Phantom stock: How to incentivize key employees

Key employees all want to own a piece of the action. If the company is phenomenally successful, they want to share in the riches. There are several ways to incentivize key employees over both the short-term and the long-term — stock options, restricted stock, non-voting stock and phantom stock are common methods. Of these options, phantom stock is the best choice for the small business owner.

“Phantom stock provides the key benefits of stock ownership without any of the liability or hassle,” says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC.

Phantom stock is essentially a cash bonus that is deferred until some triggering event in the future. Typically much larger than an annual bonus, the award is usually contingent upon the phantom stockholder’s continued employment with the company. This aids with retention of key management personnel.

Smart Business spoke with Smith about phantom stock, how it works and how to implement a phantom stock plan.

How does phantom stock work?

Phantom stock is very simple. It is essentially a contract with the employee whereby the employee earns fictional equity rights. It can include both a share in the appreciated value of the business and a share of profits or annual dividend equivalents.

What does a company need to do to implement phantom stock?

A company needs to adopt a plan and issue ‘grants’ to employees based on the terms the business owner desires. The plans are flexible. They can include vesting over time, forfeiture for cause provisions, limited triggering events or a payout over time upon an employee’s death, disability or retirement.

How can phantom stock aid with the retention of key management personnel?

Employees today want to feel that they have a vested interest in the upside of the business and that they’re not just killing themselves to make money for their boss or owner. If you want employees to stay with you and be vested in the long-term growth of your company, a good strategy is to give them a piece of short-term profit and long-term growth. The phantom stock should be set up so the longer they stay the bigger their piece gets.

What are some of the issues associated with employees owning real stock?

There are tax issues as the employees will receive Schedule K-1 tax forms with income allocated to them, but the business owner may not want to make distributions to shareholders to cover the tax liability. Banks may ask that they participate in loans. Shareholders’ agreements will be required to protect the business owner, and administering some stock plans can be complicated.

As shareholders, employees are entitled to detailed financial and other information, and have various rights under business corporation laws. For the entrepreneur or family business, sharing information about profits, expenses, owner compensation or employee compensation with employees may not be desirable. The employees might not be happy to learn that profits could be higher but for the owner’s personal expenses. Owners have to be willing to share information and be open about how they’re operating the business.

How are phantom stock plans taxed?

There are no tax ramifications at the time of grant, so there is no bookkeeping or administration required. Upon a triggering event, money is paid to the employee in accordance with the grant and is taxed as income to the employee, while the company gets a deduction. This is different than stock and more beneficial to the company.

How is the company valued for the purposes of a phantom stock plan?

There are multiple valuation methods a company can choose, but once one is chosen it must be used consistently. An employee can receive a share of the company value at the time of the grant or only the appreciation in value with a baseline set in the grant. This incentivizes the employee to help grow the company.

Is phantom stock only available to corporations?

No. There are many plans for LLCs, as well. They are called phantom interest plans or phantom unit plans.

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

Employers need to do their part to ensure employees are safe on the road

Employers that fail to enact distraction-free driving policies for their employees risk ending up in a really bad situation, says Rebecca Roderer Price, Of Counsel at Kegler Brown.

“I can think of no worse case for an employer than having an employee cause a catastrophic accident while distracted with an employment-related matter, whether it was responding to a phone call, a text or an email,” Price says. “You don’t want to be in that position.”

Distracted driving is a growing problem in the U.S. A total of 3,154 people were killed in motor vehicle crashes involving distracted drivers in 2013, according to the Department of Transportation.

There’s no way to know what those people were doing that caused them to be distracted, but it’s inarguable that the roads are safer when motorists are focused on driving their cars.
Employers need to do their part by requiring employees to maintain that critical focus when they’re in the car.

“We’ve become a society where employers expect employees to always be accessible by phone or email,” Price says. “However, that should not be the case if the employee is driving.”

Smart Business spoke with Price about what employers need to know when employees take the road on behalf of the company.

