OSHA cautions participants that training is intended to provide basic safety hazard awareness. It’s mainly up to employers to ensure operations are properly performed.

Also, a fundamental weakness of this or any type of standardized safety program is that the training rarely addresses the hazards specific to any single employee role or worksite. To be more effective, safety training should emphasize specific learning objectives relevant to the work experience.

Some analysts suggest that a better idea might be to base safety training on an analysis of the hazards of a specific job. Some common job tasks that would comprise a routine hazard analysis are:

Jobs that cause (or may cause) consistent injuries or illness,
Jobs that cause (or may cause) severe or disabling injuries or illness,
New jobs,
Jobs that have changed recently, and
Complex jobs that require written instructions.

Hazards that are identified during a safety analysis can then be incorporated into company training. In addition, training and education can help workers feel competent enough to identify and report hazards they may encounter.

Finally, the program doesn’t satisfy the training requirements specified in OSHA standards for construction. Additional training is required to address exposures and hazards that employers may face either directly or indirectly. Workers should be well-versed in OSHA standards for operations conducted at their worksites.

Stepping Stone

Given the number of fatalities and injuries sustained by construction workers, it may be worth considering the Outreach Training Program as a stepping-stone toward further improvement.

Fear the “Fatal” Four

The Focus Four hazards were responsible for nearly two-thirds (64.2%) of fatalities in construction in 2015.

According to the Department of Labor, 4,836 workers were killed in all private sector jobs in 2015, the highest total since 5,214 in 2008. On average, that amounts to more than 93 a week, or 13 deaths every day.

Of the total, 937 (21.4%) occurred in construction — more than one out of every five.

The leading causes of construction deaths (excluding highway collisions) were falls, followed by being struck by an object, electrocution and being caught in or between two objects.

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