Virginia State Court: Contractor Can Pursue Assets of Subcontractor's Owner
After a less-than-satisfactory boiler improvement job done by a subcontractor, a Henrico County Circuit Court judge allowed the prime contractor to pierce the corporate veil and reach the personal assets of the subcontractor’s owner for damages related to this job. In this case, the Court found evidence that the sole shareholder of the subcontractor failed to uphold corporate formalities such as annual meetings and the maintenance of separate financial books for the company. Moreover, the subcontractor arranged for the corporation to enter into a contract while grossly undercapitalized. The finding resulted in a judgment worth $137,454 against the shareholder personally.
In Virginia, courts regard veil-piercing as an extraordinary remedy. Generally, each corporation is a separate legal entity with its own debts/liabilities and assets. However, under Virginia law, a court may pierce the corporate veil to find that an individual owner is the alter ego of a corporation where it finds (1) a unity of interest and ownership between the individual and the corporation, and (2) that the individual used the corporation to evade a personal obligation, to perpetrate fraud or a crime, to commit an injustice, or to gain an unfair advantage.
When deciding whether to pierce the corporate veil, courts consider a variety of factors, including the intermingling of assets of the corporation and of the shareholder; the absence or inaccuracy of company records; and significant undercapitalization of the business entity. Virginia businesses must be cognizant of such corporate formalities and protocols in order to protect the personal assets of owners from potential liability.
FLSA Compliance for Company's Unpaid Interns
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As summer quickly approaches, businesses begin receiving an increasing number of offers for unpaid internships. As many businesses already know, there are many advantages to using an intern – unpaid internships may help fuel growth for your company and also provide an opportunity to mentor young professionals. However, unpaid interns can create legal troubles for the unwary business owner. Federal labor laws governing internships provide that the relationship has to benefit the intern more than the company. If it doesn’t, then the business must comply with the Fair Labor Standards Act (“FLSA”) by paying minimum wages and possibly overtime.
The U.S. Department of Labor’s Wage and Hour Division outlined a list of criteria to determine whether a trainee or intern is an “employee” under the FLSA, and thus, must comply with Federal wage laws.
The following criteria provide guidance in evaluating internship programs for for-profit organizations, but it is important to note that each program is unique and must be carefully examined:
- the training, even though it includes actual operation of the facilities of the employer, is similar to that which would be given in a vocational school;
- the training is for the benefit of the trainee;
- the trainees do not displace regular employees, but work under close observation;
- that the employer that provides the training derives no immediate advantage from the activities of the trainees and on occasion the employer’s operations may actually be impeded;
- the trainees are not necessarily entitled to a job at the completion of the training period; and
- the employer and the trainee understand that the trainees are not entitled to wages for the time spent in training.
If your company’s internship program does not satisfy all of the above criteria, your interns may be considered “employees” under the FLSA. Hiring an intern, which qualifies as an “employee” may cost your company thousands in unpaid wages and legal fines!
So, how do you ensure compliance? Establish a written internship program outlining the terms and structure of the relationship in a way that the intern is receiving the full benefit of the learning experience, and ensure that your managers and other employees properly implement it.
IRS Announces Standard Business Mileage Reimbursement Rate for 2011
Employers should take notice that the Internal Revenue Service (IRS) has announced a standard business mileage reimbursement rate of 51 cents per mile for 2011. The business mileage reimbursement rate is used by many employers for computing the appropriate employee reimbursement amount in instances where an employee uses a personal vehicle for a work-related purpose. The new mileage reimbursement rate, which takes effect on January 1, 2011, represents a slight increase from the rate set by the IRS in 2010 of 50 cents per business mile driven.
Employers with an established personnel policy should update their employee handbooks by year-end to reflect this change. Those employers who do not have an established policy for reimbursing employees for business miles traveled in personal vehicles should consider instituting a mileage reimbursement policy for 2010 and adopting a good mileage log reimbursement form for employees.
Employers should consult the IRS website for more information on the mileage reimbursement guidelines.
Even If Not Subject To Federal Law, Virginia Small Businesses May Still Be Prohibited From Discrimination Under Virginia Law
Although employers with less than 15 employees are generally not subject to federal discrimination statutes such as Title VII and the Americans with Disabilities Act, Virginia small businesses may still find themselves subject to Virginia’s discrimination laws even if they have fewer than 15 employees.
