Limiting Employee Hours to Avoid the Affordable Care Act May Violate ERISA

affordable care act, employment lawUnder the Affordable Care Act (ACA), employers with 50 full-time equivalent employees (those working 30+ hours per week) must offer at least minimal healthcare to employees and their dependents.  Employers, including many franchised businesses, may attempt to avoid this requirement by reducing employee hours and relying more on part-time employees.  While that decision may make economic sense in the short-term, it could lead to an ERISA class action suit.

ERISA prohibits employers from discriminating against employees for exercising their rights under a benefit plan or for the purpose of preventing employees from acquiring those rights.  In a recent New York case, a district court judge refused to dismiss an ERISA class action suit brought by employees whose hours were seemingly cut to avoid healthcare liability under the ACA.

The law in this area is new and is still developing, but franchisees should be careful when making staffing and scheduling changes because courts might look unfavorably on employer staffing decisions made primarily to avoid the ACA.  No matter what changes you’re planning, consider having any discussions regarding staffing decisions with your attorney to make sure you’re protected.

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A Warning to Business Owners: Your Limited Liability Is Not Limitless

limited liability, personal liabilityLimited liability shields shareholders of corporations and members of limited liability companies from personal liability for company debts.  The companies and their owners are treated as distinct legal entities, each responsible for only their own debts.

Limited liability, however, is not limitless. There are exceptions.

In some circumstances, courts will “pierce the veil” of your entity, destroying the shield of limited liability.  Observing certain formalities demonstrates to creditors and courts the distinction between your company and its owners—showing that your company is a legitimate business separate and apart from you.  To protect yourself before creditors seek to hold you personally liable for company debts, follow our suggestions below.

Adequately Capitalize—or Fund—Your Company.  Companies have bills to pay.  When yours has enough money to meet its regular obligations, courts are more likely to see it as a separate entity and less likely to see your company as just a shell created to protect you from liability.  Courts measure adequate capitalization at the time you form your company, and companies may become undercapitalized later for many legitimate reasons.  It’s smart to keep sufficient funds to pay company bills because business owners may be found personally liable if they withdraw amounts from the business that render it insolvent.

Maintain Separate Bank Accounts.  Always keep your and your spouse’s personal assets separate from the company’s by maintaining separate bank accounts.  Handle all official business through the company account and never commingle company and personal monies.  Remember, moreover, that while distributing dividends and paying salaries from the company’s account is perfectly fine, never directly withdraw from the company’s account for personal purposes and do not charge personal expenses on a company credit card.  Lastly, any deposits of your personal funds to the company should be documented as a loan to avoid commingling.

Keep Your Personal Affairs Separate from Your CompanyKnow when you’re acting as an individual as opposed to a representative of your business, and make sure clients, customers and creditors know too.  Be sure to use your exact legal company name when conducting business with third parties.  Further, when signing a contract, loan application, or vendor or credit agreement, always write your official company title, not just your name, to make it clear that you are signing in your official capacity, not personally.  And be sure to always include the entity designation “Inc.” or “LLC.”

Keep at Arm’s Length.  Ensure that courts see a distinction between you and your business by keeping at arm’s length during all transactions.  To do this, when conducting transactions between the company and its owners, observe the same formalities and create the same documentation you would for a third-party business deal.

Keep Your Companies Separate from Each Other.  When you own multiple companies, to prevent one company from becoming liable for the debts of another company you must keep each company’s affairs separate from your other companies.  Treat each company as a separate and distinct entity and conduct all transactions between your businesses at arm’s length.  Never commingle company funds, do not pay one company’s bills from another company’s account (unless it’s documented as a loan), keep separate records and be clear about which company you represent in any dealings with clients, customers and creditors.

Observe Corporate Formalities.  Make sure your company looks like a real business.  Corporations should issue stock, adopt company bylaws, elect officers and board members, hold annual meetings, keep annual minutes and maintain company books and records.  These formalities may seem trivial when you’re running a small operation, but observing them makes a big difference in the eyes of a court.  While LLCs are not required to follow many formalities by law, it is important to observe at least a few to maintain limited liability status.  Every LLC needs a clear operating agreement along with well-maintained company books and records.  LLCs should also hold formal meetings and keep minutes when making important business decisions such as changes in ownership.

Find out how to maintain the appropriate degree of separation between your personal interests and those of your business by contacting us at (312) 216-2720 or info@marcusboxerman.com.

