2016 - Wetherington Hamilton, P.A.

The Consumer Financial Protection Bureau Found Unconstitutional

November 11, 2016/in Articles, Debt Collection, General/by Ted Hamilton

For anyone involved in the financial services industry over the last four years, the CFPB or Consumer Financial Protection Bureau has become a four letter word. This entity created by Congress as part of the Dodd Frank act passed after the financial collapse in 2008, was given broad jurisdiction to regulate all types of financial services, from banks to title companies to insurance agencies. However, in a ruling on October 11, 2016, the U.S. Court of Appeals for the District of Columbia Circuit found the structure of the CFPB unconstitutional because of the “concentration of enormous executive power in a single, unaccountable, unchecked Director who wields vast power over the U.S. economy.” The case (PHH Corporation, et.al. v. Consumer Financial Protection Bureau) can be found here. As it stands, the director of the CFPB is appointed by the President. This director can only be removed for cause, such as “inefficiency, neglect of duty or malfeasance.” This structure, with the President having no discretion for removal, was found unconstitutional in the PHH case.

The PHH case also vacated a $109 million penalty imposed by the CFPB finding the agency misinterpreted the applicable statute and then violated Federal Law. The issue in the PHH case was RESPA. This act protects consumers from undisclosed arrangements in real estate closings. The court found that RESPA was not violated by PHH mortgage and vacated the penalty. RESPA governs every residential real estate closing. For those who have purchased residential real estate, you may have noticed confusing changes to your closing statements. The CFPB has mandated these changes and others in its attempt to make closings more clear.

Further changes are in the wind as imposed by the CFPB that will cause many small businesses to close. The changes to RESPA have caused tremendous consolidation in the real estate industry and have made the barriers to entry extremely expensive. Similar changes in the banking industry caused by CFPB regulation have made community banks merge or close. These regulations can only lead to higher costs for all of us.

If you are involved in any financial service industry, feel free to call us about upcoming cases or regulations involving your industry. In addition, if you are facing a claim involving regulations adopted by the CFPB, let us know and if we can’t help we can point you in the right direction.

Theodore J. Hamilton, Esq.

Anatomy of a Business Sale: Part II of III

October 31, 2016/in Articles, General/by Ted Hamilton

INTRODUCTION

This 3-part series is intended to de-mystify the business sale process. In Part I, I discussed the process of identifying a buyer, the importance of a good non-disclosure agreement, and the development of a terms sheet or letter of intent. In this second installment, I will explain the 4 basic types of business sale transactions and will provide an overview of the due diligence process.

FORMS OF TRANSACTIONS

The letter of intent or terms sheet will often describe the form of the proposed transaction as either a “stock sale” or an “asset sale.” Alternatively, the transaction may be structured as a “merger” or possibly as a “redemption.” We will address each of these in turn.

Asset Sale

In an asset sale, the company sells its assets and operations to either an existing company or to a company formed by a buyer for this purpose. The selling company remains an empty shell after the sale, sometimes retaining only liabilities, other times retaining accounts receivable, which it will continue to collect from customers. The selling company is often required to change its name so that the buying company can register the name with the appropriate state authority.

The issue of the selling company’s liabilities is usually a subject of negotiation. The buying company may be willing to assume some of the seller’s liabilities, including contracts with certain customers or certain vendors. The seller and its legal counsel must screen existing contracts and agreements to determine whether those agreements can be transferred, or assigned, to the buyer. Most such agreements, and particularly bank loans, leases, and intellectual property licenses contain some form of restriction on transfer or an outright prohibition against assumption of by third parties without prior consent. For example, attempting to assign a bank loan without obtaining the lender’s approval is almost always an event of default, allowing the lender to “accelerate” or demand immediate payment of the note. For this reason bank debt is rarely assigned to or assumed by the buyer, and the buyer’s lawyer will ensure that such debts are paid, so that the acquired assets are not subject to the bank’s liens.

If the seller is organized as a corporation, an asset sale will require the approval of the directors and a majority of the voting shareholders of the selling company. If the seller is a limited liability company, unless the operating agreement provides otherwise, a majority vote of the members is sufficient to authorize the sale of the company’s assets.

Stock/Membership Interest Sale

In a stock sale, all of the assets and liabilities remain with the selling company and it is the stock or the membership interests themselves that are sold to the buyer. The new buyer or buyers purchase the stock or limited liability company interests from the owners of the selling company. Even though the assets are technically not transferred from the original company, many of the contracts that the selling company has with third parties may treat a “change of control” of the company as equivalent to a prohibited assignment of a contract or assumption of debt. If so, this requires consent by the contracting party before completing the transaction.

If the acquired company has more than one owner, the buyer(s) usually want all of the owners to participate in the sale. This is why many buy-sell agreements and LLC operating agreements contain so-called ‘drag-along’ provisions that require minority shareholders or LLC members to join in a sale of stock or LLC interests that has been endorsed by the majority owner(s).

