Uncategorized Archives - Page 83 of 179

Did You Send Notice to the Partners?

The implementation of the centralized partnership audit regime (CPAR) has finally arrived. Enacted by the Bipartisan Budget Act of 2015, CPAR wasn’t effective until tax years beginning after December 31, 2017. Many taxpayers and tax practitioners placed it behind the Tax Cuts and Jobs Act on their list of priorities. Now 2019 brings the first filing season under CPAR as 2018 tax returns are filed.

Most partnerships and LLCs that qualify will choose to elect out of CPAR’s application. The election out is available if (1) each partner is an individual, a C corporation, a foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner, and (2) the partnership is required to furnish 100 or fewer Form K-1s for the year. To elect out, a partnership must make an affirmative election each year on its timely filed tax return and file a Schedule B-2 that sets forth the name and taxpayer identification number of every partner and every shareholder of an S corporation that is a partner. The schedule also requires that the type of partner (e.g., individual, C corporation, etc.) be identified.

Electing out of CPAR is straightforward for qualifying partnerships. The partnership tax return Form 1065 specifically asks whether the partnership is electing out and instructs taxpayers to complete a Schedule B-2. However, there is one more requirement. Did you notify all the partners of the election? The Internal Revenue Code requires that a partnership notify each of its partners that it has elected out of CPAR, and the final regulations require that the notice be delivered to the partners within 30 days of the election being made.

There is no prescribed form or manner for the notice, nor is requirement of the notice addressed on Form 1065 or Schedule B-2. The preliminary comments to the proposed regulations say it may be in writing, electronic or other form chosen by the partnership. The IRS has said that it intends to “carefully review” a partnership’s decision to elect out of CPAR to determine whether the election is valid. Partnerships and tax return preparers using tax-preparation software should make sure the partner notification is on the Form K-1s, and if it is not, notice should be sent by whatever manner within 30 days of the tax return’s filing.

This post was written by Robert E. Box, Jr. of Jones Walker LLP.

U.S. Senators Seek Formal Investigation Of Non-Compete Use And Impact

Earlier this month, a group of six United States Senators made a joint request for the Government Accountability Office (GAO) to investigate the impact of non-compete agreements on workers and the U.S. economy as a whole. This action suggests that the federal non-compete reform effort is not going away.

Recent Legislative Efforts

On February 18, 2019, we reviewed a new bill by Florida Senator Marco Rubio to prohibit non-competes for low-wage employees. That bill followed an effort in 2018 by Democrats in both houses of Congress to ban non-competes altogether. Although Senator Rubio’s bill represents a more limited attack on non-competes, we noted that it “suggests a level of bipartisan support that was not previously apparent.”

The Joint Letter

The recent joint letter to the GAO, issued on March 7, 2019, is signed by two Senators who were not involved in the prior legislative efforts: Democratic Senator Tim Kaine (VA); and Republican Senator Todd Young (IN). This represents additional evidence of bipartisanship on non-compete reform.

The joint letter does not formally oppose the use of non-competes. Nevertheless, from the Senators’ explanation for their request, it is clear that they believe the use of non-competes has become excessive, and that significant harm is being done to workers and the greater economy as a result.

In the letter, the Senators cite three ways in which non-competes allegedly are being abused:

The allegedly excessive imposition of non-competes on low-wage workers;
The alleged inability of workers to “engage in genuine negotiation over these agreements”; and
The belief that “most working under a non-compete were not even asked to sign one until after receiving a job offer.”

Further, the Senators allege that “[a]cademic experts and commentators from across the political spectrum have raised serious concerns about the use and abuse of these clauses[.]”

Based on the above-referenced concerns, the letter instructs the GAO to investigate the following questions:

What is known about the prevalence of non-compete agreements in particular fields, including low-wage occupations?
What is known about the effects of non-compete agreements on the workforce and the economy, including employment, wages and benefits, innovation, and entrepreneurship?
What steps have selected states taken to limit the use of these agreements, and what is known about the effect these actions have had on employees and employers?

Of note, these questions appear to address broader concerns about the use and impact of non-compete agreements than the discreet issues raised by the alleged “abuses” set forth above. The letter does not provide a deadline for the GAO to issue its report. However, the GAO’s explanation of how it handles investigation requests sets forth a six-step process, from Congress making the request to the issuance of the report. Further, while the GAO protocol does not offer a time-frame for every step, it does state that it “typically” takes “about 3 months” to simply design the scope of the investigation. Consequently, it would be reasonable to anticipate waiting months at least for the GAO to issue the report.

