1. Avoid Disputes: Read the Contract and Get The Deal in Writing.

One of the major principals of contract law is that a contract cannot be formed without “a meeting of the minds.”  This means that both parties must have a common understanding regarding the major terms of the deal. Business owners will have to deal with contract matters in the ordinary course of their business, whether the contract is with the business’ employees or with a manufacturer or supplier of goods.  It is important, not only to read the entire contract, but to understand the terms of the contract.  Doing so will allow the owner to know exactly what he or she is agreeing to, and such knowledge can help prevent the business owner from entering into a deal that may not be good for the business.  It will also ensure that the business owner will get exactly what he or she really wants because they can bargain to strike certain terms or add new terms.

On the other side of the coin, it is critical for business owners to put their deals in writing.  This will help keep disputes over the terms of the deal to a minimum, because those terms will in writing.  While oral contracts can be enforced in the court of law, their existence can be difficult to prove.  Even if the court accepts that an oral contract existed, there will still be an argument over the terms of the contract.  Putting the terms of the contract down on paper will allow a business owner to avoid the mess of proving the existence and terms of a contract to the court of law.  It will also increase the likelihood that the court will find the business owner has an enforceable agreement.

2. Give Structure to Your Business: Incorporate or Become a LLC.

Starting a business can be exciting, but it can also very risky.  One of the ways new business owners can protect themselves is by organizing their business in the form of a corporation or limited liability company (“LLC”).  Though there are other types of entities available to business owners, Corporations and LLC’s are the most popular forms of entity because they provide the business owner(s) (or shareholder(s)) the protection of limited liability.  The limited liability protection means that the corporation (or LLC) is treated as if it was its own person that is legally responsible for its own actions and debts.  Any debt or liability incurred by the entity is not passed down to the owner or shareholder (except in the case of piercing, which will be discussed later); instead, it remains solely with the corporation or LLC.  Creditors of the corporation or LLC will not be able to reach the personal property of the owner(s) or shareholder(s) to satisfy the outstanding debt.  They can only seek satisfaction of the debt through the repossession and sale of entity assets.

While the corporation and LLC provide limited liability protection, there are cases the courts have pierced the veil of limited liability protection.  Courts will allow the limited liability veil of a corporation or LLC to be pierced under the following circumstances:

1)    Where the members have comingled personal assets with that of the corporation (“alter-ego theory”);

2)    Where permitting the entity to keep its limited liability veil would allow fraud or other injustice to occur;

3)    Where the entity is undercapitalized; and

4)    In the case of corporations, where the members failed to follow corporate formalities.

If a business owner wishes to maintain the limited liability protection afforded to either of the forms of entity discussed above, they must ensure that their entity has sufficient means to cover the entities debts and keep entity assets separate from their own.

3. Protect Your Trade Secrets, Intellectual Property, or Trademarks

If your business has an innovative new product or method of providing services, take the time to file the necessary paperwork to protect your product or method.  The business will be more profitable if its products or methods are the exclusive property of the business.  Not only will protecting your product or method give you a competitive edge, but it will allow you exclusive rights to profit from your idea.  In order to protect your product or method, you must file a patent with the United States Patent & Trademark Office.  It may be necessary to hire an attorney to assist with filling out the necessary paperwork.

Business owners will also want to protect their trademark phrase or symbol.  If the business does not have a trademark phrase or symbol, it can be worthwhile to come up with one.  The trademark will allow easy identification of the business as it grows, and people will come to associate it with the quality of goods or services the business provides.  Not every word or phrase can be protected with a trademark.  Following the three rules below will increase the likelihood that your trademark will receive protection:

1)    Use words or symbols that the business owner or employees created themselves

2)    Use words or symbols that have a common meaning, but their meaning bears no relationship to the good or service; and

3)    Use words or symbols that are suggestive of the good or service.

