News

Laura Arredondo-Santisteban Joins FH2

Posted on by Friend, Hudak & Harris

We are pleased to announce that Laura Arredondo-Santisteban has joined our Firm as an associate attorney.

Laura will practice in the areas of telecommunications, advertising, marketing, advertising compliance and privacy. Laura’s experience includes representing clients in proceedings before the Federal Communications Commission, and assisting clients in the development of advertising, labeling and marketing materials, privacy policies, and customer terms and conditions.

Laura may be reached at LArredondo@fh2.com or at 770-399-9500. For more information on Laura, please click here

Think your workers are independent contractors? Think again.

Posted on by Ben Byrd

The “ride sharing” company Lyft is facing a class-action lawsuit by its drivers, who claim the company misclassified them as independent contractors when they should have been classified (and paid) as employees. Lyft thought it had reached a settlement with the drivers for over $12 Million, but the federal judge overseeing the case refused to approve the settlement, expressing concern that the settlement amount was too low. The parties have now resubmitted their proposal to the court–this time for $27 Million. But even that eye-popping amount is nothing compared to the $100 Million that Lyft’s competitor, Uber, recently offered to pay to settle its own misclassification case. (Uber’s offer was rejected by the judge in its case as well, and the case is still pending.) What can we learn from these start-ups’ recent troubles?

The dollar amounts involved in the Lyft and Uber cases may be unusual, but claims that a business has misclassified its employees as independent contractors are not. Many businesses, it seems, routinely mistake their employees for contractors – and end up paying the price for this mistake.

“Employee” or “Contractor”: The Choice Is Not Up To You.

Most businesses understand that—all things being equal—it is usually cheaper and easier to treat a worker as an independent contractor. So it makes economic sense that businesses want to classify as many workers as possible as contractors. Unfortunately, whether a worker is an employee or an independent contractor is a legal question, and the law does not leave the answer to the employer’s discretion. In short, simply calling your workers “contractors” does not make it so.

What Difference Does the Employee / Contractor Distinction Make?

Not only is the employee / contractor distinction not discretionary, it touches many fundamental aspects of the employment relationship, so it is critical that your organization get it right. Getting it wrong can affect:

  • Payroll Taxes. Federal tax laws require employers to withhold incomes taxes, and to withhold and pay Social Security, Medicare, and other payroll taxes on wages paid to employees. Generally, you do not have to withhold or pay any taxes on payments to independent contractors.
  • Minimum Wage and Overtime. Under the federal Fair Labor Standards Act, employees are entitled to minimum wage and overtime benefits; contractors are not. The same is generally true in states that have their own minimum wage and overtime laws.
  • Unemployment Benefits. Under both federal and Georgia law, employees are entitled to unemployment benefits, while contractors are not. These benefits are funded by a tax paid by employers on wages paid to employees, but not on payments to independent contractors.
  • General Liability. A business will normally be liable for the negligence of its employees, but not its contractors. Similarly, your liability insurance will normally not cover you for damages caused by your contractors.
  • Workers’ Compensation. Employees who are hurt on the job are entitled to workers’ compensation benefits. By the same token, the injured employee cannot sue her employer for negligence. The reverse is true for contractors: they do not receive workers’ compensation benefits, and their employers are not immune from suit. In turn, a business’s workers’ compensation insurance premiums are determined in part by the number of its workers that are classified as employees.
  • Unionization and Collective Bargaining. Whether your workers are your employees will determine whether federal labor laws apply to your relationship.
  • Application of Other Federal Employment Laws. Most federal employment laws, such as the Family and Medical Leave Act, only apply to businesses that have more than a given threshold of employees. Whether these laws apply to your business will depend in part on whether your workers are counted as employees or contractors.

What is the Test?

If the employer’s wishes don’t determine which workers are employees and which are contractors, what does? That depends on what aspect of the employment relationship is at issue. But generally, there are two tests a court will use to determine a worker’s status: the “right to control” test and the “economic dependence” test.

The “Right to Control” Test.

Under the law of most states, including Georgia, it is usually said that when the employer retains the power to control the “time, place, or manner” of the worker’s activities, the worker is an employee, not a contractor. Some examples of this control include setting work hours, assigning a place to do the work, and dictating how the work is performed. Note that under this test a worker is your employee if you have the right to control his work, even if you never actually exercise that right.

A common mistake is to assume that a part-time or seasonal worker is a contractor. Again, if you retain the right to control the work, your worker is mostly likely an employee–albeit a part-time or seasonal one.

The control test can have unexpected consequences. For example, the National Labor Relations Board recently ruled that workers hired by your sub-contractor can be considered your employees if the agreement with your sub gives you the right to exercise control over the workers (such as, for example, by giving you the right to specify work hours or locations for your sub’s workers, to remove your sub’s workers from the project, or to set other minimum qualifications or requirements for performing the work). As a result, the workers can be considered your employees (and subject you to federal collective-bargaining laws) even if that control was only exercised “indirectly” through your contract with the sub.

The “Economic Dependence” Test.  

The control test is widespread, but it isn’t universal. Most significantly, the federal Fair Labor Standards Act, which creates minimum wage and overtime obligations, broadly defines an “employee” as “any individual employed by an employer”, and further defines “employ” as “to suffer or permit to work”.  The United States Supreme Court has held that Congress intended this language to be construed more broadly, and to include more workers, than the right to control test. Working from the statute and the Supreme Court’s opinion, the federal Department of Labor, which enforces the Fair Labor Standards Act, has developed its own test: A worker is an employee if she is “economically dependent” on her employer.

But, you might reasonably ask, when is a worker “economically dependent” on her employer? To answer that question, we have to look at several factors, including:

  • Do you control the time, place and manner of the worker’s efforts?
  • Does the worker stand to profit if the venture is successful and, conversely, to lose money if it is a failure–or does he stand to make the same pay for the work done, regardless of the outcome?
  • Does the worker buy his own equipment and materials, or do you provide them for him?
  • Does the worker possess any special skills?
  • Is your agreement with the worker long-term and relatively permanent?
  • How central to your business is the service that the worker is providing?

None of these factors is controlling, however, and they must be considered in the overall context of the relationship. Unfortunately, there are very few bright lines to guide an anxious employer. In the end, though, we can be certain that current state and federal laws are intended to classify the vast majority of American workers as employees, not contractors.