Where Does This Leave Us?

As noted above, the joint letter indicates that there is growing bipartisan support for restricting the use of non-competes on a nation-wide level. At the same time, by expressing the need for additional information about the use and impact of non-compete agreements on U.S. workers, the Senators may not move forward with further proposed non-compete legislation until they receive that information and take the time to fully digest its implications.

This post was written by Clifford R. Atlas, Erik J. Winton and Colin A. Thakkar of Jackson Lewis.

For more labor and employment news, check out the National Law Review’s Employment type of law page.

Trademarks, Bankruptcy, and Leverage: What Manufacturers and Other Trademark License Parties Should Know About A Potential Landmark Case Before the Supreme Court

On February 20, 2019, the United States Supreme Court heard oral arguments in the case Mission Products, Inc. v. Tempnology, LLC. The case has important implications for manufacturers and other parties to trademark licenses when a trademark licensor files, or threatens to file, bankruptcy. Lower courts including the First Circuit found that, in the event of a trademark licensor bankruptcy filing, the licensor may reject the trademark license, prevent the licensee from further use of the license, and leave the licensee with the sole remedy of filing a claim in the bankruptcy case. Other courts have disagreed with the effect of a trademark license rejection in bankruptcy, finding that a trademark licensee may retain certain rights following a licensor rejection. When the Supreme Court rules, the Tempnology case is slated to be a landmark decision both on the general issue of what rejection truly means in bankruptcy and on the specific issue of whether a trademark licensee’s rights can essentially be destroyed in a licensor bankruptcy case.

The decision is likely to have broad implications for trademark license parties no matter which way the Supreme Court rules. If the court holds that the rejection of a trademark license effectively terminates the rights of a licensee, both licensors and licenses will know that such a “nuclear option” is available in bankruptcy and negotiating leverage will swing heavily toward a licensor. On the other hand, a decision finding that licensees retain rights post-rejection will make a bankruptcy filing a much less attractive option for a licensor as a solution for dealing with a licensee. Both trademark licensors and licensees should, therefore, be aware that the bankruptcy sword or shield (depending on your perspective) may be about to change.

The Tempnology case involved Tempnology, LLC, a company that manufactured athletic sportswear and licensed the right to use its COOLCORE trademark and related rights to a licensee called Mission Product Holdings, Inc. More details about the company, the bankruptcy court decision, and the First Circuit decision can be found here. In summary, Tempnology attempted to use its Chapter 11 bankruptcy filing as a means to terminate the rights of the trademark license to Mission. Normally, following the rejection of an agreement such as a license in a bankruptcy case, non-debtor parties are limited to filing a general unsecured claim. Depending on the case, general unsecured claimants may receive much less than the face value of their claims. However, some courts have held that rejection does not “vaporize” a licensee’s rights and the non-debtor licensee thus may retain certain post-rejection enforcement rights. To that point, outside of the bankruptcy context, a licensor’s breach of a trademark license agreement does not mean that the licensee no longer has any rights in the license. In fact, state law provides a number of licensee remedies short of termination.

On appeal to the First Circuit, the court disagreed with the characterization that refusing to permit post-rejection rights would “vaporize” a trademark licensee’s rights. The licensee continued to have rights, the court noted, but they were limited to filing a claim for rejection damages. The court further noted that the purpose of rejection under the Bankruptcy Code is to free a debtor of costly obligations and that this purpose would be thwarted if a trademark licensor debtor were required to deal with post-rejection assertions of rights by the licensee.

Mission appealed to the Supreme Court and certiorari was granted on October 26, 2018. While Mission requested review of several issues, the Supreme Court limited the matter to one issue: whether a debtor/licensor’s rejection of a license agreement terminates rights of the licensee that would survive the licensor’s breach under applicable non-bankruptcy law. In addition to the briefs filed by the parties, there were several notable amici curiae briefs, the majority of which adopted Mission’s position that a trademark licensee should retain certain rights post-rejection. Such amici curiae briefs in support of Mission included the United States, the New York Intellectual Property Law Association, a number of revered law professors, and the International Trademark Association. Moreover, the United States, as represented by the Assistant to the Solicitor General, participated in oral argument in support of Mission.

