Why you need to take caution when using independent contractors

As independent contractors continue to become a bigger part of the American workforce, the Department of Labor (DOL) is investing more time and energy to make sure companies follow the law when it comes to classifying these workers, says Timothy J. Gallagher, an attorney at Kegler Brown.

“Employers are shifting toward using more independent contractors,” Gallagher says. “It’s a direct result of companies trying to control costs where they can. You can’t keep reducing the price on goods or you’ll never make a profit. You can’t keep limiting services or you’ll be swallowed up by the competition.

“If you can minimize your labor costs by paying a lump sum for a project and avoid paying benefits or taxes for an employee, it’s easier and cheaper for the employer.”

The practice of using independent contractors has grown significantly since the recession as companies look to reduce long-term costs. In a 10-year period, usage of this contingent workforce has grown from under 30 percent of the overall workforce to more than 40 percent of that group, according to the U.S Government Accountability Office.

Smart Business spoke with Gallagher about what companies should know before utilizing independent contractors.

What is the difference between an employee and an independent contractor?

An independent contractor is not entitled to benefits from the employer. This person doesn’t have to be paid overtime or a minimum wage and bargains for terms that he or she is willing to accept. Employees are entitled to benefits from the employer and certain protections for minimum wage and overtime compensation.

The employer is also required to pay unemployment tax, income tax and worker’s compensation for employees. These costs are not required with an independent contractor, which is where the financial savings can be achieved.

How do employers get into trouble with independent contractors?

You could decide that rather than call these individuals you’ve identified as employees, you’ll change their hours and duties a bit, provide them each with 1099 tax forms and call them independent contractors.

The IRS, however, does not base its worker classifications on what the employer chooses to call its workers. Rather, the federal agency looks at 20 different factors with the goal of determining who it is that controls the relationship.

If you’re telling people where to show up, where to work, what tools to use, what equipment to use and you’re providing training and instruction, at that point, you’re controlling the whole relationship. They will likely be seen as employees, even if you’ve decided to call them independent contractors.

What happens if the IRS determines you’ve misclassified your employees?

If you’ve labeled someone as an independent contractor when the individual should be an employee, the IRS will come after you for the unpaid taxes. If it’s determined that you willfully changed someone’s classification, you’ll also incur a $1,000 penalty per each worker that you misclassified.

The DOL has developed memorandums of understanding and is sharing data with the IRS and state tax departments and agencies in 28 states. Ohio is not currently one of those states, but the trend is moving toward getting those memorandums with every state.

So if you’re reporting one thing to the federal government and something else to the state, you’re at increased risk of those discrepancies being identified and then audited and penalized.

What should employers do?

If you’re a small business that has changed employee classifications to save money, talk to an attorney about the risks and how to do it the right way.

If you’re a larger company and you use a staffing company to open a new factory or support a large expansion, you could be considered an employer or a joint employer with the staffing firm for the people you bring in, depending on how much control you exert over these workers.

Review the IRS and DOL worker classification factors and do a self-audit. You’re better off paying for a $500 consultation with an attorney before you make changes versus paying that attorney $50,000 to defend you in a lawsuit for a class action by workers you misclassified.

Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter

Legal bills too high? How to reduce sticker shock

Most lawyers in private law firms bill by the hour. And many types of legal work — particularly drafting, research and document review — require more time than clients generally assume. So “sticker shock” over the amount of the first legal is common.
Are there things a client can do to lower the shock? Yes, says William J. Maffucci, attorney with Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Maffucci about how clients can lower their own legal bills.

How can one go about lowering legal expenses when hiring an hourly-fee lawyer?

Legal work billed by the hour will always be expensive. But many people who hire hourly-fee lawyers don’t realize that they can reduce their future legal bills by, effectively, becoming part of their own legal team. They can handle many tasks that, although necessary to the representation, do not require a legal degree or a paralegal certification. The savings can be substantial, and — not paradoxically — the client’s efforts can improve the quality of the legal service.

What are some tasks clients can handle on their own?

One simple thing can be done whenever you are about to deliver documents to your lawyer: organize them. At a minimum, put them in chronological order. This is particularly important at the beginning of the engagement.

Recently a new client told me she had about 100 documents that were relevant to her matter. I asked her to arrange the documents chronologically before bringing them to my office. She ignored my request and showed up at my office with a grocery bag of unorganized, unstapled and unfastened documents. It took us over two hours to sort, which resulted in additional legal fee of approximately $900.

