The etymology of the word “entrepreneur” is well established. Since the earliest of French times, it has meant “someone who breaks into hives when coming within 20 feet of a lawyer.”

While I’m joking regarding the word’s origins, I’m quite serious (albeit figurative) regarding the entrepreneurial response to lawyers. Most young entrepreneurs see themselves as an unrivaled visionary and the last thing they need is some old dude in a three-piece pulling on the handbrake.

Until something else does.

Nothing will grind the entrepreneurial party train to a halt faster than a big lawsuit, nasty contract dispute or some other legal circus animal that no one bothered to stop from coming on board. The lawyer-averse entrepreneur suddenly finds himself begging for a hug from the old dude.

So, before you need to beg for that hug, here are 10 pitfalls that often cause startups legal trouble. A penny of legal proactivity in each of these areas will offer a pound of protection as your business matures.

1.   Not Hiring a Startup Lawyer: There are a lot of lawyers that represent small businesses, but there are only a few that regularly represent startups–particularly when it comes to fundraising from sophisticated angels and venture capitalists. There is a “market” around angel and VC funding and if your lawyer is not immersed in that market you can get fleeced.

2.   Not Having Founders’ Agreements: How do you split the equity pie? Who contributes what? Who acts as CEO? What if a founder stops performing? There are so many questions that founders never think through because everything is going to be “awesome.” However, when cash and humans are involved, things are seldom uniformly awesome.

3.   Choosing the Wrong Corporate Entity: While this sounds mundane, it is actually quite important. Whether you want to run your business as a C Corp, S Corp, LLC, LP etc. is wholly dependent on your long-term objectives. Different structures offer different opportunities and restrictions, and changing your structure years later is administratively painful and expensive.

4.   Using Someone Else’s Trade Name: Many entrepreneurs will lock on a company name without researching whether someone else owns that name. They will put up a web site, print a bunch of advertising collateral, and then they get a letter from some Malaysian conglomerate that says, “Quit using our name and pay us $1 million in damages.”

5.   Comingling Accounts: When money first starts coming in – either from investors or sales–it is easy to mix personal and business accounts. Don’t do it. The more you do, the more that someone can pursue your personal assets for any unpaid corporate liabilities.

6.   Failing to Protect Intellectual Property: Most great ideas are supported by a product or process that should be patented. If you are telling people all about your idea without a NDA or a patent application on file, you run the risk that your great idea will soon be your competitor’s great idea. Identify your core pieces of intellectual property and patent them.

7.   Failing to Have Adequate Employee Agreements: While these are less extensive than the founders’ agreements, you need at least a standard agreement in place for all of your employees and consultants that covers confidentiality, ownership of things they develop, etc. The agreement will not feel that important early on, but it will come in handy when your first employee is hijacked by a competitor.

8.   Failing to Check for Employee Agreements: If you are hiring someone from a company that has followed step No. 7, failing to investigate their former employee agreements can cause problems – especially if you are hiring them for their technical knowhow. If their “knowhow” is owned by their former employer or is blocked by a non-competition agreement, you may be getting less value than you bargained for.

9.   Failing to Comply with Federal or State Securities Laws: If you are asking even a couple of people for money – whether it is an investment or a loan – you must make sure you are observing the various securities laws. While you may not need to “register” your securities, you may need to file for an “exemption.” An improper offering can lead to regulatory fines and, maybe even worse, unwinding of a transaction.

10. Understand Key Contracts: If a third-party is important to a core part of your business, you need a contract with that party and you need to understand the core terms of that contract. In a breach-of-contract lawsuit, ignorance is not a defense.

The above case is a reminder that the “language” used by one employee can easily be considered “offensive” and sexual harassing by another employee. An employee’s stray comment, sexual inference or joke is often considered sexual harassment by a co-worker. Interestingly, the improper comments are often made by those employees in a supervisory, management or senior executive position.

To reduce company liability and prevent harassment allegations, claims and lawsuits, many companies conduct sexual harassment prevention training on an annual basis. Employees should be provided with the legal definition of sexual harassment, given examples of sexual harassment based on common work-day interactions, provided the company’s reporting procedures and encouraged to report all incidents without fear of retaliation.

Creating a culture where employees are empowered to report sexual harassment often starts with a well drafted employee handbook that clearly defines the company’s reporting procedures. To prevent sexual harassment, we recommend that all employers review their handbook policies for clarity and consider sexual harassment prevention training on an annual basis. Indeed, this training is a requirement for employers with more than 50 employees, which includes contractors and part-time employees.  Additionally, the training should be considered by smaller employers to bolster their defenses in the event of similar litigation.