How prepared are most companies to deal with a car accident involving an employee?

Employers are often under the impression that if they get sued for an employee’s negligence, they will have insurance to cover any judgment or settlement. That’s not always the case with a car accident. It really depends on who owns the car and what the facts are.

Employers need to evaluate what they are asking of employees as far as running business errands and carefully consider whether they have adequate insurance coverage. There are two different scenarios for business errands: either the company owns the car or it does not. When the company does not own the vehicle, there may not be insurance coverage if the company is presented with a claim.

Most companies have what’s called a commercial general liability policy that they believe will cover everything in terms of negligence or mistakes that happen in a business. However, most of these policies do not cover car accidents.

What is the ‘respondeat superior’ doctrine?

It stands for the notion that an employer can be held liable for an employee’s negligence if the employee is acting within the scope of employment. The rationale is simply that the employer is exercising some control over the employee while the employee is doing his or her job. An employer can therefore be vicariously liable under this doctrine where an employee is driving his or her own car on a business errand and has a car accident.  The employer may not have insurance coverage for the accident.

If there is no insurance and the employer gets sued, it must then pay the attorney’s fees out of pocket. And if there is a settlement or finding of liability in court, the employer must pay that out of pocket as well. That’s a big risk that some employers may not fully appreciate.

How can companies protect themselves?

First, talk to your insurance agent about the coverage you need to protect your employees and your business. Many insurance companies offer non-owned vehicle policies if your employees will be driving their own vehicles while working for you.

Second, if you’re asking employees to drive as part of their job responsibilities, make sure they have a safe driving history. You don’t want to send an employee out on the road to further your business if that employee has a long history of unsafe driving.

Third, you need to reduce the risk of an accident occurring in the first place and protect your business, your employees and other people on the road by creating a solid policy on distraction-free driving. Then you must enforce the policy, meaning there is a consequence for violating the policy.

It’s a hard thing to stay focused on the road when technology is just a swipe away, but it’s what needs to be done to ensure your employees are being safe on the road. A good policy on distraction-free driving isn’t necessarily going to insulate you from liability, but a solid policy at least will give you an argument against liability and will let employees know that it is OK to finish driving before taking the call.

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

Governing your company through the age of cybersecurity attacks

Experts are now saying it is not a matter of if your company will suffer a cybersecurity attack, but rather when it will occur. With customer and vendor information at risk, as well as internal hacks into your company’s systems and sensitive information, the risk is relevant and very real.

Smart Business spoke with Todd Baumgartner, Patricia Gajda, Rachael Mauk and Kate Wexler, attorneys with the Corporate & Securities Group at Brouse McDowell, about how to manage the threat.

What types of cybersecurity threats are out there? 

Cybersecurity is the state of being protected against the criminal or unauthorized use of electronic data. Given that electronic data has become an ever-increasing component of a company’s asset portfolio, the importance of protecting these assets has increased as well. Cybersecurity threats come from internal and external sources.

Although the headlines center on criminal activity, your employees’ actions present an even greater threat. And while this group does include the disgruntled employee, your data is probably most at risk of exposure from employees opening emails from unknown sources, which may open the door to a hacker’s access to the company’s information systems.

Whose responsibility is it in a company to manage cybersecurity risk? 

Consumers, shareholders, and regulators are looking to the board of directors to oversee the management of cybersecurity risk. Depending on the size of a company, the actual management of the risk may lie with the board or be delegated to a committee of the board (i.e., the audit committee or cybersecurity committee). The board needs to ensure that management of the risk is addressed. This entails developing a plan to prevent cybersecurity attacks and a response plan to mitigate the damages of an attack. It is clear in recent case law that the board will not be able to avail itself of the business judgment rule – to be reasonably informed – in its duty of care to the company if it fails in the oversight of cybersecurity.

What should directors ask to identify cybersecurity risk to their organization?