Once the trademark symbol or phrase is created, the proper paperwork must also be filed with the United States Patent & Trademark Office.  Please keep in mind that generic words, symbols, or phrases are not protectable with a trademark.  Furthermore, a geographical search may be necessary to ensure that other businesses operating in the same area are not using the same trademark words or symbols.  For a deeper explanation of the rules for creating a trademark, please visit this website: http://www.jdsupra.com/post/documentViewer.aspx?fid=2fcf0fa8-3814-4e0e-bf73-272b5647bd7b.

4. Ensure Former Employees Do Not Become Your Competitor

One of the most important provisions of a standard employment contract is the covenant not to compete.  This contract clause ensures that the employee does not become the business owner’s competitor if the employee leaves the business or is terminated.  California courts disfavor covenants not to compete and will rarely enforce them.  However, they will be enforced if they are reasonable in scope, geographic area, and time.

For the clause to be reasonable in scope, it can only restrict the employee from performing jobs or activities that would place him or her in direct competition with the former employer.  For example, a former employee of a burger stand cannot open up a burger or hotdog stand on the corner across the street from the former employer.  However, the former employee could open up a refreshment stand across the street from the former employer because such service does not directly compete with the former employer.

There is no specific rule governing how much time or how big of a geographical area restriction is reasonable.  The court will simply examine these restrictions on a case-by-case circumstance and judge whether they are reasonable within the context of the case.  Generally, the longer the temporal restriction is, the less likely that the restriction is reasonable.  Geographic restrictions will usually be reasonable so long as it is the restricted area is a reasonable estimate for the business’s area of operation.

The covenant not to compete should also contain language that will protect the business’s trade secrets.  Included in the definition of “trade secrets” is the business’s customer contact list.  Protecting the business’s customer list with a covenant not to compete will provide your business grounds to recover damages from the former employee or their subsequent employer if either attempts to solicit your valued customers.

5. Conclusion

Following the tips given above will help your business avoid many of the legal pitfalls that can plague a new small business.  While some of these tips do require the assistance of an attorney, the expenditure should be worthwhile.  The time, money, and effort ensuring that the business is covered from all angles will minimize the need for costly litigation down the road.  The less a business has to spend on litigation, the more it can spend on purchasing capital and creating the jobs America so desperately needs.

• 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.

For example, if state income tax withholding is currently $400 a pay period on an employee’s regular wages, come November 1st , the withholding will increase to $440.

Payroll departments should be prepared to receive employee inquires and amended w-4 forms after the effective date.

This new change was part of legislation (ABX4-17) signed by the Governor to assist in accelerating tax collection due to the budget crisis at the State level (I know,  not just at the State level).

Littler has a more exhaustive posting on the topic here if you would like more information on this tax issue.

Change in CA Tax Withholding Tables Effective November 1, 2009]]> http://reddingbusinessandemploymentlawblog.com/2009/09/change-in-ca-tax-withholding-tables-effective-november-1-2009/feed/ 1 http://reddingbusinessandemploymentlawblog.com/2009/09/wellness-programs-do-incentives-make-a-program-involuntary/ http://reddingbusinessandemploymentlawblog.com/2009/09/wellness-programs-do-incentives-make-a-program-involuntary/#comments Thu, 10 Sep 2009 18:36:09 +0000 Shawn McCammon http://reddingbusinessandemploymentlawblog.com/?p=68 As many of you may know, businesses are getting more creative in finding ways to save money on health care costs as those costs continue to rise.  One of the methods that employers have turned to more recently is workplace wellness programs [article discussing Safeway's plan]. The idea is that these wellness plans help the employer get ahead of the cost curve by enticing employees (usually though voluntary incentives) to participate in health risk assessments and preventive medical treatment before unattended health issues turn into large hospital claims, which usually make up the largest portion of employer’s health care costs.

This article is not an exhaustive review of the legal technicalities implicated by the adoption of a wellness programs; rather, it is designed to put employers on notice of some of the issues that are out there and some pending rule changes that may impact these plans. We will revisit these issues again later this year when the expected rule changes take effect.

