The Importance of Employment Applications, Employment Agreements, and Employee Handbooks

By: Ashley Prew

Employment applications, employment agreements, and employee handbooks are sometimes neglected by business owners who hire employees.  When used in together, a properly drafted employment application, employment agreement, and employee handbook can be effective tools to protect the Company and shield the business owner from some of the risks associated with maintaining employees. 

Employment Applications

An Employment Application provides the key information on a prospective hire and grants authority to investigate the prospective hire’s credit, criminal, civil and employment background.  In addition, it sets forth the Company’s at-will employment policy and permits the Company to discharge the employee if he or she falsified information in the employment process based upon after-acquired evidence.

Employment and Engagement Agreements 

An employment or engagement agreement is a contract used to establish the rights and responsibilities of both a worker and the Company.  Properly drafted employment agreements can protect the Company by establishing and addressing the following:

1. Whether the worker is at-will.
2. The relationship between worker and employee.  Specifically, the agreement should define whether the worker is an employee or an independent contractor.  If a Company decides to classify a worker as an independent contractor, it is important that the terms of the engagement and the terms of the agreement meet specific requirements under the IRS guidelines that allow the worker to be classified as an independent contractor; 
3. The responsibilities and duties of both the employer and the worker;
4. The payment structure for the worker. The agreement should also clearly establish how commission is earned and paid, if applicable;
5. The procedure for termination of employment or engagement by either employer or worker; and
6. Appropriate, non-disclosure, nonappropriation, confidentiality, non-solicit and/or non-compete provisions and work made for hire should be included to protect proprietary information, current customers and prospects of the business, and protect the Company from predatory business practices.  

Employee Handbooks

Employee handbooks help to provide a strong basis for defining the relationship between the Company and its employees.  Employee handbooks can benefit a Company in the following ways:

1. Provide an in-depth description of company policies and employee expectations beyond what is contained in the employment agreement;
2. Address industry specific, applicable federal and state laws, and protect the Company and employees by  articulating that the Company will adhere to these laws and regulations; and 
3.   Protect the company from potential disputes regarding the expectations of employees. 

Employment agreements and employee handbooks should be used together to establish employee expectations, maintain employer/employee relations, and to protect the Company and its employees.  An effective employment agreement often references the employee handbook or incorporates the handbook as part of the agreement by reference. 

Agreements and handbooks should always be specialized based on the type of business, the types of employees/independent contractors, and the culture and expectations of the company.  Therefore, we do not recommend using the internet to find a generic employment application, contract or handbook. Instead, working with qualified professionals such as a business law firm and a human resources firm ensures that the agreements and handbook are drafted to meet each specific business’ legal and human resources needs.  When properly drafted, used, and upheld, these documents can protect the business from potential issues with current and former employees.  

Buying a Franchise

By: Tim Williams

Franchising is a business model that companies use to expand their brand or system. If a company (the “franchisor”) is franchising to expand, it packages and sells its business concept – with varying degrees of support – to individuals (“the franchisees”).  The franchisees, in turn, initiate the franchise business and pay a franchise fee and royalties to the franchisor. The franchisor will have detailed written disclosures and contracts it uses to engage franchisees who wish to buy into the system.

During and immediately following the Great Recession, many people have concluded that they want to own and run their own business. This stems, in part, from individuals who were formerly employees who wish to have more control over their future. The workplace became, and to some degree still is, unstable due to a variety of forces, some of which are cultural.

Buying a franchise is a life decision that involves a variety of important factors including, but not limited to, suitability, financial, and legal issues. The key legal issues in considering whether or not to buy a franchise include:

1.             The “legal” and business reputation of the franchisor.

-       How has the franchisor dealt with franchisees in legal disputes?

-       Has the franchisor generally been compromise or combat oriented?

-      Talk to and visit recent franchisees to inquire into their experience with the franchisor.

A good legal and business workup on the franchisor will reveal much, which is important in advance of paying a significant sum of $100,000 or more for a franchise.

2.      Discover all the hidden costs, the franchisee’s finances and financial commitments,   understand the market, and the competition in your local area.

-       Is it a business which is easy or more difficult for others to enter?

-   Conduct thorough due diligence of the franchise you are looking to purchase, so you’re able to make an informed business decision.

3.             Know the franchise agreement.

-       Your franchise agreement will have a big impact on whether or not your franchise succeeds.

-       You should know how it’s drafted and whether it contains an exit opportunity.

-   You should know the proper disclosures, any territorial restrictions, fees, and obligations you have as a franchisee.

