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Sunday, October 2, 2011

Avoid Piercing the Corporate Veil

Many business owners establish corporations to shield themselves from personal liability for business debts and protect their personal assets from creditors of the company. When established and maintained properly, a corporation is treated under the law as an independent entity, with many of the rights afforded to individuals. Such rights include the ability to own and transfer property, enter into contracts, obtain funding and to initiate legal action. A corporation is a separate, distinct entity, apart from its shareholders; as a result, only the corporation’s assets can be seized to pay judgments or satisfy other debts owed by the company.

However, business owners can lose the liability protection afforded by the corporate business structure through simple, common mistakes. Certain corporate formalities must be observed in order to preserve the corporation’s status as a separate entity apart from its owners. Failure to comply with these requirements may permit creditors to “pierce the corporate veil” and seek payment from the individual shareholders directly.

To ensure the corporate veil remains intact, the corporation must act like a separate and distinct entity, and the shareholders must treat it as such. If certain corporate formalities are not consistently observed, a court may find that the corporation is merely an “alter ego” of the individual owner(s), and the corporate structure may be “disregarded”. When this occurs, the corporate veil is pierced and the individual shareholders can be held personally liable for the debts of the company.

The most frequent mistake owners of small corporations make is commingling of assets. The corporation and the shareholders must treat themselves as separate entities. The corporation should have its own bank and credit card accounts. Business owners should clearly document and account for expenditures made from corporate accounts if they were for personal benefit. In other words, do not use the corporation's funds for other than legitimate company expenditures.

The second most frequent mistake is to forget to keep up-to-date corporate records. Often, business owners will engage in certain actions - such as buying or selling a building or taking out a loan to purchase machinery - without noting in the corporate minutes that such actions were approved by the corporation. The corporation’s financial and corporate records must be documented. Most states also require that the shareholders and the directors meet at least once per year. A record of these meetings, in the form of minutes or written resolutions must be properly executed and maintained by the company.

The benefits associated with the corporate structure are manifold. But, as is frequently the case, these benefits can be lost by failing to "play by the rules".

Thursday, February 18, 2010

Understanding Severance

Since the 1930s, employees have acquired more legal rights as federal and state governments enacted laws giving them the right to unionize and engage in collective bargaining, to receive a minimum wage and extra pay for overtime work, and to be protected from discrimination based on race, religion, gender, or disability. However, the employee protection laws have a serious gap; with the exception of the right to maintain health insurance coverage under the provisions of COBRA, employees do not have any rights to income after termination.

Labor laws in virtually all European countries - and many other countries around the world - specify that an employee is entitled to payment if he is involuntarily terminated. The few exceptions which exist concern termination for gross cause, usually defined as criminal acts or breaches of fiduciary duty.

In the U.S., however, legal protections covering severance are far more limited in scope. There are no provisions in the federal Fair Labor Standards Act that require compensation for severed workers.  As a general rule, employees who lose their jobs are not entitled to severance payments unless the terms of severance are spelled out in an employment contract. A limited exception exists in the Worker Adjustment and Retraining Notification Act (WARN), that provides for advanced notice or pay in lieu of notice under certain conditions. WARN does not cover all employers or most termination scenarios.

However, workers who have lost their jobs may be able to demand severance if the company has traditionally provided severance to terminated employees. While an employer is free to change policies (with certain limitations), if there has been a written policy or oral statement that terminated employees will receive severance, a strong case can be made that such a commitment constitutes a binding agreement.

For example, a client of mine was terminated due to a company restructuring. His employer had a history of providing two weeks of severance per year of service (a pattern of practice). However, my client was provided with only one week of severance per year of service, which the company justified as reasonable due to its financial condition. We challenged this on several grounds, including the fact that the company's President had stated six months earlier that company benefits would be continued despite the economic climate.  Ultimately, my client received the correct severance package.

Employers should review any statements regarding severance that can be found in employee handbooks.  Oral statements, written memos, and even casual emails should be analyzed to see if commitments have been made.

A written severance policy should be drafted. The policy should consider the following questions:

• Do we want to have any severance provisions? If so, how much severance should be offered? How should it be calculated (e.g.length of service? Rank in the company?)
• If severance is granted, which workers are eligible?  Only those working full time?  What about long-term part-time workers?
• How long does an employee have to be on the job to be eligible for severance?
• Is there a cap on the duration of severance?  For example, six months regardless of length of service?
• Will any severance compensation be paid out as a lump sum or over time?
• How do severance payments affect eligibility for unemployment insurance claims?