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Choice of Entity: LLC or S Corporation?

business structures, entity choice, llc, s corporationChoosing the right business structure makes a big difference for your business.  Most of today’s small business and franchise owners opt for one of two structures, the limited liability company (LLC) or the S corporation (S corp.).  While these business structures offer many of the same benefits, there are distinct advantages and disadvantages to each.

Common Benefits.  Two key benefits offered by LLCs and S corps. are limited liability and “pass-through” taxation.  Limited liability means that owners generally are not personally liable for the debts and liabilities of the business.  “Pass-through” taxation allows these business entities to avoid double taxation—neither LLCs nor S corps. pay corporate-level taxes.  Instead, all profits and losses are passed through to the business owners and applicable taxes are paid on their individual returns.

Member & Stockholder Eligibility.  LLCs are more flexible when it comes to owner eligibility.  Almost any individual or entity may be a member of an LLC.  There is no limitation on the number of members or how the ownership interests and specific benefits may be distributed.  S corps., on the other hand, are limited to a maximum of 100 individual shareholders who cannot be nonresident aliens, corporations, partnerships, LLCs, or non-qualifying trusts.  S corps. are also limited to one class of stock and must distribute dividends, benefits and detriments related to ownership in proportion to each shareholder’s ownership interest.

Observing Corporate Formalities.  LLCs are also attractive because of their relative simplicity and flexibility.  LLCs require fewer forms and documentation at the outset of formation and throughout the life of the business or franchise.  They are not required to observe corporate formalities and may be run either by the members or a group of selected managers, who need not be owners of the company.  While corporate formalities generally are not required, LLCs still must be careful to keep business operations separate from the members’ personal affairs to prevent the piercing of the company’s limited liability veil.

S corps. are far more rigid.  They are managed by a board of directors and must observe corporate formalities such as annual director and shareholder meetings, keeping meeting minutes, adopting bylaws and issuing stock.  S corps. are also limited in their investments and cannot have more than 25% passive income (such as income from real estate investments).  S corps. must meet all of the entity requirements or risk being converted to a C corporation, with highly adverse tax consequences.

While all of the extra formalities and paperwork required by S corps. may sound like a pain, they are often beneficial in the end.  The corporate formalities and careful records provide concrete proof of decision making processes and demonstrate that the board acted in the best interest of the company, proving very helpful when tax, liability or internal governance issues arise.  S corps. may also seem more legitimate to investors, who generally view the corporate structure as more stable than the LLC.

Tax Implications.  S corps. are attractive for highly profitable business ventures because they reduce employment taxes on your profits.  An LLC must pay employment tax on its entire net income, but S corps. only pay employment taxes on wages paid.  S corps. must pay employees reasonable salaries (based on the market rate) but additional profits may be distributed as dividends, which are typically taxed at a lower rate.  Plus, S corps. can write off certain employee/shareholder benefits for more savings.

On the other hand, distributions of an LLC’s appreciated property are generally tax free.  In S corps., those distributions are taxed on the shareholders’ individual tax returns based on the fair market value of the assets.  LLCs may also provide member-level tax adjustments for LLC liabilities such as real estate that is subject to debt and may allocate tax benefits related to depreciation and losses without regard to members’ proportional ownership interests. S corps. may be subject to additional state taxes.

Greater Limited Liability.  While LLCs and S corps. both enjoy limited liability, an LLC may be preferable when facing judgment creditors.  When a creditor obtains a personal judgment against a member of an LLC, the creditor cannot directly seize the assets of the LLC.  Instead, the creditor may obtain a “charging order” requiring distributions that would normally be made to the member to be made to the creditor until the judgment is satisfied.  This does not give the creditor the right to participate in management of the LLC or vote on any LLC matters.

When a creditor obtains a personal judgment against the shareholder of an S corp., the creditor may acquire title to the stock owned by the shareholder.  This does not give the creditor the right to participate in management of the corporation, but the creditor will be able to vote on company matters.  If the creditor only obtains a small number of shares, this does not make much of an impact, but it may be problematic if the creditor obtains a large enough interest to make a real impact during shareholder votes.

Duration.  LLCs have limited durations, and when a member dies or undergoes bankruptcy, the LLC must dissolve.  S corps. exist in perpetuity and have clearer lines between the business entity and its shareholders.  So, if a shareholder dies, sells his or her shares, or leaves the corporation, the S corp. can continue with business as usual.