The Virginia Human Rights Act, which applies to Virginia businesses with more than 5 but less than 15 employees, makes it unlawful for a Virginia employer to discharge an employee on the “basis of race, color, religion, national origin, sex, pregnancy, childbirth or related medical conditions,” or age (if the employee is over 40). An employee may file a lawsuit against an employer for an alleged violation of the Virginia Human Rights Act in either a general district court or a circuit court, provided the employee files the action within 300 days from the date of termination. (If the employee files a complaint with a human rights agency or commission within 300 days of the termination date, then the employee may bring a court action within 90 days from the date the commission or agency has rendered a final ruling on the complaint.) Employers who are found to have violated the Virginia Human Rights Act may be liable for the employee’s attorneys’ fees and up to 12 months of back pay with interest.
Under the Virginians with Disabilities Act, it is unlawful for employers of all sizes to “discriminate in employment or promotion practices against an otherwise qualified person with a disability solely because of such disability.” To comply with the Virginians with Disabilities Act, an employer must make a “reasonable accommodation to the known physical and mental impairments of an otherwise qualified person with a disability, if necessary to assist such person in performing a particular job, unless the employer can demonstrate that the accommodation would impose an undue burden on the employer.” Under Virginia disability law, whether an accommodation would impose an undue burden on an employer depends on a variety of factors such as potential hardship on the employer, the size of the facility where the employment occurs, the nature and cost of the accommodation, and safety and health considerations. (For Virginia employers with less than 50 employees, any accommodation that would exceed $500 is presumed to impose an undue burden.) Employers who are found to have violated the Virginians with Disabilities Act may be subject to an injunction (to enjoin the violation) or ordered to pay the employee compensatory damages and attorneys’ fees.
Virginia business owners should visit the Virginia Human Rights Council’s website for more information regarding the Virginia Human Rights Act and the Virginia Department of Rehabilitative Services' website for additional information pertaining to the Virginians with Disabilities Act.
Virginia SCC Adds Annual Filing and Payment Options for Corporations to Growing List of eFile Services
As previously noted on the Virginia Business Law Update, the Virginia State Corporation Commission (SCC) is in the process of rolling out a new suite of electronic filing capabilities on its SCC eFile website. The latest enhancement is a welcome addition to all Virginia corporations -- the ability to file corporate annual reports and pay corporate annual registration fees online.
Over the coming months, the SCC plans to further expand the services available on its SCC eFile website. Specifically, Virginia corporations and limited liability companies will be able to submit organizational documents electronically and pay associated fees on the SCC eFile website. Additionally, Virginia businesses will be able to file Uniform Commercial Code (UCC) documents and pay UCC filing fees online.
Virginia Court Finds Non-Compete Agreement Unenforceable
A recent decision from a Virginia Circuit Court serves as a worthwhile reminder to Virginia employers that not all non-compete agreements are enforceable. Although there was a non-compete agreement in place between a wholesale business and a former employee (who served as an account representative), the court in Specialty Marketing, Inc. v. Lawrence dismissed the breach of contract action because the agreement was geographically and functionally overbroad.
As we recently detailed in our series on business litigation claims, restrictive covenants (e.g., non-compete agreements) are disfavored in Virginia as they are restraints on trade. As such, it is the employer’s burden to prove that the restrictions are: 1) no greater than necessary to protect the employer’s legitimate business interest; and 2) not unduly harsh or oppressive in curtailing an employee’s ability to earn a livelihood. To determine whether an employer has met its burden, a Virginia court will look at the function, geographic scope, and duration of the non-compete agreement.
In Specialty Marketing, Inc. v. Lawrence, the non-compete agreement at issue provided that the employee could not “be employed by . . . any business competitive with Specialty in areas where Specialty has a market for its business.” The court concluded that this language was overbroad and unenforceable because it was unlimited in functional scope and far exceeded whatever limitation was necessary to protect the employer’s business interests. Additionally, the non-compete agreement was geographically overbroad as it was not limited to the area formerly serviced by the employee; nor was the agreement limited to a specific mile radius from the employee’s former territory.