The board or committee needs to pose questions that center around five critical areas:

  • Risk Assessment — What are our mission-critical assets? Have we assessed the probability of a cyberattack on these assets?
  • Resources — Are we devoting adequate resources to address the risk presented to our organization? Is the budget sufficient to address the level of risk presented? Do we have qualified personnel to address the cybersecurity risks presented? Are we spending time training our employees to prevent data breaches?
  • Standards — What standard are we using to design our cybersecurity policies and procedures?
  • Crisis Response — Does the company have a cyber incident response team? Does our response team include members of our legal team to help address the legal and regulatory issues related to a cyber incident? Has our response team developed a cyber incident response plan?
  • Disclosure — For public companies, are we making adequate disclosure of the cybersecurity risks facing our company? Are we prepared to meet state and federal regulatory requirements for disclosure of a breach? Does the company have a form of consumer notice with language and means of delivery for that notice?

What other preparatory measures can be taken?

Control insider threats by training your employees on your cybersecurity policies and the dangers of ‘phishing’ scams. Review your current insurance policies to see if you are covered for data breaches, regulatory investigations, misappropriation of intellectual property, transmission of malicious code, data recovery, business interruption and extortion. Review contracts with vendors and subcontractors to ensure they contain provisions that impose security standards, restrictions on data storage and transfer, breach reporting, and provide you with a mechanism for auditing their compliance when handling your data.

Insights Legal Affairs is brought to you by Brouse McDowell

A revision to federal overtime rules could leave employers in a tough spot

Employers that have chosen to look the other way as employees rack up unpaid off-the-clock hours to get their work done may soon have a problem.

The Department of Labor (DOL) has proposed a rule that would drastically change its interpretation of the Fair Labor Standards Act (FLSA) with respect to overtime exemptions, says Jeffrey C. Miller, a Director at Kegler, Brown, Hill + Ritter.

The current rule, put in place in 2004, exempts employees with salaries of at least $455 a week ($23,660 a year) who perform executive, administrative, professional, outside sales and/or computer duties from overtime regulations.

Last month, under President Barack Obama’s directive, the DOL proposed updated regulations which would raise the 2016 salary exemption to $970 a week, or $50,440 a year. The federal agency estimates that 4.6 million workers would be newly qualified for overtime in the first year of this new rule.

“Many are projected as administrative  and entry-level executive professionals who are trying to advance in their respective companies,” Miller says. “They will no longer be exempt. So you’re going to need to look at the hours they are working. If you haven’t been paying attention, you need to start.”

Smart Business spoke with Miller about the new rules and how wage and hour claims that come about as a result of not playing by the rules could affect your business.

What do business owners need to know?

Going into 2016, the budget for the DOL’s Wage and Hour Division, which enforces FLSA policy, went up almost 20 percent. Wage and hour actions will increase with more resources available to use for enforcement.

Perform an audit of your employees to be sure you are classifying them correctly as exempt vs. non-exempt. You also want to be sure you are calculating overtime correctly for non-exempt employees. Have an attorney perform that audit to ensure the results are protected by attorney-client privilege. If you don’t have that confidentiality, the results could be discovered by the DOL or by a plaintiff’s attorney.

In 2014, the DOL collected more than $240 million in back wages and had about 30,000 investigative actions.  Another 8,000 or so actions are initiated by employees each year.

How do wage and hour claims occur?

Predominantly, companies are directing or permitting employees to work off the clock, but often employees realize the budget constraints of their employer and choose to work off the clock on their own.

But another cause is missing minutes where somebody is required to do something integral to their job, but is not compensated for it. If an employee has a job that requires safety equipment, he or she may be entitled to compensation for the time spent putting it on and taking it off. Lunch breaks are another concern, if employees are not actually taking a 30-minute uninterrupted meal break.

An area of immediate concern is remote work. With smartphones, tablets, and remote access, non-exempt employees are performing remote work, after hours, but not getting paid. I’ll get an email chain from a client that includes a message sent after hours from a non-exempt employee. When that employee is sending out comprehensive emails at 7:30 in the evening, it’s compensable time.