Combining the Benefits.  Business owners and franchisees should keep in mind that LLCs can request S corp. tax status.  This allows your business or franchise to remain an LLC for legal purposes but gain the tax benefits of an S corp.  To gain S corp. status, an LLC must comply with the S corp. ownership rules but need not follow corporate formalities.  So, an LLC with S corp. tax status still has more operational and ownership flexibility than a traditional S corp.

To receive S corp. status, you must file a special election with the IRS using Form 2553.  You have to file within the first two months and fifteen days of the year.  If you file later, your election will not apply until the next year.

Which to Choose?  LLCs, S corps., and LLCs with S corp. tax status are all popular choices for new businesses.  Which choice is right for your business or franchise depends on your specific needs.  If you’re having trouble deciding between an LLC and S corp., contact us at (312) 216-2720 or info@marcusboxerman.com to consult with one of our experienced attorneys about the pros and cons of each today.

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Every Employer’s Best Friend: The Employee Handbook

employee handbook, employee discipline, employer best practicesIt’s a new year, and there’s no better time to create an employee handbook or update your existing one. A well-drafted employee handbook effectively communicates workplace expectations, policies and procedures to employees.

When management follows its written policies and procedures, they provide employers with a strong first line of defense against employee claims.  Check out our list below to find out what to include in your employee handbook.

Important Items to Insert in Your Employee Handbook Include:

  • Company Information. Start with general information about your company, its policies and its goals.
  • Non-Discrimination Policy. Include an equal opportunity employment statement and ADA compliance statement, as well as anti-discrimination and anti-harassment policies and compliant procedures.
  • Conduct Expectations & Disciplinary Procedures. Explain your general expectations for employee performance and behavior and set forth in detail the disciplinary procedures your company follows, including which employee actions constitute grounds for suspension or termination.
  • Attendance Policy. Explain your policies for attendance and tardiness, including call-off procedures and consequences for tardiness and absenteeism.
  • Leave Policies. Document your policies for time off, family medical leave, military leave, jury duty, voting, holidays, vacation, sick days and bereavement.
  • Pay & Promotions. Identify how and when employees are paid, along with policies and procedures regarding breaks, bonuses and promotions.  Also explain your legal obligations regarding wage and hour laws, employment taxes and workers’ compensation.
  • Employee Benefits. Provide general information about employee benefits, including eligibility for full-time and part-time employees.
  • Safety & Security Policies. Describe your policies for creating and maintaining a safe and secure work environment.  Include an OSHA compliance statement along with information about your policies for safety hazards, accidents and emergencies.
  • Arbitration Provision. Consider an arbitration provision, which would require an employee to initiate an arbitration proceeding to bring certain claims instead of filing a lawsuit.
  • Employee Acknowledgement. After an employee receives a copy of the handbook, the employee should sign an acknowledgement of receiving and reading the handbook.  And as they say – keep the receipt.
  • Disclaimers.  Clarify that your handbook does not constitute an employment contract nor does it in any way alter the at-will employment relationship.  Also be sure to clearly state that the handbook supplants older policy documents, and that the policies in the handbook are subject to change at any time.

To learn more about employee handbooks, create a handbook for your business or have your current handbook evaluated, contact us at (312) 216-2720 or info@marcusboxerman.com.

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Amendments to the Illinois Unemployment Insurance Act Make It Easier to Contest an Unemployment Compensation Claim

unemployment, employee termination, employee misconductNew amendments to the Illinois Unemployment Insurance Act that make it easier for employers to contest a claim for unemployment compensation went into effect on January 3, 2016.

Under the Act, an employee may be denied unemployment benefits if he or she is fired for misconduct.

The Act’s definition of misconduct, however, generally requires an employer to show that the employee’s violation of company policy was “deliberate and willful ” and that the employee’s actions harmed the employer, harmed other employees, or were repeated by the employee despite an explicit warning.   When employers are unable to meet this hefty burden of proof, employees fired for bad behavior are still able to collect unemployment.

The amendments to the Act help employers by adding eight specific actions that constitute employee misconduct notwithstanding the Act’s general definition:

  • Falsification of an employment application or related documents
  • Failure to maintain required licenses, registrations, and certifications unless the failure is not within the control of the employee
  • Repeated violations of a reasonable attendance police without a sufficient excuse
  • Damaging the employer’s property through gross negligence
  • Refusal to obey reasonable, lawful instructions unless the refusal is due to lack of ability, skills, or training or would result in an unsafe act
  • Consumption of alcohol or non-prescribed drugs, or abuse of prescription drugs, at work
  • Reporting to work under the influence of alcohol or drugs unless compelled to report outside of scheduled or on-call work hours
  • Endangering the safety of the employee or co-workers through grossly negligent conduct

It is important to note that while these eight acts do not require “deliberate and willful” behavior on the part of the employee, many of them do require the employee’s knowledge of relevant employment policies.  So, it’s important to make sure your employment and attendance policies are up-to-date, in compliance with state and federal law, and are distributed to all employees.   You should also obtain signed forms from employees stating that they read and understood your policies and carefully document all employee misconduct to ensure that you have the evidence you need in the event of an unemployment challenge.