Liberty Law provides economical harassment prevention training that complies with the law, adding to the employer’s defense in the event of litigation. Additionally, Liberty Law will provide this training and seminar free of charge to its level 2 and 3 monthly subscribers (more details here) after 6 months of engagement.

Employers need to be aware that the FMLA and California child care leave laws are not  necessarily limited to traditional definitions of family and parentage.  When faced with a request for child care leave, employers need to make an individualized fact-based determination regarding the relationship between the employee and the child.

Uncle Sam wants small-business owners to take notice of a new health-care tax credit — one of the first provisions of the recently enacted health-reform law to go into effect.

Last week, the Internal Revenue Service announced that it’s sending postcards to more than four million small businesses urging them to check if they qualify for the tax break. It’s being offered in two phases, with the first worth up to 35% of qualifying businesses’ premium health-care costs for tax years 2010 through 2013. The rate increases to 50% in 2014. The maximum length of potential coverage for qualifying employers is six taxable years: four years under the first phase and two years under the second.

In general, to be eligible for the tax credit, businesses must cover at least 50% of the cost of health-care coverage for some of their workers, employ fewer than the equivalent of 25 full-time workers and pay average annual wages below $50,000. The IRS says the tax break is designed to encourage smaller businesses – which are not mandated by 2014 to provide health care, unlike companies with more than 50 employees – to offer health coverage to their low- and moderate-income workers.

Tammy Rostov, owner of Rostov’s Coffee & Tea in Richmond, Va., says she received the IRS’s postcard and expects her small retail business to be eligible for the credit. She offers health coverage to her five full-time employees and pays 100% of the premium, an amount that she says has increased by more than 200% over the past six years. She describes the tax credit as a welcome relief. “It’s a step in the right direction,” she says.

But other qualifying business owners are less enthusiastic, arguing that the tax break won’t make a significant impact on their bottom lines.

Pascal Helou, owner of Globotron LLC, a technology-consulting company in New York, says affording health insurance for his three employees is a non-issue given that he’s struggling these days just to stay in business. Since 2007, he says sales have declined 30% every year and his firm now has four clients, down from 15.

“For my business, this type of tax credit will not make a difference,” says Mr. Helou, adding that he has yet to receive the IRS’s postcard about it. “The real issue is the amount of business we’re getting. Nobody’s willing to spend money” on technology-consulting services.

Meanwhile, there are also some entrepreneurs who don’t believe the government should provide financial incentives for small businesses to offer health coverage to workers in the first place.

Jim Fab, owner of Fab Electric Inc., an electrical contractor business in Gaithersburg, Md., falls into this camp. Providing health insurance and other benefits to his 18 employees, he says, is “hopefully what separates me from the electrical contractor that doesn’t.”

Some small businesses appear to be left without any government aide under the new piece of health-reform legislation. These include organizations with between 25 and 50 employees and ones with less than 25 employees but payrolls that average $50,000 or more.

Tracy Betts, says her Springfield, Va., Web-design business, Balance Technology Group Inc., doesn’t qualify for the credit. While she employs the equivalent of eight full-time workers, their salaries’ average $71,000. “For me, it’s all about the programmers, and I can’t hire anyone for less than $90,000 (in annual pay),” she says.

Ms. Betts says a year and half ago she told her staff she could only afford to offer them either health-care coverage or a retirement-savings plan with a matching contribution from the company. All but one chose the latter benefit, she says.

• The extension of the eligibility period for the COBRA subsidy through May 31, 2010.
• A new special election period and related notice requirement for individuals who experience a qualifying event that is related to a termination of employment on or after April 1, 2010, and before April 15, 2010.

The excerpts below are from an article posted by the law firm of Drinker Biddle, a large national law firm.

Special Election Period

A health plan must extend a special COBRA election period to an individual who experienced an involuntary termination of employment on or after April 1, 2010, and prior to April 15, 2010, and who would be an “assistance eligible individual” (AEI) but who does not have a COBRA election in effect on April 15, 2010. The special election period runs from April 15, 2010, through the date 60 days after the Notice of Special Election Period is provided to that individual.

Note about effective date of COBRA subsidy. Although not specifically addressed in the Act, due to the short, 15-day gap between the expiration of the COBRA subsidy on March 31, 2010, and enactment of the Act, we believe that an individual’s COBRA subsidy becomes effective as of the first day of COBRA coverage if he or she elects coverage during the special election period.