So What Do We Do?

As Lyft’s and Uber’s experiences show, the consequences of misclassifying workers can be significant, maybe even catastrophic, to your business. Nevertheless, it is possible to structure these relationships so that your workers are legitimate independent contractors. But it is much safer—and far less costly in the long run—to take these steps at the outset of the relationship than it is to wait until after an investigator or a court has gotten involved.

Before you decide to classify a worker as a contractor, always consult your legal counsel. If you have questions regarding how to properly classify your workers, contact Ben Byrd at bbyrd@fh2.com or (770) 399-9500 for more guidance.

IoT and Connected Devices: Before Rushing In, Be Mindful of the Risks

Posted on by Joel Thomas

If your business manufactures or uses a connected device or simply collects and stores user data, it may be exposed to legal liability.  Despite the transformative effects of such Internet of Things (“IoT”) technologies, the reality is that IoT will increase your business risk – know its sources and manage it.

What is IoT?

IoT is a concept that has existed for decades.  However, due to deep declines in the cost of sensors, computing and related technologies, IoT is now influencing the physical world in transformative ways.  To start, IoT describes a ubiquitous connection of devices or objects (“things”) that can be monitored, controlled or interacted with by Internet-connected electronic devices, allowing people to interact seamlessly with both the digital and physical world.  IoT centers on machine-to-machine communications and the idea that more information (i.e., data) leads to a deeper understanding of the physical world.  In turn, this deeper understanding creates greater value for the end-user.  On a small scale, IoT includes wearable technologies that, in real-time, allow a user to track how far she has run and to share this information with friends.  IoT technology also includes an array of conveniences in home automation and security.  For example, when a homeowner pulls into his driveway, IoT can automatically open the garage door, turn on lights inside the home, and disable the home security system.  On a much larger scale, IoT will maximize efficiencies in the way that cities consume power, manage traffic, and prepare for natural disasters.  Experts at Cisco and Ericsson estimate that there will be 50 billion connected devices by 2020.  Moreover, the McKinsey Global Institute values the IoT market somewhere between $3.9 trillion and $11 trillion by 2025.

Despite the countless opportunities that IoT presents, businesses should be wary of its major legal concerns: the capture and use of consumer data, and cybersecurity threats.  Further, businesses should have actionable plans for the governance and protection of consumers’ personally identifiable information.

Whose Data is it?

When things are always on – as is the case with IoT – data is continuously shared.  And although IoT creates new opportunities to solve existing problems, it raises new issues between private citizens and businesses operating in the digital space.  At present, there is much debate over the ownership of data that consumers disclose while using products and services: Do consumers retain ownership over their personal data or do businesses take ownership over such disclosures?  Consumer disclosures are often a necessary component of the utility of products and services.  These disclosures also aid the improvement to such products and services, thereby creating long-term benefits for the consumer.  Businesses that take care in drafting their terms and conditions contract for rights in these consumer disclosures.

Still, businesses must consider consumer privacy laws and the ethical concerns of collecting and storing consumers’ personal data.  Broadly, the FTC enforces consumer protection laws that protect consumers against unfair methods of competition or deceptive acts or practices.  But businesses should also be cognizant of the applicable regulatory frameworks for the industries in which they operate.  For instance, the Communications Act, as amended, and the FCC impose additional requirements for telecommunications carriers’ use of consumer information.  In addition, state laws and regulations may impose added responsibilities.  Also, U.S. companies that engage in cross-border data flows should be aware of additional data transfer laws and data sovereignty issues.  Similarly, ethical concerns for data privacy often arise out of the representations that businesses make concerning their use of data or the overbroad bulk collection of data, where either instance exceeds consumers’ reasonable expectations.  In recent proceedings, the FTC has brought enforcement actions against technology companies like Snapchat, Yelp, Google, and Facebook for violating their user privacy agreements.  There, the FTC found the companies to have deceived consumers over the amount of personal data the companies collected and made misrepresentations on how certain products or product features actually worked.

Businesses should always provide notice and obtain consent before collecting consumer information, and they must market truthfully and ensure their public commitments match actual practices for the collection, scope, retention, expressed purpose, and confidentiality of data.  Further, businesses should also be aware that private actions concerning the ownership of consumer data could arise in a number of ways – privacy, contract, or tort.

Legal Effects Remain Uncertain

Although connected products and services may amplify products liability concerns, cybersecurity must also be addressed.  It is clear that product and service providers who do not meet reasonable expectations in the cybersecurity of their product and service offerings will face liability.  But these requirements are still imprecise, as regulators have abstained from creating formal rules and have instead decided matters on a case-by-case basis.  For example, in separate proceedings, the FTC brought enforcement actions against Wyndham Hotels and Resorts and IP-camera maker Trendnet, alleging that the companies engaged in deceptive and unfair acts because of their failure to take reasonable security measures.  In both cases, the FTC alleged, among other things, that the companies unreasonably and unnecessarily exposed consumers’ personal data to unauthorized access and theft, because they stored personally identifiable consumer data in clear readable text and failed to use readily available security measures, like firewalls or software that would secure data transmissions.  Further, the FTC alleged that neither company regularly tested or monitored the security of its network.  Both cases carry twenty year settlement obligations.  In another case, the FCC held companies YourTel and TerraCom jointly and severally liable for fines totaling $10 million due to poor data security practices, where the companies stored personally identifiable consumer data online, without firewalls, encryption or password protection.  More recently, the Consumer Financial Protection Bureau fined financial-technology firm Dwolla for misrepresentations made concerning its data security practices.  Notably, in this case no data breach actually occurred.

Still, the effect of law becomes even more unpredictable when we begin to use existing technologies in disruptive ways that touch multiple industries.  For example, the advent of a “digital wallet” has created gaps, overlaps and ambiguities in applicable payments laws.     In the face of such ambiguity, many businesses unwittingly take on extreme risk as they add connectivity to products, introducing poorly designed, vulnerable hardware or software to the marketplace.

Businesses should build products with safety in mind to address cybersecurity concerns, designing their products or services around the possibility of hacks or breaks in the communication chain.  They should regularly monitor and update the security of their products and services as needed.  One of the greatest benefits of IoT is that updates, or patches, can be pushed from the manufacturer directly to the consumer without consumer involvement, which is not only convenient for the consumer, but also limits the business’s prolonged exposure to liability.  Even if a business does not offer ongoing support, it should notify consumers of security risks and available updates.  Larger businesses may want to implement bug bounty programs, which provide recognition or compensation to individuals that report bugs or find system vulnerabilities.