During the oral arguments, the Justices probed the issue of a trademark licensor’s obligations, including contractual obligations under the terms of a license as well as obligations to maintain the trademark under the Lanham Act. This is an important point because rejection is designed to relieve a debtor of its contractual obligations in order to unburden the bankruptcy estate. The Lanham Act, however, may impose continuing obligations on the licensor with respect to the rejected license. Mission argued that Bankruptcy Code section 365 and the concept of rejection speaks to contractual obligations and that the obligation to maintain a trademark is outside the agreement. Justice Breyer challenged the argument with an analogy of a landlord for an igloo whose obligation included air conditioning the premises: “You know, you break your promise to air condition, no more igloo.” There were also some notable statements from the United States, which called the Tempnology’s position “extortionate” because the threat of a rejection would put the licensee to the “choice between paying a higher royalty payment or shutting down their business and firing all their workers.”

Tempnology responded by arguing that a trademark license involves a special relationship that deals with the trademark owner’s reputation. The Justices challenged Tempnology on that point by asking how a licensor’s breach would be treated outside of bankruptcy. When pressed on the point, Tempnology could not point to any case law or other authority that would compel the licensee to stop using the license as a result of the licensor’s breach. Justice Kagan succinctly summarized the parties’ positions that Mission was arguing rejection means breach and Tempnology was arguing that rejection means rescission. The fact that the applicable Bankruptcy Code section – section 365(g) – uses the word “breach” suggests that the Justices may be leaning in favor of Mission in the case. Note, however, the issue of mootness may preclude a substantive decision in this case. Both Justices Gorsuch and Sotomayor asked pointed questions on why the case is not moot on a number of grounds, including the fact that no court actually entered an order specifically preventing Mission from using the COOLCORE trademark post-rejection. The United States responded that the effect of the bankruptcy court order was to prevent such usage. It is not entirely clear, but it seemed that the Justices were able to get past the issue of mootness.

The issues in the Tempnology case have broad implications on whether a Chapter 11 bankruptcy can be used as a sword by a trademark licensor to relieve itself of what it perceives as burdensome licensee obligations. Under the law as adopted by the First Circuit, the scales are tipped decidedly in the favor of a debtor/licensor. If the Supreme Court rules in favor of Mission, it will provide clarity on what exactly rejection means in these circumstances and it will constitute a significant readjustment of negotiating leverage.

This post was written by Jason B. Binford of Foley & Lardner LLP.

Read more in SCOTUS Litigation on the National Law Review’s Litigation type of law page.

Can You Prohibit Employees From Using Cell Phones At Work?

With the prevalence of cell phones in today’s society, many companies struggle with how to manage employee time spent on personal mobile devices. But there are legal limits on what employers can do on this front. The National Labor Relations Board (NLRB) has taken the position that employees have a presumptive right, in most instances, under the National Labor Relations Act (NLRA) to use personal phones during breaks and other non-working times.

A recent advice memo issued by the agency has reaffirmed its stance – even since the NLRB generally has taken a more lax view of employer personnel policies over the last year. At issue, in this case, was a company policy that limited employees’ use of personal cell phones in the workplace. The relevant analysis in the NLRB memo states:

“This [company’s] rule states that, because cell phones can present a ‘distraction in the workplace,’ resulting in ‘lost time and productivity,’ personal cell phones may be used for ‘work-related or critical, quality of life activities only.’ It defines ‘quality of life activities’ as including ‘communicating with service or health professionals who cannot be reached during a break or after business hours.’ The rule further states that ‘[o]ther cellular functions, such as text messaging and digital photography, are not to be used during working hours.’ This rule is unlawful because employees have a [NLRA] Section 7 right to communicate with each other through non-Employer monitored channels during lunch or break periods. Because the rule prohibits use of personal phones at all times, except for work-related or critical quality of life activities, it prohibits their use on those non-working times. The phrase regarding text messaging and digital photography is more limited, but still refers to ‘working hours,’ which the Board, in other contexts, has held includes non-work time during breaks. Although the employer has a legitimate interest in preventing distractions, lost time, and lost productivity, that interest is only relevant when employees are on work time. It, therefore, does not outweigh the employees’ Section 7 interest in communicating privately via their cell phones, during non-work time, about their terms and conditions of employment.” (emphasis added)

In other words, while an employer may be able to limit employee use of personal mobile devices during working time in order to minimize distractions, having a policy in place that is worded in a way that limits that activity during non-working time may run afoul of the NLRA.