Clients can also review and comment upon documents, such as deposition transcripts, that are produced or created during the course of the representation. I have had many intelligent and motivated clients make comments that were at least as helpful as the comments I would have expected from paralegals, working at billing rates of perhaps $200/hour.

Are there other things a client can do to reduce the cost of hourly-rate legal service?

Whenever possible, the client should communicate with the attorney by email and not by telephone. Reading an email takes less time than having the same communication by phone. Far more than emails, phone calls disrupt a lawyer’s day in ways that a lawyer often reflects in a bill.

Many law firms and lawyers have a policy of billing in minimum time increments, often 15 minutes, even if the work at issue required less time. Clients understandably can get upset when they are billed for fifteen minutes of a time on a phone call that only took, say, six or seven minutes. But billing for the additional time is defensible because the disruption that a phone call usually causes to workflow almost always results in additional time spent by the lawyer.

The other email-related rule is this: Make it clear to your lawyer that, whenever possible, written communication to you should be through email, not the postal service or hard-document courier service. No one expects standard email communications to be as polished and professional-looking as documents on letterhead. So, whether the lawyer types the email or dictates it and gives it to a secretary to type, the elapsed lawyer time will usually be less than the time the lawyer spends preparing a hard-copy letter. And email avoids postage, which many lawyers would pass on to their clients.

Do lawyers generally appreciate when their clients use these techniques?

I’ve never met a lawyer who didn’t welcome the efforts of a client to relieve the amount of non-legal work the lawyer was obligated to do. And I’ve never met a lawyer who was offended by a client’s insistence that the lawyer communicate via email.

Eliminating the time that a lawyer must spend on non-legal work and reducing the amount of time that a lawyer must spend on written communication helps the lawyer focus on the important components of the representation. That can only make the legal service more effective.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

A look at how to preserve insurance assets in a corporate transaction

Liability insurance is an important component of risk management for most businesses, but insurance policies are often overlooked in the sale of a business. Both the current liability policies in place at the time of the transaction, as well as the historical policies issued for prior time periods are valuable assets. Steps should be taken to preserve these assets, whether for the seller if it will remain a viable entity going forward, or the acquiring company.

Smart Business spoke with Keven Drummond Eiber, Attorney at Law, OSBA Certified Specialist — Insurance Coverage Law, at Brouse McDowell, about preserving valuable insurance assets.

How does a merger or acquisition affect the preservation of insurance assets?

When a company is acquired in a stock purchase, no change of corporate form occurs. The acquired corporation remains the same entity, but with different owners, or shareholders. It is neither a successor nor a predecessor of the company that acquired its stock and it will continue to have all of its rights to coverage under its current and past liability policies.

When a merger takes place, typically, the acquired corporation is merged into its new owner. The surviving corporation will be considered the ‘successor’ and, pursuant to state statute, will inherit all of the rights and obligations, including rights to insurance policies, of the merged company.

The real challenge to preserving insurance assets, particularly from the standpoint of the acquiring company, arises in the context of an asset purchase. When an asset purchase takes place, some or all of the assets of a company are sold or transferred. Liabilities may or may not be transferred as well. The new owner of the assets is not a ‘successor’ of the company from which the assets were acquired.

How does the acquiring company identify all of the insurance assets?

The first step is to obtain all of the necessary information about the target company’s insurance program. The search should not be limited to the current liability policies, because prior policies can provide valuable coverage for future claims, especially for so-called long tail claims. Obtain actual complete copies of the policies because they will contain provisions that will be important to analyze and understand in order to ensure they remain available going forward. The due diligence period prior to closing affords the best, and perhaps the only opportunity to obtain this information.

The second step is to analyze and understand the insurance policies. Are they claims-made policies or occurrence-based policies? Do they define the ‘insured’ to include subsidiaries? Do they contain anti-assignment provisions? Do they require that the insurer be given notice of certain corporate transactions or other events, such as a sale of substantially all of the assets of the company? Are there historical claims? Have the limits been eroded by payment of claims? Are the insurers still in existence?

In Ohio, when a covered occurrence under an insurance policy occurs before liability is transferred to an acquiring company, coverage does not also transfer to that company automatically just because the liability was assumed. However, Ohio law does generally permit a party to affirmatively assign its right to be indemnified by insurance for past occurrences, regardless of the consent of the insurer. Otherwise, Ohio law will give effect to an anti-assignment provision in a policy, particularly when the nature of the insurer’s risk that it bargained for is altered by the transaction.