-        You should know what happens if there’s a breach of contract and your recourse for misrepresentations or failures on the part of the franchisor to provide support.

4.              What happens to your franchise if the franchisor is acquired by another company?

-       Can the acquiring company change the name of your business without your permission?

-       Who pays for all of the costs and lost business traction that results from a name change?

5.             Can you sell your franchise to a third party without undue restriction?

A franchise may be a good choice for some but not others. A thorough investigation will help you to sort through the issues and risks in relation to your own situation.

Precautions to Take When Sharing Confidential Business Information

By:  Adrienne Knack

Most businesses have important, confidential business information that needs to be protected.  This includes customer information, pricing, trade secrets, business practices, work product, copyrights, trademarks, service-marks, and other intellectual property and proprietary information.  There are many, everyday situations in which this information is shared, including with employees, independent contractors, distributors, and manufacturers.  Confidential business information is also shared during the process of buying or selling a business.  Often, such information is shared without realizing the dangers associated with its dissemination. 

Dangers of sharing confidential information

Employers expose much of their confidential information to their employees without hesitation.  Most of the time, it is imperative to the operation of the employer’s business to do so.  This is also true regarding pricing and business practices. Unfortunately, an employee who leaves the business may attempt to take this information to a competitor and use it against his or her former employer.  The competing business may then use this information to try to lure customers away from the business owned by the former employer, or for another predatory business practice.  Another danger is sharing too much confidential information when exploring the sale or purchase of a business.  A competitor may pretend like it is interested in acquiring a business simply for the fact that it may obtain proprietary information to use in its own business in the process.

Trademarks, service marks and branding are pieces of information that are used every day.  Businesses use these marketing tools to build the goodwill of their business.  Because this information is shared so freely, it is most vulnerable to being stolen.  If not properly protected, the livelihood of the business can be copied in an instant and used by a competitor to confuse and take customers.

Another relationship that leads to the sharing of proprietary information is when a business works with a manufacturer and/or a distributor.  Important trade secrets like recipes, packaging, and labeling are shared with the manufacturer or distributor out of necessity.  Without the proper safeguards in place, there is nothing that prevents a manufacturer or distributor from sharing this confidential business information with others.

Protections

There are certain steps that businesses must take in order to protect valuable confidential information.  A lot of these protections are encompassed in specialized and specific agreements, including:

1. Non-disclosure agreements;
2. Employee agreements;
3. Independent contractor agreements;
4. Licensing agreements;
5. Purchase agreements;
6. Consulting agreements;
7. Confidentiality agreements;
8. Non-appropriation agreements;
9. Non-compete agreements; and
10. Non-solicitation agreements.

Most of these agreements can either be freestanding or used in conjunction with one another.  Often, specialized clauses encompassing one or more of these ideas are contained within a single agreement.  For example, an employer’s agreement with its employees will often include non-compete or non-solicitation covenants, as well as non-appropriation and confidentiality covenants.

In addition to having these protective agreements in place with employees, independent contractors, potential purchasers/buyers, manufacturers, distributors, etc., there are other precautions a business must take to protect its confidential and proprietary information.  These precautions include having a properly formed business entity and consistent upkeep of the company’s corporate documents, registering trademarks and service-marks at the state and/or federal level, and registering copyrights and patents with the United States Patent and Trademark Office.

It is also very important to have these agreements and policies reviewed and updated frequently to ensure that the business is protected as the business environment evolves.  

VIRTUAL CURRENCY? THE PROS AND CONS OF ACCEPTING BITCOINS AS A SMALL BUSINESS

By:      Andrew Burrows

Since its inception in 2009 by an unknown inventor operating under the alias Satoshi Nakamoto, Bitcoin and other forms of virtual currency have gained significant ground as a valid payment option for consumers. For the uninitiated, Bitcoin is what is commonly referred to as a “cryptocurrency”, which operates on peer-to-peer software via the Internet and is created and held electronically, with the collective network taking the place of a central authority or bank to manage its transactions. With the rapid increase in e-commerce as a subset of total retail spending in domestic GDP in recent years, Bitcoin has gained viability; breaking away from its status as a mere topic of conversation for internet enthusiasts and tech gurus.  This positive press, however, has oftentimes been laced with skepticism and these cryptocurrencies still remain a topic of controversy. This is largely due to the recent use of the currency in online illegal activity such as the infamous drug trafficking scandal perpetuated by individuals via the Silk Road website. Despite the dark shadow that such activity has cast, Bitcoin can be an attractive alternative for small business owners who are looking to avoid the fees charged by credit card companies and desire to become more tech-friendly and hip to their customer base.

