Law Office of Adam P. Whitney Blog
Posts by Adam Whitney

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No Good at Goodbyes: Why Employment Attorneys are Important to use for Creating Severance Agreements

Severance agreements, which are contracts between an employer and an employee that contain certain rules and guidelines for when an employee is terminated, may be regarded as somewhat of an afterthought by employers. An employer might think to himself, “the employee is leaving the company to go his or her own way, so what is there to worry about?” Despite this fact, it is imperative that anyone involved in the hiring process has an employment lawyer review a proposed severance agreement. A...

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New Ruling From Massachusetts Appeals Court Shows the Importance of LLC Operating Agreement Language

How do Limited Liability Company Operating Agreements affect the fiduciary duties owed to co-Members of the LLC? That issue was decided in the case of Butts v. Freedman, which also involved Boston Equity Advisors LLC (“BEA”) and Outcome Capital, LLC (“Outcome”).

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Prime Motor Group Split Shows Tactics Used by Majority Owners Against Minority Owners

This is exactly what I was talking about in this recent post:

'engage stakeholders in your process. meet early, meet often.' found at https://flic.kr/p/4E1yj4 by Engin Erdogan (https://flickr.com/people/erdogan) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)
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Breaking up is Hard to Do: Ending Your LLC Membership Interest by Sale, Resignation, Dissolution or Otherwise

What do you do when you are a minority or 50% owner and the other owner(s) are not treating you fairly? Maybe the other owner is taking an unfair salary, employing family members, or otherwise manipulating the system to take economic advantage of the situation. Maybe the other owner is taking cash and not reporting it. What do you do? What if you have taken cash too?

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Having a Company Holiday Party? Have Fun, but Don't Get Sued.

Your company holiday party comes with potential legal liability. While you can never eliminate all potential liability, you can minimize your risk. Here are some ways to do that:

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'Mirror, mirror...' found at https://flic.kr/p/PBXr1n by Rolf Dietrich Brecher (https://flickr.com/people/rolfdietrichbrecher) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)
'Mirror, mirror...' found at https://flic.kr/p/PBXr1n by Rolf Dietrich Brecher (https://flickr.com/people/rolfdietrichbrecher) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

Should a Single-Member LLC Have an Operating Agreement?

When you have more than one Member in your Massachusetts Limited Liability Company, having an Operating Agreement is almost a must. Called an “LLC Agreement” in some states, an Operating Agreement is a formal legal document that sets forth the rights and duties of Members and Managers, including financial issues and working relations. But what about when you are the only Member? Isn't this just an agreement with yourself? Why would you need it?

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Document Your Ownership Interest or Stock Rights in an LLC or Corporation

Fox Mulder’s motto was “Trust No One.” Lawyers can understand this. Oftentimes, the practice of law is all about being paranoid. We have to assume that your business partner will screw you over, or that your employer will not fulfill your expectations. Don’t rely on a handshake, oral promises, or vague documents to establish your ownership interest in a business entity. That’s true whether it is a Limited Liability Company, Family Business or Corporation. The courthouse steps are littered...

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Myths and Realities - Starting or Joining an LLC or Corporation with Friends, Family Members and Acquaintances.

As a lawyer who litigates disputes among partners, close corporation shareholders, and limited liability company members and managers, I hear a lot of myths about them. The myths below are in italics, with my (sometimes snide) comments below each one.

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The New Massachusetts Equal Pay Act - How Bad Is it for Employers?

The new Massachusetts Equal Pay Act goes into effect on July 1, 2018. The basic concept of the statute is that you cannot pay employees differently based on gender. You are busy running your business, but don't ignore this statute. You could face lawsuits that result in high damages awards and an award of the plaintiffs' attorneys' fees and litigation costs. There are attorneys who will be actively targeting your company to find violations. The statute will be irresistible because any...

No Good at Goodbyes: Why Employment Attorneys are Important to use for Creating Severance Agreements

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GUEST POST BY BRANDON SLOANE

Severance agreements, which are contracts between an employer and an employee that contain certain rules and guidelines for when an employee is terminated, may be regarded as somewhat of an afterthought by employers. An employer might think to himself, “the employee is leaving the company to go his or her own way, so what is there to worry about?” Despite this fact, it is imperative that anyone involved in the hiring process has an employment lawyer review a proposed severance agreement. A poorly drafted severance agreement can have long term legal and economic consequences for a business.

Benefits of an Employment Attorney

1. Protecting an Employer from Liability

One of the primary benefits offered in severance agreements is a liability waiver, which is a clause stating that in exchange for some consideration provided by the employer in termination (usually in the form of monetary compensation), the terminated employee agrees to waive or release any potential claims he or she may have against the company.