As this case illustrates, simply having an agreement in place may not properly protect a Virginia business from competition by a former employee. To be upheld under Virginia law, the non-compete agreement must be narrowly tailored in terms of function, geographic scope, and time.
How To Avoid A Lawsuit
Fellow Virginia attorney Tim Hughes has provided six simple (but excellent) tips that businesses can follow to reduce the likelihood of getting sued. Among Tim’s pointers are to be likeable, honest, and to document everything. Tim’s post was in response to an article by mediator Victoria Pynchon, who provides an insightful perspective on how mismanaging risk can increase the odds of a lawsuit.
I couldn’t agree more with Tim and Victoria. Although lawsuits are often the price of doing business (if you are in business long enough, chances are you will eventually get sued), you can take proactive steps that will not only reduce the probability of getting sued but will substantially reduce your potential liability in the unfortunate event that you are sued.
Does your Company Have an Inclement Weather Policy?
With forecasts for the Northern Virginia region calling for nearly two feet of snow, many Virginia business owners will have to decide whether to take a “snow day.” For small businesses in particular, this decision is confounded by operational and logistical factors, including the absence of a means to timely communicate with employees (to advise them of a closing) and the potential disruption to critical business processes. Instead of playing the “should I close” decision by ear, businesses should take the proactive step of adopting an inclement weather policy.
Corey Riley, the facility administrator of DaVita Dialysis in Arlington, recommends that small businesses identify in advance which employees are critical to sustain business operations. “Given the nature of our business and that, for our customers, our services are literally a matter of life or death, we cannot afford to make decisions at the last minute. It is important that each of our employees knows precisely what to do well in advance of a winter storm,” said Riley. “On occasions like this weekend, we will rent an SUV and then have a team member pick up the employees who are essential to the operation of the center.”
“The safety of each employee should be a primary consideration in a company’s inclement weather policy,” said Talulla Newsome, a recent retiree and the former head of Colgate Palmolive’s Global Technology Center in Piscataway, New Jersey. “The policy should be flexible enough to allow employees to make a decision that is best for their own personal circumstance. Most importantly, regardless of the policy, there must be open communication between each employee and the employee’s direct supervisor.”
So what should your inclement weather policy consist of? In reality, there isn’t a “one size fits all” answer to this question. However, every inclement weather policy should:
- State that it is the company’s policy to remain open during inclement weather and that employees should make every reasonable effort to get to work (or telecommute if the company has a telecommuting policy in place).
- Detail how and when the company will communicate closings or delayed openings to employees.
- Address potential issues relating to hourly employees, such as whether they will be paid (or disciplined) for not reporting to work when the business is open.
For business continuity and employee safety, every business should have an inclement weather policy in place. Once a policy is in place, make sure that it is kept up-to-date and that it is regularly communicated to employees.
Virginia Court Rules That It Can't Dissolve An Unregistered Foreign Limited Partnership
In a case of first impression, a Norfolk, Virginia Circuit Court held that it could not order the dissolution of a limited partnership formed in another state.
In the matter of Valone v. Valone, the issue before the Court was whether a Virginia court could dissolve a limited partnership (“LP”) that was formed under Georgia law, but listed Norfolk, Virginia as the LP’s primary place of business on annual filings. Based on the evidence before the Court, there was no indication that the LP’s partners or assets were connected with Georgia.
Without the benefit of any legal precedent in Virginia, the Court relied on Virginia’s Revised Uniform Limited Partnership Act (RULPA) to support its ruling. Noting that the RULPA provides that the “circuit court of the locality in which the registered office is located may decree dissolution of a limited partnership,” the Court opined that the General Assembly did not intend for a Virginia court to dissolve an LP that did not have a registered office in Virginia.
I wholeheartedly agree with the Court’s decision. Under Virginia law, it takes more than simply listing a Virginia address on an annual filing to claim a Virginia City or County as a principal place of business. To transact business in Virginia, a foreign LP (i.e., an LP that is not formed in Virginia), must: 1) file an Application for a Certificate of Registration to Transact Business in Virginia with the State Corporation Commission; 2) pay the requisite filing fee; and, 3) pay an annual registration fee.