PROS

Cost

One of the most enticing benefits of Bitcoin as a small business owner is the ability to avoid the fees associated with credit card transactions. Bitcoin only requires a small fee (less than 1%) to pay people called “miners” who help run the Bitcoin network. The fee is only incurred by those who choose not to hold onto their Bitcoin, but rather to pay these “miners” to immediately convert the Bitcoins received into currency and deposit the funds into a bank account. When compared with the fees charged by credit card companies (an application fee, a surcharge every time a card is swiped, the cost of buying or leasing the equipment, and a percentage of total sales), Bitcoin looks very attractive to small business owners, especially low-volume businesses, as a way to retain more profit per transaction.

Speed

Bitcoin transactions are incredibly quick and can be completed in as little as 10 minutes. This is largely due to the absence of a bank as an intermediary, which speeds up the process of the transaction. Bitcoin is also held virtually and can be easily accessed through any device with an Internet connection by using a numeric “public key”. In addition, a business does not need to apply to start using Bitcoin. It merely has to download the necessary software to begin accepting the currency.

“Tech-effect”

Another advantage of Bitcoin is in the concept of virtual currency itself. A small business that accepts Bitcoin will be more tech savvy as a user of cutting-edge technology. While this may not impact the decisions of some small businesses to accept Bitcoin, the attention that can be gained from customers may be worth the effort.

CONS

Volatility

One downside to Bitcoin not being backed by any particular currency is that this makes its value increasingly volatile. Since the value of Bitcoin is not subject to interest rates and fluctuates on a daily basis, it largely derives its value from its use in transactions. Although the supply of Bitcoin is fixed, the currency would decline into worthlessness if people decided to stop using it. This risk is decreased, however, by the fact that businesses need not hold on to the Bitcoin they receive. They can convert it to their respective country’s currency at any time. Important to note, however, is that an unwillingness of users to hold on to their Bitcoin will inherently stymie its worth.

Reluctance of Large Companies To Accept Bitcoin

Although some members of the Fortune 500 have begun to accept Bitcoin as a method of payment, they do so by using a middleman to immediately convert that Bitcoin into US Dollars. Although the acceptance of Bitcoin by larger companies is a positive thing and a step in the right direction for the virtual currency, the current reluctance to take on the risk that holding Bitcoin represents is a sign that confidence in Bitcoin’s continuing success is not yet widespread.

Tax

The IRS has deemed that Bitcoin is property, rather than currency. As a result, US based businesses must report gains and losses on Bitcoin fluctuation as short term capital gains and losses. . At this point, a business owner would need to be meticulous in tracking their Bitcoin acquisitions and expenditures, tracking each transaction and the exchange rate for Bitcoin at that time.  Then, the business owner would provide this information to whomever prepares their taxes. Thus, although tax implications may be a somewhat daunting hurdle at the outset due to the relatively unknown nature of virtual currencies to a business owner, this process will surely become more routine as employers become comfortable and train their employees to account for these transactions.

TYPES OF JOINT PROPERTY OWNERSHIP IN MICHIGAN

By: Ashley Prew

Many people do not realize that there are multiple ways to own real property – or, real estate – together with another individual.  Each type of property ownership has different legal ramifications and the type of ownership is determined by the specific language on the deed transferring title to the property.   This article discusses the different types of property ownership and the legal implications of each type.   

Tenancy in Common

In Michigan, the statutory presumption is that if a deed does not specify a type of joint ownership, then the property is owned as tenants in common. Thus, if a deed says to Jane Smith and John Doe, without any language following it, it is presumed to be held as tenants in common.

Tenancy in common is an archaic type of ownership that allows each owner an undivided interest in the whole of the property, even if the percentage of interests are not equal  This means that each owner has the legal right to live in the property or to rent the property.  Problems with this type of ownership often occur if the owners do not agree on how to handle the use of the property.  Additionally, when one owner dies, the surviving owner does not automatically receive full title to the property.  Instead, the ownership interest of the deceased owner is passed to his or her heirs either through his or her estate plan or through probate.  This can potentially be very problematic for both the surviving owner and the new owner of the property interest.  If the joint owners cannot agree on how to handle or dispose of the property held as tenancy in common, the result will likely be an expensive and lengthy battle in court through a “partition action”.  This type of lawsuit seeks to divide the property interest through a sale of the property. The proceeds are divided between the joint owners based on their ownership percentages.    

