Meredyth McKenzie

Wednesday, 25 November 2009 19:00

Surety bonds

Today’s construction market is the toughest in years. Contractors are moving from private to public works and these sectors have significant differences. These include the bidding process, listing of subcontractors, owners with different agendas, high liquidated damages and higher levels of inspection. On public works contracts subcontractors and suppliers have no lien rights, so in 1935 the Miller Act was passed to cover federal projects, and all states have similar requirements.

A surety bond is required for all public works projects, which assures that a contractor will complete a project in accordance with contract terms including paying subcontractors and suppliers. Private owners should require bonds on their projects to protect them from a contractor’s failure to perform and pay subcontractors and suppliers.

“A bond not only protects the owner but also the subcontractors and suppliers on the project,” says John M. Garrett, CPCU, president of GMGS Insurance Services. “Private owners should be very wary of any contractor who cannot provide a bond.”

Smart Business spoke with Garrett about the surety bond process and what happens if you don’t have a surety bond in place.

What items will be examined during the surety bond process?

The surety decision is based on a review of net worth, working capital, experience and reputation of the construction company and its owners relative to the amount of credit granted. The surety will perform a complete credit analysis, looking at items such as prior projects, reputation with owners and bank line (how large it is, usage and security on the line). Does the lender have accounts receivable? Sureties have priority on accounts receivable on bonded projects, which many bankers don’t realize. This can lead to a reduction or disappearance of the bank line when engaged in public works.

Sureties will also look at the contractor’s litigation history. Net worth that is driven by assets such as heavy equipment book or market value might be suspect. The value of equipment could be impinged by the requirements in California to upgrade and the current economy. Sureties will also insist on full, personal indemnification. This includes indemnity of all the significant owners, indemnification of the owners’ spouses, cross indemnity of all entities and indemnity of any trusts. The surety must ensure that the contractor is fully committed to his or her company and all its obligations. Surety is a credit relationship, not insurance. If there is a loss, the surety expects to recover from the contractor.

The cost of a surety bond depends on the size, because the rate goes down as the size of the bond increases. It is about 1 percent, sometimes higher, depending on the quality of the contractor. The cost of the bond is paid by the owner.

How do you prepare for the current challenges in the construction market?

You should partner with a qualified accounting firm. The surety will insist on having a firm involved that can present a comprehensive financial statement including a work in process statement that ties into the balance sheet and profit and loss statement. You can anticipate a review level statement will be the minimum level requirement and a full audit likely as you expand the program. You also need to partner with a qualified construction law firm that is familiar with the public works environment. These attorneys understand how litigious this environment is and can advise you on the ramifications of construction litigation issues.

You should have a professional surety agent on your team, one who is a member of the National Association of Surety Bond Producers. They have been involved in the surety and public works environment for years and can offer invaluable counsel.

Given that you must list your subcontractors on bid day you should require in your scope that major subcontractors also provide bonds. If you do not do this at bid time, you cannot require it later.

Are these bonds always required?

Bonds are required by federal and state law on public works projects. Surety bonds protect the suppliers and subcontractors because they have no lien rights. However, it does not protect the general contractor. Given the budgetary shortfalls of the current economy, public entities may not be able to pay contractors for a project. You should be careful when entering into a project to make sure the entity has the sufficient funds, particularly if change orders might be involved. In California if general contractors do not get paid, they still have the obligation to pay the subcontractors and suppliers. This obligation extends to the surety.

What can happen if you don’t have a surety bond in place for a project?

If the contractor or subcontractor defaults, your contract price can escalate because you have to bring another contractor or subcontractor in to complete the project. You may end up paying for work, supplies and materials twice, thus increasing your project costs.

A surety will ultimately step in if the contractor or subcontractor defaults. The surety will determine if there’s a valid claim, examine the situation and decide how to proceed. There are several actions the surety can take:

  • Bring in another contractor or subcontractor to complete the project
  • Have the owner/contractor bring in other contractors to complete the project
  • Negotiate with the owner/contractor to buy out the damages
  • Continue to finance their principal through the work

Sureties generally prefer to keep the existing contractor on the project and finance it through completion, assuming that they still have a viable contractor.

John M. Garrett, CPCU, is the president of GMGS Insurance Services Inc. Reach him at or (949) 559-3362.

Wednesday, 25 November 2009 19:00

Added security

Buying and selling companies can be risky business, especially in today’s economy. Both the buyer and seller want to make sure they are protected during the process, and a seller wants to know that cash will be generated from the sale.

Buying tax insurance is one way to give comfort to both parties during these transactions as to potential tax exposures.

“It’s a way to make a transaction more economically efficient,” says Gary P. Blitz, managing director with Aon Financial Solutions. “While there are certainly fewer mergers and acquisitions taking place in the down economy, the dollars spent and received are precious. Sellers want to make sure they generate some cash from the sale, and cannot afford to have funds tied up in escrow accounts for as long as seven years to protect a buyer against a potential tax exposure.”

Smart Business spoke with Blitz about how to use tax insurance and the risks that business owners can face if they choose not to purchase it.

What is tax insurance, and why is it important to have it?