An employer may think that using standard liability waiver clause language from legal technology websites would be sufficient for their agreements, but this is not always the case. Each state has its own body of statutory provisions and caselaw concerning what is allowed in waiver agreements. Without the help of a seasoned employment attorney, an employer may inadvertently include (or exclude) certain words or phrases that invalidate the waiver. Such an invalidation would expose the employer to many types of litigation, including wrongful termination, breach of contract, and breach of implied covenant of good faith and fair dealing.

In addition to preventing accidental invalidations of liability waivers, employment attorneys can add in language specifically aimed at preventing costly litigation. A prime example of this issue involves the Massachusetts Wage Act (c. 149, sec. 148 et seq.). Violators of the Wage Act are required to pay treble damages to winning plaintiffs (meaning that employers found guilty of violating the Wage Act automatically owe triple the amount originally owed to the employee, plus attorneys’ fees). If an employee was owed wages earned before termination, he or she could file a Wage Act lawsuit against the employer even after the employment relationship has ended. However, there is Massachusetts caselaw that allows for agreements in which an employee consents to releasing the right to file a Wage Act claim. See Gordon v. Millivision Holdings, LLC, 19 Mass. L. Rptr. 61, 3 (Mass. Supp. 2005). An employment attorney would know the exact right language to include in a severance agreement to ensure that the employee has properly released his or her Wage Act claim against the employer.

2. Guarding Company Confidentiality

Similar to liability waivers, severance agreements can include clauses binding the terminated employee to keep certain information about the company confidential. Employment law attorneys will be aware of the legal requirements for what can and cannot be included in a confidentiality clause in a severance agreement.

3. Restricting Competition

A staple of the severance agreement is the non-compete clause, which restricts the ability of the former employee to work at competitors within a certain geographic area and for a fixed time period. In 2018, Massachusetts enacted sweeping changes to its non-compete law. For smaller businesses that may not have had to make any hires in the past few years, they may be unaware of these changes. An employment law attorney would certainly be up to date on the law, and could ensure any non-compete clause didn’t violate the new legislation.

4. Ensuring an Employer’s Benefit Obligations have been Fulfilled

Most employers offer a set of perks and benefits designed to entice employees to work for them. These can include offering sick/vacation/PTO days, medical benefits, stock options, and retirement/pension plans. Terminating the employment relationship can have legal ramifications relating to the benefits that have accrued to the employee. An employment attorney could review an employer’s benefit plans and determine what termination would mean for these benefits, and design a severance agreement crafted to shield the employer from unnecessary liability.

5. Tailoring Specific Agreements for Problem Employees

Employees are like snowflakes: no two are exactly alike. Because of this, sometimes a severance agreement will require a clause or two that are tailored only to the one employee. This is especially true for problem employees, who employers may be worried about divulging confidential information, soliciting company clients, or even trying to poach current employees away from the company. An employment attorney will be able creating the right severance agreement for a problem employee, and also can help an employer come up with the right strategy to use when terminating the employment relationship to create as few headaches as possible.

In summation, when it comes to creating severance agreements, if you aren’t going to craft them with the help of an employment law attorney, you might be better off not using them at all. There are simply too many potential hazards that can arise from a poorly executed severance agreement to not have the assistance of a lawyer who is an expert in the field.

Brandon Sloane is a third-year student at Boston College Law School. He aspires to become a Massachusetts labor & employment attorney after graduation

Disclaimer: The above is the work product of the author only.  The above is not legal advice.

New Ruling From Massachusetts Appeals Court Shows the Importance of LLC Operating Agreement Language

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How do Limited Liability Company Operating Agreements affect the fiduciary duties owed to co-Members of the LLC?  That issue was decided in the case of Butts v. Freedman, which also involved Boston Equity Advisors LLC (“BEA”) and Outcome Capital, LLC (“Outcome”). 

Underlying Facts:

Mr. Butts and Mr. Freedman co-owned BEA.  They were the founders and held equal ownership.  A third defendant, Mr. Ben-Joseph worked at BEA as an independent contractor. Butts and Fredman began having disagreements with one another, mostly about Ben-Joseph’s compensation.  Freedman and Ben-Joseph decided to leave BEA and join Outcome, a competing enterprise.

At first, there were discussions of merging BEA and Outcome.  Freedman and Ben-Joseph did not inform Butts of their meeting and discussions with Outcome.  After Butts found out that Freedman and Ben-Joseph joined Outcome, he/BEA sued for breach of fiduciary duty against Freedman (and another claim not relevant to this post against both Freedman and Ben-Joseph).  

Why Butts/BEA Lost:

The Appeals Court agreed that Freedman owed Butts and BEA fiduciary duties.  The Appeals Court explained that under Massachusetts law “fiduciaries may plan to compete with the entity to which they owe allegiance, provided that in the course of such arrangements they do not otherwise act in violation of their fiduciary duties.”

