Cancel OK

Hiring and Employment Bonds

Worth the price?

Surety vs. Employment Bonds
To secure an employment bond, companies must contract with a U.S. Treasury Department-approved insurance company (a list of these approved insurance providers may be found at the Treasury Department’s website).

Sometimes, a cash surety bond may be used instead of an employment bond. This is an option when a company is denied approval for the latter. A cash surety bond works similarly to an employment bond, but it is issued and held by PACA. “The PACA licensee must provide a cashier’s check for the bond amount, which is deposited into a noninterest bearing account and held for four years, nine months,” Sullivan clarifies.

In addition, a cash surety agreement is drawn up and signed by an officer of the company and by an associate deputy administrator of the USDA’s Agricultural Marketing Service. “At the end of the bonding period,” Sullivan says, “the funds are refunded to the employer, if they have not been called into use.”

Concluding Thoughts
All in all, PACA imposed employment bonds protect the produce industry by ensuring reparation awards get paid. And while it may seem at first glance that such a bond would also hasten payment, Sullivan divulges, “we do not necessarily see this as a matter of course.”

While employment bonds may seem like a punitive measure, their purpose is altruistic. First, as mentioned, it promotes fair trade by protecting short-term future transactions against unscrupulous business habits, and one-time offenders. Secondly, it gives vendors confidence in their transactions, knowing they will be paid for their invoices.

Lastly, these insurance instruments tend to dam a potential flood of debt within the volatile perishables supply chain. Although its predominant use is slim relative to the size of the produce industry, employment bonds continue to strengthen the integrity of the industry and its buyers and sellers.

Twitter

When confronted with the need for an employment bond, a produce company may be faced with a triple-tined fork in the road: forego a key hire, pay any outstanding reparation awards owed by the individual’s prior firm, or secure an employment bond to protect the trade from any future delinquency or malfeasance.

At times, the decision is made to pursue the bond. In this article, we explore the whys and wherefores of obtaining an employment bond and the reasoning behind these restrictive pledges. background and basic tenets

Within the U.S. Department of Agriculture (USDA) is the Perishable Agricultural Commodities Act (PACA) Division, which regulates interstate and foreign produce commerce per the Perishable Agriculture Commodities Act (the Act). As its enforcement arm, the PACA Division seeks to uphold the tenets of fair trade.

One of its main functions is to help ensure that those who deal in fresh and frozen produce are paid. In so doing, the PACA Division has the authority to restrict who may operate in the produce industry, including requiring employers to purchase an employment bond before hiring certain individuals.

The bond may be thought of as an insurance policy as it ensures PACA licensees will pay reparation orders issued against an employer for transactions occurring within the bonding period. Employment bonds differ from a license bond in that the former is used to underwrite the conduct of a produce employee, while the latter is used to ensure the conduct of a business that has had its PACA license revoked. 

Who and Why
Who is subject to an employment bond? Individuals who were previously deemed “responsibly connected” to a produce company that had its PACA license revoked or is presently suspended, or failed to pay a reparation award in the last two years. Part of these employment restrictions may include a mandated employment bond, which is held for four years plus nine months. At the end of 2014, there were 28 employment bonds in place, amounting to $3,705,000 in protective funding for the industry.

Employment bonds seek to thwart a repeat of flagrant fair trade violations and/or the business conduct that led to a PACA license suspension or revocation. Some examples of prohibited conduct under PACA where a bond may be mandated include: failure to make full, prompt payment for produce purchases; failure to pay a reparation order; unlawful employment of a PACA violator; making false or misleading statements for fraudulent purposes in connection with produce transactions; specific misrepresentation as to variety, grade, or origin of a commodity; the misbranding or mislabeling of produce; and commercial bribery.

The process of assessing the need for an employment bond begins with the company’s stated intention to the USDA about hiring a PACA offender. The USDA will follow up with a request for specific information, then provides a brief window to take one of three possible actions. “The firm has thirty days to terminate the employment, pay the reparation award [if applicable], or post a surety bond,” explains Christine Sullivan, a PACA bond specialist.