Tax insurance allows the insured party to transfer the risk of a tax authority, like the IRS, challenging the intended tax treatment of a transaction or business situation. Even companies that handle their taxes very responsibly seek certainty and assurance that their (and, importantly, a target’s) federal, state and local, and foreign tax houses are in order.

The IRS can provide that certainty, in certain circumstances, through the private letter ruling process, but there are many areas where rulings are not provided and the ruling process can be excruciatingly slow when a transaction is pending. Tax insurance brings certainty to the system, assuring that a specific tax treatment will be received. For example, it might provide assurance that a tax-free reorganization or restructuring will be respected as tax free or that the limitations on net operating loss carry forwards have been properly applied.

Many business owners are selling companies or assets to generate funds, and it makes the transaction inefficient if some of that cash will be tied up in escrow. It’s a question of tying up assets or spending a relatively small amount to transfer that risk to an insurer. That’s where tax insurance becomes very effective, especially in this economy.

In what situations should a business owner purchase tax insurance?

Tax insurance is usually used in two types of scenarios. The first is during transactions, when buying and selling companies. A wide range of tax risks may be faced by such parties, including, for example, tax-free transactions, partnership issues, golden parachute excise tax issues, capital versus ordinary treatment, tax credits (low income, historic, solar and wind) and so on. Generally, if a tax expert can form a view on the tax treatment of a situation, a tax insurer should be able to consider it.

If it meets the insurer’s underwriting standards, which generally seek to determine whether there is a sound business purpose and the tax analysis is based on sound reasoning, a policy then would be offered. However, it is important to note that tax shelters and reportable or listed transactions cannot be insured.

The other situation deals with FIN 48 accounting rules. These income tax rules came into effect over the last couple of years, first for public companies and now for private companies, as well reporting under U.S. GAAP standards. These rules set stricter and more transparent methodologies for companies to report income tax obligations in their financial statements.

There’s a great deal of difficulty and uncertainty in applying these rules, as the tax rules are subjective and require a great deal of judgment by the experts. Companies are required to test every material tax position to determine how strong it is, both under the tax law and how it’s measured.

The company has to put up a reserve and make specific disclosures if there is not greater than a 50 percent confidence level. There’s a role for FIN 48 insurance to help mitigate some of the downside if those determinations are ultimately challenged and proven wrong.

How can business owners determine if their situation requires tax insurance?

There are two sides to determining if tax insurance is right for the situation. The first is in the context of a transaction or financing where a third party is looking for comfort. That should be an indicator that insurance can be used to ease the financial pain of providing that comfort through traditional escrows and indemnities. Tax insurance also can be an effective tool for a buyer to make a better offer to a seller for an asset because by using insurance, the seller can be relieved of having to provide an indemnity.

FIN 48 insurance also can be helpful if you’re a business with a sizeable tax situation that has been recognized (not reported) for FIN 48 purposes. These policies can help manage that risk such that if they should go wrong, it will not be a catastrophic situation to you or your financial statements.

What risks do business owners face if they choose not to purchase tax insurance?

Insurance provides a financial backstop for an unexpected tax liability. Business owners certainly can and should seek advice from their tax advisers. However, professional opinions typically have caveats and exceptions and are not intended to provide indemnity if the intended treatment is not ultimately upheld.

The insurance operates in a similar fashion to how a private letter ruling would work. The taxpayer provides the factual predicate to the insurer through reps, warranties or documents. The insurer then provides comfort through the insurance policy that the intended treatment will be respected, and that it will pay the tax, interest and penalties if it is not.

Gary P. Blitz is managing director with Aon Financial Solutions. Reach him at (212) 441-1106, (202) 429-8503 or

Wednesday, 25 November 2009 19:00

Healthy travelers

With the H1N1 outbreak and upcoming flu season, keeping your employees healthy and safe while traveling should be one of your top priorities. You need to educate them on the signs and symptoms of these illnesses, other illnesses they might run into while traveling, the necessary precautions to take against illnesses and what to do in case they get sick while traveling.

“You need to consider the risks and benefits associated with travel during disease outbreaks,” says Debbie Carpenter, the director of account management for Professional Travel Inc. “Health care facilities and resources may become strained as outbreaks increase in number, severity and size.

Also, travelers, especially those with underlying risk factors, should consider the quality and availability of health care at their destination prior to travel, and may reconsider nonessential travel to areas where good health care may be unavailable.

Smart Business spoke with Carpenter about how to prepare for health issues while traveling and how to understand health screening procedures and notices.

How will a flu pandemic affect travel plans?

The global spread of pandemic influenza has prompted some countries to check the health of arriving and/or departing passengers. You may not be permitted to board your flight in any country if you appear ill.

There is also a more rigorous passenger screening process. In late July, several European airlines and countries said that persons who appear to have flu-like symptoms at check-in would be referred for medical evaluation and not permitted to board flights until cleared by a physician. Many countries, including China, are also screening arriving passengers for illness due to the H1N1 outbreak. These health screenings help to reduce the spread of the new virus.

Your employees will most likely need to stay put if a health concern arises while traveling. This can be quite costly and also affects your overall productivity. You need to be aware and proactive to prevent these types of situations from happening. Purchasing travel insurance can help, especially if you are traveling in a high-risk country.

How can you monitor global health issues?