The question of whether Freedman “otherwise acted in violation of [his] fiduciary duties” depended on the interpretation of the Operating Agreement.  Specifically, the Operating Agreement of the LLC broadly provided that Members may engage in other business ventures and investment opportunities.  Notably, there was not a non-compete provision in the Operating Agreement or otherwise.  

The Appeals Court ruled that the language of the Operating Agreement limited the fiduciary duty of Freedman such that he had no duty to disclose the Outcome opportunity or to share the Opportunity with Butts or BEA.

Freedman made cogent arguments that the language was just boilerplate and that literal application would allow members to take corporate opportunities away from their LLC. However, the Appeals Court essentially ruled that the freedom to contract overrode those concerns.  Freedman prevailed in his defense.  

Takeaway

The lesson here is that the words of an Operating Agreement matter.  Some people think that they are “standard” and that they are all boilerplate.  But what do you think will happen when your business partner has disagreements and they go to a lawyer?  The lawyer will parse through each sentence of the Operating Agreement to find language that will support your opponent in a lawsuit.  So Operating Agreements don’t matter. Until they do.

If you are are going into an LLC, read the proposed Operating Agreement carefully and strongly consider having a lawyer review it with you.  It’s important to understand your business and your goals because each situation is unique.  I get that it seems like an unnecessary expense when you are starting a business, but you could be dooming yourself for failure if you don’t pay attention to the details.  

If you already have an Operating Agreement and you are having disputes with your co-owners, have a qualified lawyer review the language to see what leverage you have.  Or, maybe you can renegotiate and enter a new Operating Agreement.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com


Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.

Prime Motor Group Split Shows Tactics Used by Majority Owners Against Minority Owners

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This is exactly what I was talking about in this recent post:

 :https://awhitneylaw.com/blog/breaking-up-is-hard-to-do-ending-your-llc-membership-interest-by-sale-resignation-dissolution-or-otherwise

A day after I posted my blog on LLC breakups, the Massachusetts Supreme Judicial Court (“SJC”) issued a ruling regarding the break up of Prime Motor Group partners, Automile Holdings, LLC v. McGovern, __ Mass. __ (Jan. 14, 2020).  

https://law.justia.com/cases/massachusetts/supreme-court/2020/sjc-12740.html

While not the main focus of the case, the SJC described the tactics that the majority used to force the minority owner to sell his shares in the company, as found by the trial judge. 

First, they amended Prime’s operating agreement to remove a provision that allowed for the distribution of profits sufficient to cover the owners’ tax liabilities.  Such provisions are commonplace, and without it, McGovern faced a tax liability of between $500,000 and $600,000 for the 2015 tax year.  Additionally, Abrams and Rosenberg [collectively, the majority interest] denied McGovern access to Prime’s financial information, leaving McGovern unable to calculate his expected tax obligation for the 2016 tax year.  Abrams and Rosenberg also demanded that McGovern and his wife return the company vehicles that they had been using and threatened to report McGovern to the authorities as being in possession of stolen automobiles.  As the trial judge remarked, these tactics amounted to Rosenberg and Abrams applying “as much pressure as they could manage to put on [McGovern] to take the best deal they could get” in purchasing McGovern’s minority stake before the company’s anticipated liquidity event.

Slip Opinion at p. 6.

The SJC was less than impressed by these tactics.  It indicated that:

the sale of McGovern’s business interest did not resemble a prototypical arm’s-length transaction with a third-party purchaser.  Rather, Rosenberg and Abrams pressured McGovern to sell his interest to them, despite the fact that Abram’s company was the majority shareholder in a closely held corporation and owed a fiduciary duty of utmost good faith and loyalty in its dealings with minority shareholders.

Slip Opinion at 25.

This statement about “a fiduciary duty of utmost good faith and loyalty” to minority shareholders creates a powerful weapon for minority shareholders.  To be sure, this is not new.  The courts of Massachusetts have ruled on this duty for decades.  And keep in mind that the duty applies to minority shareholders as well.  But the fact that the SJC seemed to go out of its way to suggest a breach of this duty by high-pressure tactics bodes well for minority shareholders who will be litigating these claims in Massachusetts.  One other takeaway here, McGovern was a sophisticated and experienced business person, but he was still subject to majority pressure tactics.  Abrams got quality legal help and apparently sold his interest for full value.  What will you do?

The decision also made some statements about restrictive covenants in employment agreements that should make Massachusetts employers very nervous.  More on that later.

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com


Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.