So what can the parties do to preserve the continued availability of liability insurance?

Include specific provisions in the transaction documents related to the retention or assumption of liabilities and indemnification with insurance in mind. Explicitly transfer the right to insurance proceeds for pre-acquisition occurrences (a ‘chose in action’), whether or not known, as an identified asset in the transaction. Assign all past liability insurance policies, not just the ones for the current policy period. Provide notice of the assignments to insurance companies. To the greatest extent possible, obtain the insurers’ consent to the assignments. If the seller is retaining all rights to insurance, obtain endorsements to reflect any company name changes going forward. And, work with your broker who can serve as a valuable resource throughout the process.

Insights Legal Affairs is brought to you by Brouse McDowell

A look at what to consider before you sign your next building lease

Property managers can use their experience negotiating lease agreements to outmaneuver business owners who are in a hurry to get a deal signed and get moved into their new office space, says Daniel K. Wright II, Attorney at Law for Brouse McDowell.

“You need to give yourself plenty of time to negotiate a fair deal,” Wright says. “You never want to lose leverage by having the pressure of an expiring lease looming in the background. It forces you to speed everything up and that’s when things get missed, things that could come back to haunt both you and your business.”

Northeast Ohio has seen its population shrink considerably over the years as the region’s economy has continued to struggle, resulting in a steady loss of both businesses and jobs. It’s created real estate opportunities, however, for companies that remain and are looking to make a move.

“If you allow yourself the time to get good advice and make the best deal for your needs, you as the tenant can take advantage of the market,” Wright says.

Smart Business spoke with Wright about things to consider when relocating your leased office or industrial facility.

Where’s the best place to start when looking to relocate your business?

Have a trustworthy and experienced fee-only real estate adviser who knows the local market and has experience in your particular industry. Fee-only means you want an adviser whose compensation is not dependent on the amount of rent you’ll pay for the space. That is important when rents are falling.

Get your attorney involved early on to help structure the negotiations and the terms of the deal and coordinate with your real estate adviser. You need this group to function as a team.

You want legal counsel with you at the table as the deal is being negotiated to ensure your best interests are being taken into account. If you wait until the end and items are missed, you’ll waste both time and money as you back up and try to rework the deal.

Put together a detailed, non-binding term sheet or letter of intent that contains important economic and business terms so as to frame the deal. This can be particularly helpful when comparing competing offers on an apples-to-apples basis, and to clarify concepts or terminology that may lack clear definition.

How can the matter of rent vs. total occupancy cost cause problems?

The real estate industry has gone to great lengths to build rent increases into leases in today’s market for operating expenses and more nebulous fees, which is the reason for the previous point about clarifying terminology.

A simple one that people often run into is the calculation of rentable square feet versus usable square feet. ‘Rentable’ is a euphemism that is used by landlords to charge a tenant for rent on portions of the building that are outside the leased premises.

On top of that, the method for measuring square footage usually includes unusable space that may be occupied by HVAC units or columns in the building. So you end up paying for space that you can’t use, as well as common hallway space and a portion of the bathrooms adjacent to your location.

These are things you need to check out during the negotiations. Get a copy of the lease so you and your team can review it. Measure the space yourself and see what you’re actually getting before you get locked into a multiyear deal.

What are some other costs to consider?

Get a quote for operating expenses per square foot over the past three years, determine what the increases have been, and try to negotiate a cap so that you can budget for these increases over the lease term.

With construction, the landlord will often build out the space however you want it. But it is typically amortized over the lease term and included in the rent, so it can add up quickly. Put tight controls in place over the scope of and schedule for the work. Require the landlord to solicit multiple bids. And in some cases, consider finding a knowledgeable design or construction professional who can work on your behalf to oversee the work and keep everything on track.

Insights Legal Affairs is brought to you by Brouse McDowell

What will this year’s election outcomes mean for both you and your business?

This is a presidential election year and as the debate continues over who will lead our nation for the next four years, there is a great deal of conversation about what impact the outcome will have on both the nation’s economy and on individual businesses.

In most presidential election years, while the race for the White House grabs the headlines, it’s the issues and candidate races closer to home that ultimately have a bigger impact on your economic future.