Redemption

A redemption is a form of a stock sale whereby the company buys the shares of one of its owners. This form of transaction is often used when there are multiple owners and only one is selling. For example, the founder may own 90% of the company and the CFO may own 10%. The company can purchase the founder’s 90% stake over time and as each segment is purchased, the CFO’s percentage ownership increases until, eventually, the founder has zero and the CFO has 100%. Just as in a stock sale, many of the contracts that the company has with third parties may treat a “change of control” as equivalent to a prohibited assignment of a contract or assumption of debt. Therefore, a redemption also often requires review or consent by certain third parties prior to consummation.

Merger

A merger is a legal procedure whereby 2 or more companies are combined, with only one of them remaining in existence after the process is completed. The merged company ceases to exist and the surviving company automatically acquires all of the assets, liabilities and operations that were owned by all of the original companies before the merger. Under both the FL business corporation law and the FL limited liability company law, a majority of the voting shares or membership interests must approve a merger. Also, as with asset sales, stock sales and redemptions, many agreements and licenses will require approval from third persons before the merger is completed.

DUE DILIGENCE

The due diligence process usually begins immediately following execution of the letter of intent or the terms sheet. “Due Diligence” is an in-depth investigation of all the things the buyer thinks it needs to know before it makes an irrevocable commitment to the deal. The buyer will provide the seller with a due diligence checklist which is typically very detailed and should be (but isn’t always) customized to the seller’s business. The seller will provide the buyer with information responsive to the buyer’s checklist requests, either stating the item requested is not applicable, or providing materials that are responsive.

Typically, a due diligence checklist requests copies of all corporate records, significant contracts, leases, patents, trademarks, permits, and license agreements. In addition, the buyer will want to send contractors to conduct physical and environmental inspection of any real estate (owned or leased) and to inspect any important equipment. The buyer’s financial management team will request financial records and may request meetings with the seller’s accountants. The buyer’s operations team may request meetings with key employees, customers and suppliers of the seller.

Sellers sometimes want to wait to disclose certain matters until they are sure the deal will go through. These may include the identity of key customers, or price and terms for their work, trade secrets, or sources of supply and purchase terms. The seller’s lawyer can usually work out procedures to make the disclosures anonymous (for example, substituting the letter ‘X’ for the name of a key customer) or delaying disclosure until everything else is in order.

Ideally, the seller should work with its consultants and advisors on its business and legal due diligence materials far in advance of the actual sale. In Part I of this series we discussed the importance of using an investment banker or business broker. If they are included in the process early enough, these advisors, together with the company’s accountant and lawyer can “clean-up” any issues that could be problematic to a buyer. In addition, the company’s lawyer can provide the seller with a due diligence checklist of its own to help gather and organize the materials likely to be requested by a typical buyer. A business that is prepared for due diligence will find the entire process much more manageable. Prompt, thorough, and accurate responses by the seller will create a favorable impression on the buyer that the seller’s company is professionally organized and well-run. This creates goodwill on the part of the seller and raises the buyer’s confidence that this is a good deal.

If the seller is unprepared and cannot provide the buyer with prompt and accurate responses to the due diligence checklist, the buyer may attempt to renegotiate the exclusivity period deadline, arguing that it will need more time. If the delays continue, the buyer may grow concerned about the viability or trustworthiness of the overall transaction, which can lead to the buyer terminating the deal. Generally speaking, it is in the seller’s interest to disclose as much as possible to move the deal along and to avoid post-closing buyer surprises that may lead to indemnification claims and purchase price claw-backs.

More often than not, the seller provides its due diligence materials through an electronic “data room.” The seller can control and monitor who receives data room access. An electronic data room saves paper and reduces the amount of time the buyer’s management team needs to spend on-site at the seller’s facility. It also creates an organized electronic record of the materials that can be downloaded to a CD or flash drive for future use, such as another deal if this one fails or in the event of a post-closing buyer indemnification claim.

CONCLUSION

In Part I of “Anatomy of a Business Sale,” I discussed the importance of preparing a business for sale and the process of identifying a buyer, and the development of a terms sheet or letter of intent that serves as an outline for the formal purchase documents. In this Part II, I explained the different forms that a business sale can take – asset sale, stock sale, redemption and merger. Finally, I reviewed the importance of the buyer’s “due diligence” investigation and why it is important for the seller to be prepared and to respond promptly and accurately. In Part III, I will conclude this series with an explanation of the typical provisions contained in the agreements used in all four forms of transactions and an explanation of the closing process.

Matthew J. Lapointe, Esq.

The Anatomy of a Business Sale – Part 1

October 1, 2016/in Articles, General/by Ted Hamilton

Business Sale Selling a private company is much more than a business transaction. After all, the owners have invested time, treasure, and in some cases blood and tears into building their business. Many owners have the first dollar their company ever earned encased in glass. They have developed deep relationships with employees, customers, and suppliers. For many business owners, their very identity is tied up in their company. Selling the business is emotionally and psychologically draining.