This case highlights an important consideration for all foreign businesses in Virginia (regardless of whether the business is a corporation, a limited liability company, or an LP) -- if a foreign business wants to avail itself of the protections and rights afforded to a Virginia business, then it must be properly registered to transact business in Virginia.
U.S. Supreme Court Hears Arguments on Whether Debt Collector's Legal Error is a Defense against Culpability
The U.S. Supreme Court heard arguments yesterday on an important matter that will have a tremendous effect on the debt collection process. In Jerman v. Carlisle, the Court considered whether a debt collector’s legal error qualifies for the bona fide error defense under the Fair Debt Collection Practices Act (FDCPA). Under the FDCPA, debt collectors must, as part of their initial contact, provide consumers with certain prescribed notices.
In this case, the creditor issued a notice which it believed was in compliance with the Act. Unfortunately for the creditor, its collection notice requiring the person to contest the debt “in writing” violated the law. Under the FDCPA, both the Federal Trade Commission and consumers subjected to collection abuses may bring civil suits against debt collectors for violations of the Act, and subject creditors to damages. The law proscribes some exemptions for debt collectors - debt collectors can avoid liability if the act was done in conformity with any advisory opinion of the Federal Trade Commission or if the violation was not intentional and resulted in a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid such error. The question in this case is whether this creditor’s misunderstanding of the law (i.e., requiring a writing to dispute the debt) fell within the bona fide error defense.
The homeowner successfully obtained the dismissal of the foreclosure lawsuit against her because her debt had already been fully paid. Thereafter, she pursued an action challenging the debt collection practices of the creditor under the FDCPA. She lost her case in both the trial court and appellate court based upon the creditor’s bona fide error defense, and appealed to the U.S. Supreme Court.
Ruling in favor of the homeowner here would result in monetary losses for some such good-faith debt collectors who accidentally violate the Act. But, as Justice Ginsburg noted during oral argument in this matter, there is no "Federal statute that makes mistake of law a defense." As we all know, rarely is ignorance of the law a defense to civil liability or criminal penalties.
If the U.S. Supreme Court rules against the creditor in this case, debt collectors who are unsure about the interpretation of the law will be forced to request and receive an advisory opinion from the Federal Trade Commission prior to any collection notice to receive protection from liability. There have only been seven instances of such requests and only four answered in the past decade. I have similar questions on this issue as Chief Justice Roberts posited during oral argument – why is the number of advisory opinions so small? Does receiving an advisory opinion take an unreasonable amount of time? Is this practical for debt collectors?
Perfunctory Due Diligence Foils Buyer's Fraud Claim over Company Purchase
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In reading the Virginia Lawyers Weekly Important Decisions of 2009, a Norfolk District Court case stood out as a reminder of the importance of a thorough due diligence examination by buyers in acquisitions of small and medium sized businesses and allocating risks in the purchase agreement. The buyer in the Norfolk case was an accountant and performed his own due diligence before his purchase of a Chesapeake accounting firm. It is apparent from the reading of the decision, however, that the buyer did not discover all material information necessary to fully understand the target company before signing on the dotted line. Such due diligence failure and the absence of risk-shifting provisions in the purchase agreement cost him a substantial sum in the end.
The accountant in White v. Nicholas L. Potocska P.C. claimed that the Seller made misrepresentations during the negotiation of the deal which resulted in the loss of one of the firm’s largest clients after closing. Unfortunately for the buyer, his fraud claims against the Seller did not even survive to reach a jury. The Judge summarily dismissed the Buyer’s claims against the Seller based upon the accountant’s curtailment of his due diligence investigation prior to the discovery of material facts. The Court opined that the failure of the buyer to uncover certain items did not suggest fraud by the seller.
This case highlights the risks inherent in the due diligence process. In Virginia, the buyer is responsible for “every piece of paper” available to him in due diligence – even the needle in the haystack. It is interesting to note that the accountant in this case was described as “one of the most diligent prospective buyers” by a business broker who worked with him. Perhaps the issues in this case had less to do with the accountant's "thoroughness" and more to do with the proper allocation of risks in the acquisition transaction documents. As we often see, sometimes it isn’t practical or cost efficient to discover all potential issues in a limited amount of time.