But 2016 is shaping up to be a little bit different, says Lloyd Pierre-Louis, a director at Kegler Brown.

“Normally, local elections have much more direct impact on business than national elections,” says Pierre-Louis.

“But this year’s national elections are just as impactful since they will determine control of the White House, the Senate and the U.S. Supreme Court. The stakes for business couldn’t be higher due to issues such as health care, equal pay, regulation, taxation, foreign trade and labor relations, just to name a few.”

Smart Business spoke with Pierre-Louis about how this year’s election cycle could impact the economy and how accurate the experts are in their projections of the election’s impact.

Which election issues or candidates should business owners keep an eye on during the upcoming election season?

As noted, most of the national races could have a dramatic effect on a number of meaningful issues. That said, you shouldn’t ignore the local elections. The commitment that candidates for local positions make to infrastructure development, modern transportation, environmental issues and regionalism can have a direct impact on local economic development.

Take the time to study each of the races and determine where the candidates stand and what they would plan to do if elected.

How impactful is this election year compared to what we’ve seen in previous years?

More so than ever. First, having a political convention in Cleveland is great economically for the region and the state. It has been decades since a national election had the potential to directly impact our state government. Obviously, Ohio and Florida are must-have swing states, so the governor’s growing national notoriety keeps him relevant in his party ticket discussion at least through July and possibly into November. That impacts our state’s political landscape.

How accurate are these projections typically?

Reputable polls usually present an accurate snapshot of how likely voters feel at that time. And candidates should be scrutinized by industries since they don’t often stray from their past records. If someone is viewed as a ‘friend’ of an industry or received plenty of campaign support from a consistent source, it should be easy to predict their business positions.

With news cycles, though, a week or month is an eternity, i.e., enough time for a candidate to self-destruct or fall victim to an unexpected scandal that could quickly reverse his or her political fortunes.

What else should people think about as they gauge the potential effects of this year’s election?

Neither political party can justifiably stake a claim as the business-friendly party. Some popular career politicians have never run a small or large business, while others have only run large businesses and never taken the personal risk small business owners have stressed over time and time again.

But every candidate claims to have the silver bullet to ‘fix’ our nation’s business climate. A candidate’s past record is much more reliable than the rhetoric, which is little more than noise. Everyone will have a business friendly tone, but it’s OK to dig a bit deeper to determine if they truly are and whether it’s enough to earn your vote.

Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter

Criminal background checks: A job applicant’s past can haunt you

Criminal background checks are vital to the hiring process. If performed correctly, they can serve as a valuable tool to assess the suitability of current employees and job applicants. However, the process is often done improperly, which can lead to liability for the employer.

“Federal, state and local laws place a variety of restrictions on an employer’s ability to gather and use information regarding an individual’s criminal background,” says Stephen C. Goldblum, a member at Semanoff Ormsby Greenberg & Torchia, LLC. “That’s why employers should consult with legal counsel prior to obtaining criminal background information to identify the laws that impact how the information can be gathered and used.”

Smart Business spoke with Goldblum about criminal background checks and best practices for screening candidates.

How are criminal background checks regulated?

It’s not illegal for an employer to ask questions about an applicant’s criminal background or to require a criminal background check. However, any time an employer uses this information to make an employment decision it must comply with federal anti-discrimination and credit reporting laws as well as state and local restrictions. Two federal agencies that regulate criminal background checks are the U.S. Equal Employment Opportunity Commission (EEOC) and the Federal Trade Commission (FTC).

How is the EEOC involved in criminal background checks?

The EEOC enforces Title VII of the Civil Rights Act of 1964, which prohibits employment discrimination based on sex, race, color, national origin and religion. Title VII also protects against disparate impact discrimination, which is any practice that is non-discriminatory on its face, but has a disparate effect on certain protected classes.

The EEOC takes the position that the blanket exclusion by an employer of all applicants with a criminal history violates federal anti-discrimination law. Therefore, an employer needs to carefully consider the circumstances of each applicant’s criminal background and determine whether the candidate’s suitability is consistent with the company’s legitimate business justifications.

According to the EEOC, there are three factors that determine if an employer’s reliance on a criminal background check is related to a particular job and consistent with business necessities:

  • The nature and gravity of the offense.
  • The time that has passed since the offense.
  • The nature of the job.

Employers must analyze these criteria when deciding whether or not to hire an applicant for a position based upon the applicant’s criminal background.

