Spring 2011 Edition

YOUR HR-EEO GOAL - KEEP YOUR COMPANY OUT OF COURT!

By F. Stephen Glass

HR/EEO compliance is a major responsibility for any company. Timely efforts toward compliance with HR/EEO policies may enable your company avoid costly lawsuits, audits, and fines.

Quiz: Who audits your compliance first- You or the Government? Hint: You don't want it to be the government.

Your goal should be to find problems before the government does. Developing a HR/EEO audit checklist can ensures that you have a chance to find and fix problems before employees' attorneys or government agents invade your workplace.

Anyone can make a mistake. Checklists were invented to help minimize errors and omissions. Because HR/EEO rules and regulations permeate your workplace, the development of an extensive program of HR/EEO checklists for your company is essential.

Your company's checklists should at a minimum address the following general topics:

• HR/EEO policies
• Recordkeeping
• Job descriptions
• Hiring, retaining and terminating employees
• Drug Free Workplace
• Performing Pre-Employment Background Checks
• Employment Discrimination and Harassment
• Foreign Workers, Immigration & Employee Eligibility
• Severance Pay and Final Paycheck
• Wage & Hour Laws
• Information Security

Developing your HR-EEO checklists is but a FIRST STEP. Checklists that are not used regularly to confirm that your company is compliant with HR-EEO rules and regulations are of no value. Set aside a time to go through all the checklists, or do the checklists once each week. Either way, you'll get the benefit of a regular checkup.

FRANCHISE DISCLOSURE DOCUMENT - ITEM BY ITEM ANALYSIS
(Part five of a series)

By M. Blen Gee, Jr.

The Franchise Disclosure Document (FDD) is required by federal law to be given to all prospective franchisees. A careful review of the FDD is an essential step in your review of any franchise opportunity. Following up on our previous four articles on the subject, this article lists more things to look for in the FDD:

ITEM 15 - Personal Operation of Franchise. Many franchisors require the franchisee to devote substantially all of his or her time to the operation of the franchised business. Others will have much less stringent requirements . Item 15 should be reviewed carefully to be sure that the franchisor's requirements meet your short-term and long-term personal goals.

ITEM 16 - Restrictions on What Can Be Sold. Typically, the franchisor will have specific products and services that you must provide to customers. Also, the franchisor typically very strictly limits the sale of products and services that are not approved for the franchise system. This can vary dramatically from franchise system to franchise system. The failure to provide required products and services and the sale of unauthorized products and services are frequent areas of dispute and can lead to franchise termination. This is an important area to discuss with existing and past franchisees .

ITEM 17 - Renewal, Termination, Transfer and Dispute Resolution. Item 17 is one of the most important and useful provisions of the FDD. The section contains a summary of many of your most important rights and obligations under the franchise agreement and should be studied carefully. Key provisions to the study include duration of your franchise agreement, rights to renew the franchise, your right to terminate (very important), the franchisor's right to terminate you, your ability to sell the franchise or pass it to a family member upon your death, the franchisor's rights to purchase your business, noncompetition obligations, exclusive territory, and the obligation to arbitrate or file suit in another state.

ITEM 18 - Public Figures. Endorsements by public figures of franchise opportunities are much less common than they have been in the past. If any public figure does endorse or recommend the franchise, these endorsements or recommendations should be ignored. There is no substitute for thorough investigation of the franchise opportunity and good business judgment. ITEM 19 - Financial Performance Representations. A franchisor that makes representations as to past performance of the franchise or potential future performance exposes itself to great risk that a franchisee may sue the franchisor because of failure of the franchisee's business to live up to these representations. Consequently, many franchisors categorically refuse to make any sort of financial performance representations.

The franchisor's decision not to make financial performance representations or to only make very limited representations leads to several problems for the prospective franchisee. Often, you will find that brokers and even franchisor executives will make oral representations to you about the performance of the franchise system and individual franchisees. In the event of a dispute later, they will all disavow having ever made these statements. More importantly, the franchise agreement will be drafted in a way that prevents you from raising these oral statements in any arbitration or lawsuit. For this reason you can never rely on any oral statements made to you about the financial performance of the franchise system or its franchisees.

The second big problem is that you will frequently find that you cannot get good, reliable financial information about the performance of the franchise system. Individual franchisees are free to provide you with information, but few business people are willing to share details of their finances with strangers.