HIPAA and Wellness Programs, A Simple Overview:

Existing regulations under HIPAA (Health Insurance Portability and Accountability Act) place certain restrictions on wellness plans.  Many wellness programs feature financial incentives for employees to use them, such as reduced premiums or deductibles. Other programs charge higher premiums if people do not enroll in the wellness program. HIPAA’s goal is to be sure that these incentives do not unduly impact any particular class of employees, resulting in unfair discrimination.

While there are many points to be aware of in designing a wellness program, a couple points stand out. The first of which is the limits on incentives that can be used to entice participation in the program. Generally, a program cannot exceed 20% of the cost of the health coverage in setting the amount of the incentive or reward.  Whether this 20% limit is a percentage of the total health coverage cost or just the employee’s share of the cost of coverage depends on how the plan is structured as it relates to dependents, spouses, etc..  Just know there are limits on the incentives.  Rewards or incentives for the employee to participate in the wellness program may take the form of rebates, or contributions toward the employee share of the premium, waivers of co-pays or deductibles, or other variations.

HIPAA also requires that there be waivers from the wellness program for certain individuals. For example, an employer might offer a 20% premium discount for employees who have an annual cholesterol test and achieve results below a certain cholesterol count. The employer would also have to offer reasonable alternatives or waivers to those who are medically unable to achieve those cholesterol levels.

In addition to the requirements under HIPAA, it is important to keep in mind that the Americans with Disabilities Act (ADA) and California Fair Employment and Housing Act (FEHA) also impose requirements on wellness programs. Complying with HIPAA’s nondiscrimination rules and wellness program requirements does not ensure compliance with the ADA or FEHA regulations.

Wellness Programs to be Effected by New Regulations?

New regulations and rule making on the horizon may impact workplace wellness programs. The employment provisions contained in Title II of the Genetic Information Nondiscrimination Act (“GINA”), prohibit employers from discharging, refusing to hire or otherwise discriminating on the basis of genetic information.  Although, this new law becomes effective November 21, 2009, final GINA regulations have yet to be passed.  The Equal Employment Opportunity Commission (EEOC) has recently approved a proposed final rule to implement Title II.  The proposed regulations are being reviewed and are expected to be published by the EEOC just prior to the law’s effective date.

In essence, GINA prohibits employers from discharging, refusing to hire, or otherwise discriminating on the basis of genetic information, and from intentionally acquiring genetic information about applicants and employees. There are also requirements on how the employer should handle the confidential information. GINA defines “Genetic information” broadly, but does permit employers to acquire genetic information when it is requested as part of an employer’s “health or genetic services, including such services offered as part of a voluntary wellness program.” It is expected that the EEOC will clarify the nature and scope of this exception in the final regulations before November 21, 2009.

In requesting comments on its proposed regulations, the EEOC acknowledged that under the Americans with Disabilities Act, the Commission has said that a wellness program is voluntary if it neither requires employees to participate nor penalizes employees for non-participation.  The issue then becomes at what point do incentives, rebates, or other employer tools turn the wellness program into something less than voluntary.

Out of about 40 comments received by the EEOC during its information gathering process, approximately 16 of those addressed the issue of whether and when a wellness program should be considered “voluntary” under GINA.  Of these 16 comments, 4 requested that the EEOC’s final regulations clarify that a wellness program would not be “voluntary” if the program provided individuals any financial inducement to provide “genetic information.”  The remaining comments requested the EEOC issue a final rule clarifying that a wellness program would be “voluntary” if the inducement provided to employees fell within the HIPAA 20% cap governing financial rewards (discussed above) for participating in wellness programs covered by HIPAA.

As many employers inquire about family medical history in the course of administering wellness programs, usually through “health risk appraisals” aimed at identifying health risks, and many wellness programs also are made available to family members who participate in group health programs, the final GINA regulations will affect the design and implementation of wellness programs. Because the EEOC also enforces the ADA, whatever position it takes on the GINA regulations, will likely become its enforcement position for determining whether wellness programs violate the ADA.