How is the FTC involved with criminal background checks?

The FTC enforces the Fair Credit Reporting Act (FCRA), which places restrictions on employers that obtain background information from consumer reporting agencies, which are referred to as consumer reports and include criminal background checks. An employer that uses consumer reports to make employment decisions must comply with the FCRA.

Before obtaining a consumer report, written permission must be obtained from the applicant. If the consumer report reveals something that causes an employer not to hire the applicant, the FCRA requires the employer to notify the applicant and provide a copy of the report as well as a document issued by the FTC titled, ‘A Summary of Your Rights Under the Fair Credit Reporting Act.’ This enables the applicant to correct any inaccurate information in the consumer report.

What recent developments impact the use of criminal background checks?

Many state and local jurisdictions, including Philadelphia, have laws referred to as, ‘Ban the Box.’ This legislation may prohibit employers from inquiring about criminal convictions or arrests during the application process.

It’s important for employers to be familiar with the laws in the municipalities in which they operate and ensure that the personnel responsible for interviewing and making hiring decisions are knowledgeable regarding the applicable federal, state and local laws.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Title tips: Officer titles and their meanings

There should be a clear delineation of duties within a company that follow a natural hierarchy. A board of directors comprises a group of people elected by shareholders to oversee the business and appoint officers. While the board of directors sets a company’s direction, the officers run the day-to-day activities of the organization.

Employees below the officer level have job titles and descriptions designed to meet the corporate goals and revenue targets set by the board of directors and implemented by the officers who are selected by the board.

All companies, regardless of sector or size, should make sure there is no confusion as to what is expected from a person bearing a specific title.

“Clarity on what roles are associated with a title across various departments in an organization is crucial,” says Ashleigh M. Morales, an associate at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Morales about the difference between titles for officers and employees, how to avoid liability issues, and how to define expectations associated with titles.

How do corporate officers and rank-and-file employees differ?

Corporate officers are selected by the board of directors, managers or members, depending on the type of business entity and its structure. In a corporation, officers are appointed by the board of directors. In an LLC, either the members manage the LLC, in which case the members select officers, or the members appoint managers to manage the LLC, in which case the managers select officers. Typically, corporate officers include a president, vice-president, treasurer and secretary. Even if these specific titles are not required by law, it is often advisable to fill the role, and the same person can generally serve multiple offices. For example, one person can act as treasurer and secretary. Titles, however, are not just used for corporate officers but are often given to employees.

When similar titles are used, confusion may arise. There may be some overlap in the titles — for example, a vice president who is a corporate officer and a vice president of sales who is an employee — but there are clear differences regarding their duties (fiduciary duties of loyalty and care), authority, whom they report to and their exposure to liability, if any. It’s important for employers to understand the difference and to make sure their employees and officers understand their roles and expectations.

How can a corporate officer protect against liability as an officer?

Corporate officers can be exposed to a greater level of personal liability than an employee of a company. To protect against such exposure, corporate officers should review the company’s formation documents, which include articles of incorporation, bylaws, operating agreement, etc., to make sure the company’s indemnification obligations adequately protect the officers. Corporate officers should also check the company’s Directors and Officers Liability Insurance coverage and make sure they are covered.

What is the process for termination of an officer?

A corporate officer is selected by the company’s board of directors, members or managers, as applicable, so the company’s bylaws or operating agreement would dictate how they can be removed. Removal as an officer does not necessarily mean the person is also terminated as an employee, although usually it goes hand-in-hand.

How should a company define roles and expectations associated with job titles?

It’s important for a company to be consistent with employee titles. If there is a vice-president of sales and a vice-president of marketing it should be clear what is expected of each role. The differences between senior vice presidents and executives can have important implications as well.

Different companies have different viewpoints on titles. The title of vice president in one company may carry the same responsibilities as a senior manager in another company. And there are cases where a senior manager has the same responsibilities as a director in another company. Each business should pick titles that make the most sense for its organizational structure.

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

What to do when a crisis hits and you need to respond

The time spent preparing for the worst-case scenario in your company could ultimately be what saves the business, says James P. Sammon, director at Kegler Brown.

“You don’t want to be coming up with ideas on the fly when you’re in the cauldron of the emergency,” Sammon says. “If you haven’t already developed protocols and appropriate responses to things that can go wrong in your business, you’re playing with fire.”