Joint Tenancy with Rights of Survivorship

Joint tenancy with rights of survivorship is created by very specific language in the deed conveying title to the joint tenants.  Joint tenants with rights of survivorship must also acquire the property interest at the same time (through one deed) to create this type of ownership.  The main difference between joint tenancy and ownership as tenants in common is that with joint tenancy, if one owner dies, the surviving owner obtains 100% of the property ownership.  This type of ownership prevents the problems listed above by avoiding the transfer of a partial property interest.   

Tenancy by the Entirety

The final type of joint ownership of property in Michigan is only available to married couples.  Holding property in tenancy by the entirety comes with certain legal benefits and advantages.  First, tenancy by the entirety includes rights of survivorship for both parties, like joint tenancy with rights of survivorship.  Therefore, if one spouse dies, the other spouse continues to own the property as an individual but with a 100% interest in the property.  Additionally, tenancy by the entirety allows a married couple to own the property as a single legal entity.  The main benefit of this type of ownership is that creditors of an individual spouse may not attach and sell the interest of one of the spouses.  This also prevents a lien from being placed on the property if one spouse is sued as an individual and a judgment is obtained against that spouse. There may be exceptions to this, however, particularly when it comes to the IRS as a creditor.

It is important to realize that if an individual owns property and then marries, the marriage does not automatically create ownership as tenancy by the entirety.  If a couple purchases property and then marries, the marriage does not automatically create ownership as tenancy by the entirety. In both instances, they should meet with a qualified attorney to prepare and execute a new deed to themselves as husband and wife to create a tenancy by the entirety.

Conclusion

When individuals attempt to transfer property ownership on their own, either by sale, or to a family member, there may be unintended consequences on the type of property ownership that is created.  We recommend that individuals needing a property transfer work with qualified professionals to complete the transfer.  Even transfers through “for sale by owner transactions” should use a qualified title company and qualified attorney to complete the transaction in a way that suits the best interests of the property owners.   

EMPLOYEE VS. INDEPENDENT CONTRACTOR - KNOW THE RISKS

By: Tim Williams

Business owners often lack clarity on when to classify a worker as an employee and when to classify a worker as an independent contractor. Classification of a worker as an independent contractor may initially save the business money and benefits such as group health and retirement benefits, workers’ compensation coverage, as well as Social Security and unemployment insurance taxes. In most cases, the only tax form employers have to complete for an independent contractor is a Form 1099-MISC.

Classifying workers as employees, on the other hand, requires that the business undertake several tax-related actions. This includes: withholding federal, state, and local income taxes; paying half of the Social Security and Medicare Taxes; paying the full tax required under the Federal Unemployment Tax Act and any amount required under State unemployment insurance tax laws; paying for workers’ compensation; filing a number of returns during the course of the year with the various tax authorities; and providing Form W-2s by January 31. The employee may also have rights to any employee benefits offered, such as health insurance, paid vacations and holidays, and retirement plans. In addition, the employee is eligible for any Federal or State mandated entitlements, such as family medical leaves of absence, etc.

Despite the savings a business may accrue by classifying a worker as an independent contractor, it is critical to ensure that workers are classified correctly. Misclassification can result in significant liability down the road.

EMPLOYEE OR INDEPENDENT CONTRACTOR?

The IRS has issued guidelines to help businesses determine worker status. In the past, a list of 20 factors compiled by the IRS had been used as guidance to determine whether workers are employees or independent contractors. The IRS has now focused the analysis in three areas: 1) behavioral control; 2) financial control; and 3) the type of relationship between the individual and the business.

Behavioral Control

If the business has significant control over the individual’s work, that fact weighs in favor of classification of the worker as an employee. Facts that show whether the business has a right to direct and control how the worker does the tasks for which the worker is hired include the type and degree of the following:

• Instructions the business gives the worker; and

• Training the business gives the worker.

Financial Control

Much like behavioral control, if the business has significant financial control over the individual’s work, this also weighs in favor of classification as an employee. Facts that show whether the business has a right to control the business aspects of the worker’s job include, but are not limited to the following:

• The extent to which the worker has unreimbursed business expenses (independent contractors are more likely to have unreimbursed expenses than employees); and

• The extent of the worker’s investment (an independent contractor often has an investment in the equipment he or she uses in performing services).

Type of Relationship

The nature of the relationship between the worker and the business can also point toward the classification of a worker as an employee or independent contractor. Factors that determine the type of relationship between the parties include, but are not limited to:

• Written contracts describing the relationship the parties intend to create; and

• Whether the business provides the worker with employee-type benefits, such as insurance, a retirement plan, vacation pay, or sick pay.

Assumptions to Avoid in Classifying Workers

A business should not assume it is safe to classify a worker as an independent contractor simply because:

• The business owner thinks it is a free and open choice.