Take Time to Contract Thoroughly with Corporate Partners

Does your business collect or share data with corporate partners absent a formal contract?  Businesses should appreciate the danger for potential liability as the number of stakeholders who play a part in the value chain increases.  The Target and Home Depot data breaches occurring in December 2013 and September 2014, respectively, provide retail examples of the importance of security practices among corporate partners and finding a balance in the amount of access afforded to vendors.  In both instances, point-of-sale systems were compromised when third-party vendor credentials were stolen for back office systems.

Along with internal security measures, businesses should look to standardize security across the many stakeholders involved in their distribution chain.  If security cannot be standardized, businesses should work only with service providers who are capable of maintaining adequate security over the data for which they are responsible.  When contracting with corporate partners, a business should implement strong indemnity provisions that protect it against damages caused by the other party.  Further, businesses should maintain licensing and supply agreements between them and their corporate partners that clearly define: the scope of the data collected; the ownership of such data; the custodian of the data; the acceptable uses for the data; whether any third-parties will have access to the data; how to determine liability in the event of a breach; the side of the point of demarcation on which responsibilities lie; and how compliance will be verified.

Plan for a Breach before It Occurs

Lastly, businesses should have actionable plans for the governance and protection of data that contains consumers’ personally identifiable information.  Many companies maintain information of a wide scope under a false impression that more data is always more valuable.  But collecting and retaining large stores of information can actually make it more difficult for companies to realize a breach has occurred.

Businesses should follow these tips: limit the scope of data collected; do not retain data for longer than needed; anonymize data where possible; and be reasonable in the disposal of confidential documents.  Further, businesses that are custodians of large amounts of data that contain personally identifiable information should maintain cyber risk insurance.  Cyber risk insurance policies generally indemnify first party and third party losses that result from disruption to the company’s own network, data breaches of personally identifiable information, cyber extortion, and media liability.  (For a more in depth discussion on insurance coverage, be sure to read Michael Stewart’s post, “Insurance for Technology Businesses: Are You Covered?”)

Managing the Risks

As businesses release innovative products and services, they are faced with policymakers’ unclear expectations for security practices and uncertain applications of existing legal standards.  Businesses can reduce their legal exposure by marketing truthfully; knowing the consumer protection and data security laws and regulations that govern their industry; creating comprehensive data security programs that are verified through regularly scheduled audits; using reasonable security measures and addressing failures or opportunities for breach before a system is compromised; and having a plan in place to deal with a breach, including knowledge of the requirements for reporting it.

Friend, Hudak & Harris, LLP is at the forefront of inspecting and assessing the potential impact of IoT across a number of industries. This leaves us well positioned to guide clients through varied complexities, helping them to avoid or reduce technology related risks.

“Exempt” or “Nonexempt” – Important Upcoming Changes to FLSA Regulations

Posted on by Suzanne Arpin

Classifying Your Employees as “Exempt” or “Nonexempt”
under U.S. Wage and Hour Laws:

Important – and Potentially Costly – Changes
You Need To Know About

Exempt Employees May Become Nonexempt: What You Should Consider Now

The U.S. wage and hour laws (the “Fair Labor Standards Act” or the “FLSA”) require employers to pay every employee a minimum wage and overtime—unless the employee is exempt from the law.  If an employee is exempt, the FLSA does not apply to or protect such employee.

The FLSA puts the burden on employers to classify employees correctly as either “exempt” or “nonexempt” in accordance with regulations promulgated by the Department of Labor—and the employer can be subject to onerous liability for failing to classify employees properly.

You need to be aware that the Department of Labor has promulgated new regulations that could have a significant impact on whether you choose to—and even whether you are able to—continue to classify certain of your employees as exempt.  As discussed further below, as of December 1, 2016, certain employees may no longer be classified as “exempt” unless they are paid significantly more—meaning you, as an employer, will need to decide whether to:

  • increase the employee’s compensation to the new threshold amount in order to continue classifying him or her as “exempt” under the FLSA; or
  • re-classify him or her as “nonexempt” and become subject to payment of FLSA-mandated minimum wage and overtime.

This may present a serious challenge for employers with exempt employees who are expected to, and regularly do, work more than 40 hours in a given week to complete the required responsibilities of their positions.

THEREFORE, NOW IS THE TIME TO MAKE SURE:

  • you are currently classifying all your employees properly under the FLSA; and
  • you identify any of your currently “exempt” who employees will become “nonexempt” on December 1st, absent an increase in their compensation.

With respect to any such employees who may be subject to reclassification, you then need to decide whether to reclassify them (and pay overtime) or increase their compensation in light of the new regulations issued by the Department of Labor.

I.  Classification of Employees as “Exempt” and “Nonexempt”: A Brief Summary

The FLSA requires that most employees in the United States be paid at least the federal minimum wage for all hours worked and overtime pay at time and one-half the regular rate of pay for all hours worked over 40 hours in a workweek. However, there are a number of categories of employees that are exempt.  Those exempt groups include bona fide:

  • executives;
  • administrative employees;
  • professional employees, both “learned” and “creative”;
  • certain computer employees;
  • outside sales employees; and
  • highly-compensated employees.

Together, the forgoing exempt groups are referred to as the “white collar exemptions.”

The White Collar Exemptions

As a general rule, to qualify for one of the white collar exemptions, employees generally must meet certain tests regarding their job duties and be paid on a salary basis at not less than $455 per week (until November 30, 2016—starting December 1, 2016, this number goes up to $913 per week.)  But, even then, the exemption requirements are not as straightforward as they appear at first glance—for example, a different salary test applies to the “highly-compensated employee exemption”, and the “outside sales employee exemption” is subject only to a duties test and does not have a minimum compensation threshold at all.  So careful attention must be paid to the specific requirements of each exemption when considering whether a given employee is exempt from minimum wage and overtime requirements.