This is another reminder for employers to ensure their policies are drafted in a way that conforms to applicable NLRB standards. A poorly drafted rule – even with the best intentions – can result in legal headaches for a company.

This post was written by David J. Pryzbylski of Barnes & Thornburg LLP.

Read more employer HR policies on the labor and employment type of law page.

Federal Government Slaps $600K Fine on Wanaque Center After 11 Children Die

The federal government imposed a $600,331 fine on the New Jersey nursing center where a viral outbreak left 11 children dead and 36 sick last year. Investigators reported Wanaque nursing home’s poor infection controls, lack of administrative oversight, and slow response from medical staff “directly contributed” to the rapid spread of the virus and its related death toll.

The 114-page federal inspection report, published in December, claimed the staff at Wanaque failed to correct issues that could have controlled the outbreak, allowing residents and one staff member to contract the virus and placing others in “immediate jeopardy.”

The report alleges the center had a faulty infection-control plan, did not respond appropriately when the outbreak emerged, and failed to properly monitor the infection rate.

Multiple children at Wanaque retained high fevers for days before staff sent them to the emergency room, two of which died within hours of arriving at the hospital. At least two other children, who had been symptom-free, contracted the virus and died after staff failed to separate them from their sick roommates.

Wanaque’s pediatric medical director appeared to be absent during the crisis and claimed he did not fully understand the responsibilities of his position. The director also failed to attend quality assurance and performance meetings and had not filed monthly reports for the last four years.

The Wanaque facility is strongly disputing the findings in the federal investigation report, arguing the staff followed proper protocols and the outbreak was “unavoidable.”

New Jersey ceased all admission to the nursing home following the outbreak, but is now allowing the facility to admit new patients. A restriction does still remain in place barring Wanaque from admitting pediatric ventilator patients until federal and state officials approve the facility’s written infection-control plan.

In addition to the $600,331 federal fine, the New Jersey Department of Health is imposing a $21,000 penalty on the nursing home for each infection-control-related failure.

This post was written by Jonathan F. Lauri of Stark & Stark.

Read more Malpractice Enforcement on our Professional Malpractice Page.

IOT (Internet of Things) Legislation Makes an Appearance in the U.S. Senate

For those who are not familiar with the acronym, IoT or ‘Internet of things’ refers to the interconnection of network devices and everyday objects for increased control and ease of use.

The US Government has been steadily increasing the amount of IoT devices used in day-to-day business. In response to mounting concerns surrounding this, a bipartisan group in the Senate revealed a piece of legislation that will govern the use of IoT devices in the government context.

As we have blogged previously, the implementation of IoT brings with it an array of potential security issues and vulnerabilities. If hackers are able to access one device, there’s the possibility for them to manipulate others connected on the same network. This could result in national security risks, citizen information breaches or high-scale ransom attacks.

Under the bill, the National Institute of Standards and Technology (NIST) will give recommendations to the federal government, including minimum security requirements and how the government should approach potential cybersecurity issues. These policies and recommendations would be revisited every five years to keep them fresh and responsive to ever-changing cyber threats.

The potential that such standards would provide more industry wide guidance is to be encouraged, as several years into the growth of IoT there remains huge variability in security. The internet of things is generally less of a focus than most people’s computers, but the impact and ability to propagate is arguably greater.

Ella Richards and Cameron Abbott of K&L Gates contributed to this post.

State Water Board Unveils Aggressive Plan to Issue Investigative Orders for PFAS

Environmental & Natural Resources

Within the month, the State Board will issue orders requiring investigation of potential PFAS contamination, a widely used class of chemicals, at more than a thousand California facilities.
Phase I targets airports and landfills.
Phases II & III, to be implemented later this year, will include refineries, bulk terminals, fire training facilities, wildfire areas, manufacturers, wastewater plants, and domestic wells.

On March 6, the California State Water Resources Control Board announced it will soon issue orders to owners and operators of more than a thousand facilities in California requiring environmental investigation and sampling for per- and polyfluoroalkyl substances, known by the acronym PFAS. As “Item 10” in a four-hour meeting providing updates on state and federal programs addressing PFAS, Darrin Polhemus, Deputy Director of the State Board’s Division of Drinking Water (DDW), and Shahla Farahnak, Assistant Deputy Director of the Division of Water Quality (DWQ), unveiled an aggressive “Phased Investigation Plan.”

