How to protect sensitive information in the workplace

Every business, no matter how large or how small, receives private data or information from employees, vendors and customers. It’s the business owner’s responsibility to keep this information private and protected. If private information is leaked or falls into the wrong hands, a business could be subject to major liabilities, penalties and embarrassment. The monetary and reputational costs could be staggering.

“It’s no understatement to say that every business needs to have a plan in place for keeping information safe and secure,” says Matthew Kelly, an intellectual property attorney and certified information privacy professional at Semanoff, Ormsby, Greenberg & Torchia, LLC. “Businesses also need to know what to do in the event of a breach.”

Smart Business spoke with Kelly about some of the ways businesses can protect sensitive information and how to best respond if that information is ever compromised.

How should a business begin developing an information management plan?

The first step is to identify what kind of information the business is receiving and whether there are any industry-specific laws that come into play. For example, the health care industry collects personal health information of patients and is subject to federal laws known as HIPAA and HITECH. There are also specific federal laws that cover the financial services industry, the credit card industry, the telecommunications industry, the marketing industry and laws that cover educational institutions. These laws will outline what is required or prohibited in the collection and use of information specific to the businesses in those industries.

Once the legal requirements are identified, business owners should assess how to best handle sensitive information within their organization in a way that’s cost-effective and administratively efficient. Encrypting data, using a dedicated server, limiting access to certain employees and creating a secure method of disposal of information are just some of the ways that a business can protect the data it collects.

Though much information is stored electronically these days, paper files still exist and should be shredded or burned when the time comes to dispose of them. If a business creates a privacy policy that it communicates to customers, it needs to be sure to live up to that policy.

Are there risks in allowing employees to use their personal devices at work?

Each employee’s device increases the possibility of a data breach if it is lost, stolen or hacked. It also increases the risk of theft or copying of information by employees. To addresses these issues, businesses are increasingly implementing Bring Your Own Device (BYOD) policies.

A good BYOD policy will communicate clearly how an employee’s device is to be used in the workplace and how company data is to be handled on those devices. At a minimum, each device should be password protected so that if it does get lost or stolen, a third party cannot access the data.

Some companies prohibit the taking of photographs at the workplace, especially when dealing with proprietary technology or trade secrets. Employees should also be made aware that any business information stored on those devices is company property, and that such information will be returned to the company or deleted when an employee leaves the company or is terminated.

How should a company proceed if there is a data breach?

Data breaches can be very damaging to a company’s reputation and very embarrassing. No company wants to let down its customers or appear incompetent in the handling of sensitive information. For this reason, most states have adopted laws requiring companies to notify customers, and sometimes law enforcement, as soon as commercially possible when data breaches of a certain nature occur.

For most states, the notification requirements will not be triggered unless there has been a material breach of personal information, such as a person’s name and social security number. Businesses that suspect a breach are expected to act quickly to determine whether a breach has actually occurred, the identity of the customers affected and how to secure the exposed data to prevent further damage.

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

Open dialogue, respect are key to working well with municipalities

Municipal leaders must evaluate a number of factors when faced with a company pursuing a development project within their borders, says Charles A. Nemer, a Principal at McCarthy, Lebit, Crystal & Liffman. Business leaders who are willing to work with the community to address these details in a constructive fashion demonstrate a level of respect that can often help it move forward more quickly.

“When a business is looking to expand, it has typically studied the situation and crafted a plan that will allow it to capitalize on a particular opportunity,” Nemer says. “This type of project, however, is also likely to impact the municipality to some degree. Thus, it is imperative that company leadership describe the thought process behind the plan and show what it would mean for the community’s future.”

Smart Business spoke with Nemer about how building a stronger working relationship with municipal leaders can lay the groundwork for cooperation on important projects.

Where do companies run into trouble when undertaking capital improvement projects?
Zoning is the most common point of conflict. When a property/business owner seeks a variance for a particular use that is not permitted under the current zoning ordinances, it sets up a debate between the applicant and the municipality.