No company wants to believe that it will face a crisis in which customers are harmed by their products or services. But those companies that have taken the time to prepare for such a scenario have a much better chance of making it through the calamity with minimal damage. That process has to begin at the top.

“The calming actions by the leader can have a palliative effect on everyone,” Sammon says.

Smart Business spoke with Sammon about what to do when your company is faced with a worst-case scenario.

What’s the most important thing to keep in mind in the initial moments of a crisis?

First and foremost, you need to remain calm. A lot of the things you need to do should already have been thought out and in place. You must have the ability to roll with the punches and be very fluid during a crisis. Often, the companies that struggle most during a crisis are those with corporate heads who are not fluid or adaptable to what’s actually happening.

At this point, you don’t know if the crisis is going to stop quickly or if it’s going to turn left or right. You can plan for it as best you can, but you still need to be flexible. History has proven that rigidity in response to emergencies often causes greater damage than the emergency itself.

In today’s immediate information age, it is important to lock down the information within your organization before you worry about the outside world. A company should have not only policies and procedures in the employee handbook, but also confidentiality provisions and protocols for who will speak to the outside world and how the corporate message will be crafted.

How do you respond when you may not yet know all the facts of what happened?

You want to follow the KISS method. Keep it simple, stupid. You can’t answer every question that everyone is going to have, nor should you. Answer the big questions upfront and be succinct, logical and tight. On Twitter, you have only 140 characters to compose a message. The message you need to deliver may need to be a little longer than that, but the idea is keep it concise and to the point.

Don’t give people the ability to spin what you say in a manner that you don’t want it spun. Control the narrative.

If you run your company like a good military machine where everything gets funneled up the necessary chains of command, you’re going to have a system in place. Your top people are going to know what they need to know as quickly as they can get it.

What should your goal be when you speak to the public?

Perception is — more often than not — reality. Perception of a company before an emergency occurs will often dictate how a company is viewed by the public after an emergency.

If the company has been a bad corporate citizen, that company is not going to get the benefit of the doubt when something goes wrong. Conversely, if up to that point, the company has been a good corporate citizen who is active, responsible and well-liked in the community, that’s also going to dictate perception.

What if it was a mistake by someone in your company that led to the crisis?

Internally, you should appoint someone, such as your legal counsel, to lead any investigation. People may fear coming to the CEO to admit that they did something wrong. But it’s important to find out all the facts you can — good or bad. You can’t have any secrets.

Externally, you may need to own up to the error regardless of the financial consequences. And in the right circumstances, saying that you’re sorry can go a long way toward helping your company heal. In the end, if it’s necessary, you have to take corporate responsibility. It is not only the right thing to do, but it can also help to stem much of the damage that can follow.

Insights Legal Affairs is brought to you by Kegler Brown Hill + Ritter

Take the time to understand loan terms and how they might affect you

Businesses that borrow money tend to put a priority on interest rate terms and the amount of money that a bank is willing to lend them.

Often that means they either overlook or pay less attention to the other terms of the loan, says Marc B. Merklin, managing partner at Brouse McDowell.

“It’s usually those other terms that can come back to haunt you and your business,” Merklin says. “When you’re negotiating a loan agreement and reviewing the documents, it’s critical that you understand what creates default so that you don’t find yourself in a position where your bank can put you in default.”

Borrowers are often surprised to learn they are in default, especially when they’ve made all their payments on time.

But there are other factors that can trigger such an action, factors that can be missed when you don’t thoroughly review all loan documents before signing.

“Whether you get a lawyer or you do it yourself, it’s important that you read the loan documents and understand what they say,” Merklin says.

Smart Business spoke with Merklin about how to approach the discussion with your lender to renegotiate or extend the terms of your loan.

What are some things that can trigger a default?
In most loan agreements, you’ll see financial covenants such as fixed-charge coverage ratios and net worth requirements.

It’s not that difficult to run into a fixed-charge coverage ratio violation if you’re a seasonal business or a business that has routine cash flow variances. Be aware of these variables as you negotiate loan terms so that any covenants account for the normal fluctuation of your business.

There are also discretionary defaults that can give the bank the power to declare default based on adverse material changes in your financial position. But what is material? What is adverse? This may vary, depending on your point of view.

It’s best to avoid things that you can’t measure. If you have a default provision in your loan agreement, you should know by looking at numbers or performance what will trigger the default.