Notice of Special Election Period

In the case of any individual who experienced a qualifying event related to a termination of employment on or after April 1, 2010, and prior to April 15, 2010, a plan administrator must provide the general COBRA notice, including a description of the availability of premium reduction in the case of a qualifying event that is an involuntary termination of employment, within 60 days of enactment of the Act (i.e., by June 14, 2010). If the plan administrator has already distributed the general COBRA notice to such individuals, then the plan administrator may simply supplement it with an additional notice describing the extension of the availability of premium reduction with respect to involuntary terminations through May 31, 2010, and the special election period.

Note about the notice requirement. The Act is not clear on whether this notice applies only to AEIs, or to any individual who has a qualifying event related to a termination of employment, whether voluntary or involuntary, during the period April 1, 2010, through April 14, 2010. The more conservative approach is for a plan administrator to provide the special election notice to any individual who experienced a qualifying event related to a termination of employment on or after April 1, 2010, and prior to April 15, 2010, in order to notify all individuals who may potentially be eligible for the COBRA subsidy, including those who an employer may have incorrectly classified as voluntarily terminated.

A Reminder – Expansion of Assistance Eligible Individuals

Under ARRA, only individuals who experienced a qualifying event that was an employee’s involuntary termination of employment could become AEIs and take advantage of the COBRA premium subsidy. The Temporary Extension Act of 2010 expanded the premium subsidy to include as a qualifying event for purposes of the subsidy, a reduction of hours that occurred at any time on or after September 1, 2008, and is followed by an involuntary termination of employment that occurs on or after March 2, 2010 (and before June 1, 2010). Individuals who experience a qualifying event that falls under this expanded definition and are otherwise eligible AEIs (Reduced Hours AEIs) will be eligible for the COBRA subsidy beginning with the first day of the first period of coverage for which the individual is a Reduced Hours AEI. The Reduced Hours AEI’s maximum continuation coverage period is determined as if the individual had elected COBRA when initially eligible due to the reduction of hours.

Action Items

Plan sponsors and administrators should consider the following immediate action items:

• Notices. Plan administrators should update their COBRA notices and other plan communications to include the extension of the eligibility period to May 31, 2010.
• Assess Prior Terminations. Identify covered employees (and their qualified beneficiaries) who became eligible for COBRA on or after April 1, 2010, and before April 15, 2010, as well as their COBRA elections. Provide an updated COBRA notice to these individuals that includes a description of the extended eligibility period and the special election period. Identify those employees and beneficiaries in the group whose qualifying event is the employee’s involuntary termination of employment and who are eligible for the COBRA subsidy.
• Continue to Monitor Reduced Hours AEIs. Plan administrators should continue to identify any Reduced Hours AEIs, and provide a new notice to them upon involuntary termination. An individual in this group may be eligible for the special election period if, upon a reduction in hours the individual did not elect, or elected and later discontinued, COBRA.
• Stay Tuned. Two separate bills in Congress propose to further extend the COBRA subsidy eligibility period through June 30, 2010, or year end.

COBRA Update, Again…]]> http://reddingbusinessandemploymentlawblog.com/2010/04/cobra-update-again/feed/ 0 http://reddingbusinessandemploymentlawblog.com/2010/03/details-on-the-new-hire-act-signed-by-president-obama/ http://reddingbusinessandemploymentlawblog.com/2010/03/details-on-the-new-hire-act-signed-by-president-obama/#comments Thu, 25 Mar 2010 18:33:41 +0000 Shawn McCammon http://reddingbusinessandemploymentlawblog.com/?p=177 President Obama recently signed the Hiring Incentives to Restore Employment (HIRE) Act, containing more than $17 Billion in tax credits designed to stimulate employment. The Act also includes $20 Billion for highway and transit infrastructure programs as well. One of the most important provisions for businesses is a tax credit for hiring from the ranks of the unemployed.

Under the Act, when an employer hires a “qualified employee” the employer is excused from paying the normal Social Security match of 6.2% of the wages in 2010. What is a qualified employee you ask? A qualifying employee is one who

• is hired after Feb. 3, 2010 and before Jan. 1, 2011;
• is not hired to replace another employee;
• is not related to the employer;
• and certifies under penalty of perjury that he or she has not been employed for more than 40 hours during the 60-day period ending on the date that employment begins with the new employer.

This incentive can save the employer over $6,000 annually for each qualified employee that is hired. Under certain circumstances, the employer who hires a new employee, and retains their services for 52 weeks, may also be able to receive an additional tax credit available on the 2011 tax return equal to the lesser of $1,000 or 6.2% of the wages paid to an employee for those 52 weeks.