On the business side, the company can talk about how the new development will create jobs and therefore, strengthen its own market and industry positions. If the company has been around for a long time, it’s an opportunity for community leaders to reaffirm their commitment to the business. When it’s a new business, it could mean an influx of jobs as well as the chance to diversify the local economy. These are all worthy points for the company to make as it attempts to sell the project.

There is another side of the equation, however. What is the effect on the municipality? What would be the larger consequence of rezoning a particular parcel of land? How would it impact traffic? Does this location have the necessary roads, sewers and water lines to support this plan? How would the new development fit in with the other properties in that part of town?

In addition to physical changes, there are economic considerations when a business wants to build or expand. Tax abatements are desirable for businesses that want to minimize expenses, but they take valuable funding away from schools that rely on tax revenue to operate. What is being offered to ensure the schools are not harmed by this change? The burden is on business leaders to prove the worthiness of their plan and to craft it in such a way that the community benefits as well.

What can a business leader do to help this process along?
Business leaders need to show a willingness to sit down and talk about the details of their plan. Ideally, this is done before any applications for variances are filed with the municipality.

The company should work with its legal counsel to put together a presentation that highlights the benefits that would be realized for both the business and the community if the plan is approved. At the same time, it should not attempt to gloss over points that may be a concern to municipal leaders.

The purpose of the meetings is to discuss these potential hardships and benefits of the project and determine if solutions can be found. Open dialogue is an important part of this effort, as is the ability to see the project from other points of view.

Local government leaders are elected or appointed to represent their constituents, which includes business owners as well as the people who live in the community. Business representatives need to understand this dynamic and be mindful of it as they strive to get their project approved.

What role can legal counsel play in this process?
The company should work with an attorney that has experience in municipal law and can rely on that experience to initiate the dialogue between the business and the municipality. This is not something that will happen quickly. It’s about building relationships and patiently working toward a conclusion that benefits both parties. The company’s approach to this dialogue can go a long way toward determining the ultimate outcome.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

Medical marijuana: Issues surrounding its use in the workplace

Medical marijuana is no longer just an issue for employers in a few states. As marijuana use, both medicinal and recreational, continues to become legally accepted in the U.S., it may ultimately be removed as a Schedule I drug under the Controlled Substances Act.

If and when this occurs, Frank P. Spada, Jr., an attorney with Semanoff Ormsby Greenberg & Torchia, LLC, says employers will have a more difficult task of dealing with medicinal marijuana in the workplace.

“It is almost certain that employers, even in states with laws that don’t require employers to accommodate a medicinal user at work, will face challenges by attorneys who will seek to have the laws interpreted pursuant to these changing social attitudes,” he says.

Smart Business spoke with Spada about medicinal marijuana’s workplace impact.

How does medicinal use of marijuana affect the rights and obligations of employers?

Many of the states, including Pennsylvania, that have enacted medicinal marijuana laws prohibit discrimination against employees based on an individual’s status as a certified user of medical marijuana. Most of these states, including Pennsylvania and New Jersey, protect employers to some degree with provisions in their respective laws that prohibit marijuana use in the workplace. Pennsylvania, for example, does not require employers to accommodate the use of marijuana on the job or ‘when the employee’s conduct falls below the standard of care normally accepted for the position.’ It permits employers to discipline employees who ‘are under the influence’ of medicinal marijuana in the workplace and specifies that employers may prohibit employees from performing certain safety-sensitive positions while under the influence.

New Jersey’s law does not presently require an employer to accommodate medicinal marijuana use in the workplace, but there are two pending legislative proposals that, if ultimately enacted, would limit the adverse action that could be taken against an employee for medical marijuana use before establishing that an employee’s ability to perform the job is impaired.

How can it be established that an employee actually used marijuana in the workplace?

