Months before its fall, Chattanooga accounting firm paid employees in unusual manner

Employment law expert said the arrangement sounded ‘bizarre’

Staff photo/ Jonathan Frost is seen in 2018. His accounting firm, which became Croft & Frost, abruptly laid off its employees Tuesday.

In December 2022, employees of the Chattanooga accounting firm Croft & Frost were told about an unusual arrangement.

Given cash flow issues and other factors, payroll had been delayed, and they would receive their paychecks that month as gross pay — the way independent contractors or freelancers are typically compensated.

Also, the money would come from a company called Rhino Onward International.

An employment law expert told the Chattanooga Times Free Press the arrangement sounded "bizarre" and that it could draw scrutiny from tax authorities because pay and withholding for employees and contractors is handled very differently.

For employees at the beleaguered accounting firm that for months failed to pay them on time before abruptly laying them off this past week, it now looks like a sign something was amiss.

The address listed on the website for Rhino Onward International as its headquarters is in the same Chicago building where Croft & Frost has maintained an office. And like Croft & Frost, Rhino Onward International lists Paul Croft and his business partner, Jonathan Frost, as top leaders.

"ROI is a design-build developer as well as an integrator for our clients along with being a manufacturer of green energy solutions," the company says on its website.

The exact relationship between the two firms remains unclear. The Times Free Press has emailed, called and texted Frost, and knocked on the door and left notes at two area homes listed in his name. And the newspaper has sent messages seeking comment, which remain unanswered, via Linkedin to Croft and Rocky Garza, a self-described keynote speaker and confidence coach who served as Croft & Frost's chief operations officer. Croft & Frost has switched off its website. The newspaper also sent to messages to Rhino Onward International via email and its website and did not receive a response by press time.

In January, as Frost promised in an email, Croft & Frost employees began receiving pay as they had before. Taxes and other items were deducted from paychecks like normal, and the money came via the business they worked for. The whole December payment arrangement might have seemed an unusual blip if not for what happened the following spring.

(READ MORE: Chattanooga accounting firm lays off entire staff, locks door)

From a pay period in late May 2023 to this week, Croft & Frost has consistently failed to pay staff on time even as Frost and other company leaders continually assured workers the future was bright, according to company emails and phone interviews with former employees.

Worker complaints

When they were informed by video call Tuesday they were being laid off, employees were owed three late paychecks and other promised funds.

The State Department of Labor has reported receiving at least three worker complaints, and the agency's spokesperson said it would investigate if employees were not paid within a given time frame. On Friday, three ex-Croft & Frost employees told the Times Free Press they got three paychecks' worth of money via direct deposit — the bulk of what they were owed.

The former employees are awaiting a final paycheck compensating them for the partial pay period in which they were laid off, and they have been told they will not receive bonuses, holiday pay the company failed to issue, and business reimbursements they have long been promised that for some amount to hundreds of dollars.

Croft & Frost laid off its staff days before the third quarter tax deadline Friday — a date by which many business owners and others are generally supposed to make tax payments, though it remains unclear what, if any, effect the firm's abrupt move has had on clients.

"We are urging consumers to contact our team and file complaints with us if they have proof of unlicensed activity or misdeeds," said Kevin Walters, spokesperson for the Tennessee Department of Commerce and Insurance, which includes the Board of Accountancy.

Stop-gap measure

"At Croft & Frost, we help you build courage and create wealth," the accounting firm would often say in marketing materials.

To that end, in addition to accounting services, it allowed clients to pay to join a community that facilitated frequent access to the firm's experts. Those were referred to as the wealth expert and the people expert. Frost was the strategy expert.

"As the co-founder of Croft & Frost, J.D. has been able to establish himself as a go-to resource for those looking to scale their business, expand their skill set and drive production to new levels," said the firm's website about Jonathan Frost, its CEO.

Growth was the theme in an email Frost sent to employees Dec. 1, 2022. The past year, he said, had been packed with it. The firm had almost doubled in size, he said, and he and Croft had put in countless hours on process and accountability to ensure they had a company they all believed in.