Develop a plan to ensure that employees receive quality care when falling ill during travel. Partnering with an international security risk management company is your first step to due diligence. This ensures that you are up to date on day-to-day occurrences as well as country-specific information.

You can avoid any possible disruptions in service if you avoid high-risk situations from the start. You should also be aware of employees with previous health conditions that would make them high risk, and make necessary arrangements to have another employee travel in their place.

What should you expect during foreign country screening procedures?

Consult the embassy of countries in your travel itinerary for information about entry screening procedures. You may be asked to do the following during these screenings:

  • Pass through a scanning device that checks your temperature
  • Have your temperature taken with an oral or ear thermometer
  • Answer questions about your health
  • Review information about the symptoms of the H1N1 virus
  • Provide your address, phone number and other contact information
  • Contact health authorities in the country you are visiting if you become ill

If you have a fever, respiratory symptoms or are suspected to have the H1N1 virus, you may be asked to:

  • Be isolated from other people
  • Have a medical examination
  • Take a rapid flu test
  • Be hospitalized and given medical treatment if you test positive for H1N1

What are the different types of travel notices issued by the Center for Disease Control?

  • In the news. Notification by the CDC of a disease occurrence of public health significance affecting travelers or travel destination. This provides information to travelers, Americans living abroad, and health care providers about the disease. The risk for disease exposure is not expected to be increased beyond the usual baseline risk for that area, and standard guidelines are recommended.
  • Outbreak notice. Notification by the CDC that a disease outbreak is occurring in a limited geographic area or setting. This provides information to travelers and resident expatriates about the outbreak’s status and reminds about the standard or enhanced travel recommendations for the area. The risk for disease exposure is thought to be increased, but defined and limited to specific settings.
  • Travel health precaution. Notification by the CDC that a disease outbreak of greater scope is occurring in a more widespread geographic area. This provides information to travelers and expatriates about the outbreak’s status, specific precautions to reduce their risk for infection, and what to do if they become ill while in that area. The risk for the traveler is increased in defined settings or associated with specific risk factors, but the CDC does not recommend against travel.
  • Travel health warning. Notification by the CDC that a widespread, serious outbreak of a disease of public health concern is expanding outside the areas initially affected. This provides information and status updates to travelers, and also reduces the travel volume to the affected areas to reduce the risk of spreading the disease. All nonessential travel to the area is recommended against. Additional preventive measures may be recommended, depending on the circumstances.
  • Defining and describing risk for travelers will clarify the need for recommended preventive measures. Scalable definitions will enhance the usefulness of travel notices, enabling them to be tailored in response to specific events and circumstances.

Debbie Carpenter is the director, account management with Professional Travel Inc. Reach her at (440) 734-8800 x4041 or

Tuesday, 10 November 2009 19:00

Understanding the plan

Many changes are occurring during this year’s health insurance open enrollment season. Carriers are seeing reductions in benefits and increases in employee costs. Many employers are also moving from large meetings to one-on-one sessions to discuss benefits with employees. 

It’s important to give open enrollment the attention it deserves, so that everyone is able to make informed decisions.

“Employers benefit from employees who are educated well in advance, have the opportunity to understand the changes, see reasons for changes, and know the new benefits,” says Frank Jantzen, vice president of Client Service at AvMed Health Plans. “If employees know in advance, there will be fewer questions for the benefits person after enrollment.”

Smart Business spoke with Jantzen about open enrollment, how to get employees engaged and how to work with your health insurance provider during open enrollment.

How can you give open enrollment the attention it deserves?

Have established times or meetings where there’s a general session and everybody gets the same information. Make sure to publish employee questions and answers where everyone can see them. That helps everyone get the same information and dispels rumors. Employees can then make their own decisions based on facts and not on what their neighbor tells them might be true.

Remind employees to come prepared with Social Security numbers for spouses and dependents and necessary documentation so enrollment isn’t delayed. It’s frustrating if you sign up and think everything is fine, but when you go to use the insurance after the effective date, you find out your application is pending because information is missing.

What are key things to remember during the open enrollment process?

The employee doesn’t necessarily make the benefit decision — someone else, like a spouse, sometimes makes it. Depending on who is in your audience, it’s important that the spouse, not just the employee, understands the plan and how to get the most out of the benefits. You have to make sure the information goes home. That also means giving employees enough time to make a decision.

Employees moving from a co-pay to co-insurance design need to be given examples of the cost of care received. Give examples of hospital costs versus free-standing facilities. Make sure that information goes home to the spouse, as well.

How do you get employees engaged in the open enrollment process?

A lot of employers now are increasing the co-pay for hospital emergency rooms to make it significantly higher than going to an urgent care center. Urgent care centers are abundant right now, and they’re easy to get to. You may want to provide extra information to your employees on the cost of seeing a doctor at an ER versus an urgent care center. You can also distribute a list of urgent care centers to let employees know where they are and their hours. That would encourage them to use the urgent care center and avoid ERs when possible.

Another important item is prescription drugs. All plans seem to have similar formularies, yet there are differences. If you move from a carrier without a progressive medication program to one with a program, let employees know what drugs are pre-authorized and which ones will be questioned. This will give employees full exposure on the plan.

Provide a benefit calculator so employees can see how much their out-of-pocket costs would be for different medical procedures if they’re using a health reimbursement account or high-deductible plan with an HRA or health savings account. Let them know in advance when the deposits to their HSAs will be made so they can budget appropriately.