ABOUT PFAS

PFAS are a class of chemicals widely used for decades in many consumer products for their grease- and stain-resistant properties, including nonstick products, carpeting, furniture, and makeup. PFAS were also commonly essential ingredients of firefighting foams used at airports and other locations where large quantities of flammable fuels were present. PFAS compounds are potentially toxic at extremely low levels. In the last several years, public scrutiny of PFAS has accelerated as their environmental prevalence has become better understood. Testing performed in connection with the U. S. Environmental Protection Agency’s (USEPA’s) third “Unregulated Contaminant Monitoring Rule” (UCMR3) identified 133 PFAS detections in California drinking water systems, and follow-up testing resulted in nearly 300 more detections.

PHASE I ORDERS IMMINENT

In Phase I of its investigation plan, the State Board will issue orders to 31 airports it believes to have used PFAS-containing aqueous firefighting foam, and 252 landfills it believes to have accepted materials that contain PFAS. The State Board will also issue investigative orders to operators of 578 drinking water wells within a two-mile radius of one of the airports, and 353 drinking water wells within a one-mile radius of the landfills. It will also issue orders for 389 drinking water sources within a mile radius of PFAS impacts identified in the UCMR3 testing.

State Board staff have already drafted the Phase I orders and expect to issue them by the end of this month, if not sooner.

PHASES II & III EXPECTED SUMMER/FALL 2019

The State Board is still formulating the next phases, but staff said “high priority” targets in Phase II will be refineries, bulk terminals, and non-airport fire training areas. Phase II would also include manufacturers of PFAS, if any. (Presently, the Board does not believe there are any in California, but it intends to verify that understanding as part of the investigation.) In the second phase, the State Board will also test storm water in areas of the massive 2017 and 2018 California wildfires to evaluate whether burning of consumer products in those fires resulted in PFAS releases to the environment.

Phase III will focus on so-called “secondary manufacturers” – those that use PFAS in their products or processes. Board staff specifically mentioned plating facilities as potential targets. The third phase will also include wastewater treatment and pre-treatment plants, and domestic wells.

State Board staff expects to implement Phases II and III in the summer and fall of this year.

TIMELINE AND STRATEGIC CONSIDERATIONS FOR RESPONDING TO ORDERS

If you get an order, you will need to be prepared to respond quickly. Targeted source facilities will receive an order issued by the State Board under the authority of California Water Code section 13267. These orders will require businesses to respond to a questionnaire regarding the historical use of PFAS-containing products within 30 days, and to submit work plans for conducting testing within 60 days. After the work plans are accepted, businesses will have 90 days to perform the testing and submit the results.

Source: Presentation at State Water Resources Control Board Meeting, March 6, 2019, Water Boards PFAS Phased Investigation Approach
https://www.waterboards.ca.gov/pfas/docs/7_investigation_plan.pdf

Regulated entities should use great care in responding to these orders. Failure to comply may be punished by fines ranging from $5,000 to $25,000 per day per violation. Under the statute, the burden, including costs, of the ordered reporting must “bear a reasonable relationship to the need for the report and the benefits to be obtained from the reports” and responding parties may take steps to protect their trade secrets from public disclosure as a result of required reporting. Moreover, appropriate execution of the required testing is critical. Because PFAS are so widely used in consumer products, there are myriad opportunities for cross-contamination that could result in false positives if exacting sampling protocols are not utilized.

Targeted water system operators will receive an order from DDW under California Health & Safety Code section 116400. Those orders will require periodic PFAS analyses, likely on a quarterly basis, unless DDW determines that a different schedule is reasonable.

FEDERAL PFAS ACTION PLAN AND NEXT STEPS IN CALIFORNIA

California’s Phased Investigation Plan comes on the heels of the February 14 release of the USEPA’s PFAS Action Plan, identifying short- and long-term actions USEPA plans to take over the coming years. USEPA said it will set federally enforceable Maximum Contaminant Levels (MCLs) for perfluorooctanoic acid (PFOA) and perfluorooctanesulfonic acid (PFOS) – two members of the PFAS family, designate those chemicals as hazardous substances under the Superfund law, require monitoring for additional PFAS in the next UCMR, and develop interim cleanup standards for PFAS in groundwater. The Action Plan would give the federal government greater enforcement authority over PFAS and has come under fire from a number of consumer advocacy and political organizations.

The State Board, somewhat uncharacteristically, has not been on the forefront of PFAS regulation. In 2016, the USEPA published a Health Advisory Level of 70 parts per trillion (ppt) in drinking water for combined PFOA and PFOS. Then, in November 2017, New Jersey announced that it would be the first state to establish a legally enforceable MCL for PFOA, setting it at 14 ppt, the most stringent standard in the country.

