Business Law Notes

Summer 2009 Edition


By F. Stephen Glass

Hard economic times often lead to hard decisions for employers. The most difficult decisions involve the termination of employees. In today's business environment, many employers must make business decisions in which an employee must be terminated whether because of job performance, Job restructuring, or company reorganization. Moreover, as recent economic circumstances have dictated, nearly every employer has had occasion to consider layoffs or reductions in force (RIFs) as a potential tool for containing the costs of doing business.

Former employees are not reluctant to sue former employers for wrongful termination. Courts are often perceived as leaning towards employee rights, which has heightened employer anxiety about employee terminations. Wrongful termination suits are expensive both in direct costs (attorney's fees and discovery) as well as indirect costs (business disruption and the drain on employers at the mercy of court schedules.) If there is a jury verdict for the former employee, then there are additional costs.

Employers must ensure that the selection of employees to be laid off does not implicate any number of federal, state and local anti-discrimination statutes, including Title VII (Civil Rights), the ADEA (Age Discrimination in Employment Act), the ADA (Americans with Disabilities Act), the FMLA (Family Medical Leave Act) and USERRA (Uniformed Services Employment and Reemployment Rights Act).

Employers must be certain that the process for determining who will be laid off is clearly defined, objective and not based on an individual's membership in a protected class, including race, gender, age, disability, military status or FMLA use, among other criteria. Managers and supervisors must be able to articulate clear reasons for their selections. All decisions should be reviewed by human resources or counsel to ensure that particular employees were not selected on the basis of any discriminatory or retaliatory basis. Further, the selection must not disproportionately affect employees in a particular protected group.

Remember, employers only get one chance at getting it right when terminating an employee.

Franchise Disclosure Document - Item by Item Analysis
(Part one of a series)

By M. Blen Gee, Jr.

Far and away the most important legal protection for franchisees in this country is the broad pre-contract disclosure requirements of the Federal Trade Commission (FTC). The FTC Franchise Rule requires certain specific disclosures by a franchisor in a Franchise Disclosure Document (FDD), As franchisors and their attorneys have become increasingly sophisticated, it is more important than ever to review the FDD with a critical eye. Here are some important things to look for:

ITEM 1 - The Franchisor. its Predecessors and Affiliates. Is this a relatively new franchisor? If so. caution and careful scrutiny of the franchise is recommended. Many start-up franchises have a great concept, but execution of the concept on a systemwide basis sometimes is not adequate. On the positive side. a smaller and newer franchise system may be more willing to accept modifications to its standard franchise agreement; this provides a great opportunity to negotiate out of some of the more onerous provisions found in the typical franchise agreement.

Look at affiliated companies and determine how they are related to the franchisor. Frequently an affiliate company will be the owner of the 'corporate" outlets. Determine how many "corporate" outlets there are. If there Is only one corporate store. this means less operational experience. If there are no corporate outlets, you can expect operational aSSistance from the franchisor to be minimal in the future. It may also mean that the franchisor is more interested in selling franchises than continuing to develop and strengthen the franchise concept.

Are any of the affiliated companies in a similar business? If so. you may find that the affiliated company will open a competing business in your territory.

ITEM 2 - Business Experience. Prior experience of key management personnel will be listed here. For small or startup franchise systems, prior business experience of the management can be an important indicator of the quality of the system as a whole. If senior staff is heavy on the side of former sales and marketing people, the franchisor may be more oriented toward selling franchises than long-term business performance. On the other hand, if senior management personnel have several years of high-level operational experience with a well known and well run major franchise, this bodes well for the operational performance of the small or startup franchise system.

If you are investigating a relatively new franchise system without a track history and only a few current and former franchisees to contact, the prior experience of management personnel will be a critical factor.

>> Read part two of our Franchise Disclosure Document series

Wage Compensation for S Corporation Shareholders

By F. Stephen Glass

Corporate shareholders are specifically included within the definition of "employee" for federal employment tax (FICA and FUTA) and income tax withholding purposes. When corporate shareholders perform services for a corporation, and receive or are entitled to receive payments, their compensation is generally considered wages and not as bonus distributions of cash and property or loans to shareholders.

The IRS regulations state that distributions and other payments by an S corporation to a corporate shareholder must be treated as wages to the extent the amounts are "reasonable compensation" for services rendered to the corporation.

The IRS does not look kindly upon S corporations that attempt to avoid paying employment taxes by treating a shareholder's earnings as cash distributions, payments of personal expenses, and/or loans (not subject to the 15.3% employment taxes) rather than as wages (subject to the 15.3% employment taxes).

If shareholder-employees are paid reasonable compensation, then the amounts bon used out to the shareholder-employee are not subject to the employment tax.

Unfortunately, the IRS does not provide specific guidelines as to what is or is not "reasonable compensation" Tax courts that have ruled on this issue have based their determinations on the facts and circumstances of each case. Knowledgeable professionals can assist with the determination of what is reasonable compensation for an S corporation's shareholders.