How can you protect your company?

Have policies in place about when employees can and can’t work. Your basic policy is that you can’t work off the clock unless it’s approved by management and if it’s not, you’ll be subject to discipline. You should have an open-door policy so that concerns can be brought to management to keep the company’s good faith defenses.

Use technology. Only allow approved employees to access company systems after hours. Include a prompt when employees clock out to ask if they had an uninterrupted lunch break, and a prompt when they clock in to ask if they performed any work since they clocked out. If the answer is yes, it goes to HR and can be addressed.

Start with the audit to eliminate any potential exposures and to look for all cost savings. Be proactive because once the DOL comes in, you’re pulling time records for every employee at every location and responding to discovery and depositions.

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

You may be able to reduce your rent when renewing your lease

The option to renew the term of a lease is a common provision found in leases. Many tenants accept a level of rent during the renewal term equal to a set percentage increase or a factor of fair market value. Upon a renewal the tenant will remain in the space and rent will increase.

However, many tenants do not realize that there may be room to negotiate a lower rent than what was contained in the option. The option rent should be regarded as a “cap”, not an agreed upon rent.

Smart Business spoke with Craig M. Chernoff, a member at Semanoff Ormsby Greenberg & Torchia, LLC, about lowering the rent during a lease renewal, when to start the process and who you should involve in the process.

Why would a landlord agree to accept a lower rent during a renewal term than what the tenant’s option provided for?

When a lease is renewed, the financial benefit to the landlord can be substantial. If a tenant does not renew its lease, the landlord will be hurt. The property will sit vacant for a period of time, which may be significant. In order to induce a new tenant to lease the vacant space the landlord will incur substantial costs, including fit out costs and other allowances. Finally, the landlord will likely have to a pay commissions to a real estate broker for finding a new tenant. That may not be the case upon a renewal.

If, however, a tenant renews its lease, the landlord will immediately benefit. The property will not be vacant and the landlord will continue to receive rent. The landlord will not likely have to make concessions to the tenant, such as fit out costs and other allowances. Also, the landlord may not have to pay a commission.

That said, landlords know that tenants incur costs for moving, such as moving expenses, fit out costs and potential downtime. Accordingly, the landlord and the tenant each have a point at which either losing a tenant (as to the landlord) or moving (as to the tenant) does not make economic sense.

When you examine these different standpoints you can determine at what point a landlord will need to make concessions so as not to lose money by having a vacant space and incurring costs for a new tenant. You should ask yourself if you want to move, and perhaps pay significantly more once everything is said and done, or if you want to use the leverage you have to negotiate a cheaper rent and maybe even additional concessions.

How should a tenant go about performing this analysis and negotiating with the landlord?

A good understanding of market conditions is paramount. Real estate brokers best understand the relevant market conditions. There are tenant-oriented brokers and consultants who will help tenants perform this analysis. A tenant may have to pay a fee, but the savings may greatly outweigh any fees a tenant may incur. The tenant’s attorney should be intimately involved with this analysis so the attorney can effectively negotiate with the landlord.

Can this negotiation occur even if the lease already provides the terms for the renewal?

Absolutely. Just because a lease provides an option for renewal does not mean that a tenant cannot try to re-negotiate for better terms. An option does not commit the tenant, only the landlord. Remember, the tenant does not have to renew, and the landlord wants to try to keep the tenant in the space.

When should a tenant start this analysis?

Leases typically provide a time frame for renewals. These time frames vary, and may be 90 days, 180 days or even a year before a renewal. Ideally, a tenant should speak with an attorney and a real estate broker at least six months to a year prior to the date it must exercise its renewal option. The earlier the process is started the better.

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

Four tips you should keep in mind when acquiring another company

Business owners who get impatient when pursuing the acquisition of another company will often find that they miss out on important pieces of information in their haste to quickly complete the deal, says Todd C. Baumgartner, a Partner at Brouse McDowell.