Securing a Bond
In the event a business decides to move forward with an employment bond, certain information is requested by PACA. First, Sullivan explains, “We ask the employer questions so we can understand the volume and nature of its business, as well as what role the violator will have in the employing firm.” Additional pertinent information that may be requested includes balance sheet and income statements; monthly average produce purchases; annual produce sales; the total number of employees; the violator’s title and duties; the level of his/her supervision; customary payment terms; PACA’s history with the employing firm; any bankruptcy actions; and even the company’s Blue Book rating.

“We use the same factors for all bond determinations,” Sullivan notes, “but will aggravate or mitigate as appropriate, based upon the factual situation.” Once all of the information is collected, it is analyzed and a commensurate bond amount is determined. “The bond amount for an employee whose license was suspended for unpaid reparations should not be less than what is owed to PACA licensees,” she states.

Even with unpaid reparation obligations owed to the trade, a violator can still be eligible for immediate employment if his/her employer posts a surety bond. However, if a business loses its PACA license due to violations of the Act, the company’s principal is ineligible for employment for one full year. After this time, an employer is required to post an employment bond to hire the individual. Otherwise, an additional year of sitting on the sidelines is required before all restrictions reset to zero.

The Gambit
So why hire a violator and go through the hassle of obtaining an employment bond? There are many reasons, including the person’s experience, skill set, and contacts within the industry. “There are also situations where violators are unable to pay their produce debt for reasons beyond their control,” points out Sullivan, such as when a company goes bankrupt, setting off a chain reaction of losses and nonpayment.

Sometimes a person has been deemed a responsible party within a violating company, but had minimal involvement with the violation. Another example is a bankruptcy brought on by personal issues, such as medical bills. In this case, a PACA licensee is incapable of paying, or draws upon assets until the funds are depleted. “Nonetheless,” Sullivan asserts, these parties are culpable and still “held responsible under PACA law.”

Trying to circumvent a mandated employment bond is risky. A business that hires a restricted employee without the proper bond jeopardizes its PACA license, not to mention having to nurse expensive headaches. “The penalty for nonlicensed operations is $1,200 for each offense and not more than $350 for each day the offense continues,” states Sullivan. “These types of cases are referred to the U.S. Department of Justice for prosecution.” It should be noted that even businesses without a PACA license are subject to these rules, if they are required to have a license.

Surety vs. Employment Bonds
To secure an employment bond, companies must contract with a U.S. Treasury Department-approved insurance company (a list of these approved insurance providers may be found at the Treasury Department’s website).

Sometimes, a cash surety bond may be used instead of an employment bond. This is an option when a company is denied approval for the latter. A cash surety bond works similarly to an employment bond, but it is issued and held by PACA. “The PACA licensee must provide a cashier’s check for the bond amount, which is deposited into a noninterest bearing account and held for four years, nine months,” Sullivan clarifies.

In addition, a cash surety agreement is drawn up and signed by an officer of the company and by an associate deputy administrator of the USDA’s Agricultural Marketing Service. “At the end of the bonding period,” Sullivan says, “the funds are refunded to the employer, if they have not been called into use.”

Concluding Thoughts
All in all, PACA imposed employment bonds protect the produce industry by ensuring reparation awards get paid. And while it may seem at first glance that such a bond would also hasten payment, Sullivan divulges, “we do not necessarily see this as a matter of course.”

While employment bonds may seem like a punitive measure, their purpose is altruistic. First, as mentioned, it promotes fair trade by protecting short-term future transactions against unscrupulous business habits, and one-time offenders. Secondly, it gives vendors confidence in their transactions, knowing they will be paid for their invoices.

Lastly, these insurance instruments tend to dam a potential flood of debt within the volatile perishables supply chain. Although its predominant use is slim relative to the size of the produce industry, employment bonds continue to strengthen the integrity of the industry and its buyers and sellers.

Twitter

Patti Orton Kuna grew up on a grape farm in Ripley, NY. Now residing in northwestern Pennsylvania, she writes mainly about specialty crops and value-added agriculture.