Another common issue for smaller businesses is change of control. Your loan agreement may include a default if there is a change in control of your business. It might not just be sale, but it could happen after the death of a principal owner.

If you have a husband and wife and they are both involved in the business and are both guarantors, and the wife dies, the husband may not want that to be an event of default for his business. Understand how change of control in the ownership of your business could affect your financial status.

What is a cure provision?
If you do have a default, you can negotiate a cure provision that gives you an opportunity to fix the problem.

You might be able to put more money into the company as equity or subordinated debt or cut your expenses to bring you back into compliance.

If you can get a cure provision in your loan agreement, it can be a valuable tool when you get in trouble.

What can you do to avoid problems with your loan agreement?
Keep the future in mind as you negotiate the loan documents and always think about the worst-case scenario.

The bank may give you a break on your interest rate if you have a demand feature on your line of credit that allows it to make your loan immediately due in full. If you include that demand provision, know that the bank could actually make a demand.

Talk to more than one bank about your loan. If you can have two banks competing for your business, that helps you.

Try to negotiate loan agreements when things are going well. If you wait until you’re in trouble and then try to negotiate terms, it’s much more difficult.

Finally, if you know you have a problem, don’t hide it from your lender and hope they won’t find it. Be communicative and if you have a difficult situation, be honest about what you’re doing to fix it. ●

Insights Legal Affairs is brought to you by Brouse McDowell

Companies need to be diligent when protecting against cybercrime

If you have never been a victim of identity theft, it’s not because you’re immune to the risk, says Lucas M. Blower, Attorney at Law at Brouse McDowell.

“The reason may be that there are just too many people to get to,” Blower says. “It’s not necessarily because you’re more protected than someone else. It’s just difficult to get to everybody.”

Cybercrimes such as identity theft and data hacking are a reality in today’s world, and there is only so much that companies can do to protect their valuable data, Blower says.

From a liability standpoint, however, you need to be cognizant of the actions that you openly agree to take to secure the interests of your company and its customers.

“If you don’t have proper controls in place for your customers’ data and there is a data breach, you can be held liable under federal law,” Blower says. “In addition, if you put something on your website that explains how you’re going to protect customer data, you need to actually do it.”

Smart Business spoke with Blower about cyberrisks and what you need to know in order to protect your company.

Why is cyberrisk a difficult topic for both companies and the courts?

One problem is that some companies may believe they are insured against cyberrisks as a result of their general liability policies. They have a good argument, at least under the language of some policies, according to Blower.

Many insurance companies, though, are arguing that these policies should be read narrowly, so that they do not apply to cyberrisks. At least some courts have sided with the insurance companies. Even where they haven’t, insurance companies have been putting new exclusions into the policies that would prevent coverage.

What’s happening is policy holders are getting pushed into a market that has a bunch of language that is far less litigated and far more uncertain than the language in the general liability policies.

We’ve been living with general liability policies for a long time. We know what they say and we know what they mean. What policyholders need to know whenever they are buying these cyber insurance policies is that the normal rules of insurance interpretation will still apply.

What can you do to protect your business?

The first thing you need to do is ensure you’re following through with whatever actions you’ve told employees or customers that you’re taking to protect their information. If you don’t comply with the system you’ve agreed to set up and an incident occurs, your insurance carrier could tell you that the loss is excluded from your policy.

In some policies, there is a policy exclusion for a ‘failure to follow minimum required practices.’ So it’s good practice to continuously reassess your exposure to information security and privacy threats.

What about the risk of human error?

There are commonsense steps you can take to protect your company, but the reality is you’re still facing two problems: first, you can’t protect against missteps where people don’t do what they are supposed to do.

Second, you’re not always equipped to respond to the sort of attacks that are coming at you. The threats evolve and change as new defenses are put in place. Given those two areas of vulnerability, there’s no way to manage your risk without an insurance component.

Fortunately for policyholders, there are a number of pro-policyholder rules governing the interpretation of insurance policies that are going to apply to cyber policies as well.

There is a rule that insurance policy language is construed strictly against the drafting party, which is the insurance company. If there’s any ambiguity in the language and you can construe that ambiguity in favor of the policyholder, that’s how you read the contract.

There are protections built into the law that prevent insurance companies from avoiding obligations based on an over-technical reading of their policies after the loss report comes in and is bigger than expected. Insurers aren’t going to have many customers if they’re selling a product that doesn’t actually cover you when you need it.

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