These tax incentives are meant to spur job creation, especially for small businesses who are undecided about whether to begin to ramp up expansion efforts in light of recent economic challenges.

Here is the press release from the Ways & Means Committee Chair describing this bill.

Matthew Nelson of Dinsmore & Shohl writes here that UPS just entered into a $12.8 million settlement in a case dealing with the improper classification of their northern California drivers. He writes that “[t]he drivers claimed they were wrongfully classified as independent contractors rather than regular UPS employees, and as a result, were denied the benefits and protections of, among other things, the Fair Labor Standards Act (“FLSA”). Particularly, the drivers focused on the FLSA’s minimum wage and overtime guarantees.”

The drivers alleged that UPS controlled almost every aspect of the working relationship; including, delivery times for packages, that UPS dictated the drivers’ dispatches, set the prices, and even controlled what the drivers wore. Essentially, the drivers claimed they were such an integral part of UPS’s business, that they could not be said to have any separate or distinct business of their own. The court allowed the case to proceed as a class action, and the group eventually included roughly 2,400 UPS delivery drivers. Mr. Nelson also notes that “UPS denied the allegations, but eventually agreed to settle the case for $12.8 million (the settlement received provisional approval, but must still receive final approval from the court).”

If you are an employer utilizing independent contractors in your business, make sure that the classification is correct and that you aren’t simply postponing liabilities to a later point time.

You must properly classify those in your workplace (employee v. independent contractors)]]> http://reddingbusinessandemploymentlawblog.com/2010/03/you-must-properly-classify-those-in-your-workplace-employee-v-independent-contractors/feed/ 0 http://reddingbusinessandemploymentlawblog.com/2010/03/employers-must-consider-additional-accommodations-under-ada-feha-when-an-employee-exhausts-available-statutory-leave-time/ http://reddingbusinessandemploymentlawblog.com/2010/03/employers-must-consider-additional-accommodations-under-ada-feha-when-an-employee-exhausts-available-statutory-leave-time/#comments Tue, 02 Mar 2010 20:49:32 +0000 Shawn McCammon http://reddingbusinessandemploymentlawblog.com/?p=166 This month, the EEOC and Sears, Roebuck & Co. entered into a court approved settlement agreement in the amount of $6,200,000.00 entitling the 235 impacted employees to over $26,000 each.  The distribution is being carried out pursuant to the terms of a consent decree approved by Federal District Judge Wayne Anderson on September 29, 2009. You can read the EEOC’s press release here.

In its lawsuit against Sears, the EEOC had alleged that Sears maintained an inflexible workers’ compensation leave exhaustion policy and terminated employees instead of providing them with reasonable accommodations for their disabilities, in violation of the ADA.

This large settlement reminds employers that if employees are out on some form of statutory leave, like the workers’ compensation leave at issue in the Sears matter, and the employee exhausts the leave but is still experiencing a medical condition that qualifies under the ADA or California’s Fair Employment and Housing Act (FEHA), the employer must engage in the “interactive process” to determine if a reasonable accommodation (including a possible extension of the employee’s leave) is available and can be provided to the employee without creating an undue hardship on the employer.  Otherwise, strict application of leave policies that result in the termination of an employee who fails to return to work at the exhaustion of such leave may result in significant liability for the employer.

Recently, however, the government signed the Defense Department’s 2010 appropriations bill (“2010 DOD Act”) that will allow laid-off workers to receive subsidized COBRA premiums for up to 15 months, which previously expired after 9 months.

The Department of Labor’s Employee Benefits Security Administration (EBSA) has released a fact sheet explaining how the 2010 DOD Act extends the COBRA subsidy enacted during the earlier economic stimulus package. In general, the 2010 DOD Act extended the COBRA premium reduction eligibility period for two months, through February 28, 2010 and increased the maximum period for receiving the subsidy from 9 to 15 months.

Also, the fact sheet reviews the eligibility requirements for the subsidy, the new period of coverage, and notice requirements that plan administrators must provide. The fact sheet explains that plan administrators are now required to provide notice about the changes made to the COBRA premium subsidy provisions to individuals who have already been provided a COBRA election notice, unless the election notice included the updated premium reduction information. The notices must be given to eligible individuals by February 17, 2010. Individuals who have been terminated on or after October 31, 2009 and will lose health coverage must be provided this notice “within the normal timeframes for providing continuation coverage notices.” Those who had reached the end of the reduced premium period before the legislation extended it to 15 months must be provided this notice within 60 days of the last day they were eligible to receive COBRA premium assistance under the old rules.