The sale process can also seem unduly complicated and ritualized to business owners used to making their own decisions and implementing those decisions with little or no oversight. The sale process includes the preparation and review of unfamiliar documents, seemingly endless requests for documents and financial records (known as “due diligence”), and long discussions over legal points and contingencies. There may also be difficult tax issues to work through. For many clients, the sale process is mysterious and takes much longer than they think it should take.

In this three-part series, I intend to de-mystify the process and explain the different phases of the sale of a company. In this first installment, I will discuss the process of identifying a buyer for the company, the importance of a non-disclosure agreement, and the preparation of a terms sheet and a letter of intent outlining the business points of the deal. I will conclude this first part with a discussion of how and when the business owner should disclose the transaction to minority owners, employees and other stakeholders.

In Part II, I will discuss the basic forms a business sale may take – an asset sale, stock or LLC interest sale, redemption or merger. I will conclude Part II with a description of the “Due Diligence” process, which applies to all forms of transactions.

Part III will contain a detailed look at the main provisions of an Asset Purchase Agreement and a Stock/LLC Interest Purchase Agreement. I will include a clear (hopefully!) explanation of the warranties and representations commonly made by sellers, the indemnities commonly included in such agreements, common pre-closing and post-closing covenants and the closing process itself.

Without further preliminaries, here is Part I of Anatomy of a Business Sale.

Identifying a buyer

Business owners can identify buyers in a number of ways. A long-time employee, a competitor or a customer may express an interest in acquiring the company. Sometimes an investment banker or business broker may approach the business owner on behalf of a potential buyer.

Business owners who have concluded that now is the time to exit their company may reach out to their lawyer or accountant. These professionals may know people who would have an interest in the business. More likely, they will put the business owner in contact with an investment banker or a business broker. These professionals usually have wide networks of contacts and know how to get the maximum exposure and the highest price for the business. There are also business transition experts who specialize in planning and assisting the business owner with developing and executing a transition plan, using accountants and lawyers with whom they have established relationships.

The investment banker or business broker will usually spend time with the business owner, interviewing him or her and reviewing financial records and business policies and procedures. They will usually prepare a set of comprehensive materials describing the general nature of the company, its industry, and its approximate location, without divulging its precise identity. The broker or investment banker will compile a list of possible contacts, using his or her own database and perhaps soliciting suggestions from the business owner and the business’ lawyer and CPA. That list will then be approved by the business owner, who of course has the final say on who he or she will contact. The broker or investment banker will then contact the people on the list, inquiring whether they have any interest in a possible transaction.

In some cases, the business owner is not concerned about pre-sale publicity and the broker or investment banker will embark on a very public marketing campaign to sell the business.

THE Non-Disclosure agreement or “NDA”

If a prospect responds to the overtures of the broker or investment banker, the next step is to ask the prospective buyer to sign a non-disclosure agreement with the seller. This agreement requires the prospective buyer to keep confidential any information it may receive concerning the company, its finances or its business. In most cases it will also require the buyer not to disclose the very fact that the company is for sale or that any transaction is being discussed. The NDA should also contain provisions prohibiting the prospective buyer from trying to hire away the selling company’s employees, trying to contact the company’s customers or vendors or otherwise using any of the information they receive about the selling company in any way other than the consideration of the transaction.

The non-disclosure agreement should also require the prospective buyer to return any and all documents it receives if the deal does not proceed. Nowadays, most of this information is shared electronically, and if the deal does not proceed it is important to obtain a certification from the prospective buyer that it has permanently deleted all confidential material from its computer system.

In some cases, the prospective buyer may be providing information to the selling company as well. This would certainly be the case where the buyer wants to pay part of the price over time, or with shares of its stock. In these cases, the NDA works in both directions and the selling company will be required to respect the confidentiality of the information provided by the prospective buyer or merger partner. Likewise, if the deal does not progress, the selling company will be required to return or permanently delete any confidential information it received from the prospective buyer.

Most prospective buyers honor their commitments and it is rare to see litigation arise out of an NDA, but it happens. Consequently, it is important to have your lawyer draft the NDA or carefully review the NDA provided by the broker or investment banker.

THE “Agreement in principle,” the “Term Sheet” and the “Letter of Intent”

term-sheet

After the parties sign an NDA, the prospective buyer usually asks the selling company to disclose summary financial information and information about its facilities, product or service lines, customers and vendors. The buyer may also want to meet the owners and top executives and interview them about the business.

When the prospective buyer has a good picture of the company’s historical financial information and of the business in general, the owners will start to negotiate price, payment terms and other specific terms and conditions of the deal. These specifics may include the owner’s continued employment by the selling company after the closing (how long, what salary and benefits); the disposition of company-occupied real estate (is it part of the deal or will it be leased to the new owner); and whether the seller will retain any company assets. With advice from the lawyers and accountants, the owners should also determine the form of the deal: a sale of assets or a sale of the company’s stock or LLC interests. These business points will often be reduced to writing in a “Term Sheet,” a short (usually 1 or 2 pages) summary in bullet points that is signed by the seller and the buyer.