“Be thorough in your due diligence and avoid both the temptation and the pressure to pull the trigger until you’re ready.” Baumgartner says. “You need dedicated people who are going to invest time in the due diligence process to understand the target company’s culture, systems and operational philosophy. Understand that these people are going to be dedicated to this process for several months and adjust their workflow accordingly.”

Follow a methodical approach and you reduce the risk of uncovering a costly surprise after all the papers have been signed and the acquisition is complete.

Smart Business spoke with Baumgartner about four tips you’ll want to keep in mind when acquiring another company.

Tip No. 1: Structure the deal to mitigate the buyer’s risk

One way to reduce your risk as a buyer is to buy the assets of the company, but not the stock. When you also buy the company’s stock, you become the company. You now stand in the shoes of the seller and if the seller hasn’t paid taxes, you haven’t paid taxes. If the seller is being sued, you’re being sued. If you just buy the assets, most of those liabilities will not transfer to you.

To further protect yourself as a buyer, include a holdback provision in your purchase agreement requiring a portion of the purchase price to be held in escrow to cover any liabilities that might arise. You can also add an earn-out provision that reduces the purchase price if the company fails to meet a certain revenue benchmark.

There are a few compelling reasons to buy a company’s stock. Examples include a favorable lease, a customer contract that would otherwise be difficult to transfer, or existing environmental indemnification coverage that protects you against potential environmental property liabilities.

Tip No. 2: Do your due diligence

Create a due diligence checklist that ensures you know as much as you can about the company you are buying. You should understand how the company operates, what kind of benefits plans are in place and any existing HR policies, including employee vacation and flexible work arrangements.

If there is real estate involved, conduct an environmental study. If you’re buying equipment, make sure it’s in good working order and well-maintained. Perform a Uniform Commercial Code search to ensure there are no liens on the assets you’re buying.

Tip No. 3: Get assignment of all contracts and leases you need to run the business

Every company has contracts with vendors and suppliers to operate as a business. Ensure that these contracts are assignable to you. If they’re not, get consent to have them assigned to you. The same holds true for customer leases and contracts. Get all the pertinent information that will allow you to continue working with these partners of the business.

Pay particular attention to real estate leases. In almost every case, you need landlord consent to assign a contract to you. There have been cases where a buyer bought a business and went to operate in the building where the company does business and found a padlock put on the door by the landlord because consent to use the building had not been granted. As the buyer, you need to reach out to people and scrub the contracts to make sure you are in compliance and have addressed all issues. The earn-out provision can be helpful in this effort as you can incentivize the seller to help transition clients and customers to you.

Tip No. 4: Secure any intellectual property that comes with the business

If your company has a name, you have intellectual property (IP). You need to make sure you control all the IP to prevent someone from taking the company’s name and all that it represents out from under you. The company you buy may have software that runs its systems that was designed by that company. Make sure you get that software along with any other IP assets that are essential to operating the company.

Insights Legal Affairs is brought to you by Brouse McDowell

A look at what happens when lawyers and judges are accused of misconduct

Trust is a critical component to any business relationship, but perhaps none more so than that of a lawyer and the company that the lawyer is representing.

“It’s impossible to have any kind of good lawyer-client relationship without trust going both ways,” says Geoffrey Stern, a Director at Kegler Brown Hill + Ritter and former Ohio Supreme Court Disciplinary Counsel.

“If you’re a business leader and you share confidential information with your lawyer, you have to trust that the lawyer is going to respect the need for confidentiality.”

Stern says the majority of lawyers are decent, honorable men and women who approach their work with a high level of integrity. But as with any profession, there are some individuals who find their way into trouble.

In the legal profession, that can result in an investigation by a committee of the local bar association or by the Ohio Supreme Court Office of Disciplinary Counsel. In some cases, it’s an intentional or reckless act of misconduct. But there are other times when it’s a misunderstanding that requires outside help to be resolved.