California has been more measured in its response. As Allen Matkins previously reported, in November 2017, the state added PFOA and PFOS to the Proposition 65 list of chemicals “known to the state” to cause reproductive toxicity, and in July of last year DDW set “notification levels” of 13 ppt for PFOS and 14 ppt for PFOA, and a “response level” of 70 ppt for combined PFOA and PFOS. Yet, to date, there is no enforceable drinking water or cleanup standard for PFAS in California, and Deputy Director Polhemus’ comments at the March 6 meeting made clear that none is imminent. The State Board and others are struggling with how best to address the whole class of thousands of PFAS chemicals without undertaking the massive regulatory effort required to set MCLs for each individual chemical in the family. Given this challenge, DDW has not requested a Public Health Goal (PHG) for any PFAS chemicals, and Deputy Director Polhemus said any such PHG is still at least a couple of years off, with potential MCLs at least a few years behind that.

The release of DDW’s Phased Investigation Plan, however, is the first major step in California’s systematic approach to investigating the release of PFAS to the environment, and signals an imminent new regulatory regime.

More information on the State Board’s March 6, 2019 meeting is available here.

This post was written by Kamran Javandel and Vaneeta Chintamaneni of Allen Matkins.

Bomb Squad Officer with Hand Tremors Can Be Temporarily Transferred Pending a Medical Exam

In a common sense ruling, an Arizona federal court has determined that a city was within its rights to temporarily transfer a bomb squad technician pending a medical exam. According to the court’s opinion, the transfer occurred after a fellow employee observed the plaintiff was having hand tremors and reported that the plaintiff had dropped some chemicals with which he had been working. The plaintiff, who argued that the spill was a common occurrence and that any hand tremors were not the cause of him dropping the chemical, sued the city after a neurologist cleared him to return to duty. The plaintiff alleged that the city perceived him as disabled and violated the ADA by forcing him to undergo a medical exam. Finding that the requested medical exam was related to the job the officer performed and was consistent with business necessity, the court rejected plaintiff’s claims and entered summary judgment in favor of the city.

It may seem obvious that a person who is assigned to diffuse bombs and has hand tremors can be temporarily reassigned and asked to undergo a medical exam. Still it’s important to note that the employer in this case benefitted from carefully following protocol. Too often, employers react to a report that an employer may have a physical impairment affecting his work by immediately discharging the worker, transferring him to another job, or asking for a fitness-for-duty examination. The ADA, however, requires the employer to be more thoughtful on how it approaches such a situation.

Carefully following protocol often involves an employer first asking whether the employee at issue showed objective signs of impairment, and then determining whether that impairment poses a danger to the employee or others or affects the employee’s ability to perform essential functions of the job. Based on those preliminary steps, the next step often requires the employer to assess whether a request for a medical exam makes sense in light of the report of impairment and the job the employee is performing. If the answer to those questions are yes, then the employer can temporarily transfer the employee (or place him or her off work) and direct the employee to undergo a targeted fitness-for-duty exam.

The conscientious employer will not make any permanent job decisions, however, until the results of the fitness-for-duty exam are returned and any follow up questions are asked. Moreover, because the very act of asking an employee to undergo a fitness-for-duty exam violates the ADA if it is not job related and consistent with business necessity, employers may choose to consult with their employment counsel before requesting an exam or otherwise taking an adverse employment action against an employee who exhibits a physical impairment at work.

This post was written by Richard P. Winegardner of Barnes & Thornburg LLP.

Terminating Right to Stock Options Through Severance Agreement in Massachusetts

Parting with any employee comes with a host of dangers and pitfalls for an employer. These liabilities are increased when the exiting employee holds ownership in or options to own the employer’s company. Especially for smaller businesses, restricting its ownership from departing with employees is essential to continuing to operate smoothly and effectively. But in cases where an employee has unexercised stock options in his or her employer’s company, how can the company ensure that shares of its ownership do not walk out the door with a former manager? A well-crafted severance agreement is the answer.