Sometimes the parties go straight from the Term Sheet to the actual transaction document — an Asset Purchase Agreement, a Stock/LLC Interest Purchase Agreement or a Merger Agreement. Depending upon the size and complexity of the deal, the parties often move from a Term Sheet to a Letter of Intent (“LOI”). The LOI sets out the agreed-on business terms but goes beyond the Term Sheet by including some or all of the following:

(1) the seller’s commitment to give the buyer access to the business for ‘due diligence’ purposes (we’ll address due diligence in detail in Part II).
(2) a “no-shop” provision, whereby the seller agrees not to discuss selling the company with anyone else for a fixed period of time.
(3) a provision that allows the buyer to terminate the LOI if at any time it concludes that the details of the business are unsatisfactory.
(4) a termination date or a date by which the deal must close.
(5) provisions for a deposit, to be held by the investment banker, broker or, more commonly, the seller’s attorney.
(6) any financing contingency or other contingencies.

The LOI usually not a comprehensive legal document, but it can be legally binding. Legal counsel should absolutely be involved in the preparation of the LOI to ensure that it is perfectly clear which parts are legally binding (e.g., the “no shop” clause and confidentiality provisions) and which are not.

INFORMING EMPLOYEES AND OTHER STAKEHOLDERS

If there are minority owners in the company, it is often a touchy issue determining precisely when to inform them of the possible transaction. In larger companies, the majority owner is often the only one actively involved in the business and family members or early investors have only minor equity interests. Of course, these minority owners are certain to become involved eventually in any transaction, either because their approval is legally required for the company to sell assets, or because most buyers of stock or LLC interests will want to acquire 100% of the company’s equity.

When and how to break the news to minority owners, top company executives and other stakeholders is mostly a business decision for the majority owner, who must balance the risk of premature disclosure against the risk of angering other stakeholders by a perception that they were not sufficiently trustworthy to be told of the deal earlier.

There are certain key employees who simply must be told fairly early in the process because their cooperation is essential to getting the deal done. The CFO, for example, will need to handle much of the response to due diligence inquiries about the company’s financial position. Likewise, the head of Human Resources may be tasked with compiling information about employees, the structure of benefit plans and pending litigation that will be disclosed to the prospective buyer. These and other key employees are often offered a “deal bonus” to ensure that they remain with the company through the transition and the consummation of the deal.

There is no easy answer to the question of how much information a business owner should share with employees and other stakeholders before a company sale. Every situation is different. The business owner should consult with legal counsel, the broker or investment banker and others to determine whom to tell how much and when.

COMING UP NEXT

In Part II, I will discuss the two basic forms a business sale may take – an asset sale or a stock/ownership interest sale (including a merger). I will also provide a discussion of the due diligence process and the importance of full disclosure.

Matthew J. Lapointe, Esq.

Enforcing Your Out of State Judgment in Florida

September 9, 2016/in Articles, Debt Collection/by Ted Hamilton

Problems with Enforcing Your Out of State Judgment in Florida:

The firm of Wetherington Hamilton, P.A. regularly enforces out of state judgments in the State of Florida. These types of cases are handled through the use of the Florida Act that allows the enforcement of foreign judgments in the state of Florida. Once the judgment is recognized in Florida, the attorneys of the firm are used to using process such as garnishment, execution and levy to collect on a judgment.

Theodore J. Hamilton, Esq.

Having a Good Credit Application

August 19, 2016/in Articles, Debt Collection/by Ted Hamilton

business credit application If your business involves granting credit, it is important to have a good credit application. Most creditors are aware of the need to include material about basic information such as ability to pay, shown by income and obligation, and past credit history. Businesses need to be viewed in terms of profitability and stability through determining years in business as well as bank balance and financial statements.

Some items that are also important are often left out of a credit application and should be considered. There should be an attorneys fee provision for defaults in payment as this is required to be in writing in many states to recover the fees changes by an attorney for suit. A waiver of jury trial should be included to avoid additional cost, delays and other difficulties that might be encountered should a suit be decided by a jury. A venue provision should be included so that you have the choice of deciding the best place to file the suit. It should also be clear as to the identity of the person or business who is being granted credit. Another consideration is including a personal guaranty.

These are some of the items to be considered in a good credit application. If you are not certain what you should include or if your application has these provisions, you should consult with an attorney. The lawyers at Wetherington Hamilton are experienced in individual and business credit applications and transactions. If you have questions about a credit application please give us a call at 813-676-9082 or email the author at Info@WhhLaw.com.

Thomas K. Sciarrino Jr., Esq.

What Happens When Someone Attempts to Avoid Being Served?