While the ADA normally requires that employee medical inquiries and examinations be “job-related and consistent with business necessity,” it permits employers to conduct “voluntary” medical examinations, including “voluntary” medical histories, which are part of an employee wellness program.  As with GINA, the unanswered question is whether a program remains “voluntary” under the ADA if it provides a financial incentive to answer medical inquiries or participate in medical examinations.

In previous comments by the EEOC, the agency has stated that providing a monetary incentive may render the program involuntary, depending on factors like the size of the incentive, and whether the incentive results in significantly higher premiums for employees not participating in the wellness program. The EEOC, as recent as March 2009, stated in an informal opinion that requiring a health risk assessment as a prerequisite for obtaining health insurance coverage would violate the ADA.

Employers will need to keep an eye on these developments and evaluate whether their wellness programs need any modification due to changing regulations.  Employers should not be scared away from implementing a wellness program.  This kind of creative problem solving is what is necessary today for those businesses looking to minimize costs and remain competitive.

E-Verify compares information from the Employment Eligibility Verification Form (I-9) against federal government databases to verify workers’ employment eligibility. The system facilitates compliance with federal immigration laws and helps to deter unauthorized individuals from attempting to work and also helps employers avoid employing unauthorized aliens.

All U.S. employers must complete and retain a Form I-9 for each individual they hire for employment in the United States. This includes citizens and non-citizens. On the form, the employer must examine the employment eligibility and identity document(s) an employee presents to determine whether the document(s) reasonably appear to be genuine and relate to the individual and record the document information on the Form I-9. The list of acceptable documents can be found on the last page of the form.

The Form and Instructions are here, and in Spanish here.

This is why some businesses go ahead and classify that new worker as an independent contractor rather than an employee. But just because the business classifies the worker as an independent contractor, does not mean the various regulatory agencies will do the same, and doing so may get the business in trouble.  Regulatory agencies favor the employee and the employee model of hiring for work.  The IRS and State Franchise Tax Board would also like for you to designate the person as an employee so you have to pay the employment taxes.  They lose countless amounts of money each year to underreported self employment income.

In order to stay out of trouble with the various regulatory agencies you need to weigh several factors (developed by case law) to determine whether the person is truly an independent contractor or an actual employee. You should keep records of the decision and why the decision was made. You want information in the file that will support your decision that the person really is an independent contractor, if you go with that classification.   Generally speaking, the more control you exert over the person, the more likely the person will be classified as an employee. If you direct their work, tell them when they have to report, pay for their tools or supplies, give them any training, set the hours of work, require they only work for you, and things of this nature, you have likely exerted sufficient control over the person for them to be classified as an employee.  If the person doing the work uses their own tools, can subcontract the work to someone else, can report to work on their schedule, does work for various other individuals or businesses, provides their own training, and does not have to report like other employees, tends to suggest the person is a true independent contractor.

There are other factors different agencies look at, and some safe harbor provisions an attorney can advise you about.

The IRS has a publication discussing worker classfications.  Visit the Department of Labor’s site for discussion related to proper classification here.  Finally, the Employment Development Department has an valuable resource here.

You should also have an independent contract agreement in place with anyone you designate as an independent contractor to recite all the facets of the agreement and memorialize the lack of control you have exerted over the person in terms of the business relationship.

The 2nd District Court of Appeal for California has reversed the lower courts grant of summary judgment in favor of the employer, and held that when an employee causes a car accident while driving home from a 3 day business conference, even though on his normal commute route, the employer may be held liable for the injuries sustained while on the “special errand” for the employer where the employer cannot show that the employee was acting on his own interest or so deviated from the scope and course of employment that the chain of causation may be considered broken. Ok, that was a mouthful of a sentence, but I think you get the point.

You can find the opinion here.