Contests and games are fun too. You have to grab their attention with some astounding facts, reward them with a gift card or something and then move into the education portion of the topic.

How can you help employees understand any changes that have been made to the plan?

You need to take ownership of the benefit decision. If there’s a change from one carrier to another, take time to explain to the employees why you switched. If it was cost — tell them what the increase would have been if you stayed and relate it back to their individual contribution. Most employees only think about what it’s costing them, not the employer’s total premium. Tell them what it costs and what it would have meant for them.

If you’re changing plan design, tell employees why the decision was made. It’s easy to avoid that conversation and let employees blame the new carrier. But it’s not the new carrier they’re unhappy with most of the time, it’s the plan design. Take ownership and tell employees why this plan was chosen, and how much it will cost or save them.

If you’re moving to a high-deductible plan, provide examples of how employees can avoid high-cost procedures, including how much an MRI will cost at a hospital versus an urgent care center. Give them hard numbers.

How can you work with your health insurance provider during open enrollment?

Share information with the carrier about your contribution. Some information may only be given to the employee and not the carrier, which makes it difficult. The carrier is then not able to step up, answer questions and help out. When you talk about the decision, what the employer/employee contributions are and what, if any, HSA deposits are, have the health plan provide details on benefits and specific ways to get the most cost-effective, quality care.

Your presence at all meetings is very valuable. It should be a team effort. The carrier will explain about the benefits and how employees can get value out of them. You can explain the decision and the reasons for selecting the plan. <<

Frank Jantzen is the vice president of Client Service at AvMed Health Plans. Reach him at

Monday, 26 October 2009 20:00

A balancing act

Medical costs are continuing to escalate, a trend that will likely continue for years. Employer sponsored health insurance premiums have increased 119 percent over the last decade. The average employer sponsored premium for a family of four costs close to $13,000 a year, with employees paying for about 30 percent of this cost. Increased hospital and pharmaceutical costs and high tech radiology technology all play roles in escalating medical costs.

You want to find a way to control some of these costs and possibly shift some of it to your employees without having them pay too much out of pocket.

“It’s a struggle for everyone,” says Kirk Cianciolo, DO MBA, senior vice president and chief medical officer with AvMed Health Plans. “But as you start to control costs, and it begins to plateau or even decelerate, you can enrich benefits and lower the out of pocket costs for members.”

Smart Business spoke with Cianciolo about various ways to control health care costs through plan design and educating employees on healthier lifestyles and smart medical care.

How can you design your plan to help control costs?

You want to look for unique benefits in your plan design. You also want to develop a plan that offers a compromise between what you’re looking for and what your employees want. You may want to offer something different, such as limited networks or unique pharmacy benefits. One option is to find ways to change your benefits without having to move a lot of the costs over to employees. So that means looking at a different type of coverage, such as a higher deductible, higher co-pay, or a limited formulary or network. All of these items would lower premiums and minimize any transference of additional costs to employees.

Another option is to not change your benefits and move to either a high deductible plan or shift some costs to employees. The final option is to have things remain the same and just absorb the costs.

What role does the health of the work force play in rising health care costs?

The four primary factors that lead to increased costs are tobacco use, lack of exercise, diet and stress. These are all things that we can change and control as individuals. But the motivation, timing and reasoning for change vary for everyone, and hasn’t been figured out yet. Determining what motivates people to manage these factors in their personal lives will have a huge impact on overall medical costs. You can actually decrease the severity of disease in the country by 30 to 40 percent if you concentrate on controlling these four factors.

And starting to make these changes doesn’t have to be anything big. There’s a misnomer that people have to have their weight normalized before they see any benefits. But someone who loses five or 10 pounds will immediately begin to see changes in their blood pressure or cholesterol levels. Ultimately you do want to normalize weight, but even in the early stages of weight loss you can start to see dramatic changes. It’s about getting your employees to understand that they don’t have a huge mountain to climb, they just need to start climbing it.

You may not know what those drivers are for individuals and groups, but you do know that they’ll change when they are ready. The key is continuing to educate employees and familiarize them with what’s available and the tools out there to help in the transformation. Employees will then have that information at their fingertips when they’re ready to change and it can assist them in the change process. So you need to have the information available when employees are ready.

What about the size of a group?

The greater the size, the more economies of scale, so there will be a bigger impact. Larger groups try to keep benefits close to what they were and have the employer absorb some of the costs. The other costs are then transitioned to employees.

Smaller groups tend to price shop and look for equivalent benefits or an alteration in benefits so they can get the best price. For instance, some plans might offer dental or vision, but they’ll drop those benefits to maintain the medical benefits.

How can you educate your employees on the importance of controlling costs?

You have to make sure employees have a larger responsibility in the process, either through understanding benefits or what their out of pocket costs will be for certain medical expenses. For example, most people don’t know what a physician’s office visit costs, one day in the hospital costs, or what an MRI costs. People are surprised at what the actual costs of these items are when they either receive high deductibles, out of pocket costs are increased, or information is shared more regularly.

Members are also beginning to ask more questions. They will ask their physicians if they should use a generic or brand name drug, or if they really need a certain test done or if a less expensive one will be fine. People are asking those questions because there’s a lot of duplication that adds tremendous dollars to the system.