July 15, 2016/in Articles, Debt Collection, General/by Ted Hamilton

When filing a civil lawsuit in the state of Florida, initial service of process on the defendants named in the lawsuit is critical in order to confer jurisdiction on the courts. The Florida Rules of Civil Procedure and Florida Statutes govern who may serve process upon whom and how service of process may be perfected. See Rule 1.791, Fla. R. of Civ. P. and Chapters 48 and 49 of the Florida Statutes. Without perfecting service of process on the parties, the court lacks personal jurisdiction or authority over the parties and therefore lacks the authority to enter judgment. There are various forms of service, including personal or individual service, substitute service, and constructive service. Personal and substitute service give the Court personal jurisdiction over the parties who have been served, while constructive service gives the court in rem jurisdiction, over something such as property, rather than someone.

So what happens when a person attempts to avoid service of process? Can the court obtain jurisdiction over that person? As one might expect, the answer is, it depends. The statutes and rules regarding service of process must be strictly adhered to in order to perfect service on an individual. Florida Statute 48.031 (1) (a) states as follows:

Service of original process is made by delivering a copy of it to the person to be served with a copy of the complaint, petition, or other initial pleading or paper or by leaving the copies at his or her usual place of abode with any person residing therein who is 15 years of age or older and informing the person of their contents. Minors who are or have been married shall be served as provided in this section.

Interesting situations and questions of law can arise when individuals attempt to avoid being served. If a deputy or process server finds a defendant to be at home, but that person refuses to answer the door or attempts to hide, then at least one court has held that service of process was sufficient when the deputy “…read the summons in a loud voice and announced that he was leaving a copy of the summons and complaint on the doorstep for Mr. Haney and another copy with Mr. Haney as service on his wife.” Olin Corp. v Haney, 245 So.2d 669 (Fla. 4^th DCA 1971). In that case, the deputy attempting to serve the defendants had observed Mrs. Haney leave the house and Mr. Haney remained in the doorway. When the deputy identified himself, Mrs. Haney ran into the house in an apparent attempt to avoid service.

The point is that in order for the court to have the authority to proceed with a civil case in Florida, service of process must be perfected. The experienced collections attorneys at Wetherington Hamilton know how to handle this issue, even when a defendant is attempting to avoid service.

Joan W. Wadler, Esq.

The Basics of Florida’s Construction Lien Law

June 27, 2016/in Articles, Construction Law/by Ted Hamilton

As the prices of real estate continue to rise in the Florida, more and more people are contemplating making changes or additions to their homes through construction improvements. Dealing with a contractor of any kind, especially for a remodel, is often a difficult and uncertain task both financially and in respect to the final result. Before entering into any contract with a contractor, make sure that you are dealing with a licensed contractor. If you are not, then be sure that you know who you are dealing with and understand that you are responsible for pulling permits if necessary.

Also, protect yourself when you pay your contractor. As a general matter, a licensed Florida Contractor has the right to file a lien on your property if they are not paid after jumping through a few hoops. First, a General Contractor usually files a Notice of Commencement in the Public Records where you home is located. This is required for obtaining a permit. This document protects the General Contractor and all Subcontractors should you sell your property while construction is taking place. All liens filed on the property for the job, relate back to the date of the filed notice of commencement.

Next, any subcontractors working through the contractor must send you a notice to owner telling you they are working on the home. This has to be sent within 45 days after they first start to work on the job. When you pay your contractor, you should receive a release or partial release from all subcontractors that have sent you a notice to owner along with a partial release from your contractor. You can also get your Contractor to give you an affidavit prior to payment telling you all subcontractors they have hired on the job. This will ensure that you are paying the correct amounts as the job progresses.

Finally, if a licensed subcontractor or contractors has not been paid, they have the right to file a lien on your property within 90 days of completion of their work on the job. This must also be sent to the owner. It is filed in the public records of the County where the jobsite is located. The owner has the right to contest this lien which shortens the time for the Contractor to file suit to foreclose the lien to 60 days. Otherwise, the contractor must file suit to foreclose the lien within one year of filing the lien or the lien is no longer a valid lien. If suit is filed, the Contractor has the right to recover all attorney’s fees and costs in the foreclosure case if they prevail.

A couple more points, unlicensed contractors cannot file a lien. It is illegal to do so. Furthermore, if a contractor includes amounts in their lien that they have not paid to their subcontractor, this will result in an invalid lien filing.

Feel free to call our office if you need further help regarding lien filings or your construction contract.

Ted Hamilton, Esq.

Founding Partner

Employee or Independent Contractor: A Disaster in the Making?

June 21, 2016/in Articles, General/by Ted Hamilton

At a recent business association dinner, I introduced myself to the gentleman sitting next to me. He was a retired business executive, now offering his substantial business expertise to new entrepreneurs as a SCORE[1] volunteer. When I told him I was a business lawyer, he asked me: “What is the most common legal issue for new business owners?” Without hesitation, I answered: “New business owners routinely misclassify workers as independent contractors, when those workers should be classified as employees.”

