Your Managers May Not Be Exempt Under the DOL’s Proposed Overtime Rules

Posted on March 25, 2016 by mboxerman

overtime-clipart-4277100715_cf6ca17eebBusiness owners and franchisees, you might need to start paying your managers overtime.  The Department of Labor (DOL) is updating the overtime rules for the so-called “white collar” exemption that excludes certain executive, administrative, and professional employees from the FLSA requirements for overtime payments.  This exemption is widely used by franchisees, retail stores and quick service restaurants whose managers work far more than 40 hours per week.

Under the current rules, the salary threshold for the white collar overtime exemption is $455 per week or $23,660 per year.  Under the proposed rules, that threshold would rise to $970 per week or $50,440 in 2016, more than doubling the amount an employee has to make before qualifying for the exemption.

If the proposed changes go through, businesses and franchises with managers who make less than $455 per week will have to either have to raise salaries to meet the new threshold requirement or reclassify managers as non-exempt, which means they’ll have to clock in and out like regular employees.  The DOL also plans to update the threshold requirement on an annual basis to account for inflation.  So, you’ll have to revisit the issue yearly unless all of your exempt employees are well over the salary threshold.

In addition to updating the salary requirement, the DOL may alter the “duties test.”  The white collar exemption generally requires than an employee’s duties relate to management or require advanced knowledge.  Currently, the “duties test” does not include a limit on the amount of time an employee may spend on nonexempt duties before losing his exempt status.  The DOL has not proposed any changes yet but plans to consider requests for changes during the comment period for the rules.

The DOL is also accepting input on whether to include a portion of nondiscretionary bonuses and incentive payments that are made at least monthly when calculating an employee’s weekly salary.  Year-end bonuses will not be included.

The new overtime rules are not finalized yet, but they may come into effect sooner than you think.  The DOL recently sent the proposed rules to the Office of Management and Budget (OMB), which has 30-90 days to review the rules.  Then, the rules will be published, and employers will have 60-90 days to comply with the new requirements.  This means business and franchise owners have three to six months to prepare for the coming changes.  So, you should start planning sooner rather than later.

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Avoid Disputes with Business Partners by Planning Ahead

Posted on March 15, 2016 by mboxerman

partnership disputes, dispute resolution, business relationshipsWhen partners embark on a new business venture there’s so much excitement about the future that most ignore the unfortunate fact that disputes are virtually inevitable.

Planning for these disputes is the best way to avoid them. We offer the following recommendations to help you avoid partner disputes:

Put Your Agreement in Writing. Whatever entity you choose, a detailed, written agreement—the business version of a prenuptial agreement—is a must. A shareholder agreement (for a corporation), operating agreement (for an LLC) or partnership agreement (for a partnership) details how the business will be managed. Although not all disputes are preventable, written agreements help minimize them by answering many questions that otherwise lead to disagreements. Your agreement should address:

  • Each owner’s equity.
  • Each owner’s role, duties and obligations with respect to the business.
  • Whether one or more owners will be primarily responsible for the day-to-day business operations and decision-making.
  • Expectations for additional capital contributions or loans to the business.
  • Whether any owners are entitled to a salary.
  • How and when profits will be distributed.
  • How to break deadlocks.
  • Whether there are any restrictions on competition with the business.
  • How to handle transfers of ownership interests in the company.
  • What happens in the event of death, incapacity or withdrawal of an owner.
  • What happens upon dissolution of the company.
  • How and where disputes will be resolved.
  • Shareholder agreements, operating agreements and partnership agreements are not one-size-fits-all, so it’s best to have your agreement carefully tailored by an experienced attorney.

Set Clear Expectations for Financial Contributions. Establish clear expectations about how much each owner is expected to contribute and whether contributions—be they cash contributions, equipment to be used in the business or sweat equity—are to be treated as capital contributions or loans. However the contributions are characterized, put it in writing. Document any loans. Also, create rules for future contributions and discuss penalties for a partner’s failure to contribute. These details should be set forth in your agreement.

Define Owners’ Duties. Whether your partners are active or passive, it’s a good idea to have written descriptions for each partner’s duties, as well as the amount of time they are expected to devote to the business to prevent disputes about who’s doing their fair share.

Disclose all Partners in a Franchised Business. If your business is a franchise, be sure to identify all partners on the franchise documents to avoid a default under your franchise agreement and to protect all partners’ rights.

Decide on Compensation and Profit Treatment. Spell out in advance how much money will be paid as salaries or guaranteed payments, how much will be reinvested into the company for expansion or improvements, and how much will be distributed at the end of the year. In addition, agree upfront as to whether distributions will be made to pay owners’ tax bill for company earnings.

Make Company Financial Information Available. Even if the owners don’t have equal control over the company checkbook, it’s important for all of them to have access to company financial information. Many business relationships go sour because of mistrust, but doubts about fairness can be dispelled by giving each owner full access to the company’s financials. Also, be sure to agree in advance on a trusted CPA or accountant to handle bookkeeping and tax matters.

Address Disagreements Directly. If a dispute arises, sit down with your partners to address it. Focus on finding solutions instead of placing blame, and remember that it’s not about winning the argument; it’s about making the best possible choices for your business.

Discuss Worst-Case Scenarios in Advance. Don’t be shy about discussing how things might go wrong. Discussing issues such as what to do if an owner wants to leave the business or isn’t pulling his weight, or how to handle an owner’s death or disability may be uncomfortable at the outset, but talking in advance of a dispute is preferable to fighting it out in court.

Choose the Right Partners. Lastly, remember that friends and family members don’t always make good business partners. It’s important to choose partners whom you trust, who agree with your general vision for the company, who have complementary skill sets and whose strengths make up for your weaknesses.

For more information about building a successful business relationship and how best to avoid disputes, contact us at (312) 216-2720 or info@marcusboxerman.com.

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

Posted on February 26, 2016 by mboxerman

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

Posted on February 16, 2016 by mboxerman

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 Company.  Know 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?

Posted on January 29, 2016 by mboxerman

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

Posted on January 26, 2016 by mboxerman

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

Posted on January 5, 2016 by mboxerman

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

Posted on December 4, 2015 by mboxerman

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

Posted on November 23, 2015 by mboxerman

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

Posted on November 9, 2015 by mboxerman

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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