So, how can a buyer reduce risk in an acquisition absent a lengthy, exhaustive due diligence investigation? The purchase agreement can be crafted to shift certain due diligence risks to the seller, and make clear that all parties are relying on the seller’s statements. Moreover, if client retention is a part of the purchase price to be paid to the seller, the parties can incorporate an earn-out into the purchase price formula based upon company’s revenue after the closing.
LLC Formation in Virginia: Six Steps To Forming a Limited Liability Company
With the beginning of a new year upon us, now is an excellent time to form a limited liability company (LLC). Although the LLC formation process may appear daunting, it is not. You can form a Virginia LLC by following these six steps:
1. Choose an LLC Name
The first step in forming an LLC is to choose a business name. Under Virginia law, your business name must contain the words "limited company" or "limited liability company" or an acceptable abbreviation ("L.C.," "LC," "L.L.C.," or "LLC"). After you select a business name, you must make sure that it is “distinguishable” from other names on file with the Virginia State Corporation Commission (SCC).
2. Prepare and File Articles of Organization
The next step is to prepare Articles of Organization, which sets forth: the name of your LLC, the name and address of an agent for service of process (the “registered agent” and the “registered office”), and the primary address for your business. Once completed, you must file the Articles of Organization with the SCC along with a $100 filing fee. It typically takes 2-3 weeks for the SCC to approve your Articles of Organization and to issue a Certificate of Organization.
3. Adopt an Operating Agreement
Although Virginia law does not require an LLC to adopt an operating agreement, I highly recommend that you do so for your business. An operating agreement is the functional equivalent of a corporation’s by-laws: it sets forth how your LLC will be governed and operated (e.g., management decisions, allocation of profits and losses, voting rights and procedures, “buy-sell” provisions, etc.). (Because of the importance and potential complexity of an operating agreement, you should retain an attorney to assist you.)
4. Obtain Required Licenses
Depending on the type of business you are forming, you may be required to obtain federal, state, or local licenses. The best way to determine what licenses or permits you may need for your LLC is to contact the clerk’s office in the city or county in which you plan to operate your business.
5. Get an Employer Identification Number
If you are forming an LLC with more than one person or if you intend to have employees upon formation, you need to apply to the IRS for an Employer Identification Number (also referred to as a Federal Tax Identification Number). Although you can apply for an Employer Identification Number online, I recommend that you first speak with a tax professional to understand any potential tax repercussions.
6. Open a Bank Account
The last step is to open a bank account. As the primary purpose of an LLC is to limit your personal liability for the financial obligations of your business, it is important to keep your business and personal finances separate.
By following these six steps, you will have your LLC up and running in just a couple of weeks. As you will want to do it right the first time, you should contact an attorney if you have any questions and avoid online incorporation services.
Contract Forum Selection Clauses Are Critical When Doing Business with Out-of-State Companies
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In the event of a contract dispute, litigating the matter in Virginia has its advantages to Virginia businesses – Virginia litigation limits travel expenses to out-of-state jurisdictions, provides familiarity with judges and opposing counsel, and assists in the prevention of inconsistent application of laws to your business contract. However, the only way to ensure that you have the “home team” advantage is to incorporate a forum selection clause in your business contract.
A forum selection clause provides the particular location where any and all lawsuits relating to the contract will be litigated, and is critical when doing business with out-of-state vendors, customers and other business partners. If your business contract is silent with respect to where such disputes will be resolved, you may find yourself litigating in far away places.
Two recent cases involving eBay highlight the importance of a forum selection clause - Tricome v. eBay, Inc. and Universal Grading Service v. eBay Inc. In both cases, eBay business users attempted to sue eBay in their home jurisdiction on the East Coast. In response to the litigation, eBay moved to transfer the cases to Santa Clara County, California, based on the forum selection clause contained in the User Agreement between eBay and the plaintiffs. The Judge found that eBay could name the forum in its contracts with users and that the users assented to this jurisdiction when they clicked on the box acknowledging the terms and conditions of the User Agreement; thus, eBay prevailed and successfully forced these plaintiffs to litigate on its home turf.
If you are a Virginia business, you should make sure that all of your business contracts contain a forum selection clause that designates a Virginia court (preferably in the city or county where your office is located) as the forum for litigation.
Teaming with a Large Company to Pursue Government Contracts? Watch Your Small Business' Intellectual Property!