Why do business owners do this? In some cases it is inadvertent – the business owners do not understand the applicable tests or do not properly apply the applicable tests. In many cases, however, it is an intentional decision by the business owner to operate in a “gray area.” There are many reasons why a business owner would prefer to classify a worker as an independent contractor rather than an employee:

The business is not required to withhold income tax, pay social security and medicare taxes, pay unemployment compensation taxes or provide worker’s compensation insurance for independent contractors
Independent contractors are not subject to minimum wage or overtime pay requirements
Independent contractors aren’t eligible to participate in employer sponsored health plans and retirement plans

In my experience, misclassification seems to be more prevalent in certain industries. Other lawyers have observed the same trends. The law firm Pepper Hamilton studied reported cases from 2010 to 2015 and found that businesses in about 40 industries have been specifically targeted by federal or state agencies or have been the subject of class action lawsuits because of worker misclassification.[2] Those industries include amateur and professional athletics, aerospace and defense, automotive, charities, cleaning and janitorial services, computer programming and technical consulting, construction, health care, landscaping, publishing/editing, security, and trucking, among others.

The Unpleasant Consequences of Getting it Wrong

For many years, misclassification was not high on the list of priorities at the IRS or the US Department of Labor (“DOL”). That changed around the mid-2000s, when the IRS, the DOL and state agencies began stepping up their audits of both for-profit businesses and non-profit agencies. In 2004, the IRS audited a non-profit youth soccer league in Fairfield, Connecticut, assessing the league more than $300,000 in back taxes, penalties and interest based upon the league’s misclassification of its coaches as independent contractors instead of employees. The league ultimately settled with the IRS, agreeing to treat its coaches as employees going forward and paying $11,600 in back taxes, thankfully only a fraction of the initial assessment.

Government audits are not the only risk, however. Recently terminated workers and workers injured on the job are likely to retain attorneys and sue for unpaid overtime or for payment of medical expenses on the ground that they should have been classified as employees, not independent contractors. Large companies that use independent contractors to supplement their regular workforce or that operate on an independent contractor business model (such as Uber) are increasingly being targeted in class-action lawsuits brought on behalf of workers who are allegedly misclassified as independent contractors. In two widely reported cases, the federal 9^th Circuit Court of Appeals found in 2014 that FedEx Ground drivers in Oregon and California had been misclassified as independent contractors. FedEx lost those cases despite the fact that it had written contracts with all of its drivers in which the drivers agreed that they were independent contractors. That case cost FedEx over $225 million.

The consequences of misclassification can be grave. Besides owing back taxes to the feds, the business will also owe state unemployment taxes and unpaid worker’s compensation premiums, and may owe unpaid overtime or minimum wages, medical expenses and unpaid vacation and sick pay.

A Multiplicity of Tests Employee-vs.-Independent-Contractors

If a big company like FedEx can get it wrong, even with the resources to hire the best attorneys to write the best contracts, what’s a small business owner supposed to do? The reason that business owners who want to comply with the law find it so difficult is the multiplicity of tests. Years ago, the IRS used a “twenty-factor common law test.” Around 2010, the IRS issued guidance that it would use a three-part test, emphasizing the degree of control that an employer has over the worker. The DOL’s test, which it uses to enforce the Fair Labor Standards Act’s minimum wage and overtime provisions, is known as the “Economic Realities Test.” The focus of the DOL test is the degree to which the worker is economically dependent upon the employer. Finally, each state uses a test to determine eligibility for worker’s compensation and unemployment benefits. Some state tests mirror either the IRS test or the DOL test, but many do not.

The IRS Test (The 3-Category “Control Test”)

The IRS guidance[3] describes three broad categories of factors that need to be considered in applying the “Control Test”: behavioral control, financial control, and the relationship of the parties.

Behavioral Control covers facts that show if the business has a right to direct and control what work is accomplished and how the work is done, through instructions, training, or other means.

Financial Control covers facts that show if the business has a right to direct or control the financial and business aspects of the worker’s job. This includes:

The extent to which the worker has unreimbursed business expenses
The extent of the worker’s investment in the facilities or tools used in performing services
The extent to which the worker makes his or her services available to the relevant market
How the business pays the worker (by the hour? by the job?), and
The extent to which the worker can realize a profit or incur a loss

Relationship of the Parties covers facts that show the type of relationship the parties had. This includes:

Written contracts describing the relationship the parties intended to create
Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay
The permanency of the relationship, and
The extent to which services performed by the worker are a key aspect of the regular business of the company

The US DOL Test (6-Factor “Economic Realities” Test)

On July 15, 2015, the Department of Labor issued “Administrator’s Interpretation No. 2015-1,” a 15- page document describing the DOL’s “Economic Realities Test” under the Fair Labor Standards Act.[4] The document briefly describes the history and purposes of the Fair Labor Standards Act and the origins of the Economic Realities Test. The DOL describes the 6 factors that must be considered to determine whether a worker is an independent contractor or an employee under the Economic Realities Test:

the extent to which the work performed is an integral part of the employer’s business
the worker’s opportunity for profit or loss depending on his or her managerial skill
the extent of the relative investments of the employer and the worker
whether the work performed requires special skills and initiative
the permanency of the relationship
the degree of control exercised or retained by the employer

The Administrator’s Interpretation document includes numerous examples of how the test should be applied in different situations. The underlying theme the DOL’s Economic Realities Test is that true independent contractors are in business for themselves, deciding which jobs to take, how much to charge, and when and how to do the work. Whether they succeed or fail in their chosen business is fundamentally within their own control. By contrast, a worker who is economically dependent on the company for whom he or she is working is not really in business for him or herself, but is an employee.