If you have any questions regarding the amendments to the Act and how they impact your business, contact us at (312) 216-2720 or info@marcusboxerman.com.

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U.S. Attorney’s Office to Review City and Suburban Restaurants for Compliance with Americans with Disabilities Act

americans with disabilities act, ada compliance, chicago restaurant ownersThe United States Attorney’s office for the Northern District of Illinois recently announced it is reviewing restaurants in Chicago and the suburbs to ensure the facilities comply with the Americans with Disabilities Act (ADA).  Public accommodations such as restaurants must comply with ADA requirements so that they are handicap accessible.

If you are unsure whether your restaurant is fully compliant with the ADA, now is the time to check.  According to the U.S. Attorney’s office, restaurant owners found non-compliant will have the opportunity to voluntarily upgrade their facilities to meet ADA requirements and, if they do so, they will not be penalized. Owners and operators who are found to engage in a pattern of discrimination or who refuse to voluntarily upgrade may face civil lawsuits and be subject to fines and penalties.

Importantly, several Chicago attorneys are also filing private actions alleging violations of the ADA. We urge you to give this matter your immediate attention – ADA lawsuits are costly to defend or settle.  If you have questions about your restaurant’s ADA compliance, contact us at (312) 216-2720 or info@marcusboxerman.com.

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Review This Before Terminating an Employee

Terminating an employee is never pleasant, especially if you’re worried about a potential lawsuit. Be sure to review this checklist to best avoid unnecessary litigation and to help ensure you are prepared to defend against a claim for unlawful termination or unemployment compensation.

  Review Any Applicable Employment Contracts. Under Illinois law, absent an agreement to the contrary, all employees are “at will,” meaning you are free to terminate an employee for any non-discriminatory reason. The at-will status, however, may be altered by a written or oral agreement. If you have an employment agreement with an employee, make sure your termination does not violate that agreement.

  employee termination, employee misconduct, employment lawReview Your Employee Handbook. Your employee handbook may restrict your
ability to terminate. Many employee handbooks set out an employer’s discipline practices. If your handbook sets forth a progressive disciplinary policy, make sure you’ve followed the policy. Also, check to see whether your handbook provides that certain offenses are not grounds for immediate termination.

  Investigate Charges of Employee Misconduct. Don’t fire an employee before you find out what really happened. Make sure you or your manager perform a reasonable investigation. Obtain signed statements from all witnesses and listen to all sides of the story – including the employee’s – before you make a decision. To ensure fairness, make your decision to terminate calmly, not in the heat of the moment.

  Document the File. Keep careful, detailed records of all employee misconduct, disciplinary actions and performance issues and reviews. Before you terminate, make sure the employee file has enough information to support termination, or make sure you can explain any lack of documentation.

  Determine Whether the Employee Received Sufficient Warning. Before terminating, ask yourself the following questions: Is the employee familiar with company expectations and disciplinary policies? Has the employee received previous warnings based on the same or similar behavior? Should a reasonable employee know that this behavior would result in termination? If you answer “yes” to these questions, your employee should not be surprised about your decision to terminate, and your decision looks objectively reasonable. If you answer “no” to any of these questions, consider suspension instead of termination.

  Get a Release. Gain peace of mind with a severance agreement and general release. A severance agreement provides an employee with a severance package (i.e. additional payment and/or benefits) in exchange for a release of claims, protecting you from a lawsuit. Severance agreements must be entered voluntarily, and the employee should be given a chance to review the agreement with an attorney before signing.

If you’ve got any employment questions, contact us at (312) 216-2720 or info@marcusboxerman.com.

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California Franchise Law Update: The New Franchisee-Friendly Regime

franchise agreement, franchise law, franchise relationshipRecent amendments to the California Franchise Relations Act (CFRA) drastically shift the balance of power between franchisees and franchisors.  The amendments to the CFRA greatly expand franchisee protections in the event of termination, nonrenewal, and transfer.

The amendments take effect January 1, 2016.