Terms of severance involve more than payment of wages or salaries for a specified time after termination. Severance policies should also cover payment for unused sick leave as well as other benefits. In some cases, the company may decide to offer outplacement services to a severed employee, including career counseling and assistance with resume preparation. Workers are often asked to sign an agreement not to sue for wrongful termination in return for receiving severance benefits.  Non-compete clauses may also be part of a severance agreement.

It is important for employers to retain experienced employment counsel when drafting severance provisions for employee handbooks or in crafting severance agreement language.

Monday, October 12, 2009

One Attorney's Opinion

“My attorney is a fighter. He always fights to the last dollar of my money!” (Anonymous)

From the first day of law school attorneys are trained to be zealous advocates. By nature, attorneys are competitive. We fight to win, to achieve our client’s goals by besting the other side. Frankly, our clients look to us to be the combatants in the ring, championing their cause and advancing their interests. Our clients want us to go after the other side without pity or remorse.
But are we really serving our client’s interests by aggressively litigating? Should our focus instead be on solving our client’s problems by other means? In other words, should we look for alternatives to fighting and resort to legal combat only as a last resort?
By asking the questions I am also supplying my answers. Now, I like a good fight. It starts the adrenaline flowing and enlivens the practice of law. In addition I have no objection to earning legal fees from litigation; they can be quite good. But sometimes I think I better serve my clients by counseling them regarding why litigation is not always the best approach to resolving their legal problem.
Obviously, the decision to litigate is fact dependent and sometimes litigation is undertaken to make a point rather than achieve a specific objective. However, too often clients authorize litigation without truly understanding both the monetary and the psychological costs involved.
I view my role as an attorney to be an advocate, a counselor and an advisor. The advocate role is well understood by clients. The counselor and advisor roles are not.  In my experience, a good counselor is one who can help the client look at alternative means to achieve the desired end. The advisor then evaluates the alternatives, provides the client with his or her professional advice on the best strategy to employ, and often guides the client to make the most appropriate decision. These roles are not as much fun – and may not be as financially rewarding to the attorney – but they go to the fundamental service we provide, which is to help our clients resolve their legal problems.
While we are taught to be zealous advocates, perhaps we serve our clients best when we serve them least. Litigation is not the first strategy and frequently not the best alternative.

Sunday, August 30, 2009

You Are On Notice

As most employers know, there are a myriad of federal and state laws that govern the relationship between employer and employee. These laws can be complex and seemingly designed to be understood only by lawyers (which is not surprising considering that they were written by lawyers). For example, the Family and Medical Leave Act was enacted to serve a noble and socially desirable purpose but the end result has been a plethora of litigation that, over the years, has confused judges and employers alike. The Fair Labor Standards Act and New Jersey’s Wage and Hours law have caused many an employer to misclassify and incorrectly pay employees – with severe financial penalties for the employers and good fees for the attorneys. However, there is one aspect of all of these laws and regulations that is quite easy to understand and comply with; notice requirements.

Employers have some very specific notice requirements. Failure to provide the various forms of notice required by federal and state law can result in sanctions for the employer with attendant expenses, as well as a loss of legislated employer rights. For example, failure to post the required FMLA notices can result in the employer losing the right to take action against an employee who does not fulfill his/her obligations under the law. In addition, the failure to post can support allegations of interfering with an employee’s FMLA rights and cause an employee’s leave to not be designated as FMLA leave, thereby potentially entitling an employee to 12 weeks of leave in addition to time already taken.

The U.S. Department of Labor outlines, in various federal regulations, the notice requirements for employers. A list of required posters is available at the Department of Labor website, www.dol.gov/osbp/sbrefa/poster/matrix.htm. New Jersey’s Department of Labor and Workforce Development also lists the required posters and notices at http://lwd.dol.state.nj.us/labor/employer/content/employerpacketforms.html. Several of the notices can be printed off of the web site. Workers compensation insurance carriers will have the required notices for this mandatory benefit, and general business insurance carriers will be able to supply (or procure) the mandatory Occupational Safety and Health Act posters.

In short, proper notice is the foundation of ensuring that employers and employees alike are aware of their rights and obligations under the various employment laws. Since the employer controls the workplace, the employer is responsible for ensuring that notice requirements are met.

Notice has been served.


Sunday, August 23, 2009

Is My Time Really Your Time?

Cell phones, pagers, emails, text messaging…technology has provided numerous ways to keep in touch with each other. We are always “on” and available. If we want to avoid someone, it is no longer sufficient to say “I never got the message” because we can always get the message, no matter where – or when.

Employers have been quick to grasp the benefits of this technology. The distinction between work time and personal time is becoming blurred.  More and more, employees at all levels (not just executives) are expected to be “on call”, available to work when contacted even when off-the-clock. However, is this legal?