By taking the extra time to craft a comprehensive severance agreement, rather than an off-the-shelf template, a company can extinguish its former executives’ interest in the company. Because a grant of stock options is a part of the employment contract, it is essential that the severance agreement clearly and unambiguously terminate the employment agreement itself. Recently, in the case of MacDonald v. Jenzabar, Inc., 92 Mass App. Ct. 630 (2018), the Appeals Court for the Commonwealth deemed a former manager’s rights to both unexercised stock options and unclaimed preferred shares in his employer’s company to be extinguished by a broad general release by his employer.

Broad Release Term Specifically Terminating Employment Agreement

Among other provisions the general release at issue provided:

“As a material inducement to the Company to enter into this Agreement, you agree to fully, irrevocably and unconditionally release, acquit and forever discharge the Company…from any and all claims, liabilities, obligations, promises, agreements, damages, causes of action, suits, demands, losses, debts, and expenses (including, without limitation, attorneys’ fees and costs) of any nature whatsoever, known or unknown, suspected or unsuspected, arising on or before the date of this Agreement and/or relating to or arising from your employment and your separation from employment with the Company and/or any of the Released Parties, including, without limitation, … any and all claims under the [employment agreement].”

Integration Clause Terminating and Superseding All Previous Agreements

In addition to this general release of claims, the severance agreement contained a merger and integration clause:

“This Agreement constitutes a single, integrated contract expressing the entire agreement between you and the Company and terminates and supersedes all other oral and written agreements or arrangements; provided, however, that you understand and agree that the terms and provisions of the Confidentiality Agreement are specifically incorporated into this Agreement, and you remain bound by them.”

Stock Options Arise Out of Employment Agreement and Are Extinguished with Its Termination

Because the Court found that the plaintiff’s stock options and preferred shares arose from his prior employment, these provisions were found to be unambiguous and conclusive. Of note, the Court specifically observed that in addition to “generally [extinguishing] any and all agreements, of any nature whatsoever….[it] also expressly extinguishes the employment agreement.” Therefore, absent any language to the contrary, this contract provision is sufficient to extinguish the employment agreement and consequently the preferred shares and stock options arising therefrom.

Going forward, an employer seeking to extinguish the unvested stocks and stock options in its departing managers, would be advised to consult with an attorney to craft a broad severance agreement with specific reference to the operative agreements relating to employment. Such consultation will allow the employer to restrain the ownership of its business while also crafting exceptions for contracts executed in the employer’s favor. With the right severance agreement, an employer can make sure that its stock stays in-house while continuing to be protected by previously executed non-competes and confidentiality agreements.

This post was written by Evan K. Buchberger of Raymond Law Group LLC.

Three Takeaways from DOL’s Proposed New Overtime Rule

On Mar. 7, 2019, the U.S. Department of Labor (DOL) issued a Notice of Proposed Rulemaking (NPRM) regarding changes to the “white collar” overtime exemptions under the Fair Labor Standards Act (FLSA).

Here are three key points employers need to know:

1. The salary basis threshold would increase to $679 per week ($35,308 per year).

The DOL set this threshold by using the same methodology from the 2004 revisions, which set the salary level at $455 per week.

In 2004, $455 per week represented the 20th percentile of earnings for full-time salaried workers in the lowest-wage census region and in the retail sector. The new annual salary of $35,308 represents the DOL’s estimate for the 20th percentile standard in January 2020, when it anticipates the rule to become final. The NPRM would also permit employers to count nondiscretionary bonuses and incentive payments (including commissions) paid on an annual or more-frequent basis to satisfy up to 10 percent of the standard salary level.

With the prior rule issued under President Barack Obama, the DOL attempted to change the salary basis level from $455 to $913 per week. As we have covered in this blog, the change did not take effect because the United States District Court for the Eastern District of Texas blocked the rule from taking effect. Under President Donald Trump, the DOL ultimately stopped pursuing the rule and dropped its appeal of the Texas court’s ruling.

2. The salary basis threshold for highly compensated employees would also increase from $100,000 to $147,414 per year.

The proposed salary basis threshold represents the 90th percentile of full-time salaried workers nationally, as projected by the DOL for 2020. This was the same methodology used by the DOL for the Obama-era rule.

3. The duties tests for executive, administrative and professional employees remain unchanged.

Assuming an employer has properly classified its exempt employees, the NPRM will not change that classification, unless the employee no longer satisfies the salary basis threshold.

Given how the Obama-era rule met its demise, the NPRM is unlikely to be the final word. Stay tuned for additional developments.

This post was written by Rufino Gaytán of Godfrey & Kahn S.C.

Category: Uncategorized

Did You Send Notice to the Partners?

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