Standard urine tests that are universally used by employers do not establish that an individual is ‘impaired’ by or ‘under the influence’ of tetrahydrocannabinol (THC), the psychoactive chemical in marijuana. A urine test measures, in nanograms, the amount of THC metabolites in the body, which are byproducts produced by the chemical changes in the body to THC after marijuana is smoked or ingested. It does not measure the amount of THC that is in the body. Even if a urine test could identify a level of THC in an individual’s body at the time the test was taken, there is not a universal agreement on what level would constitute impairment. Unlike alcohol, where a blood alcohol concentration of 0.08 percent is considered legal intoxication in every state, there is no such legal limit of THC under federal or state law (The PA law does prohibit a patient from specific jobs when under the influence of more than 10 nanograms of active THC per milliliter of blood in serum). Complicating the matter even further is that the THC metabolites are unlike most drug metabolites, which are water-soluble and can be excreted rapidly from the body. THC metabolites are fat-soluble and exit the body slowly, which can result in a positive test on one day and a negative on the next. Such a situation makes it difficult, if not impossible, to determine through a urinalysis when an employee last smoked or ingested marijuana.

Can employers take action against an employee who has tested positive for marijuana?

The Americans With Disabilities Act does not require an employer to accommodate an employee who is a current user of drugs that are considered illegal under federal law. Therefore, an employer’s reference to the presence of ‘illegal drugs’ in its policy, at present, is still a legitimate basis to take an adverse employment action for a positive drug test for marijuana use. Employers should be careful that their policies do not state that an adverse employment action will be taken if an employee is found to be ‘impaired’ or ‘under the influence’ since establishing impairment or being under the influence cannot presently be determined for marijuana use through a urine test.

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

The importance of a prompt response to construction claims

No construction project is perfect. Regardless of how much experience the participants might have, mistakes, deficiencies and disputes happen.

“There is near certitude of flaws and conflict in the construction process,” says John M. Tedder, Shareholder and Director at Sherrard, German & Kelly, P.C., and a member of its Construction Services Group. “The most important aspects, then, are proper planning in the contracting process, and how the parties respond to claim situations when they do indeed occur.”

Smart Business spoke with Tedder about responding to claims in a construction project and mitigating them from the outset.

What is typically the basis for a construction claim?

Regardless of the size or complexity of the project, construction claims tend to fall into three primary categories:

  • Deficiencies in the actual design and/or construction.
  • Payment disputes for base contract sums that are due or any extra/changed work that has been performed.
  • Warranty items/correction of nonconforming work.

What is the best way to respond to a claim?

It is critical to get out in front of any claim that occurs on the project. In many cases, owners and contractors are focused on the task at hand and try to delay dealing with claim issues until a later date. This is the opposite of what should happen. Instead, at the first hint of a problem, the parties to the contract should pause, evaluate their rights and obligations under the relevant contract documents, and seek the advice of counsel to guide their decision-making.

There are often statutory or contractual deadlines and notice provisions that also must be adhered to in order to preserve certain common construction claim rights and defenses. Mechanics’ lien statutes, prompt pay act statutes, bond statutes or forms typically have some form of notice provisions and/or filing deadlines that should be evaluated and complied with so the respective parties do not prejudice their rights to a claim, or their defenses.

What should contractors, in particular, understand about notices?

There are statutes, whether involving mechanics’ liens or surety bonds, that require that certain notices be given or a claim filed within so many days of it arising, or the viability of that claim is jeopardized.

As a general matter with regard to contractors and subcontractors on commercial projects in Pennsylvania, there is a six-month window to file and perfect a lien claim. That starts from the date work is completed and claims filed after that time are invalid.

Lien claimants other than contractors — subcontractors, sub-subcontractors and suppliers to first-tier subcontractors engaged by contractors — must precede this lien claim by a 30-day notice of intent to lien before filing that claim, the filing of which must be ahead of the six-month deadline.