"Paul and I have made huge investments both in time and financially for us to build what we are building," he went on. "When in a growth zone, either personal or professional, we all know that courage is a huge part of that. The courage to endure hard things. The courage to be a part of something that others are not and ultimately the courage to change the way we think. And with all of that, we are in the middle of the most courageous season to date. Take what Rocky shared with us this morning about his life, his grandparents and that hard and good are not always opposites. Life takes courage.

"So Paul and I are writing to you all today to let you know that in the spirit of courage and reality of scaling a business, this payroll will be delayed from Friday December 2nd to one day next week due to a timing issue in our cash flow."

Frost underscored that employees would get paid — he said he knew how hard it was to do their jobs — and that cash flow would be significantly improved by Jan. 15, 2023. The firm, he said, had "three life-changing deals that will come to fruition within the next 60 days."

'Back on track'

The next day, the originally scheduled payday, Frost sent an email update. Business-related travel would be put on hold, workers would be paid the next week and the company would be contracting with a new payroll service, he said.

"Paul and I will remain transparent with you all through this process," he said.

The weekend came and went. On Monday, a human resources staffer told workers they would get paid by the following Wednesday or Friday.

"We do not anticipate any delay in the following payroll that is going to take place on Friday, 12/16/22," she wrote.

The next day, she sent another update.

"We will be paying everyone their gross pay amount through Rhino Onward International as a 1099 for the remainder of the year," she said.

The three paydays in question were scheduled for Dec. 2, 16 and 30. All health insurance premiums would be covered by Croft & Frost for the remainder of the year, the human resources staffer wrote, but she instructed employees to complete an attached Form W-9 — which companies usually request from contractors, not employees.

(READ MORE: Polk County Circuit Court Clerk's employees paid more than $123,000 for time not worked)

On Dec, 16, Frost sent an update in which, referencing, the 1099 tax form businesses must generally send to contractors they paid within a given year, he indicated the new and temporary payment arrangement resulted from the company's switch between third-party payroll services.

"As we continue to get set up with our new payroll system, we are getting back on track with all appropriate staff being set up as a W-2 employees and not being paid as a 1099, as we are being paid this month," he said, "We are in the process of getting our 1099 contractors set up as well."

When it came time to file 2022 taxes, the 1099 forms pertaining to the December payments arrived, employees said.

One employee showed the Times Free Press payment records attributed to Rhino Onward International from his bank account and the corresponding 1099 tax form he later received from the green energy solutions company — which he said was as far as he knew a completely different company from Croft & Frost and which he never did any work for.

The tax form showed thousands of dollars in "non-employee compensation" he received in gross pay from Rhino Onward International. The taxes he owed on it included a portion that, were he classified as an employee, would generally by paid by the business.

Puzzling situation

The IRS and state and federal agencies all apply similar tests to determine whether a worker is an employee or a contractor. The general IRS rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work, but not what will be done and how it will be done.

Told of Croft & Frost's December arrangement, a Vanderbilt Law School employment law professor did not see much ambiguity.

"As long as nothing else about the relationship changed, this would still absolutely be an employment relationship, not an independent contractor relationship," the professor, Jennifer Shinall, said by phone.

Shinall said the arrangement puzzled her and seemed unusual for a larger business. The firm had dozens of employees. She pointed out that in the short term, the move would not seem to even save the company's owners money, since they would be paying out gross pay, which has no deductions.

(READ MORE: Former Volunteer Energy accountant gets 17-year sentence in million dollar theft)

Intentionally misclassifying employees can carry significant civil penalties and prompt investigations by the IRS, the Social Security Administration and other agencies, Shinall said. She doubted the fact that Croft & Frost employees were paid like contractors by what seemed to be a separate company would allay the concerns of government agencies if the businesses were controlled by the same people.

At an accounting firm, employees are likely to know more than the average person about tax law. But one ex-employee said he was inclined to be trusting — the payroll system switch seemed like a reasonable explanation — and didn't think much was amiss. Now though, he said he feels it foreshadowed what came months later.

Another long-time employee told the Times Free Press the setup did seem odd at the time.

"You really can't do that because they're W-2 employees, but they said it would be expeditious and more efficient to do that," he said of the pay arrangement. "At least people got paid."

Contact Andrew Schwartz at [email protected] or 423-757-6431.