While this may be frustrating, if you cannot get adequate information about the performance of the franchise system, you should not become a franchisee.

If the franchisor does, however, make financial performance representations (include detailed financial information about the performance of the franchise system) in the Franchise Disclosure Document, this is a good sign and the information should be studied carefully.

THE DUTIES OF A CORPORATE DIRECTOR OR OFFICER

By F Stephen Glass

The North Carolina Business Corporation Act codifies the general rule that a corporate director or officer must carry out his or her duties: (1) in good faith ; (2) with the care an ordinarily prudent person in a like position would exercise under Similar circumstances; and (3) in a manner he or she reasonably believes to be in the best interest of the corporation. The corporate director and officer's duty of good faith is to act in the best interest of the corporation and not in his or her own interest or in the interest of another person or organization. One should not use his or her position as a corporate director or officer to make a personal profit. To do so could be a conflict of interest and a breach of that duty of good faith to the corporation. North Carolina courts have long held that directors and officers are generally not liable for mere errors of business judgment, nor for slight omissions from which a questioned loss could not have been reasonably expected. The "business judgment rule" protects a director or officer, with no personal interest in the transaction, from personal liability to the corporation and its shareholders, even though a corporate decision by the officer turns out to be unwise or unsuccessful. A court will not substitute its judgment for that of a disinterested director or officer if the director officer acted in good faith, was reasonably informed , and rationally believed the action taken was in the best interests of the corporation. Officers and directors owe a fiduciary duty and obligation of good faith to minority shareholders as well as to the business corporation. In summary, every corporate director and officer owes duties of fidelity, honesty, good faith and fair dealing to the business corporation.

IRS ALLOWS QUALIFIED REAL ESTATE PROFESSIONALS LATE ELECTION TO AGGREGATE RENTAL REAL ESTATE INTERESTS Notice 2011-34. 2011-24 I RB

By F Stephen Glass

The IRS has provided guidance that allows certain real estate professionals to make a late election to treat all interests in rental real estate as a single rental real estate activity for purposes of the passive activity loss (PAL) rules. Under Code Sec. 469(c)(1), the PAL disallowance rules apply to any trade or business in which the taxpayer does not materially participate. A taxpayer is treated as materially participating in an activity if he meets at least one of the seven tests in Reg. § 1.469-5T. In general, any rental activity is per se a passive activity regardless of the taxpayer's participation in the activity. (Code Sec. 469(c)(2)) However, there are exceptions to the general per se rule.

The Code Sec. 469(c)(2) per se rule for rental activities doesn't apply to a qualifying real estate professional. A taxpayer qualifies as such for a particular tax year if: (1) more than half of the personal services that he performs during that year are performed in real property trades or businesses in which he materially participates; and (2) he performs more than 750 hours of services during that tax year in real property trades or businesses in which he materially participates.

If a taxpayer is a qualifying real estate professional, the PAL rules generally are applied as if each interest of the taxpayer in real estate were a separate activity. But, under Code Sec. 469(c)(7), a qualifying taxpayer may elect to treat all his interests in rental real estate as one activity.

The election is made by filing a statement with the taxpayer's original income tax return for the tax year and must contain a declaration that the taxpayer is a qualifying taxpayer for the tax year and is making the election under Code Sec. 469(c)(7)(A).

Employment Law Special

SUPREME COURT RULES ARIZONA LAW PUNISHING BUSINESSES THAT HIRE ILLEGAL IMMIGRANTS NOT PREEMPTED BY FEDERAL IMMIGRATION LAW

By F Stephen Glass

The Legal Arizona Workers Act, which provides for the revocation or suspension of the business license of employers in the state that knowingly or intentionally employ unauthorized aliens, was not expressly or impliedly preempted by federal immigration law, ruled the Supreme Court in a 5-3 decision (Chamber of Commerce v Whiting, May 26, 2011, Roberts, J). Additionally, the Court ruled that the Act's provision mandating the use of the E-Verify system was not impliedly preempted by federal law.

A federal district court found that the plain language of the Immigration Reform and Control Act's preemption clause did not invalidate the Legal Arizona Workers Act because the Arizona law did no more than impose licensing conditions on businesses operating within the state. Further, the district court concluded that the state law was not preempted with respect to E-verify because, while Congress made the program voluntary at the national level, it expressed no intent to prevent states from mandating participation.