Additionally, the standard form construction contract documents published by the American Institute of Architects contain a number of notice provisions that stipulate the number of days a contractor or owner has to give notice of a claim, condition or issue. Failure to adhere to these contractual notice provisions may result in waiver of a party’s potential claim rights.

What can the parties do from the outset to limit the possibilities of claims?

It is important at the beginning of a project not to rush through the contract negotiation and preparation phase, whether you are an owner, design professional, contractor or subcontractor/supplier. Engaging with legal counsel from the outset as goals are set and before a project starts can help protect each side’s interests during a project and limit exposure to claims.

Still, no perfect construction project has ever been performed or will ever exist. Bank on the fact that problems will arise. To mitigate the effects of these problems, proper planning is needed and that is aided greatly by involving counsel from the start of the contracting process, and thereafter getting counsel involved early on when the prospect of a claim appears on the horizon. At the first sight of a problem, be proactive. Delaying a response almost always results in bigger issues and potential litigation that is more expensive for everyone involved.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

Defending your business reputation that is under attack

Businesses have access to many forms of legal restitution when false statements are made that damage their reputation, says Defamation Attorney Christian R. Patno, a Principal at McCarthy, Lebit, Crystal & Liffman.

“As defamation claims become more commonplace online and otherwise, businesses need to proactively take steps to ensure they are prepared to respond,” Patno says. At the same time, businesses also need to make sure they are protected if they are accused of defamation.

“Defamation coverage is available, but not all insurance companies offer it. It is very important that companies review their policies to make sure they have enough coverage for their employees and officers,” he says.

Smart Business spoke with Patno about defamation and how businesses should respond when they believe it has occurred.

What can a business do when false statements are made in the media that damage its reputation?
Defamation is defined as any false statement that hurts someone’s good reputation. Libel is a written falsehood while slander is spoken. If someone is stating an opinion rather than a fact, defamation does not apply.

When a false statement is broadcast on TV or published in a newspaper in Ohio by the media employee, there are statutory rights to demand that a correction be broadcast or published within a short time period. Media outlets that do not provide that corrective action risk statutory penalties.

What are business responses to defamation claims in the non-media arena?
When a potential claim arises, there are two perspectives that should be considered. One is the legal aspect of the case and the other is how the pursuit of the case will affect the business non-legally.

At the claim stage, the defamed business has the ability to negotiate an appropriate settlement to avoid litigation. This might involve a retraction and corrected statement, a cease and desist, as well as financial compensation from an insurance company or the personal assets of the accused if damage has occurred.

If unsuccessful, the claim then moves to litigation, subpoenas get issued, records are opened and the privacy of the business victim and defendant is broken as the process runs its course. This unfortunately may result in information coming out through litigation that the defamed company would prefer to keep confidential.

The ultimate question at each stage that must be asked is whether the gain from litigation is greater than the toll it takes to obtain it. The statute of limitations in Ohio for libel and slander is one year from the date it occurred.

However, if a false statement was published three years ago and is republished, the clock starts again and the entity that republished it would be liable for a defamation claim. In Ohio, compensatory damages for defamation have been capped between $250,000 and $350,000, depending on factors. Past economic damage leading up to trial and post-trial are also considered.

What are some risks that businesses must confront in relation to defamation?
Defamation claims in the business sector often involve a competitor or former employee, and something that is posted online, tweeted or told to the media or the next prospective employer. There could also be a claim where a potential customer is told something about a competitor that exposes that company.

There are also situations where business owners can make statements. The question in these business owner situations becomes whether the defamation was made in a personal capacity, as a business owner or both. It is important to avoid making any statements that could be construed as being untruthful about employees or competitors.

Organizations should train personnel to couch statements in the form of opinion and specifically use the words, ‘In my opinion.’ When talking about former employees, the best advice is to avoid negative statements. If the statement is made in good faith and is not malicious, it is probably safe. Remember, truth is an absolute defense.