• The worker wants or asks to be treated as an independent contractor.

• The worker signs a contract that states they are an independent contractor.

• The worker does assignments sporadically, inconsistently, or is on call.

• The worker is paid commission only.

• The worker does assignments for more than one company.

Risks When Individuals are Misclassified

The stakes for failing to classify workers as employees are high.

For Federal income tax purposes, if the misclassification as independent contractor was intentional, severe Federal tax penalties result. If the classification was unintentional, the Federal tax penalties are less severe, but still significant.

The Federal tax penalty for failure to withhold Federal income tax from a worker’s paycheck is 100% of the amount of the unwithheld tax. In addition, interest is charged on the unpaid amounts. Likewise, the individual responsible for the misclassification within in the business is personally liable for the employer portion of the Social Security. Business owners are also generally personally liable for any unwithheld Michigan income tax.

In addition to the tax penalties and personal liability, misclassifying individuals as independent contractors can result in liability for failure to provide health and retirement benefits to the individuals. Failing to provide Federal and State mandated entitlements to family medical leave, COBRA, etc. can also lead to significant liability on the part of the business.

Another very substantial liability that can result from failing to properly classify individuals as employees is for worker’s compensation. Michigan law provides that if someone should have been covered by worker’s compensation and was not, and the person suffers a work related injury or illness, the employer becomes the worker’s compensation carrier and must pay the scheduled benefits directly. This can well exceed $100,000 per instance, depending on the injury or illness.

PLAYING IT SAFE

When in doubt about how to classify a worker, the most conservative approach would be to classify him or her as an employee. It is always advisable to seek professional advice from your attorney when these issues arise. As a matter of law, the business has the burden of proving a worker is an independent contractor. It is also important to note that when a former worker files an unemployment insurance claim, an investigation is automatically triggered by the IRS to determine the status of the worker.

The IRS uses the above guidelines to determine proper classification. It will also look to a written contract for independent contractor classification. Any such contract would generally set forth the terms of the relationship between the employer and the individual, and may include:

• A statement that the independent contractor is not entitled to employee benefits programs;

• A joint severability clause stating that if part of the contract is struck down, the rest of it survives; and

• Acknowledgment that the independent contractor is free to work elsewhere at any time.

A contract between the employer and the worker may be immaterial, however, depending on the facts and circumstances of the relationship between the employer and the individual.

ACTION STEP:

If you are currently engaging independent contractors and are unsure if they are classified correctly, contact us for assistance in sorting through the issues. The IRS has a partial amnesty program for businesses that voluntarily disclose classification issues.

THE IMPORTANCE OF PURCHASE AGREEMENTS

By: Adrienne Knack

Often, we have clients in our office who tell us that they have a purchase agreement in place, whether it is for a business, a building, or something else.  Naturally, we want to review such agreements for our clients, so we will then ask them for a copy of the agreement.  That is usually when we hear something to this effect:  “Well, we don’t have anything in writing.  We talked about it and shook on it.”  Regrettably, a handshake does not a purchase agreement make.

It is always better for our client if they have us prepare the purchase agreement, rather than reviewing a purchase agreement prepared by someone else.  To quote Benjamin Franklin, "[an] ounce of prevention is worth a pound of cure."  This is especially true if the drafter of the agreement is not an attorney.  There is a lot that goes into the substantive preparation of a purchase agreement, no matter what item or asset is being purchased.  There are many considerations and terms that need to be included. A layperson is typically not aware of the key subtleties.  This includes provisions that address items like Small Business Administration requirements, arbitration clauses, venue, default, taxes, and warranties, to name just a few.

Another dangerous and often costly mistake made by clients is using form contracts.  Every transaction, especially when dealing with real estate, is highly individual.  Form contracts where the parties simply need to “fill in the blanks” do not work.  They are never specific enough, rarely properly address state law, and often contain extraneous provisions, while missing necessary ones.

A lot of times, people are very eager to buy or sell something and they are willing to sacrifice a lot in order to make it happen.  We always warn clients against this line of thinking.  Something that may seem small or trivial now could become extremely problematic in the long run.  We do not want our clients to open themselves up to liability that could come back to bite them years down the road.  An example of this is property tax prorations.  Property tax prorations are quite complex and are capable of shifting the value of the transaction to the seller or the buyer. A client may say, “I will just pay the taxes” without realizing it may be a $10,000 swing.

Purchase agreements properly memorialize a transaction and also help to protect both the buyer and the seller.  If a proper purchase agreement is not in place the ramifications for both parties could be extraordinarily costly.