Whether on-call time is compensable often presents a perplexing problem for employers. In determining whether an employee must be paid while on call, we first have to determine if the employee is ''engaged to wait'' or ''waiting to be engaged.''  Skidmore v. Swift & Co., 323 U.S. 134 (1944).  Both the federal Wage and Hour laws and the New Jersey Administrative Code look to whether the employee in question was free to use the “on call” time for personal purposes, or whether the conditions for being “on call” were sufficiently restrictive that the employee could do little more than sit around, waiting for the employer’s call.

The general rule is that non-exempt employees are entitled to receive compensation for on-call time if they are required to be at work and are unable or not permitted to perform personal activities during that time. For example, if an employee is required to remain at home on a day not normally worked, so as to be available to respond to a customer's service call, that employee is considered "engaged to wait" and must be paid at the appropriate rate. In contrast, if the employee is free to leave his home and engage in personal activities (shopping, entertainment, visiting) subject to the understanding that he may be contacted and asked to respond to a service call within a reasonable period of time, the employee is "waiting to be engaged". The employer may pay additional compensation but generally is not required to do so.  As such, employees who are required to carry a beeper, cell phone, or other similar device, or to stay within a certain distance from their home in case of an emergency, are generally not compensated for that time. 

Whether this is a good employment practice, however is the topic for another writing. My time should be my time but, with technology it is becoming your time, too.

Wednesday, August 19, 2009

Truth or (Unintended) Consequences?

Reading today’s Wall Street Journal discussing the ramp-up of regulation enforcement by the Department of Labor reminded me of a television program quite popular several years ago. It was called "Truth or Consequences" and, if I remember correctly, launched the TV career of Bob Barker. The WSJ article described how the Department of Labor will hire hundreds of new investigators (and probably hundreds more support staff) so as to significantly increase enforcement of our many labor laws and workplace rules.

Generally, I believe this is a good thing. We could use a little more enforcement in many areas, what with the billions of dollars being spent by Washington on stimulus projects and the generally laize faire approach of the previous administration. However, this article got me thinking about the "law of unintended consequences", which states that no matter what you thought would happen, something else will probably happen that you hadn’t even thought about. It’s that "something else" that I am concerned about.

In my experience, few business people really object to following the rules that govern their industry. What most do object to, though, are the myriad forms, multiple and often duplicate reports and documents, and other bureaucratic nonsense that the enforcement agencies require. The most frequent complaints I hear from my business clients concern the complexity of the rules, conflicting messages sent by the agencies and the amount of time --- and money --- spent on reporting to the government. And this is just on the federal level. When you add in the state requirements, the burden is mind boggling. Yet, history clearly shows that more oversight means more rules, reports, responses, and investigations.

Right now, most businesses owners and managers are paddling like mad to keep their head above the financial waters. More feeding of the bureaucratic maw will only take time and resources away from actually making more products, delivering better services, or inventing the next "killer app". Can we afford the additional drag on our economy?

More regulation and enforcement will certainly increase the need for lawyers, so I guess the adage "every cloud has a silver lining" certainly applies here. However, I can't help but be concerned that, no matter how laudatory the goal we may be creating costly and perhaps unneeded burdens on the productive sectors of our society. Slower or minimal recovery from our economic ills may be the result, and more and longer lasting unemployment the unintended consequence.

Keep an eye on this as you look for the recovery in your area.

Monday, August 17, 2009


As an attorney, I am always asked by my clients: "what is the law?" I am expected to know the answer, and most of the time I do (or can research it).  But every once in a while, answering the question "what is the law" requires more than an explanation of statutes, administrative codes, or an analysis of case law.  The answer goes deeper, to the fundamental reason why we have laws in the first place.
A very wise and thoughtful person once told me that we have laws to tell the other guy what to do (or not to do, as the case may be). No one ever believes that a law is needed for me; only someone else. Yet, society is made up of me and thee and your “me” is my “thee”. Consequently, my response to the question sometimes is no more than the law is whatever is needed to make sure you and I can get along together. The rest is commentary.

Which brings me to the point of this blog. An attorney is – or should be – more than an expert in the written or decided law. He or she should also be a counselor, advisor, confidant, and guide to others. The attorney should provide information as a matter of course. However, she or he should also be willing to share opinions based on knowledge, experiences, and (hopefully) wisdom. This is the commentary.
This blog – also known as a “blawg” for its legal focus – will present my opinions and comments on issues, cases, and events in the law that affect all of us. I invite you to respond and contribute to it. Comment on what I have written, even if (and especially if) you disagree. Offer your own comments and wisdom, as well as ideas for topics to be discussed. I look forward to communicating with you through this media and in the near future, in person.

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