State Tests

About a third of the 50 states use the “A-B-C Test” to determine whether a worker is an independent contractor: (A) the worker must be free from direction and control in connection with the performance of the service; (B) the worker’s service must be performed either outside the usual course of business of the employer and outside the employer’s places of business (some states only require one of these); and (C) the worker must be customarily engaged in an independently established trade, occupation, profession, or business of the same nature as the service performed.

Florida uses a “right of control” test, which is very similar to the IRS Control Test. Florida courts have adopted a number of criteria to determine whether the employer has a right of control, including

The extent of the right of control by the employer over the details of the work
Whether the person employed is engaged in a distinct occupation or business
The kind of occupation involved, and whether the work is done under the direction of the employer or by a specialist without supervision
The skill required in the particular occupation
Whether the employer supplies the instrumentalities, tools, and the place of work
The length of time the person is employed
Whether the work is a part of the regular business of the employer

Many states have entered into agreements with the IRS, the DOL or both, to share information and to cooperate in enforcement activities. An audit by the state worker’s compensation agency can thus spark an IRS or DOL audit and vice-versa.

Conclusion

Tests like the IRS’s Control Test and the DOL’s Economic Realities Test are called “balancing tests” by lawyers and judges, because all facts and circumstances need to be taken into account and no one factor predominates. All of the factors must be weighed and a conclusion drawn based on the preponderance of the factors breaking one way or the other. Ignoring certain facts can skew the tests one way or the other.

An close examination of all of these tests reveals certain common themes. The employer’s degree of control is a factor in all of the tests. The worker’s opportunity to realize a profit or suffer a loss is a factor in both the IRS test and the DOL test, and is implied in part C of the A-B-C Test. The extent to which the worker’s services are integral to the employer’s business is an important factor in both the IRS test and the DOL test and is arguably implied in part C of the A-B-C Test. A thoughtful consideration of the work to be performed and the nature of the relationship will usually lead to the correct result and that result will usually be that the worker is an employee, not an independent contractor.

It is important to emphasize that it doesn’t matter if a business has a written contract with a worker that declares him or her to be an independent contractor. If the applicable test results in that worker being classified as an employee, then that worker is an employee, notwithstanding what the contract says. That being said, in a true independent contractor relationship it is a very good idea to have a written contract delineating the services to be provided, the compensation to be paid, and how the relationship can be terminated, as well as providing for indemnification, insurance requirements of the contractor, etc. We recommend that businesses currently using independent contractors on a regular basis should review those relationships based upon the tests described in this article. If the workers at issue truly are independent contractors and the business does not have written agreements with those independent contractors, the lawyer for the business should draft appropriate contracts. If the business already has written independent contractor agreements, but they were not prepared by an attorney or an attorney has not reviewed them recently, we recommend that you have a qualified business lawyer or employment lawyer review them as soon as possible and modify them as necessary. If a company is not certain about the proper classification of its workers, we at Wetherington Hamilton stand ready to assist with that analysis. The IRS, DOL, and Florida Department of Revenue, as well as the plaintiff’s bar, are all paying attention even if you are not.

Matthew J. Lapointe, Esq.

Article References:

[1] SCORE is a nonprofit organization, supported by the U.S. Small Business Administration, that helps small businesses through education and mentoring. With headquarters in the Washington, D.C. area, SCORE has chapters throughout the U.S. Find out more at www.score.org.

[2] “The Crackdown and Costs of Independent Contractor Misclassification – And How to Minimize or Avoid Its Risks,” by Richard J. Reibstein, Lisa B. Petkun and Andrew J. Rudolph, Pepper Hamilton, LLP, 7/10/2015.

[3] See https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee

[4] See https://www.dol.gov/whd/workers/misclassification/ai-2015_1.htm

The Importance of a Work Life Balance: An Attorney’s Perspective

May 13, 2016/in Articles, General/by Ted Hamilton

Attorney Work Life Balance Having been a member of the Florida Bar since 1991, and having practiced in various areas of law, I fully understand and take seriously the commitment of time and resources required in order to be an effective and successful attorney. Preparation is key if one expects to have a chance of “winning” and effectively representing one’s client at any hearing. I pride myself in my work ethic and preparation for each hearing that I attend, no matter how much time for preparation may be required. As attorneys, we do not create nor do we have control over the facts of any given case, but we do have control over our preparation and understanding the facts as they relate to the law for each and every case. As an attorney, a wife and mother, I know that this type of preparation requires sacrifice at times, but the rewards are well worth it! Having said all of that, it is important to me as an attorney, to be able to balance my work and home life.