Job titles do not determine exempt status. In order for an exemption to apply, in addition to meeting any applicable threshold compensation requirements, an employee’s specific job duties must meet all the “duties” requirements of the Department of Labor’s regulations (the “duties tests”) for the specific exemption claimed.  For example, simply giving an office worker an “administrative” title does not automatically entitle you to claim that the employee is subject to the “administrative exemption”—as that exemption is only available to administrative employees whose primary duties include the exercise of “discretion and independent judgment with respect to matters of significance.”  Similarly, merely giving an employee a title indicating they are a “professional” does not mean he or she will be entitled to the “professional exemption”—that exemption is reserved for employees whose primary duties include performance of work requiring “advanced knowledge . . . in a field of science or learning . . . customarily acquired by a prolonged course of specialized intellectual instruction.”  The “outside sales employee exemption” is reserved for your sales employees who are “customarily and regularly engaged away from the employer’s place or places of business”—employees who primarily work in your offices to receive and facilitate sales (such as in a call-center or sales department) would not be covered by this exemption.

Nonexempt Employees (Including “Blue Collar” Employees)

Obviously, your employees who do not meet the applicable compensation and duties tests for any available exemptions must be treated as “nonexempt” under the FLSA.  But you should also be aware that certain employees must be treated as “nonexempt” no matter how highly they are compensated.

The white collar exemptions do not apply to manual laborers or other “blue collar” workers who perform work involving repetitive operations with their hands, physical skill and energy.  FLSA-covered, non-management employees in production, maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers and laborers are entitled to minimum wage and overtime premium pay under the FLSA, and are not exempt no matter how highly paid they might be.

The Consequences of Misclassification

In recent years, FLSA cases have become very attractive to plaintiffs’ employment lawyers, who began filing lawsuits after realizing that many employers are in violation of the FLSA. These lawsuits often turn into very expensive class actions.

One of the most common mistakes employers make is misclassifying nonexempt employees as exempt.  The penalties are quite harsh and are not very flexible or negotiable.  In addition to back pay, employees may recover what are referred to as “liquidated damages” equal to the pay employees should have received.  In other words, employees can recover double “back pay” damages for unpaid overtime.  In addition, successful plaintiffs are entitled to recover the full amount of their attorneys’ fees which often are more than the double back pay damages.

Part-Time Versus Full-Time: Same Rules Apply.  The same compensation and duty tests apply to part-time and full-time workers.  Therefore, part-time workers must meet the exact same minimum threshold salary and duty tests as full-time employees in order to be exempt from the FLSA.  No proration applies to the minimum threshold salary levels for part-time employees.

II.  The New Regulations: Redefining the White Collar Exemption

In 2014, President Obama directed the Department of Labor to reevaluate and update the regulations defining which white collar workers were subject to overtime laws.  New regulations were published in May, 2016.  Unless Congress acts to change the regulations, they will become enforceable on December 1, 2016.  The Department of Labor estimates that over 4 million additional U.S. workers will be subject to the minimum wage laws and be entitled to overtime pay in 2017 as a consequence of the new regulations.

Key Provisions: New Minimum Salary and Annual Compensation Thresholds

The new regulations focus primarily on updating the salary and compensation levels needed for executive, administrative and professional workers to be exempt.  Currently, to qualify for the white collar exemption, a worker must have the required job duties and either receive a minimum salary of $455 per week or $23,660 per year (the “salary basis test”) or total compensation of at least $100,000 to qualify as a highly compensated employee.

On and After December 1, 2016:

  • the threshold salary level for the salary basis test will be $913 per week (or $47,476 annually); and
  • the minimum total annual compensation requirement for highly compensated employees will be $134,004 (which must include at least $913 per week paid on a salary or fee basis).

Notable Other Terms of the New Regulations:

  • If an executive, professional, or administrative employee’s salary is close to the new salary levels, an employer may use nondiscretionary bonuses or incentive payments (including commissions) to satisfy up to 10 percent of the new threshold salary level. These payments must be made during the year, at least quarterly.  For highly compensated employees, a catch-up payment equal to the amount necessary to meet the annual threshold may be made in the last pay period of the payroll year.
  • The salary and compensation levels will be automatically reset every three years, beginning on January 1, 2020.

III.  What Does This Mean for You?

From a Financial and Budgeting Perspective.  The new regulations significantly narrow the scope of the white collar exemption and, thus, significantly broaden the number of employees who are subject to the FLSA.  Employees who were previously “exempt” may soon be “nonexempt” and entitled to overtime pay if they work more than 40 hours a week.  After December 1, 2016, all employees (other than those subject to the outside sales employee exemption) who earn less than $47,476 per year must be classified as nonexempt and be paid overtime at “time and one-half” for all hours worked over 40 hours per week. 

As you plan your staffing and budget for 2017, you should anticipate these changes and determine how best to address them from a business perspective.  If overtime is truly a necessary component of any reclassified employee’s work, you may have to budget for more payroll.

From an Employee Morale and “Business Culture” Perspective.  If you decide to raise salaries in order to meet the new threshold, you will likely have happy employees.  However, if you are instead leaning toward maintaining salaries at their current levels, you should also consider the consequences of reclassifying formerly-exempt employees as “nonexempt.” At first blush, it may sound advantageous to be reclassified as nonexempt and be entitled to overtime pay.  However, such reclassification may be detrimental to employee morale and you will need to address this.

The over-arching concern of the FLSA is that nonexempt employees be paid for time actually worked, and if that time exceeds 40 hours a week, overtime must be paid at time and one-half.  The flip side of this apparently good intention is that employers must very strictly monitor and control the time an employee spends working.  You might consider the effect the following may have on your employees and your established business culture:

  • Start times, stop times, breaks, lunch hours, quitting times and, of course, overtime must be subject to rigid rules and carefully monitored. Many exempt employees enjoy a great deal of flexibility with respect to, for example, their lunchtime from day to day, working long hours on a project when they are “on a roll” and choosing when they arrive at and leave work.  This will have to change radically when an exempt employee is reclassified as a nonexempt employee.
  • The reclassified employees will be obligated to track their time precisely, incurring annoying recordkeeping responsibilities they did not have before.
  • The employer may be compelled to pay a reclassified employee less basic compensation in order to budget his or her overtime pay, which may or may not ultimately be paid. This will create financial uncertainty for the employee.
  • If an employer prohibits overtime, the reclassified employee may feel his or her ability to get the work done in the time allowed has been compromised.