The Ninth Circuit upheld the law in September 2008 against a challenge from a group of plaintiffs led by the U.S. Chamber of Commerce's National Chamber Litigation Center, among other business and civil rights groups.

Employee reported too little harassment, too late; Title VII claims fail

Finding a clinical director of a medical facility reported too little harassment too late, the Eighth Circuit affirmed the trial court's ruling disposing of claims arising out of the employee's allegations that an acting CEO sexually harassed her (Wilkie v Dept of Health & Human Servs, 8thCir, April 27, 2011). The employee was unable to produce evidence that the alleged harassment affected the terms or conditions of her employment, and furthermore, she could not establish her prima facie case of sex discrimination or retaliation, the appeals court concluded.

Vitran Express to pay $2.6 million to settle claims that it secretly obtained criminal background checks of job applicants

Vitran Express has agreed to pay $2.6 million to settle a class action suit against it for alleged violations of the Fair Credit Reporting Act (FCRA) in connection with its use of consumer background reports in the hiring process (Hall v Vitran Express. Inc, ND Ohio, April 19, 2011) .

Employment application shortening limitations period for FMLA claim unenforceable. contrary to public policy

An employment application that shortened the limitations period for employment claims to 180 days, and required an employee to pay the employer's attorneys' fees if she brought an unsuccessful claim, was unenforceable against an FMLA suit. (Madry v Gibraltor Nat'l Corp, EDMich, April 25, 2011). Consequently, the employee was granted her motion to strike her employer's statute of limitations affirmative defense because the shortened limitations period was void as contrary to public policy.

THINKING OF HIRING KIDS THIS SUMMER? GOOD IDEA TO CHECK OUT THE CHILD LABOR LAWS FIRST

By F Stephen Glass

Employers may be subject to either the federal child labor or the North Carolina youth employment provisions or both. The federal provisions apply under the same coverage criteria as established for the other provisions of the FLSA. The North Carolina youth employment provisions generally apply to all employers doing business in North Carolina regardless of their size or number of employees. However governmental, agricultural and domestic employers are totally exempt from the North Carolina youth employment provisions, including the requirement to obtain a North Carolina work permit for youths under 18. Both federal and state laws govern the employment of young workers and when both are applicable, the law with the more stringent standard must be obeyed.

The child labor/youth employment provisions do not apply where no FLSA employment relationship exists, such as bona fide volunteers in medical, educational, religious or nonprofit organizations where an employer-employee relationship does not exist; regulate such issues as discrimination, harassment, verbal or physical abuse, or morality, though other federal and state laws may.

MINIMUM AGE STANDARDS FOR EMPLOYMENT

The FLSA and the child labor regulations issued at 29 CFR, Part 570, and the WHA and the youth employment regulations establish both hours and occupational standards for youth. Children of any age are generally permitted to work for businesses entirely owned by their parents, except those under 16 may not be employed in mining or manufacturing, and no one under 18 may be employed in any occupation the Secretary of Labor has declared to be hazardous or the Commissioner of Labor has declared to be detrimental.

18 - Once a youth reaches 18 years of age, he or she is no longer subject to the child labor/ youth employment provisions. Youths under 18 years of age must obtain a youth employment certificate (work permit) when employed, even if they are employed by their parents. The certificate and the issuing instructions are obtained from the N.C. Department of Labor Web site.

16 & 17 - Basic minimum age for employment. Sixteen- and 17-year-olds may be employed in any occupation other than those declared hazardous or detrimental. No youth under 18 years of age who is enrolled in school in grade 12 or lower may be employed between 11 p.m. and 5 a.m. when there is school for the youth the next day. Sixteen- and 17- year-old youths may get the hour restriction waived upon written permission from the parent/guardian and from the youth's principal/designee.

14 & 15 - Young persons 14 and 15 years of age may be employed outside school hours in a variety of non-manufacturing and non-hazardous/non-detrimental jobs for limited periods of time and under specified conditions.

Under 14 - Children under 14 years of age may not be employed in non-agricultural occupations. Permissible employment for such children is limited to work that is exempt from the FLSA and WHA (such as actors or performers in motion pictures, theatrical, radio or television productions). Children may also perform work not covered by the FLSA or WHA such as completing minor chores around private homes or casual babysitting.

For more information concerning the Fair Labor Standards Act and the North Carolina Youth Employment provisions of the Wage and Hours Act for Non-agricultural workers, see the web site of the North Carolina Department of Labor.

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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