Kirk Cianciolo, DO MBA, is the senior vice president and chief medical officer at AvMed Health Plans. Reach him at (352) 337-8701 or

Monday, 26 October 2009 20:00

Keeping employees healthy

Having healthy employees can result in a happier and healthier work force. But it’s not always easy to keep people healthy, especially in the approaching flu season, when germs spread easily throughout an office.

And then there are the larger health issues, such as heart disease, diabetes and cancer.

But as an employer, there’s something you can do about it. By taking advantage of preventive care offerings and screenings included in your health plan, you can help keep your employees healthy by preventing them from developing a particular condition or helping in early detection. And it doesn’t have to be expensive for you, because most health plans already include these tests and screenings.

“Many health plans are taking away the financial negatives, such as high co-pays and deductibles, that prevent people from getting preventive care,” says Dr. Bruce Niebylski, associate vice president of medical affairs at Priority Health.

Smart Business spoke with Niebylski about the preventive care offerings available in health plans and how to encourage employees to take advantage of them.

How has preventive care evolved?

Preventive care has evolved a lot over the last 20 to 30 years. Back then, we were seeing tremendously sick people because they weren’t taking care of their blood pressure and didn’t know about cholesterol or osteoporosis. People were eating high-fat and high-salt foods and not exercising, and it showed. The 40-year-olds were having heart attacks, and the 50-year-olds were having strokes. Now, there’s much better treatment and care for these conditions.

Children are also being immunized, and diseases such as asthma are being treated at an early age. We have a healthier population because of improving lifestyles, with people eating better and exercising more often.

What type of preventive care offerings should be included in a health plan?

The plan needs to reflect your company’s population. A typical health plan insures a wide range of ages.

You need to include childhood preventive care measures, such as immunizations, as well as screenings for breast cancer and prostate cancer.

It’s been proven that if people get these tests and immunizations or take prescribed maintenance medications, doing so will prevent them from becoming ill or getting worse if they are already sick.

How can an employer encourage employees to take advantage of preventive care offerings to help maintain healthy lifestyles?

The No. 1 thing is awareness. There has to be some type of communication to employees regarding the types of preventive care measures that they should be getting.

For example, you may want to bring in representatives from a local hospital or health plan to offer preventive care tests on site, such as cholesterol screenings, mammograms and flu shots.

Another good idea is to include preventive health care reminders in birthday cards. Inside the card is a listing of preventive care screenings that you should get based on your age and gender. For example, a 55-year-old male should be taking his baby aspirin each day, have a colorectal cancer screening and get an annual prostate check.

If there were any small children on his health plan, there would also be reminders about vaccinations. It just revolves around awareness.

Many health plans offer products designed to reward members for staying healthy or getting healthier. For example, with some plans, if you get regular preventive screenings, such as a cholesterol check or weight and body mass index assessment, and have a signed form from your doctor, you will save money with lower insurance co-pays and deductibles.

Some employers may also give employees $50 or $100 for filling out a health risk assessment form by a certain date.

How can preventive care help keep employees healthy in the upcoming flu season?

There’s been a lot of talk about what to do at businesses, since flu is an airborne illness that tends to be passed along when people are in enclosed spaces with others. Companies may decide not to hold large meetings and could instead host conference calls.

Many companies are also discouraging shaking hands, because that’s a surefire way to pass the flu bug along. You should also encourage people with signs of the flu to stay home from work so it does not spread to other employees.

Most companies have been supportive of offering flu shots on-site, but doing so hasn’t been 100 percent successful because some people are afraid of the shots. However, there’s been enough press regarding the seriousness of the swine flu that people are beginning to understand the need for a flu shot as a way to prevent it.

What are the benefits of preventive care?

Employees receive peace of mind through preventive care, and they’re not worrying about whether a bad medical problem will happen to them. The regular checkups and monitoring give them peace of mind that nothing bad is about to be sprung on them.

While some of the procedures, like colonoscopies, are bothersome, they help you rest easier when you receive good results.

Dr. Bruce Niebylski is associate vice president of medical affairs at Priority Health. Reach him at (248) 324-2763 or

Monday, 26 October 2009 20:00


The recent spread of the H1N1 flu virus and threat of a pandemic, along with the upcoming flu season, could cause major problems for business. You need to prepare your company for the challenges associated with these health concerns, such as employee absenteeism, interruptions in supply and delivery, and changes in commerce patterns.

“You need to be aware of the legal landscape facing your company because of issues created by the swine flu,” says Todd L. Sarver, member of the labor and employment counseling and litigation practice at McDonald Hopkins LLC. “You also must carefully plan for these problems in a way that limits future liabilities.”

A possible H1N1 pandemic could also create problems regarding employee leave. You need to review your current sick leave policies or develop new ones to account for a possible pandemic.

“Adjusting leave policies will encourage sick employees to take time off without fear of losing their jobs and reduce the remaining employees’ exposure to swine flu,” says Brendan Fitzgerald, associate in the labor and employment counseling and litigation practice at McDonald Hopkins LLC.

Smart Business spoke with Sarver and Fitzgerald about how to prepare for a possible H1N1 pandemic and how to deal with the problems a potential pandemic would cause your business.