All this may feel a lot like a demotion to a reclassified employee.  In order to avoid this, you should communicate early and often with the affected employees and give them training and easy access to designated management so that their concerns can be vetted and addressed.  You should consider doing the following:

  • Emphasize that the new rules are law imposed by the US Federal government; they are not your idea. However, you are required to comply.  Reassure reclassified employees of their value to the company and let them know where to go to express their concerns and get answers to their questions.
  • Provide training on the new timekeeping requirements and educate employees as to the importance of accurately documenting their time worked –even if it’s something as “trivial” as answering some emails in the evening at home. This is a very hard habit to start.
  • Prohibit working “off the clock.” It is common for reclassified employees to decide that they will simply work the hours they need to and not record them if additional hours are required. This is absolutely illegal under the FLSA and if the employer permits it, the employer is liable for substantial penalties, in addition to paying the employee for any applicable overtime.
  • Be aware that if your reclassified employees are required to travel, special rules apply to what portions of travel time are compensable and how.

Review Your Policies and Handbooks: Decide Whether Changes Should Be Made.  If your workforce can operate efficiently without overtime hours, consider prohibiting it absent express written authorization from management.  Whatever policy you adopt, be sure to review your handbooks, policies, or notices to be sure your employees are aware of company policy as well as their right to receive approved overtime if they are nonexempt.

Consider Structured Agreements with Reclassified Nonexempt Employees.  To create some predictability for both the employer and the employee, one option is to implement a compensation structure that pays nonexempt employees an annual salary factoring in a certain amount of overtime.  The FLSA permits this—however, there must be an express written agreement in place and regardless of the agreed working hours, if the employee works more overtime than contemplated, he or she must be compensated for it at time and one-half.

Beware of Perceived Discrimination.  If you have employees with the same job title or duties that are paid differently, with some exempt and some nonexempt, be careful.  Although there is no requirement that such a group be classified the same, generally speaking, employees with the same job title who perform the same duties and responsibilities should be paid similarly, unless you can clearly articulate a justification for the difference.  Otherwise, the difference may give rise to a claim of discrimination under various federal laws.

IV.  Do Not Panic: Create an Action Plan Now

Bottom Line: 

As of December 1, 2016, it’s likely that many of your employees who earn less than $47,476.00 per year must be classified as nonexempt and paid overtime at a rate of time and one-half times their regular rate.

Action Plan: 

  • You need to evaluate your employee population to determine whether any of your currently exempt employees will become nonexempt on December 1, 2016 absent increased compensation.
  • You should take the time to review your work force as a whole to identify any employees who have been misclassified as exempt or nonexempt.
  • If any of your exempt employees will become nonexempt on December 1st under the new regulations, you need to decide what makes sense from a financial and budgeting perspective—should you increase their compensation so that they remain exempt or reclassify them as nonexempt as of December 1, 2016?
  • Based on that evaluation, develop an action plan as needed to educate reclassified employees and to make the transition as smooth as possible.

Need Help?  Have Questions?

If you need help or have any questions about properly classifying your employees under the FLSA or about other employment law matters, please contact Suzanne Arpin at sarpin@fh2.com or (770) 399-9500.

Suzanne M. Arpin Joins FH2 as Partner

Posted on by Friend, Hudak & Harris

We are pleased to announce that Suzanne M. Arpin has joined our Firm as a Partner.

Suzanne practices corporate and transactional law, with a focus on employment law matters including employee benefits, executive compensation, ERISA litigation, and executive compensation program implementation.

Suzanne may be reached at sarpin@fh2.com or at 770-399-9500. For more information on Suzanne, please click here

FH2 Alert – New Federal Trade Secret Law Requires Changes to Your Form Agreements

Posted on by Michael Stewart

On May 11, 2016, President Obama signed the Defend Trade Secrets Act of 2016 (the “DTSA”) into law.  The DTSA—which went into effect immediately after being signed—creates a new right for trade secret owners to sue under federal law when their trade secrets are misappropriated, and also provides the trade secret owner with significant remedies for misappropriation (including seizure, injunctive relief, damages, and, in certain cases, double damages and attorneys’ fees).  But the DTSA also provides individuals with immunity for certain permitted disclosures of a trade secret—and requires an employer to notify its employees (including contractors and consultants) of these immunities in any contract or agreement with the employee that governs the use of trade secrets or other confidential information.

We will provide more in-depth guidance on the DTSA soon.  However, you need to know now that compliance with the DTSA necessitates immediate changes to certain of your form agreements with employees and individual independent contractors and consultants to incorporate the notices mandated by the DTSA.

Specifically, starting May 12, 2016, the DTSA requires all employers to include a new notice “in any contract or agreement with an employee that governs the use of a trade secret or other confidential information” if that contract or agreement is either entered into or updated after May 11, 2016.  This required notice must inform the employee about certain immunities from liability under federal or state trade secret law for disclosing a trade secret in connection with “whistleblower” activities or in legal documents filed under seal.

Some important points on this new notice requirement:

  • Applies to More than Just Your “W-2 employees”:  Under the DTSA, an “employee” for whom you must include the required notice includes not only your W-2 employees, but also any individual performing work for your business as a contractor or consultant.
  • Applies to “Any Contract or Agreement that Governs the Use of a Trade Secret or Other Confidential Information”:  Depending on your business, this could implicate revising multiple forms of contract documents that your business currently uses with its employees, contractors and consultants, such as employment agreements, invention assignment or “work made for hire agreements”, independent contractor agreements and confidentiality/non-disclosure agreements.
  • Noncompliance Also Limits Remedies under the DTSA:  Failure to include this notice when required also means that the employer cannot recover double damages or attorneys’ fees under the DTSA when bringing a claim for trade secret misappropriation against that employee.
  • Be Mindful of Existing Agreements:  The notice requirement applies to “contracts and agreements that are entered into or updated after” May 11, 2016. So, while the DTSA does not require you to amend agreements you executed before May 12, 2016 solely to add the new notice, it does require you to add the notices to those agreements if you amend or update them for other reasons after May 11, 2016.

Note—The DTSA provides that the mandatory notice requirement may also be satisfied by including in your agreement a reference to a “policy document” (for example, a handbook) that is provided to the employee and sets forth your reporting policy for a suspected violation of law. However, even then, your agreements may still need to be updated to include such a reference, and the associated “policy document” should be reviewed to ensure it complies with the DTSA.