Immunities also apply, depending on where the statement is made, who the defamed victim is and the content of the statement. If the statement is made with malice or reckless disregard for the truth, it could create the risk of punitive damages and attorney’s fees.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman.

How to stay compliant when growing into foreign markets

When it comes to doing business in another country, U.S. companies are confronted with an increasingly complex legal and regulatory landscape. As a result, it is critical for international businesses to find ways to ensure compliance as efficiently as possible. An important, but often overlooked, aspect is selecting and managing local counsel for the most cost-effective compliance result possible.

“Foreign jurisdictions — China is a good example — have legal systems that are becoming much more sophisticated,” says Walter R. “Bob” Bashaw II, Managing Shareholder and Director at Sherrard, German & Kelly, P.C. “The muscles of these legal systems are exercising themselves more every day. That creates a need for companies to build effective compliance programs that are capable of supporting both their U.S. and overseas businesses.”

Smart Business spoke with Bashaw about common mistakes made by companies as they pursue growth in foreign markets, and how to structure compliance departments capable of staying on top U.S. and foreign regulatory requirements.

What common mistakes do businesses make as they grow into foreign markets?

Small and emerging companies doing business overseas often follow business opportunities into foreign markets first and worry about shoring up the legal component of their expansion plans later. Companies naturally balk at spending the time and money it takes to build effective compliance programs. Their cost-control and U.S.-centric mentality, especially in smaller companies, tends to create blind spots.

Ideally, companies should grow their business and simultaneously develop the corresponding compliance systems in lock step with that growth. The best approach is to think about legal compliance as a 360-degree exercise that focuses on both U.S. and foreign laws.

The most effective compliance programs marry technology with experienced counsel. Fortunately, there are more and better technology solutions to assist with compliance than in the past. There are also a lot of great lawyers around the world. Good, old-fashioned, professional advice still remains at the center of developing compliance programs.

It is extremely important for there to be a good partnership between the business principals, U.S. counsel and the lawyers in the countries where the business operates, especially those companies without an in-house general counsel. Finding the right balance between cost and ensuring compliance is the art of the practice. Securing the right professionals with local expertise at the right price is critical. When companies choose or manage local counsel poorly, they can end up spending a lot of time and money for relatively little benefit and unnecessary risk exposure.

What should companies keep in mind as they search for a local lawyer?

When searching for overseas counsel, consider law firms that are local and sophisticated in the areas of law that pertain to your business, have experienced English-speaking lawyers, and can demonstrate cost-effective service.

Hourly rates are not the only factor in assessing cost. Much like finding a good lawyer in the U.S., it requires working through a process to identify candidates and thoroughly interview each until the right one is found. Also, be willing to develop relationships with local counsel as much as possible. We are all human, and like most people our overseas colleagues enjoy working with people they know and trust.

How can companies create a compliance structure that works?

Companies should take a multi-disciplinary, multi-jurisdictional approach to legal compliance. This means establishing the right processes and procedures from the start, and forming a team of people responsible for ensuring on-going training support, auditing and investigation.

The best teams consist of corporate and local business sponsors, compliance professionals, and lawyers in the various jurisdictions in which the company operates. Information should be shared as freely as possible within the team, keeping in mind data privacy, export controls and similar laws. Team members should regularly talk to each other to create a team atmosphere with clear and shared goals.

Insights Legal Affairs is brought to you by Sherrard, German & Kelly, P.C.

How to use stock legends properly to prohibit unwanted transfers of shares

A legend is a statement on a stock certificate that notes restrictions on the transfer of the stock. A great deal of time and thought is put into preparing agreements among shareholders of closely-held companies, especially with regard to the transferability of share provisions. But if the final administrative step at the end is not taken, the restriction may be useless against a third party without knowledge of the restriction.

“Shareholders may agree to restrict the transfer of shares of a company’s stock, but if the restriction is not properly included on the stock certificate, the restriction on transfer could potentially be ineffective,” says Ashleigh M. Morales, an attorney with Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Morales about stock legends and the impact of not properly including them on stock certificates.