What legal ramifications could you face as a result of a potential H1N1 pandemic?

The Occupational Safety and Health Act’s General Duty clause requires that you provide a safe and healthy work environment for your employees. This clause protects workers from the risks of the swine flu in their place of employment. OSHA has indicated that it will adjust its priorities in the event of a pandemic to ensure that employees are adequately protected from swine flu. Companies that violate this clause will be subject to monetary fines. Civil penalties of at least $5,000 per violation or up to $70,000 per violation will be assessed to companies that willfully or repeatedly violate this clause.

What precautions should you take to prepare your company for a potential pandemic?

OSHA has issued several guidelines to help you prepare for a potential swine flu pandemic. They are as follows:

  • Develop and/or review a pandemic flu plan.
  • Review sick leave policies.
  • Work with employees to address leave, pay, transportation, travel, child care, absence and other HR-related issues.
  • Purchase flu supplies, such as touchless garbage cans, alcohol-based soap/hand sanitizer, tissues and cleaning supplies.
  • Provide employees with access to the latest flu information, including information about medical care and benefits.
  • Implement a social distancing program to limit face-to-face contact between employees and customers.
  • Develop a cross-training program to ensure continuity of essential functions.

In addition, employers need to have contingency plans in place regulating how they will staff their operations in the event of massive absenteeism.

How can you deal with problems a potential pandemic may cause at your company?

A pandemic would create many issues with employee leave. Employees may be eligible for leave under the Family and Medical Leave Act if they or their qualified family members contract the swine flu. If eligible, an employee is entitled to up to 12 weeks of unpaid FMLA leave to care for this health condition. You should review and update your leave policies to comply with the FMLA and take advantage of its protections.

You can draft new sick leave policies to provide or expand sick leave to employees with the swine flu. This can be either paid or unpaid leave, and can be granted through sick days or personal time off.

You also might want to consider alternative work arrangements to ease the impact of a pandemic on your workplace. You could allow employees to telecommute from home to avoid the spread of illness. You should create a detailed plan to cover telecommuting, especially the recording of work time. You may also consider flexible scheduling to stagger employee work times and minimize face-to-face contact among employees and the risk of spreading disease. You need to be aware of your business and customer needs and implement a policy to cover any flexible scheduling arrangement.

What other problems could an H1N1 outbreak cause?

You need to develop cross-training programs in case a large number of employees are unable to work due to illness. You must avoid any problems with the Fair Labor Standards Act when implementing these types of programs. If exempt employees are utilized in nonexempt positions while attempting to continue operations, they risk losing their exempt status. You will then be required to pay that employee overtime for all hours worked over 40 hours in the workweek. You should consult with legal counsel before instituting any cross-training programs to ensure that employees’ exempt status will be preserved.

You also need to avoid any discrimination or retaliation against employees during a possible pandemic. Treat all similarly situated employees the same and refrain from taking any adverse employment actions based on an employee’s use of leave or any employee complaint.

Examples of potentially discriminatory or retaliatory actions include:

  • Only cross-training younger workers
  • Employing a social-distancing program that separates workers perceived to have a high risk of contracting swine flu
  • Only allowing certain employees to telecommute
  • Disciplining or terminating employees for taking FMLA or other medical leave in connection with a pandemic
  • Retaliating against an employee for filing a complaint with OHSA regarding a swine flu outbreak at your company.

Todd L. Sarver is a member of the labor and employment counseling and litigation practice at McDonald Hopkins LLC. Reach him at (614) 458-0042 or Brendan Fitzgerald is an associate of the labor and employment counseling and litigation practice at McDonald Hopkins LLC. Reach him at (216) 430-2009 or

Managing your cash flow is critical to helping avoid the extended cash shortages that can be caused by large gaps in your cash inflows and outflows. But it’s a task that many business leaders have difficulty doing, especially in an uncertain economy.

To gain a better handle on your cash flow, consider establishing a proactive funds management process, which may help you avoid the cash shortages that can damage your business or even cause its demise.

“The greatest risk you face is not having the funds to pay your employees and vendors,” says Jane Zalla, treasury management sales officer with Fifth Third Bank.

Smart Business spoke with Zalla about how proactive funds management can help maximize your company’s cash flow and make sure you’re getting the most impact from your cash flow.

How has the economy affected funds management?

A lot of industries are experiencing problems, causing a trickledown effect into other industries. If your vendor or customer base is heavily based in an industry that is experiencing problems, you might run into cash flow problems.

Credit is also a big concern. A lot of companies rely on credit from banks to manage their cash flow and use it as working capital. But the credit standards and restrictions have tightened, making it more difficult to obtain the credit you need to make up for your cash shortages.

How can you help improve your company’s profitability through proactive funds management?

Regularly perform a cash flow analysis and develop a financial forecast. One suggestion is to have a rolling 13-week cash flow forecast, because although it is difficult to predict the future, with proper forecasting and planning, one can help overcome unforeseen disruptions. Even if you’re not directly impacted by something, your vendors and clients could be, and that, in turn, may have an adverse effect on your cash cycle.

One way to protect your company from cash flow shortages is to create a cash reserve. Organizations should typically have a 30-day reserve to cover normal operating expenses. This improves your ability to fund your own business operations instead of having to request credit from a bank.