Smart Business spoke with Stern about how these investigations work and what you can do to protect your company’s interests.

What is the goal when a lawyer or judge is being investigated?

The goal of the investigation is to determine whether probable cause exists to believe that an ethical rule has been violated. There is a threshold for this probable cause. The words in the rule are ‘substantial, credible evidence of misconduct.’

If that threshold is reached, the case moves on to trial. At the trial, misconduct has to be proven by what’s called ‘clear and convincing evidence,’ which requires a high level of proof. The committees that look into these cases are staffed on a volunteer basis by lawyers and judges, as well as some non-attorneys.

How often do these investigations lead to guilty verdicts?

As Disciplinary Counsel of the Ohio Supreme Court for four years, my office handled about 14,000 grievances against judges and lawyers. Of the ethics complaints that are filed, only 1.5 percent of them go forward to trial. That’s controversial as some critics believe that the disciplinary system in policing itself is a big whitewash. I do not share that position.

More than 90 percent of the cases that go forward result in a finding of misconduct and a sanction that ranges from a public reprimand, which is usually published by the Ohio State Bar Association, all the way up to disbarment. Disbarment in Ohio is permanent. There is no way a disbarred Ohio lawyer can ever be readmitted to the practice. These disciplinary cases are not the same as legal malpractice.

Disciplinary matters deal with the licenses of lawyers and judges. Malpractice cases involve the seeking of monetary damages for departure by a lawyer from accepted standards of practice.

How can you reduce the risk of a problem occurring in your company?

One common issue in the legal realm is conflict of interest, the idea that a lawyer cannot represent two masters. Rule 1.13 of the Ohio Rules of Professional Conduct deals with the relationship that a lawyer has with a business organization, such as a corporation, a partnership or an unincorporated entity.

The rule states that the lawyer retained by a business organization owes his or her allegiance to the organization and not necessarily to the CEO or the board. A question arises, however, that because the corporation does not have a separate physical existence, who really speaks for the corporation? This can become the subject of an investigation of a lawyer who attempts to represent the interests of the corporation and other persons with interests adverse to the corporation. A lawyer with proper consent may represent both the corporation and the officers, directors and board, known collectively as the constituents, but there may remain questions of conflicts and client consent to representation.

In most cases, the relationship between the entity and the lawyer is a healthy and productive one. Focus on building and maintaining that trust, and you’ll avoid putting yourself in a situation where such a conflict of interest may occur.

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

How new changes in disclosure requirements will help borrowers

The Consumer Financial Protection Bureau (CFPB) will soon require lenders to comply with new rules aimed at helping borrowers make informed decisions about the loans available to them when buying a home. In the past, many consumers didn’t understand the costs and risks associated with their loans, and they had little protection from lenders changing the terms of their loans as they got close to closing. The new rules should address these issues.

The “Know Before You Owe” rule has been a while in the making, says Catherine Marriott, a member of Semanoff Ormsby Greenberg & Torchia, LLC.

“There were a lot of borrowers who were not aware of the terms of, and risks associated with, their loans. The new rules are aimed at making sure a borrower is more informed from the start,” she says.

Smart Business spoke with Marriott about the new disclosure requirements and how the changes will also impact other parties to a real estate transaction.

What is the CFPB?

Congress established the CFPB to protect consumers by enforcing federal consumer financial laws. The CFPB seeks to educate consumers so they can take more control over their financial lives, to make more effective rules governing the practices of financial institutions, and to consistently and fairly enforce those rules.

What does the CFPB do in the context of a mortgage loan?

With respect to a mortgage loan, the CFPB wants to make sure that consumers understand their loan options and the costs associated with these options. The end result should be a fully-informed consumer who understands the costs associated with their loan within a few days of the loan application. The consumer should not be faced with fundamental changes to their loan terms or costs at the last minute, nor should they face any surprises at closing. It’s important to note that the CFPB is protecting consumers, so these new rules apply to loans to individuals, not corporate borrowers.