If you would like assistance with revising your agreements to comply with the new requirements under the DTSA, or if you have questions about the DTSA or protecting your trade secrets generally, contact Mike Stewart at Friend, Hudak & Harris, LLP.

Why You Should Prepare Your Business For Sale (Whether or Not You Are Selling)

Posted on by Scott Harris

Thinking about selling your business—eventually? Here’s some advice on how to maximize its value, reduce costs and minimize risks. (P.S. This advice is equally as useful if you’re not selling your business.)

As it turns out, business buyers are looking for the same things as business owners—sound businesses that produce predictable cash flows with quantified risks. (Who wouldn’t want that?) But what makes a “sound” business? A “predictable” cash flow? A “quantified” risk? These are subjective concepts ultimately intended to support the most tangible of outcomes: a factually-derived, cold, hard purchase price.

Because previous performance does not guaranty future results, financial performance is not the only factor helpful in determining a business’s value.  Buyers want assurances that past performance is likely to be repeated (and/or improved).  So, when valuing a business, buyers want to see tangible proof that the business’s valuable relationships and assets are protected and its risks are quantified (and, where possible, managed). This proof supports the proposition that past financial performance is more likely than not to be repeated or improved and gives buyers something tangible to “put their hands on” in valuing a target business. This proof allays buyers’ natural skepticism and allows corporate sales to be concluded cheaper and faster. So important is this proof that, we submit, creating and maintaining it increases a business’s value—whether or not the business is being sold.

So, what is this “proof”? That depends on the particulars of a given business’s valuable relationships, assets and risks.  What are the business’s sources of revenue?  Where does its money come from? Upon what assets and properties are the business’s cash flow dependent? What are the risks to that cash flow? To illustrate, let’s apply these principles to a hypothetical manufacturing business.

“Proof”—A Hypothetical Manufacturing Business

Our manufacturer obtains the bulk of its revenue from selling finished goods. What’s necessary for our manufacturer to continue producing cash flows from sales of finished goods? That depends on the particulars of this manufacturer. It could include intangible things like its relationships with customers, vendors and sources of raw materials, and unique manufacturing “know-how” that makes what or how they manufacture more valuable. It could also include physical assets, like its manufacturing facility, particularly if it is strategically located near customers or raw materials, so that it allows the manufacturer to save transportation costs and time, making its prices cheaper and its products faster to deliver than its competitors. The “proof” of these things (both intangible and physical) might include: customer and vendor contracts; proprietary trade secrets, confidential information or even patents supporting unique manufacturing processes; and the deed or lease for its manufacturing facility.

What are the risks to the manufacturer’s continuing cash flows? Again, these depend on the manufacturer’s circumstances. What if the manufacturer is threatened by an infringement lawsuit from a competitor? What if the long-term lease for its manufacturing facility is coming to an end? What if its source of supply for a key raw material is threatened? These things are important for assessing risks to the business’s ability to continue producing its historic cash flows. Proof of these matters would include copies of the infringement lawsuit and the contested patent or other intellectual property upon which such suit is based. It would also include files documenting the status of lease renewals or the search for an alternative location. Lastly, the manufacturer’s current raw material contract for the threatened source of supply would be critical, as would be contracts representing the status of negotiations or agreements to secure alternative sources of supply.

But what if there was no proof or paperwork documenting these relationships, assets or risks? What if the manufacturer relied upon its president’s personal relationships with vendors and suppliers, instead of having contracts with such parties? How would a buyer be able to evaluate the likelihood and strength of continued cash flows based on those relationships? What if the president intends to retire after the business is sold? What if the manufacturer has not filed applications for patents to protect its unique manufacturing processes or taken steps to protect the confidentiality of its trade secrets (making it very easy for another company to use those processes)?  What if the manufacturer has not secured written confidentiality obligations from its employees and contractors who are familiar with such matters (and who could take them with them when they leave)? What if there was no written lease for the manufacturing facility, but instead, the lease was based on a “handshake deal” between the manufacturer’s president and the lessor many years ago?

Such a lack of proof supporting valuable relationships and assets and allowing quantification of risks obviously makes cash flows much more difficult to predict. In fact, at some point, gaps in proof might make future cash flow predictions so tentative that a transaction, at any price, might not even be possible. Moreover, even if the business is not being sold, a lack of such proof increases the risk within which the business operates—and its value, even to the current owner.

It’s Time to Determine what “Proof” Your Business Has—and What It Needs

So, what should the prudent company executive do? Our recommendation is to:

  • identify the assets, sources of revenue, critical relationships and risks unique to your business; then
  • list the sources of “proof” that your business needs to maintain, support and quantify how these are likely to affect future revenues. (Don’t forget your business’s proof of its relationships with its most valuable resource—its employees.)

Once the business has listed the proof that it needs to maintain, it should then:

  • identify areas where insufficient or no proof exists and begin documenting those matters to substantiate important relationships and assets;
  • evaluate existing sources of proof to make sure they are adequate, up-to-date, organized, and available; and
  • create systems allowing these proofs to be accessible, organized and secure.

Going through these procedures will cause the business to focus on those things that generate and maximize your business’s value—whether or not you are currently considering its sale!

Start Today. Some Areas of “Proof” to Consider

Below is an incomplete list of typical relationships, assets and risks that businesses might consider in evaluating their “proofs.” (Apply these to your unique circumstances before settling on the list of “proof” that is most relevant to your business.)

As you can see from this list, there are many things to consider when documenting—and thereby maximizing—proof of your business’s value. What’s important is that the business start developing this proof early and continue to identify where additional proof may be needed or improved.

If you need help identifying, prioritizing, creating, or improving the particular “proofs” for your business, we can help. Contact Scott Harris at Friend, Hudak & Harris, LLP.