Another strategy is to shorten your cash flow conversion period. Send invoices out promptly — as soon as the goods or services are delivered — to aid in collecting payment more quickly. You might also consider offering discounts for prompt payment.

Monitor past due accounts and notify customers when bills are late. Consider establishing a deposit policy, in which a portion is paid upfront before goods are provided and the rest is paid after delivery to help improve your receivables process.

How do you begin doing a cash flow analysis?

First, look at what you’re producing and selling and the costs associated with this. You have to look at your overall business structure, such as how many employees you have to pay, what type of operating facility you have and what the overall expenses are for running your business, from cost of goods sold to delivery.

You also have to look at how long it takes to receive payment on your goods. The goal should be to have this as short as possible. The faster you can get money into your account, the faster your cash flow starts working for you and you can consider either investing overnight or paying down debt. Depending on your business, a typical receivables time frame is 30 days outstanding; however, this will vary depending on the industry and other factors.

Managing the receivables process is critical in forecasting your cash flow. Sending out invoices promptly and managing the collection process will help minimize the gap between the cash inflows and outflows.

The payables process is also important for cash flow. Typically, the goal is to extend out as much as possible while keeping within the agreements of your vendors. Extending your payables allows you to keep the money in your account longer, earning interest and/or possibly paying down debt and saving on the interest expense.

How can you ensure you’re getting more impact from your company’s cash flow?

Having strong cash flow is critical, and it’s always good practice to build up cash reserves for times when cash flow may become an issue. While you’re doing this, you can consider placing the idle balances in short-term options to earn higher interest. Your cash reserves should be liquid to allow for easy access, but you don’t want it just sitting there doing nothing.

It’s always good practice to review options with your banker and consider such items as sweeps or paying down debt, which can be a huge expense that hits your bottom line. You can save the interest expense on the credit side if you pay this down quickly.

Having a positive cash flow also allows you to fund your own endeavors. You can expand, purchase new equipment or facilities, acquire smaller businesses or buy out partners on your own if you have a strong cash flow.

What are the benefits of proactive funds management?

You may earn more income if you manage your funds and cash flow. You get paid on the sales from the goods you produce but have to make sure what you’re selling pays for your expenses.

If you manage your cash flow, you are more likely to have money set aside to earn a higher interest rate or to use to pay down debt. Managing your expenses and cash flow will help put you in a more positive financial position.

Jane Zalla is treasury management sales officer with Fifth Third Bank. Reach her at (513) 534-0245 or

Monday, 26 October 2009 20:00

Smart financing

Industrial revenue bonds (IRBs) are tax-exempt vehicles, typically issued by a state or local government for the benefit of private companies. Historically, the use of these proceeds was limited to a strict interpretation of the manufacturing elements of qualified businesses. For those companies that qualified, it proved to be an inexpensive form of debt to help fund growth.

One of the provisions of the recent American Recovery and Reinvestment Act (ARRA) was to make the definition of manufacturing less restrictive, allowing certain capital costs that historically would not qualify under the traditional manufacturing label.

“Certain research and development costs or certain elements of warehousing and distribution weren’t allowed under the historic rules governing industrial revenue bonds,” says John Sassaris, senior vice president, commercial division head, with MB Financial Bank.

Smart Business spoke with Sassaris about the changes in how industrial revenue bonds are administered and the key things you should know about the bond application process.

How did ARRA impact IRBs, and how long will those changes be in place?

First and foremost, the definition of manufacturing has been greatly expanded, allowing for more flexibility in bond sizing. Also, there is a designation entitled recovery zone bonds, which covers areas in major cities geared toward stimulus or recovery plans.

For example, the entire city of Chicago qualifies, as the city council recently designated the whole city as a recovery zone. Any company that’s looking to expand or build space in the city proper can likely qualify for a recovery zone allocation. There have also been several changes in how nonprofit entities can issue 501(c)(3) bonds or their version of tax-exempt indebtedness.

While we have seen a tremendous amount of activity this year on the nonprofit side, we have yet to see the same level of uptick on the private activity or IRB side. This is likely due to the economic uncertainty that remains in the overall marketplace, but as the economy settles, some deployment of capital is anticipated. While companies will have the ability to issue tax-exempt indebtedness for years to come, the changes that were implemented as part of the stimulus plan are set to expire at the end of 2010.

What are the eligibility requirements for IRBs?

In a normal setting, 75 percent of the proceeds need to be used for core manufacturing. You cannot exceed more than $20 million of capital expenditures going three years back and three years forward.

A company cannot issue more than $10 million of IRBs per project and cannot exceed an aggregate bond total of $40 million across the country.

In addition, only 2 percent of the bond can be used to fund the cost of issuance.

What do business leaders need to know about the bond application process and dealing with government entities?

First, it’s not as difficult as people believe. Depending on the structure, you can actually have a deal close within a 60-day window, which is much quicker than people anticipate.

Another key is making sure you surround yourself with a good team of professionals. A supportive bank and an experienced bond attorney are critical to the success of the offering.

Establishing contact with a municipal body that will issue the bonds on your behalf is another important early step. These are municipal bonds for the benefit of private activity, so you need a municipality to issue them — city, county or authorities such as the Illinois Finance Authority. This entity has the ability to issue a certain amount of bonds every year throughout the state.