Congratulations to Lloyd Jacobs, CEO of ClickCulture, Inc" ( upon winning ten International Communicator Awards! The Raleigh-based web technologies, design and integrated marketing firm, offers a full spectrum of marketing services, including graphic design, collateral deSign, high-tech advertising, search engine optimization, communications, point-of-purchase and point-of-sale services.

F. Stephen Glass, a partner in JHVGG, recently was the solo presenter to a national audience on the topic "Business Valuation s, Approaches and Methods." The presentation was sponsored by the National Business Institute (NBI), publisher of Glass' manuscript by the same title. NBI has also published several of his manuscripts in the area of business organizations and estate planning.


By F. Stephen Glass

The FLSA allows employers to pay a youth minimum wage of $4.25 an hour, compared to the regular $7.25 minimum wage (as of July 24, 2009) to employees who are under 20 years of age during the first 90 consecutive calendar days after initial employment.

The 90 day eligibility period begins with the first day of work for your company. It does not matter when the job offer was made or accepted (or when the teenager was considered "hired"). The 90-day period starts with and includes the first day of actual work for the employer. The 90-day period is counted as consecutive calendar days, not days of work. It does not matter how many days during this period the teenager actually performs work.

N.C. requires youth employment certificates for all youth under age 18, with some exceptions permitted.

And You Think Your Meetings are a Pain

An employee's claims for Family Medical Leave Act retaliation, false imprisonment, and intentional infliction of emotional distress were not covered by the employer's insurance policies providing defense-and- indemnity coverage for bodily injury caused by an "accident." The employee allegedly ruptured his quadriceps while walking down a flight of stairs at work. The company president witnessed the injury, but despite the employee's obvious agony and inability to walk on his own power, "forcibly transported" him "against his will" to a scheduled business meeting where for two hours he endured excruciating pain. Several hours later, the employee was taken to the hospital where he underwent surgery. The president called him at the hospital "at least twice" to "hasten his discharge." When the employee returned to work, the president accused him of "milking" his injuries and shortly thereafter fired him. The employee sued. The employer's insurers claimed that no coverage existed as to the employee's claims. The court found that the complaint alleged "not just intentional acts but also injuries intentionally caused ," Because the insurance policies covered liability for accidental, not intentional, injuries, they did not cover the claims (Lucterhand v Granite Microsystems, Inc, 7th Clr COA. April 28, 2009).


By F. Stephen Glass

The IRS has announced that it has intensified its scrutiny of worker classification. Businesses may want to take a fresh look at how their policies, procedures, and documentation treat workers. Employment tax regulations provide that an employer-employee relationship exists when the business for which the services are performed has the right to direct and control the worker who performs the services. This control refers not only to the result to be accomplished by the work but also to the means and details by which that result is accomplished. Thus, the very nature of determining whether a worker is an employee or an independent contractor is both subjective and fact intensive. Categories that the IRS finds to be persuasive are as follows:

Behavioral Control - Facts which Illustrate whether there is a right to direct or control how the worker performs the specific task for which he or she is engaged, such as instructions and training given by the business.

Financial Control - Facts which illustrate whether there is a right to direct or control the business aspects of how the worker's activities are conducted, such as significant investment, unreimbursed expenses, services available to the relevant market, method of payment, and opportunity for profit or loss.

Relationship of the Parties - Facts which illustrate how the parties perceive their relationship, including the intent of the parties (often found in written contracts), employee benefits, discharge/termination, and regular business activity.


By M. Blen Gee, Jr. and F. Stephen Glass

North Carolina is an employment-at-will state, i.e., in the absence of a contract for a specific term, either the employee or the employer may terminate the employee's employment for any reason - except that the employer may not discharge an employee for a reason that violates public policy. For instance, an employee-at-will cannot be terminated for reasons that would violate anti-discrimination laws (age, sex, race, national origin, religion, disability). Nor may an employee-at-will be terminated in retaliation for the exercise of his or her rights, including that of filing of a workers' compensation claim. Employers should be aware of the following key issues [though not an ali-inclusive list] when considering the termination of an employee.

1. Termination Letter - For "at will" employees (no written, oral or implied agreement that the employee is employed for a specific period of time), it may be preferable to have no termination letter or a simple letter stating that the employee's performance has not met the company's needs. This is especially true If you have not documented the employee's previous poor performance.

A termination letter may be useful where the employee's prior poor performance has been properly documented by previous letters to the employee. Such letters should be placed in the employee's confidential personnel file. Then, in the event of termination, a termination letter can outline the specific performance issues that have not improved and provide a clear justification for termination.

2. Severance Packages - Severance packages are complex legal documents. Employers who decide to offer severance packages to employees in exchange for a legal release of age discrimination claims must ensure that their severance agreements comply with the Older Worker's Benefit Protection Act (OWBPA). To be valid and enforceable, the release must be knowing and voluntary, in writing, specifically refer to rights or claims under the ADEA by name, and be drafted in plain language that the employee will understand. The employee must also be advised in writing to consult with an attorney before signIng the agreement and be given additional consideration in exchange for the release.