Under the amendments, franchisors must satisfy a tougher standard to terminate a franchise agreement. Franchisors are usually required to show “good cause,” which currently requires a showing that a franchisee failed to comply with a material provision of the agreement. Starting in January, franchisors must show a failure to “substantially comply” with the franchise agreement, a more difficult standard to meet. The amended CFRA also enhances the remedy for wrongful termination, requiring franchisors to pay the fair market value of the franchise business plus damages.

The amendments also eliminate franchisors’ ability to contract for strict transfer refusal rights, instead requiring franchisors to accept any candidate for transfer or sale as long as the candidate meets the franchisors’ pre-existing standards for new franchisees.

The most surprising change is the repurchase obligation imposed after lawful terminations. Effective January 1st, if a franchisor retains control of the franchisee’s property after lawful termination, it must pay the former franchisee the original cost less depreciation of all inventory, supplies, equipment, fixtures and furnishings unless the franchisee fails to transfer clear title or the termination was agreed to. This forces franchisors either to pay a high premium for termination or permit a former franchisee to maintain control of the formerly franchised premises, thereby becoming potential competitors.

How franchisors in California will react to these changes and how transactions will absorb the increased costs is yet to be seen. Check back with us in the new year for more details.  If you have immediate concerns, contact our office at (312) 216-2720 or info@marcusboxerman.com to discuss them today.

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Withholding or Reducing Discretionary Bonuses May Lead to Discrimination Claims

In October 2015, the Second Circuit Court of Appeals ruled that an employer’s reduction of an employee’s discretionary bonus constitutes an adverse employment action and may support an employee’s discrimination claim. Davis v. New York City Dep’t of Educ., 2015 U.S. App. LEXIS 18115 (2d Cir. 2015).

employee discrimination, discretionary bonuses, adverse employment actionsIn Davis, a teacher, took an extended leave of absence after injuries suffered in a car accident. As a result of her leave of absence, Davis’ employer reduced her bonus from $3,000 to $1,000. The Second Circuit held that the reduction of Davis’ bonus constituted a materially adverse action even though Davis’ discrimination claim ultimately failed.

The Second Circuit found that the “fact that the employer has discretion whether to grant bonuses or raises does not support the conclusion that an employer may freely allocate them on the basis of racial or religious bias, or disability discrimination.” It noted that most business decisions are discretionary. Employers have discretion in deciding who to hire, fire, and promote, but the fact that those decisions are discretionary does not protect them from discrimination statutes. The Second Circuit sees no reason to analyze bonuses differently.

The Second Circuit’s Davis expressly refused to follow the law of the Seventh Circuit, which treats employers’ decisions about discretionary bonuses as “beyond the reach of discrimination statutes” because bonuses tend to be “sporadic, irregular, unpredictable, and wholly discretionary,” as opposed to raises, which are the normal, expected reward for satisfactory work. Hunt v. City of Markham, 219 F.3d 649 (7th Cir. 2000).

After this ruling, the state of the law governing reductions in discretionary bonuses and raises is unclear. Both the Second Circuit and D.C. Circuit hold that the denial or reduction of a discretionary bonus is materially adverse. On the other hand, the Seventh Circuit treats decisions about bonuses as “wholly discretionary.” To be on the safe side, employers should ensure that they have documented reasons explaining all decisions regarding bonuses to avoid legal problems while the law on this issue continues to develop.

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Negotiating Commercial Leases – Part 4 – Eliminating Financial Obstacles

During the last few weeks, Marcus & Boxerman published a series of blog posts about red flag provisions in commercial leases. This installment explains how to control the state of your finances by eliminating obstacles from your next commercial lease. Check out the information below to find out how to protect your personal assets and prevent roadblocks for future secured financing to avoid problems down the line.

landlord's liens, personal guarantees, commercial leasesPersonal Guaranty. Protect your personal assets by placing a limit on personal guarantees. Personal guarantees are required by most landlords, but the scope of those guarantees is often negotiable. You can reduce your personal exposure by limiting the guarantee to a set number of years or by decreasing the extent of the guarantee by a percentage each year.

Landlord’s Liens. Put your financial interests first. Commercial leases often include a provision granting landlords a first lien in all of the personal property located on the premises. Do not agree to such a provision, because if your landlord has a lien on all of your assets, your bank cannot, thereby causing you trouble if you attempt to finance or refinance a project.

To learn more about limiting your personal obligations and preventing obstructions to future financing, contact us at (312) 216-2720 or info@marcusboxerman.com.

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