Why is a legend important?

Typically, in privately held companies, shareholders will agree to restrict the transfer of stock in the bylaws, a shareholders’ agreement or a buy-sell agreement. Shareholders generally want to restrict the transfer of stock because they want a say in who will be running or owning the business with them. They may not want their fellow owners’ children, spouse or friends running the business with them in the event of an untimely death. In most situations, the other shareholders (or at least a majority of them) have to agree to the transfer of a shareholder’s shares.

What happens if the stock certificate does not include the legend?

Even if all the shareholders agree to a restriction on the transfer of shares, if a third party receives a stock certificate without a legend containing the restriction and without actual knowledge of the restriction, that third party may not be bound by the restriction and may become the owner of the shares against the will of the other shareholders.

Pennsylvania law provides that unless a restriction is noted conspicuously on the stock certificate a restriction will be deemed ineffective except against a person with actual knowledge of the restriction. The legend puts the world on notice that the restriction exists so someone cannot claim they were unaware of the restriction. Most shareholders’ agreements provide that a legend must be included on stock certificates and the legend on the stock certificate should match that language.

How might this affect a company?

Let’s say an owner dies and all of his property passes to his children. And his children find his stock certificates without any legend on them but the deceased owner had agreed to a restriction on the transfer of shares in the shareholders’ agreement. Assuming the children were unaware of the restriction, the restriction would be ineffective as to the children and they would become the owners of those shares. This is a result the deceased owner and his fellow business owners most likely did not intend. And it becomes an even bigger issue if the restriction allowed the company to redeem the shares at a value less than fair market since now the children could demand fair market value for the shares. This could come at a significant cost to the company or the other shareholders in terms of the price to be paid or litigation.

Do shares of a company have to be certificated?

Generally, Pennsylvania does not require shares to be certificated — a company’s Articles of Incorporation will provide whether the shares are certificated or uncertificated. If shares are uncertificated, the company is required to provide the owner of the shares with written notice of the information typically contained on the certificate, including any restrictions on transfer.

Are LLC interests certificated?

Interests in limited liability companies may also be certificated or uncertificated. If certificated, any restrictions on the transfer of a limited liability company interest should be handled like shares of a corporation.

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

Identify your intellectual property or risk losing it

Intellectual property (IP) protection is a critical task that enables companies to safeguard the hard work, expertise and ingenuity of their employees, says Kristen M. Hoover, a patent attorney at McCarthy, Lebit, Crystal & Liffman.

But, to be effective, a plan must be crafted to fit the way an organization functions.

“Each business must create a strategic plan that protects its unique intellectual assets everywhere they’re used,” Hoover says. “To do this, companies need to understand what IP they have and how those assets are deployed both inside and outside their walls.”

Smart Business spoke with Hoover on how to formulate a plan to ensure a company’s valuable IP resources are protected.

What constitutes IP and what assets might companies overlook when designing a protection program?
Many companies think IP protection is exclusive to patents. For some businesses, particularly those involved in innovation, manufacturing or R&D, patents will be a key component to their IP protection strategy. However, patents are not the only form of IP protection. IP can also be protected with trademarks, copyrights, trade secrets and contracts.

Trademarks often don’t receive the level of attention they should. Many companies put off seeking protection or do not think about it until a problem arises. Logos, slogans and business names are all items that should be protected. Trademarks are source identifiers and a key component to a company’s brand identity. They allow companies to be instantly recognizable to consumers and build their reputation in the marketplace.

Copyright protection is often overlooked, too, because copyrights are associated with artistic works. However, there are many business assets such as websites, internal manuals and handbooks that are copyrightable.

Additionally, companies that provide consulting work may have prepared materials or give presentations that should be protected. A trade secret is any confidential business information that gives a business a competitive advantage.