May and June are extremely busy months for anyone who has school-aged children. Summer plans are being finalized; students have awards ceremonies, performances, sports banquets, and end-of-the-year events of all kinds. The list seems endless. In order to be able to accomplish everything, a great deal of planning and coordination is required. It is a given that effective time management plays an important role in obtaining and maintaining a balance between work and home life; however, there is more to this equation.

So how is it possible for anyone, whether they have children or not, to be an effective attorney while balancing life outside of work? First and foremost, no one can do everything alone. As an attorney, it is critical to have the support of competent legal assistants and paralegals. Without knowledgeable and effective legal assistants, it would be difficult at best to successfully balance home and work, while successfully representing one’s clients. At Wetherington, Hamilton, P.A. our support staff is second to none. This fact alone makes it possible to for our attorneys to maintain balance while effectively representing clients and obtaining the best results possible.

In addition, the firm philosophy places strong emphasis on taking time off when needed. In order to maximize productivity and effectiveness in the work place, appropriate time away from the job is necessary. This might mean something as simple as taking an extra thirty minutes at lunch time in order to run an errand or attend a personal appointment. This type of flexibility in scheduling can make the all the difference in one’s attitude about the workplace. That is not to say that taking extraordinary amount of time of is suggested or recommended. Rather, the goal is to obtain and maintain just the right balance between work life and home life…not an easy task…

Attorney Wadler and her family

Just as the scales of justice symbolize balance or the weighing of issues in order to achieve a just result, so too, maintaining balance between one’s work life and personal life allows for the best results in both worlds. The law firm of Wetherington Hamilton, P.A. allows for and encourages this type of balance, making this law firm not only a great place to work, but a successful law firm, achieving positive results for its clients!

Joan A Wadler, Esq.

The Doctrine of Accord and Satisfaction

May 9, 2016/in Articles, Debt Collection/by Ted Hamilton

Should you or should you not accept a payment for less that the full amount owed when it is indicated to be for full payment? It is always best to not accept a check for less that the full amount owed if there is any chance that it can be interpreted as being accepted as settlement in full. However, if you do, it may not mean that the debt is indeed settled in full by acceptance of the check.

The doctrine of accord and satisfaction is, “the substitution of a new agreement between the parties in satisfaction of a former one.” Such a compromise will effectively relieve a debtor from the remaining obligation only if a separate agreement has been established between the two parties to the effect that the payment of less than the full amount of the original debt satisfies the obligation.

Although the doctrine of accord and satisfaction is a common law doctrine of contract law, it has been statutorily codified in Florida. Two separate statutes govern the application of this doctrine, depending on whether the debt in question is either disputed and unliquidated (an unknown amount) or undisputed and liquidated (a known amount).

One statute deals with accord and satisfaction by use of an instrument (a check) when a debt is either unliquidated or disputed as to the amount or existence of a debt. The statute sets forth that, “the claim is discharged if the person against whom the claim is asserted (the debtor) proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim.” F.S.A. § 673.3111(2). In contrast, the other statute deals with accord and satisfaction in the context of liquidated claims or claims that were not disputed by the parties. The statute provides that, “when the amount of any debt or obligation is liquidated (known), the parties may satisfy the debt by written instrument other than by endorsement on a check for less than the full amount due.” F.S.A. § 725.05. The plain language of the statute appears to prevent the satisfaction (full payment) of an undisputed debt by less than the amount due through a notation on an endorsed check stating that, “the check is payment in full.”

The key to determining whether partial payment of a debt acts as a satisfaction of the debt, is whether the tender of partial payment of the debt constitutes a binding contract that effectively supersedes the original debt obligation. The new contract can either be express or implied from the surrounding circumstances. With undisputed claims, a creditor’s act of depositing a check for less than the amount owed will not constitute an implied satisfaction of the original debt, even if, the check had been enclosed in a letter stating that it was tendered in full satisfaction of the debt, else to be returned, or if words of similar import had been written on the check. It has also been held that an endorsed check for less than the amount owed on the debt does not satisfy the obligation regardless of whether the endorsed check includes the condition that the amount, is a full and complete settlement, of the debt.

While there are protections in place for a creditor who accepts a check for less than the full amount without the intention that it is for settlement in full; it is risky as there may be an issue as to whether the debt is actually disputed or liquidated. Whenever you accept payment when it is indicated that it is for settlement or payment in full, you may have precluded your ability to recover the full amount owed. The attorneys at Wetherington Hamilton have experience representing creditors in many different situations. Please contact the author for more information.

Thomas K. Sciarrino, Esq.