Potential “Proofs” for Businesses to Consider

  1. Customers: contracts with each customer; list of customers lost and added in the past three years; purchasing policies; credit policies; list of unfilled orders; advertising or marketing contracts, programs and materials; and list of major competitors.
  2. Contracts with Third Parties: subsidiary, partnership or joint venture agreements; “insider” contracts between the business and officers, directors, shareholders and the business’s affiliates[1]; license agreements (both those for licensing of the business’s intellectual property to others, as well as those permitting the business to use intellectual property that it does not own); security agreements, debts, mortgages, collateral pledges, etc.; guarantees by or in favor of the business; installment sales agreements; distribution, sales representative, marketing or supply agreements; letters of intent or agreements relating to the purchase or sale, merger or consolidation of the business or its assets; agreements to purchase equity in other entities; contracts with customers, quotes, purchase orders, invoices and warranty terms; and non-disclosure or non-competition agreements to which the business is a party.
  3. Products and Services: list of all products or services sold in the past three years or currently under development; tests, evaluations and other data regarding existing or developmental products or services; descriptions of all products and services, correspondence, applications and reports relating to regulatory application and approval for products and services; and descriptions of all complaints and warranty claims.
  4. Legal Matters: articles of incorporation or organization and all amendments; bylaws and amendments; voting agreements; shareholder and/or operating agreements (whichever is applicable for the particular entity); stock ledgers and certificates, subscription agreements and shareholder lists; stock option, stock purchase plans and grant or award agreements under each; puts, calls, warrants, subscriptions and convertible securities; minutes of director, director committee and shareholder meetings (both annual and special meetings); certificates of authority to conduct business as an out-of-state company or LLC; list of all states and countries where the business has employees, property (whether owned or leased) and conducts business; annual company reports filed in each state; and list of all trade names and registrations for fictitious names.
  5. Financial Information: last three to five years’ year-end balance sheets, income statements, statements of changes of financial position (whether audited or not); auditor’s and CPA’s letters and responses; most recent interim financial statements; list of all debts (both long- and short-term); credit reports; general ledger accounts; descriptions of internal control policies; and projections, budgets and strategic plans.
  6. Real Property: list of all business locations; deeds; mortgages; leases (including renewals); title insurance policies; surveys; and zoning approvals, variances and use permits.
  7. Personal Property: lists of all personal property of the business, describing the property, its type, location, and date of acquisition; motor vehicle registrations; all property leases, including vehicles; and list of capital equipment purchased or sold in the past three years.
  8. Intellectual Property: lists of patents, copyrights, trademarks and service marks, and all registrations for same; list of trade secrets and confidential information of the business; any agreements or other documentation evidencing the business’s ownership of, or rights in, such intellectual property.
  9. Employee and Consultants: employee lists with name, address, last three years’ salary and bonus, title, position description, initial employment date, and years of service; employment agreements; consulting agreements; non-disclosure, non-solicitation and non-compete agreements; invention disclosure and intellectual property assignment agreements; separation agreements; employee handbooks; lists of accrued holiday, vacation and sick day leave; employee benefit plans and their descriptions; workers’ compensation claims and history; discrimination, grievances, harassment, labor disputes, requests for arbitration, workers’ compensation, unemployment, and wrongful termination claims and history; list of all employee benefits plans, summary plan documents and descriptions of qualified and non-qualified plans; list and description of all health, welfare and disability insurance policies and self-funded plans; and collective bargaining agreements.
  10. Licenses & Permits: business licenses; any governmental approvals, consents or permits; and copies of applications to, or proceedings before, regulatory agencies.
  11. Environmental: for each property ever owned or occupied: environmental audits, list of hazardous substances, environmental permits and licenses; property owned or occupied; and lists describing all environmental litigation, investigations, liabilities or continuing indemnification obligations.
  12. Taxes: copies of all foreign, federal, state, and local tax reports and returns for the last three to five years; sales and use tax returns; audit or revenue agency reports; tax settlement documents; employment tax filings; and tax liens.
  13. Claims and Litigation: a description of any pending or threatened litigation; copies of insurance policies possibly providing coverage as to pending or threatened litigation; all documents relating to any injunctions, consent decrees, or settlements to which the business is a party; and list of any unsatisfied judgments.
  14. Insurance: list and copies of the business’s general liability, personal and real property, product liability, errors and omissions, key-man, directors and officers, worker’s compensation, and other insurance policies; and list of insurance claims history for past three years.

[1] Which means any person or entity, controlling, controlled by, or under common control with, the company.

FH2’s Mike Stewart Wins Client Choice Award for Third Time

Posted on by Friend, Hudak & Harris

FH2’s Mike Stewart was named the exclusive 2016 Winner of the  International Law Office’s Client Choice Award for the IT & Internet category for Georgia.  This marks the third time Mr. Stewart has won the Client Choice Award since 2013. Established in 2005, the Client Choice Awards recognize those partners around the world that stand apart for the excellent client service they provide.  For more information on Mike, his practice and his accomplishments, Click Here.

8 Key Terms You Need to Pay Attention to in Your Next Lease

Posted on by Chip Gerry

Almost every person or business (the “tenant”) that seeks to occupy space in another’s building (free standing, multi-tenant office or shopping center) will enter into a contract, known as a lease, with the owner (the “landlord”) of the building. A lease is an amalgam in nature, comprised of (i) the conveyance of an interest in real property by the landlord to the tenant, and (ii) a contract between the landlord and tenant that defines all of the elements of the relationship between them regarding the building and premises for the duration (the “term”) of its use by the tenant. Because commercial leases are typically in effect for a relatively long period (three or more years), the lease is a dynamic document that has very real implications for the tenant in years to come.

The lease is comprised of a variety of provisions that define aspects of the landlord/tenant relationship – ranging from the direct economic ones (such as rent, taxes and maintenance) to non-economic ones (such as the manner of use, renewal and tenant relocation). Because the landlord’s and the tenant’s interests are typically divergent, the provisions require negotiation between the landlord and tenant. But which ones are of most significance to the tenant? Unless the tenant is leasing a substantial amount of space in the building the bargaining positions of the tenant and landlord are generally weighted in favor of the landlord, so the tenant must decide which provisions are most crucial to modify in order to meet its needs and which ones can be accepted as proposed by the landlord.

The following are key provisions that merit special attention by a tenant.

1. Rent: While this seems obvious, the tenant must be sure that base rent (per square foot rental rate times the total square feet in the premises) is clearly stated for the term of the lease, and that there are no overlooked rent escalations (such as cost-of-living adjustments) included that have not been specifically agreed to.

In addition to base rent, leases generally provide that the tenant will pay its pro rata share (based on square footage of the premises divided by the square footage of the building) of building operating expenses, taxes and insurance. This will be discussed later in more detail under the heading Building Operating Expenses.