How will the CFPB achieve these goals?

The CFPB has implemented new rules, effective Oct. 3, 2015, requiring lenders to comply with new disclosure requirements relating to many types of common mortgage loans. Lenders will be required to provide a specific new disclosure form that must be delivered to consumers within three business days of receipt of a completed loan application. The new closing disclosure will include estimates of loan and closing costs. There will be very specific delivery requirements so lenders can be sure that the closing disclosure has, in fact, been received by the consumer. There will also be very limited circumstances when loan terms or closing costs can change, and doing so will require another notice and the passage of additional time. In addition to the new closing disclosure, lenders will be required to deliver a summary of all final borrower closing costs at least three business days prior to closing, which will be called ‘consummation’. There can be no changes to these costs after disclosure or the new costs must be re-disclosed, and consummation must be delayed to comply with the three-business-day disclosure requirement. A new form of settlement statement will also be used at consummation. This form is intended to be easier for consumers to understand.

How will these changes affect other parties to the real estate transaction?

Sellers will probably be asked to schedule the pre-settlement inspection around 10 days prior to consummation so that lenders can finalize and disclose to the borrower all closing costs at least three business days before consummation. Sellers may also need to be flexible about the date of consummation because of the strict disclosure requirements. Sellers will need to fully comply with the terms of the agreement of sale because any changes to buyer costs will require re-disclosure and a delay in consummation. Real estate agents will need to be familiar with the changes and advise buyers and sellers accordingly. They will also need to be familiar with changes to the PA Association of Realtors forms as they are modified to address issues raised by the new disclosure requirements.

Buyers, sellers and real estate agents should consult with a real estate attorney if they have concerns about how the upcoming changes will affect their transactions.

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

Address potential conflict at the front end when forming your joint venture

Opportunity abounds when the initial plans to form a joint venture are being drafted. You see numerous opportunities for growth and express confidence that the new partnership will be a boon to everyone involved.

It is during this time of great camaraderie that you should take a few moments to spell out in clear legal terms what actions would be taken if the joint venture doesn’t go according to plan, says Elizabeth G. Yeargin, a Partner at Brouse McDowell.

“You want language in your agreement that will encourage you to keep working together rather than give up if you have difficulties,” she says. “Some companies take the chance that things will work out and obviously, you hope that it does. But if it doesn’t, you end up fighting it out, often in court. That’s not the goal.”

Smart Business spoke with Yeargin about why you need to prepare for potential conflict in your joint venture.

How do you approach a deadlock amongst joint venture partners?

Deadlock becomes more likely to occur when you have two leaders with strong personalities who will now have to share decision-making responsibilities. This can be difficult for someone who is used to being in charge and reporting to no one. Draft a pre-agreed upon plan that lays out the steps that will be taken to resolve the deadlock with the worst-case scenario being the dissolution of the joint venture.

The first step might be that you get together and have a meeting. If that doesn’t work, you can bring in an independent third party that you both mutually respect and hope he or she can bridge the gap. If you’re still split, take a more formal approach and try mediation. When you’ve gone through all your options and still can’t agree, you can move to the breakup of your joint venture, whether through a buy-out of one of the partners or the dissolution of the venture.

What challenges can the breakup of a joint venture present?

Breakups come about for a couple of reasons. It could be a case of deadlock in which you and your partner cannot agree on operating the venture and need a mechanism to get out of the partnership. But another scenario could be that one person just wants to leave the business and do something else or wants to stay in the business, but lead it without a partner.

You need to contemplate a provision where one partner can propose an offer to buy the other out. Also consider whether you want to allow potential offers from third parties to buy a partner out and if the other partner wants a right of first refusal if that happens. Do you want the right to tag along if your joint venture partner wants to sell and also be bought out? You may also want to think about a provision where nobody has the right to buy anybody out for a given period of time to give the joint venture a chance to succeed.