Every state has a similar authority. An inducement resolution needs to be passed by the authority in which your project is recognized by a municipal body.

Once that’s complete, any money spent 60 days prior to the inducement and going forward three years from that point will qualify for the tax-exempt project that you want to finance.

What is the cost of IRBs?

It varies on a deal-by-deal basis. For example, in a normal setting, a standard bond will be somewhere in the low to moderate five figures. While this seems like a large figure, the bulk of this cost is wrapped into the bond, so the actual cash outlay is very small. That being said, this type of financing only makes sense if you’re talking about bigger projects that exceed $2.5 million to $3 million.

If you’re going to move forward with the project and it fits the tax rules, you can make up the cost of the bond, in most cases, within two years based on the interest savings over conventional financing. That really helps you determine whether it makes sense to apply for an industrial revenue bond.

What are the benefits and drawbacks of IRBs?

IRBs have lower rates relative to conventional financing. It used to be quite costly to go through this process and issue debt, but the process has become easier over the years.

It’s always cheaper to pay a tax-exempt rate, but the greatest obstacle remains qualifying your project.

John Sassaris is senior vice president, commercial division head with MB Financial Bank. Reach him at (847) 653-1848 or

Monday, 26 October 2009 20:00

An eye on change

A new rule could be in place if the Securities and Exchange Commission votes in favor of it in 2010, as expected. Proposed Rule 14a-11 would require public companies subject to the proxy rules contained in the Securities Exchange Act of 1934 to allow for shareholder nominations in the company’s own proxy materials, instead of having shareholders take on this process and incur expenses themselves. Similar rules were proposed in 2003 and 2007 but were not approved. This new proposal would make boards of directors more shareholder focused.

“There’s a fear that directors are not paying attention to shareholder needs,” says Erin E. Reeves, associate with Baker, Donelson, Bearman, Caldwell & Berkowitz PC. “The thought is that if boards are fearful that shareholders will be able to nominate their own candidates more easily, directors will have to be more responsive to shareholders.”

Smart Business spoke with Reeves about proposed SEC Rule 14a-11 and its implications for businesses.

What are the specifics of proposed Rule 14a-11?

Boards of directors are elected annually by a company’s shareholders from a slate of candidates. Typically, the current board proposes the slate of nominees and the company distributes information about them in a proxy statement. Shareholders can nominate their own candidates for the board at the annual meeting, but this is usually ineffective because most votes have been cast by proxy before the actual meeting. Shareholders do have the option to launch a proxy fight and nominate their own candidate in their own proxy materials, but the expense of doing so often deters shareholders from that option. This new rule attempts to remove that barrier.

In addition to some limitations on the percentage of directors that can be nominated through this process and a one-year share ownership requirement, the proposed rule contains a tiered system to determine which shareholders can take advantage of it:

  • A shareholder must own 1 percent of shares for companies with net assets of $700 million or more.
  • A shareholder must own 3 percent of shares for companies with net assets between $75 million and $700 million.
  • A shareholder must own 5 percent of shares for companies with net assets of less than $75 million.

The rule would allow for aggregation among shareholders to meet these threshold amounts. It may seem like 5 percent of shares is a lot, but it might be possible with aggregation.

What implications would this proposed rule have on businesses?

The rule may not be approved in its current form, so the implications may change. There may be changes made before the vote next year or the SEC might decline to vote on it at all.

If it is passed in its current form, it would cause a big change in the way public company boards operate. Companies would have to brace for the possibility of shareholder nominees to the boards. There might be more dissident shareholder groups that end up with representation on the board.

Companies will also have to be receptive to information from shareholders before annual meetings. All of the information regarding shareholder nominees will have to be gathered and included in proxy materials for the meeting.

What are the benefits and drawbacks of the proposed rule?

Boards of directors may be more focused on the shareholders and less prone to making unnecessary and risky decisions for the company.

Some drawbacks include increased costs for companies to gather shareholder information to be included in proxy materials. The cost increase will depend on the size of the company and the number of shareholder nominees. There are limits on the number of directors who can be nominated through this process, so that would control some of the costs.

Another argument against the rule is that it would make companies vulnerable to the interests of dissenting shareholders. Directors who previously felt secure in their positions may be worried about being ousted, and they may also be worried more about the short term and what will happen in the next year with the shareholders instead of the company’s long-term results.

How can you keep up to date on everything happening with the proposed rule?

Pay attention to any further discussion of the rule in the coming weeks, and the vote as well, if it happens. Back in May before the comment period, the SEC was split 3-2 in favor of the rule. There’s been a push toward getting something done about this issue, but the rule may not be passed in this exact form, depending on the comments received and any changes that are made. Companies should read the proposed rule, which can be found in SEC Release 33-9046, and be prepared to factor in the potential costs of including shareholder nominations in company proxy materials. There will be an effective date if the rule is passed, which would give you time to do more research and adapt to the rule’s requirements. If the rule is not passed next year, but the issue is something that would affect your company, make sure to stay alert to the issue and send in comments if a similar rule is proposed again.

Erin E. Reeves is an associate – bar results pending, at Baker, Donelson, Bearman, Caldwell & Berkowitz PC. Reach her at (404) 443-6712 or