2. Use: This provision defines what the tenant can use the premises for. Landlords will frequently seek to limit the use to a specific one, while it is in the tenant’s best interest to keep the scope of use more broad. For example, the landlord may seek to limit the use to “law offices”, but the tenant should try, at a minimum, to expand the approved use to include “general office purposes” or, better still, any purpose not prohibited by law.

3. Maintenance and Repair: It is critical that the division of responsibility for maintenance and repair of the building (together with its common areas) and the premises (the space within the building actually occupied by the tenant) be fair to the tenant. The tenant will typically be responsible for repairs and maintenance to the premises, while the landlord is otherwise responsible for the building and common areas. In this situation the definition of “Premises” within the lease is very important. The tenant should seek to define the premises for which it is responsible as “below the ceiling grid, above the surface of the floors and inside of the exterior windows”. If the definition of the Premises is not so limited, tenant could find itself liable for maintenance and repair of electrical systems and HVAC above the ceiling grid and plumbing systems below the floor. Additionally, the tenant should try to avoid being made responsible for any “replacement” of components of the premises, like plumbing and light fixtures unless the replacement is necessitated by the tenant’s negligent acts or omissions.

4. Building Operating Expenses: While landlords are typically responsible for maintenance, repairs and replacements of the building and common areas, the costs incurred by the landlord in fulfilling that responsibility are almost always passed to the tenant on a pro rata basis. The amount involved can be substantial, sometimes as much as 30/40% of base rent. The lease will include a comprehensive definition of all such costs which will include taxes (unless addressed separately), insurance and virtually every other cost incurred by the landlord in operating and maintaining the building and common areas and providing services to the building.

During the lease negotiation the tenant should try to avoid including the following items in the definition of building operating expenses:

  • Depreciation on improvements and equipment, especially if a capital reserve is already part of the definition;
  • Costs properly chargeable to landlord’s capital account such as repaving, new roof and construction of additional improvements; and
  • Paying a percentage that varies from 10-20% of base rent, to the landlord for its administrative costs, rather than its actual out-of-pocket costs for administration.

The tenant should also seek to limit its obligations for building operating expenses to paying only those expenses that represent an “increase” over the building operating expenses for a base year established in the lease. The “base year” is typically the year that the lease is entered into. However, many landlords seek to pass on all building operating expenses to tenants, not just increases over a base year.

Payments of the building operating expenses are typically made monthly based on the landlord’s estimate of such expenses, with a reconciliation in the first 90 days of the next calendar year based on the actual operating expenses for the preceding year.

5. Extension/Renewal Options. When negotiating for the use of space, the tenant should consider having an extension/renewal option provision included in the lease. This grants the tenant the option (or several consecutive options) to extend/renew the lease for one or more fixed terms on substantially the same terms and conditions as are contained in the original lease, with the exception of base rent, financial incentives and the renewal option itself. This provision will provide that the option may be exercised, if at all, by written notice to the landlord, given within a specified number of months before the then current term expires. Landlords frequently resist such provisions because they restrict the landlords’ rental options in the future. Nevertheless, landlords may be persuaded to agree – particularly if the lease includes a relocation provision in favor of the landlord (see below).

Rent for the renewal/extension period is negotiated by the landlord and tenant and is often based on “market rent” at the time of renewal, with stated criteria for determining “market rent” such as (i) similarly situated second generation space in comparable buildings, (ii) where the building is located, (iii) annual rent escalations, (iv) definition of rentable space, and (v) other similar factors affecting the rental rate.

If the landlord and tenant cannot agree on “market rent”, the option will often provide for determination of market rent by one to three arbitrators who are experienced in representing landlords and tenants of buildings comparable to the building.

The option will almost invariably state that in no event shall the base rent for the renewal term be less than base rent in effect on the last day of the preceding term.

6. Relocation: Landlords of multi-tenant buildings (and sometimes landlords of shopping centers) often include a provision in the lease that allows them to move tenants to other spaces in the building. Landlords want to include such a provision as it allows the landlords the flexibility to adjust its leases in the building to accommodate prospective tenants who need large spaces within the building. If a tenant does not have the leverage to get the landlord to agree to omit the provision, it needs to negotiate adequate protection against the cost and disruption of a “forced” move. If a relocation provision is included it should provide for, at least, the following:

  • No less than 60 days’ advance notice;
  • The new premises should be substantially the same in size, dimensions, configurations, tenant improvements and finishes as the original premises, all paid for by landlord;
  • The relocation shall be at landlord’s sole cost and expense;
  • The relocation shall take place over a weekend and be completed, if possible, before the Monday following the weekend of the move; and
  • Tenant shall be reimbursed for all costs incurred by tenant as a consequence of the relocation including without limitation, moving costs, changing stationery and business cards, moving of computers and telephone systems and re-cabling the new premises to meet the tenant’s technology requirements.

7. Assignments: Leases will frequently prohibit a tenant from assigning the lease or sub-letting all or part of the premises without the landlord’s prior consent. The tenant should seek to limit the landlord’s discretion in prohibiting assignment or sub-letting by providing that the landlord may not unreasonably delay, condition or deny its consent to an assignment or sub-lease. Further, to account for future business transactions and restructurings, the tenant should seek the right to assign the lease, or sub-lease the premises – without any required landlord consent – to any entity controlling, controlled by or under common control with the tenant, or to any entity into or with which the tenant has merged or consolidated or which purchases all or substantially all of the tenant’s assets.

8. Surrender of Premises: This provision often does not receive the attention it needs when the tenant is negotiating the lease. The lease will typically require that, upon expiration or termination of the lease, the premises must be returned, broom clean, in good order and condition (except for normal wear and tear), substantially in the same condition as it was when the lease commenced.

While a provision of this sort is customary and should not be objectionable to the tenant, many leases go further, and require that, in addition to removing its trade fixtures and personal property, tenant must remove all communications wiring and cabling installed by it from the ceiling and walls of the premises – and sometimes even from the premises to the point where it terminates to the building’s wiring. Further, some leases seek to obligate the tenant to pay for the removal of all tenant improvements made to prepare the premises for tenant’s occupancy. Both of these provisions should be rejected if at all possible as the cost to tenant of complying can be substantial. However, tenant should retain the “option” of removing cabling and wiring as tenant may wish to reuse these items in its new location.