Another big thing is valuing the company. If one partner is providing the intellectual property or reputation and business connections in the community and that partner leaves, how does that affect the company’s value? Bring in a professional familiar with your particular line of business who can help you put together a precise formula that can be used to value the company.

What about noncompete provisions?

There are two things to consider in drafting a noncompete provision. The first is determining what the partners can do while the joint venture is operating. Figure out the different lines of business in which the joint venture members are involved and the extent to which they can independently compete with the venture. You want to be careful not to restrain trade, so consult with an antitrust attorney. The other aspect is what happens if one of the partners is bought out or leaves the joint venture. You need to define the parameters of a trailing noncompete prohibition and how long it should last.

What if both partners want to change the rules?

Any joint venture agreement should have a provision that states the agreement itself can be amended and how that can be done. Be thoughtful before entering a joint venture. Consider all possible scenarios while you’re both on the same page. That makes it a lot easier down the road if things go awry.

Insights Legal Affairs is brought to you by Brouse McDowell

What to know when questions come up about workers’ comp entitlement

The authority of an employer to deny an employee’s entitlement to workers’ compensation benefits can sometimes be difficult to define. The challenge arises when the employee has done something that leaves the individual unable to work, says Dave McCarty, a director at Kegler, Brown, Hill + Ritter.

“Most employers have written work policies that lay out what you can and can’t do as an employee in that company,” McCarty says. “Those policies have implications on employment status. The question is to what degree can those policies also be used to impact your workers’ comp entitlement?”

In other words, if you have an employee who is terminated as a result of breaking a written company rule, are you still responsible to cover the employee’s workers’ compensation claim?

Smart Business spoke with McCarty about what to do when faced with questions about workers’ compensation entitlement.

How do workers’ compensation entitlement cases come about?

They happen more often than you might think in a variety of scenarios. For example, you have an individual who lies on his employment application. He says he has a commercial driver’s license and gets hired and injured before it’s discovered that he lied and wasn’t qualified for the job. So you have a valid workers’ compensation claim, but a question as to whether he is entitled to compensation or only payment of medical bills. It’s a big deal to employers because compensation being paid as opposed to medical benefits being paid, things like total temporary disability and other forms of compensation, are big cost drivers for employer premiums. If employers can avoid having to pay compensation, even though there is a valid claim, that’s significant.

What is the voluntary abandonment doctrine and how does it apply in these cases?

If an employee is fired for violating a written work policy that clearly defines the prohibited conduct, which has been identified as a dischargeable offense and which the employee knew or should have known, he is not entitled to temporary total disability benefits. The reason is the fact that it is his own action, rather than the injury in the workplace, which prevents returning to work and therefore the loss of wages. There needs to be a causal connection between the injury and the loss of wages in order for the person to be entitled to compensation.

In 1995, a case called Louisiana-Pacific said that if you as an employee take some action that you know or should know is going to result in your termination, the natural consequence of that act which can be anticipated is you’re going to lose your job. The causal connection between the injury and the loss of wages is broken.

What is total temporary disability?

It’s defined as a temporary inability to return to the former position of employment. So whatever the person was doing at the time he or she got hurt, if the doctor says as a result of the injuries, the person can’t do his or her regular job and it is a temporary situation, not a permanent inability and then that person doesn’t return to work, they would be entitled to temporary total compensation. Other than when incarcerated, that rule is pretty universal with one exception: if you commit violations of written work policy that result in your termination, you may not be entitled to compensation.

Are employers typically familiar with how these cases are handled?

Enough employers are unaware of how this issue is handled that legal advice is recommended. Larger employers often have a support staff in place and probably have encountered these situations before. Smaller employers may not have the experience to realize that this is a defense that might be the difference between being able to stay in a group and have really good premium savings or get kicked out of the group and have the business’s bottom line really be impacted.

How should employers respond to workers’ compensation entitlement questions?

Meet with legal counsel before deciding on a course of action. If a network of attorneys and third-party administrators can be established to serve as a sounding board when these issues come up, it can make dealing with them much easier.

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