In the current recessionary economic climate, there is one customer that is arguably still spending a lot of money to receive goods and services – the U.S. federal government. For many small businesses trying to team with government agencies, the best approach may be to team with a larger company that can supplement your small business' skill sets, and provide leverage and credentials you may not yet have acquired. In pursuit of these contracts, it is vital to pay attention to your small business’ intellectual property (patents, trademarks, copyrights, trade secrets).
By encouraging teaming of large government contract firms with small businesses, government agencies can benefit. Government agencies fulfill their goal in carrying out the principal tenet of the original Small Business Act (1953) – to encourage and develop small business growth. By consolidating their buy requirements with a single contractor, government agency buyers of goods and services can reduce their administrative burden, program management costs and risks, all while expanding opportunities for small business that result in overall increased competition and the fostering of innovation.
So, what’s in it for the large firms? Well, both small and large companies benefit from teaming. While a small company can tap its larger counterpart’s knowledge, experience and purchasing power, the larger firm gains access to small business set-aside opportunities. For example, by partnering with Service-Disabled Veteran Owned Small Businesses (SDVOSB), large firms can access one of the hundreds of monthly set-aside contracting opportunities for which they would otherwise be ineligible to compete. Also, partnering with a small business can enhance a large business’ relationship with various federal contracting agencies as many struggle to meet their set-aside goals. The mutually beneficial relationship of the teaming arrangement results in a highly-efficient and diversified team capable of winning new business and providing excellent customer service to the government.
Regardless of the mechanics of a large government contractor-small business teaming arrangement, smaller firms – simply because they are small and are eager for new business – have to be vigilant about their intellectual property rights. For example, unbeknownst to many small, high-tech firms is that Section 52.227-11(k)(3) of the Federal Acquisition Rules makes it illegal for a large firm to require a small business it is partnering with on a government contract to give up any IP rights as a precondition to working on the contract. Thus, there is a statutory framework that levels the playing field in negotiations with large firms. This statutory level playing field, however, only applies to patent rights. For a small firm’s innovations protected by trade secret, copyright or trademark, extra vigilance is required when negotiating such agreements to preserve these forms of IP rights.
Fourth Circuit: A Court Cannot Overturn an Arbitrator's Construction of Business Contract
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Based on a recent decision by the Fourth Circuit Court of Appeals, business owners may want to think twice before including an arbitration clause in a contract. In the case of PPG Industries, Inc. v. Int’l Chemical Workers Union Council, the Fourth Circuit considered whether a reviewing court must defer to an arbitrator’s construction of a contract even when the court believes that the arbitrator construed the contract incorrectly. In a decision that may be of some surprise to business owners, the Fourth Circuit held that even if a court is convinced that the arbitrator committed serious error, a court cannot overturn the arbitrator’s decision.
In its reversal of the district court, the Fourth Circuit held that, except in “very limited” instances, a court has no right to determine the correctness of an arbitrator’s award when the parties to a contract have agreed that disputes should be submitted to arbitration. Once the arbitrator has ruled, then the court’s only function, with respect to that decision, is to determine “whether the arbitrator did his job – not whether he did it well, correctly, or reasonably, but simply whether he did it.” Unless the arbitrator ignores “the plain language of the contract,” a court cannot overturn a clearly erroneous award.
Although the PPG Industries, Inc. decision isn’t new law, business owners should pay it special attention. Over the past couple of years, I have had many clients request an arbitration clause in a business contract because they believe that it is a quicker and cheaper alternative to court litigation. While arbitration does have some advantages over litigation, those advantages come at a heavy price: the substantial risk of having no recourse for a bad or incorrect arbitration award.
In Virginia, where courts are renowned for their “rocket dockets”, business owners may want to think twice before inserting an arbitration clause into a contract. Without the advantage of a quicker resolution, it may be best to forego an arbitration clause in favor of permitting court litigation. Although courts and juries aren’t always perfect, at least you will have the option to appeal an erroneous decision.