This could be any number of things, such as marketing strategies, data compilations, manufacturing processes, purchasing information, personnel information or customer lists. It’s a term that can be applied broadly and cover a multitude of assets, and often companies are not aware of all the assets that could be protected as trade secrets.

Trade secret protection, however, is dependent on companies handling this information appropriately. An IP protection plan should include proper procedures for handling this confidential information.

How can confidential information be protected?
To maintain confidential information, and therefore trade secret protection, companies must have internal policies that restrict access to confidential information, dictate how employees with access handle this information, and require the use of nondisclosure and confidentiality agreements. All employees should be made aware of these company policies and be required to follow them.

Contracts such as nondisclosure and confidentiality agreements are useful tools to maintain confidential information and protect trade secrets. For instance, nondisclosure agreements provide protection when discussing a potential business venture with another company or potential business partner.

While it may be necessary to share protected information in order to explore potential business ventures, it’s critical to take steps to ensure that information is not shared or used beyond the meeting. The nondisclosure agreement allows parties to share information while keeping it safeguarded and providing a means to seek restitution if it is not.

How can companies effectively assess and shore up their IP vulnerabilities?
Companies should talk with a patent attorney who has experience developing effective strategies to protect these valuable business assets.

This should include a review of all aspects of the company’s day-to-day business in order to gain a clear understanding of what IP the company has that should be protected. By working with an experienced professional who can provide guidance at each step, the process of establishing an effective IP protection plan becomes more affordable and manageable.

Insights Legal Affairs is brought to you by McCarthy, Lebit, Crystal & Liffman

Treatment of inside salespeople under the Fair Labor Standards Act

The Fair Labor Standards Act (FLSA) establishes minimum wage, overtime pay, recordkeeping and child labor standards affecting full-time and part-time workers in the private sector and in federal, state and local governments. Nearly all employees are covered by the FLSA unless they qualify for one of the exemptions.

Smart Business spoke with Michael B. Dubin, a member with Semanoff Ormsby Greenberg & Torchia, LLC, about the FLSA, why inside salespeople are commonly misclassified as exempt and the consequences of failing to pay overtime to non-exempt employees.

How are salespeople treated under FLSA?

Outside salespeople are exempt from the overtime requirements under the FLSA while inside salespeople are generally non-exempt and are required to be paid overtime for all hours worked over 40 in a workweek.

To qualify for the outside sales exemption:

  1. The employee’s primary duty must be making sales or obtaining orders or contracts for services, or for the use of facilities for which consideration will be paid by the client or customer; and
  2. The employee must be customarily and regularly engaged away from the employer’s place of business. Any fixed site, whether home or office, used by a salesperson as a headquarters or for telephone solicitation of sales is considered one of the employer’s places of business.

Inside salespeople are those generally attempting to make sales over the telephone, internet or by mail. These employees are typically non-exempt and are eligible for overtime pay. However, in certain limited circumstances, an inside salesperson may be exempt under the ‘retail or service establishment exemption.’ To qualify for this exemption, an employer must demonstrate that:

  1. The employee works for a retail or service establishment;
  2. The employee’s regular rate of pay is at least one-and-a-half times the minimum wage; and
  3. More than half of the employee’s earnings in a representative period (not less than one month and not more than one year) are derived from commissions on goods or services.

A retail or service establishment is a business where 75 percent of its annual dollar volume of sales of goods or services (or both) is not for resale and is recognized as retail sales or services in the particular industry.

Why do employers misclassify salespeople?

Many employers see no distinction between outside salespeople and inside salespeople since both positions are selling goods or services. As a result, many employers misclassify inside salespeople as exempt employees. When made aware of the misclassification, these employers often ask if they can direct the inside salespeople to go on the road a couple of days a month so they can be characterized as outside salespeople exempt from overtime. The answer is no, because an outside salesperson must be ‘customarily and regularly’ engaged away from the employer’s place of business, which means greater than occasional, but less than constant. Therefore, this attempt to avoid paying overtime will be unsuccessful if challenged.