If the severance package containing the release of age claims is given to a single employee, the employee must be given 21 days to consider the agreement and seven days to revoke his/her acceptance after signing. If the severance package and release is offered to a group or class of employees, then those employees must be given 45 days to consider the agreement and seven days to revoke acceptance.

Moreover, releases given to a group of employees must also provide the employees with enough information to allow an informed choice as to whether to sign the release. This includes the class, unit or group of individuals covered by the program: any related eligibility factors: the job titles and ages of all individuals North Carolina is an eligible or selected for the Employment-at-will state. program and the ages of all individuals in the same job classification or organizational unit who were not eligible or selected.

3. Exit Interview - Keep it short, unemotional and professional. Remember, an employee who is angered by a termination letter or the exit Interview is more likely to look for a way to seek revenge, either through discrimination claims or other forms of attack against the former employer. The exit interview should be in private, in a quiet location away from other employees. There should be at least two people present in addition to the employee.

4. The Exit - The employee should be directed not to take with him any confidential company information or any property belonging to the company. The employee should surrender any keys, company credit card , or other company property and computer passwords in his possession at the time of the exit interview.

Accompany the employee to his or her work station to retrieve personal items. Sometimes people who are very emotional will want to leave immediately. In that case, personal items should be boxed up for the employee, with an itemized list prepared. The employee can return at an agreed-upon time to get personal items or the items can be mailed to the employee certified mail, return receipt requested.

5. COBRA and Other Benefits - Be sure to notify the employee in writing of his or her COBRA benefits and maintain a copy of this notice in your permanent file. Also notify the employee of any other post-termination benefit.

All wages due on or before the next regular payday either through the regular pay channels or by mail if requested by the employee. Wages based on bonuses, commissions and similar forms of calculation must be paid on the first regular payday after the amount becomes calculable.

Accrued vacation must be paid unless you have provided in his belief that he would have continued employment; or. the employee with written notice that vacation will be forfeited upon termination. Except under very limited circumstances, wages cannot be withheld and the employer is subject to double damages and attorney's fees for wrongfully withholding wages.

6. Written Procedures - If there is a written employment agreement, or an employee handbook, the written procedures for termination should be strictly followed.

7. Slander or Libel Exposure - Do not discuss the reasons for terminating the employee with anyone outside of management. Do not discuss it with rank and file employees, clients or any third party. If anyone calls to your office checking on the former employee's references, the person responding should simply say that you cannot comment. All written statements concerning the termination. including the termination letter, should be maintained in a confidential file that is not subject to access by non-management personnel.

8. Issues Requiring Special Care - If any of the following issues or conditions are present, you should exercise special care in the termination, including contacting legal counsel:

  • Employee is 40 years old or older;
  • Is there any evidence suggesting that the decision to terminate this employee is related In any way to his or her known handicaps or disabilities? (See the ADA, 42 U.S.C. § 12111 , et seq. and the Handicapped Persons Protection Act, N.C. Gen. Stat. § 16SA-1, et seq.);
  • Racial, ethnic or national origin issues;
  • Family Medical Leave Act issues;
  • HIV;
  • Prior allegations of sexual harassment:
  • Recent jury duty;
  • Workers camp claim, court testimony, employee Initiated inquiry; investigation and inspection or other government action;
  • Alleged wage and hour violation;
  • Military service;
  • The employee is a recent hire, has recently relocated at the request of th e employer or as a result of employment, or the employee has taken any other aclion such as buying a new home in his belief that he would have continued employment; or.
  • Any other allegations by the employee of employer misconduct.

9. Employee's Personnel File - The employee's personnel file should be examined. Frequently, employees will have received favorable written evaluations even though the employee's performance was less than adequate. If the employee is terminated based on poor performance, these positive evaluations could raise an implication that delerminatlon is for some other reason.

10. Is there a written employment agreement? Are there documents which could be argued to be agreements (e.g., letters regarding initial employment) between the company and the employee? If so, those agreements should be reviewed. Has anyone at the company made any oral promises or assurances to the employee that would or may be violated by the termination decision?

Of course, independent contractors are not employees. They are contractors who perform services for the business according to the terms of their contract. Before terminating the services of an independent contractor, the contract creating the relationship should be carefully scrutinized.


About our authors:

M. Blen Gee, Jr. is an honors graduate of the University of North Carolina School of Law. His areas of concentration include business and corporate law, including sales of businesses; business litigation, including arbitration and mediation; franchise law; automobile dealer law; and insurance company insolvency. Mr. Gee has earned the highest peer-review rating for professional excellence and ethical standards by the national publication Martindale Hubbell.


F. Stephen Glass is the author of numerous publications on business and business entities as well as estate planning. He is a frequent presenter for the National Business Institute. His practice is concentrated in the areas of business and corporate law, business succession planning and estate planning. He serves on the Cary board of Capital Bank. Mr. Glass has earned the highest peer-review rating for professional excellence and ethical standards by the national publication Martindale Hubbell. He serves on the American Bar Association Business Law Committee on Corporate Governance.

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