IRS Announces Standard Business Mileage Reimbursement Rate for 2010
Employers should take notice that the Internal Revenue Service (IRS) has announced a standard business mileage reimbursement rate of 50 cents per mile for 2010. The business mileage reimbursement rate is used by many employers for computing the appropriate employee reimbursement amount in instances where an employee uses a personal vehicle for a work-related purpose. The new mileage reimbursement rate, which takes effect on January 1, 2010, represents a significant decrease from the rate set by the IRS in 2009 of 55 cents per mile.
Employers with an established personnel policy should update their employee handbooks by year-end to reflect this change. Those employers who do not have an established policy for reimbursing employees for business miles traveled in personal vehicles should consider instituting a mileage reimbursement policy for 2010 and adopting a good mileage log reimbursement form for employees.
Employers should consult the IRS website for more information on the mileage reimbursement guidelines.
Business Law News Bites
Here is a quick summary of some interesting blogs I have read this week on a variety of business law topics that may be of interest to Virginia businesses:
Brian Hill, of the Employer Lawyer Report, analyzes how Facebook’s new privacy controls will impact the employer-employee relationship. According to Hill, these new privacy control measures could make it more difficult for employers who use Facebook to monitor their employees.
Robin Roberts, of the Startup Lawyer Blog, provides some guidance on how equity should be divided amongst co-founders of a startup company. The primary method described by Roberts is to base the equity split on an assessment of the past, current, and future contributions of each co-founder. Regardless of the method used, Roberts advises that co-founders make the equity-split determination quickly and that they consider vesting founders’ stock over a period of time.
Joshua Heslinga, of the Virginia IP Law Blog, writes that it makes good business sense to enforce your patents before they are reexamined by the United States Patent and Trademark Office (USPTO). As Heslinga notes, the timing of a reexamination decision (where a patent is reexamined by a patent examiner to verify a patent’s validity) can be a crucial determining factor in the outcome of a patent litigation case. If a reexamined patent is determined to be invalid, then that will almost certainly result in the dismissal of a pending patent infringement litigation action.
Joel Greenwald, of the Overtime Advisor Blog, details potential issues an employer may face for having employees work through lunch. According to Greenwald, employers that require "non-exempt" staff (e.g., receptionists, data entry clerks, administrative assistants, secretaries, billing clerks, customer service representatives, etc.) to work during their unpaid break time could face substantial liability under the Fair Labor Standards Act (FLSA). Under the FLSA, non-exempt employees must: (1) be paid for every hour they work; and (2) have all hours worked count towards their potential overtime pay. The website for the Virginia Department of Labor and Industry has a good FAQ section on wage payment issues in Virginia.
Michael Stocker, of the Eyes On Wall Street Blog, discusses a proposed bill by Senator Christopher J. Dodd (D-Conn.), Chairman of the Senate Banking Committee, that would overhaul the U.S. financial system. Senator Dodd’s financial reform plan bill would, among other things, consolidate bank regulators, create a consumer financial protection agency, and impose new restraints on exotic financial instruments and credit rating agencies.
Should You Use LegalZoom to Incorporate a Startup Business?
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One question that I am frequently asked by prospective clients is whether it is best to use an online incorporation service like LegalZoom or to retain an attorney to incorporate a startup business. My answer is always the same: if you are looking to form a startup business -- such as a limited liability company (LLC), an S-corporation (S-corp), or any type of business entity -- your best bet is to retain an attorney instead of relying on LegalZoom or other similar online legal document preparation services.
Although LegalZoom is a viable alternative for the preparation of some legal documents, it is not the best option for entrepreneurs looking to start a new business. First, LegalZoom cannot provide legal advice. It can only provide “self-help services at your specific direction.” Most entrepreneurs looking to start a new business need individualized advice from an attorney. They not only need to understand the incorporation process, they also need assistance with a host of other legal issues that accompany starting a new business including the hiring of employees, reviewing and negotiating leases, and drafting business contracts.
Additionally, LegalZoom uses a standard online questionnaire to determine what should go into the incorporation documents that it prepares for you. However, given that incorporation documents (e.g., Bylaws, Operating Agreements, etc.) are the foundation for the operation of your business, an attorney is often needed to ask important questions regarding various business contingencies and intricacies. For instance, although I may start the process of forming an LLC with a basic set of questions to the client, I always have hundreds of “what if” questions based on the initial answers provided by the client. The client’s answers to my litany of additional questions are essential to my determination of what to include in the incorporation documents or whether other legal documents are necessary to effectuate the client’s goals.