What is the penalty for failing to pay overtime under the FLSA?

If an employer fails to pay overtime under the FLSA, the employee has a private right of action and can seek any unpaid overtime going back two years from the date of filing the action. If the employee can prove the employer acted willfully in violating the FLSA, they may be entitled to overtime going back three years. The employee may also be entitled to liquidated damages, which can be up to the amount of the back overtime (it doubles the amount owed to the employee), as well as the recovery of attorneys’ fees incurred in the action.

To keep abreast of FLSA requirements, it is prudent to have an attorney experienced in FLSA conduct a wage and hour audit every few years. This process will allow the attorney to review all job descriptions, the actual duties performed and the FLSA classification of each position to determine whether any employees or group of employees are misclassified and to rectify any such misclassification.

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

It’s never too early to begin crafting your business succession plan

Succession planning can be a difficult task for business owners whose sole focus has always been the growth of the company, says Steven P. Larson, an attorney with McCarthy, Lebit, Crystal & Liffman. However, taking steps to secure your company’s future is the best way to protect yourself, your family and your employees following your departure.

“Every business transition strategy, even within the same industry, is going to follow a different path,” Larson says.

“Every approach is unique because it is based on what you want to accomplish and the legacy you wish to leave behind. There are always options, but the sooner you develop a plan, the more choices you will have. Ultimately, your efforts will provide a great deal of relief and guidance to your family and your employees, knowing that there is a plan in place.”

Smart Business spoke with Larson about how to initiate the succession planning process and the importance of starting early.

Where is a good place to begin your succession planning?
There are two primary areas of focus. The first step is to review your basic estate plan, which should include your will, revocable trust, financial power of attorney, health care power of attorney and living will.

These documents provide baseline protection to ensure that upon your death or incapacitation, a trusted individual is ready to step in and manage your affairs. Along those lines, it’s a good time to consider what protective measures you have in place, such as life insurance and disability insurance to cover you in the event of death or incapacity.

The other area of focus is to develop your ideal business succession plan. Here, the options are vast and highly customizable. While some business owners choose to transfer control of the business to a family member, others may elect to remain with the company in a reduced capacity.

Further options include selling the company to a third party or arranging for a management buy-out, either immediately or over a period of time. Typically, this is a lengthy process that can take years to fully develop and implement from beginning to end. It is never too early to begin thinking about the future of your business and what you want your legacy to be.

How does insurance tie in with both estate planning and business succession planning?
Insurance is important for any business owner, but it becomes particularly significant if you own a business that is highly dependent on your presence to succeed or a service business, such as an architectural firm, law firm or medical practice.

These types of businesses cannot function without you. Thus, you need to formulate a plan that clearly spells out what should take place in the event that you are unable to continue due to your incapacity or death. If you wait until this worst-case scenario occurs, it will be too late to get the insurance coverage needed to protect your business and any stakeholders.

Life insurance is utilized frequently during the estate planning process, particularly for business owners. It may be used to fund a buy-sell agreement, pay estate taxes or provide liquidity to your family.

How prepared are most business owners to deal with succession planning?
It’s one area of the business that is often put off for another day.

Succession planning involves asking and answering difficult questions, including when you should step away, if there is someone in the family or business who has what it takes to lead the company, if you have the time to transfer your knowledge to that person, and ultimately, what is your legacy.

Often business owners have a general idea of what they envision the transition looking like, but it takes work to craft the final version of their succession plan.

Business owners, especially those who built the company from scratch, have a deep knowledge of their business. They also recognize the value of the company, but they may not know what it takes to monetize that worth.

It can be eye-opening to go through a business valuation and determine what needs to be accomplished in order to find the right buyer, if that’s the chosen path. It is important to engage the right team of advisers and give yourself time to complete the process to ensure you achieve your end goals.

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