The process of starting a new business is much like the process of building a new house: you want it done right the first time around! Although it may be tempting to cut a few corners and save some money with a legal document preparation service, it is worth your while to retain an attorney to ensure that you are building a solid foundation for your new business. For startups in Virginia, a great resource for obtaining basic information on the incorporation process can be found at the website for the State Corporation Commission.
Efficiently Managing Due Diligence in Acquisition Transactions
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Are you or your company considering the acquisition of another business? If so, you will want to discover and analyze all material information necessary to fully understand the target company before signing on the dotted line.
Due diligence is one of the most risk-fraught elements of the transaction; however, it rarely receives the attention it deserves in acquisitions involving small privately held companies most often because of budgetary constraints. You don’t need to skimp on this phase, though – the proper implementation and execution of a well conceived due diligence review can control costs and expenses, reduce risk, and maximize the value of your investment.
A due diligence review reveals more than just potential “deal killers” in the target, it provides information that will be useful for valuing the stock or assets of the target and defining representations and warranties in the final sales agreement. Otherwise, how will you confirm that the business is what it appears to be and is worth the asking price?
The key to effectively and efficiently managing the due diligence phase of an acquisition is to include the following organizational elements into the review process:
- Prepare a Player’s List: Prepare a spreadsheet of contact information for each responsible person involved at the target company as well as your own team (i.e., address, telephone numbers, facsimile numbers and email addresses).
- Organize a Due Diligence Checklist: Prepare and organize a comprehensive Due Diligence Checklist with items grouped together in categories and columns for the names of the responsible team members, notes and status of each items.
- Assemble a Due Diligence Team: Assign a key staff member(s) to gather certain categories of documents. For example, make your accountant responsible for gathering and reviewing relevant financial documents and tax returns of the target company; chief operations manager responsible for gathering customer contracts; human resource manager responsible for gathering employee contracts and benefit information; etc.
- Structure the Due Diligence Process: Develop key phases for specific tasks, such as, the gathering documents, including on-site and off-site review; conducting research on target’s organization, liens, and litigation; researching the target’s industry, competition, long-term prospects; meeting with key management of the target company; document review; etc.
- Develop Milestones: Set reasonable deadlines for the review process with check points along the way to ensure complete and proper implementation of the due diligence process.
Due diligence should be approached as a business process in order to maximize the monetary benefits of the deal. Achieving success and efficiency in this phase of the transaction can be as simple as organization plus disciplined implementation.
H1N1 Vaccine for Business Continuity
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As concerns about the H1N1 influenza virus (the “swine flu”) escalate across the U.S., business owners face the daunting task of creating and maintaining a healthy workplace for employees. With estimates of 22 million H1N1 cases in the United States between April and October 2009, the H1N1 flu is of pandemic proportions. As the holiday season fast approaches, businesses should immediately implement an H1N1 preparedness plan to maintain business continuity.
The adoption of an H1N1 preparedness plan is especially important for small businesses. As noted by Karen Mills, the Administrator for the U.S. Small Business Administration, “For countless small businesses, having even one or two employees out for a few days has the potential to negatively impact operations and their bottom line. A thoughtful plan will help keep employees and their families healthy, as well as protect small businesses and local economies."
Although developing an H1N1 preparedness plan may seem a touch overwhelming, the process is not as involved as it may seem:
- Identify work-related exposures and protect employees from health risks
- Include business continuity measures for essential business functions, jobs, and roles
- Update human resource policies to reflect public health recommendations and workplace law
- Implement a telecommuting policy
- Allow employees to stay home if they are sick or if they have to care for a sick family member
- Establish procedures and triggers for activating and terminating the company’s response plan altering business operations, and transferring business knowledge to key employees
- Include a process to communicate information to employees
Given the uncertainties of the H1N1 influenza, you must take the time to put a preparedness plan in place. At a bare minimum, you should organize a meeting of your company's key decision-makers and discuss the basic components of an H1N1 plan. The Centers for Disease Control and Prevention has an excellent H1N1 guide for businesses and employers. So, give your business a vaccine against H1N1 with a preparedness plan, and protect your business from the H1N1 pandemic.
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