Breaking up is Hard to Do: Ending Your LLC Membership Interest by Sale, Resignation, Dissolution or Otherwise

'engage stakeholders in your process. meet early, meet often.' found at https://flic.kr/p/4E1yj4 by Engin Erdogan (https://flickr.com/people/erdogan) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

What do you do when you are a minority or 50% owner and the other owner(s) are not treating you fairly?  Maybe the other owner is taking an unfair salary, employing family members, or otherwise manipulating the system to take economic advantage of the situation.  Maybe the other owner is taking cash and not reporting it.  What do you do?  What if you have taken cash too?    

Maybe the other owner is buying all the supplies from his other business or just shifting business from your company to his other company.  Maybe the other owner is taking supplies or equipment for his other business.  Maybe the other owner didn’t contribute his fair share to begin with.  What do you do?  What if things are not well-documented and your business partner is a master manipulator or con artist?  

Maybe the other owner is hiding the financial records of the company.  You don’t know if there is a profit or how much.  You don’t know how much money is coming in, let alone where it is going.  What do you do?  You usually have certain rights to financial records.  https://awhitneylaw.com/blog/a-minority-owners-right-to-inspect-llc-records-or-corporate-books-and-records 

What do you do if the majority terminated your employment?  Does it matter if the other owner is the Manager of the LLC? Does it matter if you have no employment contract? Does it matter if they have something on you?  No one is perfect, of course, and it’s inevitable that they will have something to complain about.  But does that give them the right to fire you from your own company?  Maybe, but maybe not.  Owners often have a reasonable expectation of employment and cannot be fired so easily.

Should you dissolve the LLC?  Put it in receivership? Maybe you are not getting along with the other owners.  They are abusive.  They are not treating you fairly.  They are trying to drive you out.  What do you do?  Maybe you can take one of these extreme remedies, but is it a good idea?  This is a complicated question and you need guidance from someone who has done it.

Can you sell your LLC Membership interest?  Does it matter if it’s a Massachusetts Limited Liability Company?  A Limited Liability Company formed in Delaware or some other state and operated in Massachusetts?  Can you force the LLC to buy your share?  Maybe, but it depends in part on if there is an Operating Agreement and what it says.  It depends on which state’s law controls.  You also need to follow the right procedures, which can be spelled out in an Operating Agreement.  You also must know how to value your share.  

Can you simply resign your interest?  The answer is the same, but the potential liabilities increase, so you have to proceed strategically and with caution.  Just giving up your interest may seem simple and without consequences, but that is not necessarily true.  At least do it the right way and get a full release and know the tax consequences.

Unfortunately, there are no easy answers to any of these questions.  There are no “LLC Police” to report your business partners to.  It’s unlikely that any government agency will be of much assistance.  The government doesn’t want to get involved in private business disputes unless there is a public interest, illegal activity or tax evasion.  Even then, a bad situation could become worse.  I have seen all the above situations and more.  Some business partners lie, cheat and steal. Some are sneaky. Some are tyrants. Some are substance abusers. Some are sexual harassers. Some are poor business people.  And some just have different priorities and visions for the business.  

There is help.  A lawyer who is experienced in these matters can come up with a plan and help you to decide what to do. Sometimes there are certain strategies and tactics that can provide your business partners with the motivation to do right by you.  Don’t you deserve that?  You invested blood, sweat, tears, and dollars into the business.  Are you willing to give up what you deserve, or do you want to fight for it?   

If you are having problems with your business partners and you cannot work it out personally, contact me so that I can help you come up with the best solution that works for you.  

Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

www.awhitneylaw.com

Fine print: the above is not legal advice, but general information.  I cannot provide legal advice without a written fee agreement and a full review of your legal matter.




Having a Company Holiday Party? Have Fun, but Don't Get Sued.

'Party Time' found at https://flic.kr/p/ihruT3 by Nanagyei (https://flickr.com/people/nanagyei) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

Your company holiday party comes with potential legal liability.  While you can never eliminate all potential liability, you can minimize your risk.  Here are some ways to do that:

1.Don't Serve Alcohol.

If you must have alcohol at your party, do yourself a favor and do not serve alcohol yourself.  Either have a professional caterer who is properly trained, licensed and insured (and ideally, who will indemnify you or name you as an additional insured), or go to a bar or restaurant.  Consider providing employees with a limited number of drink tickets.  

2. Remind Employees to Be Safe and Behave Property.

Remind employees beforehand of company expectations and that people consuming alcohol should have a designated driver.  Offer to pay for rides home, no questions asked.  In the era of Uber and Lyft, there should be plenty of rides available in most areas.  Remind and expect the management team to lead by example.

Sexual harassment is also a major concern for office holiday parties.  Gently remind employees of company policies prior to the party.  

3. Set High Expectations for Managers and Supervisors.

Your first lines of defense are the company supervisors.  Recruit them to look out for employees who are drinking too much.

Remind them also that they lead by example.  If Sales Manager Bob is on his sixth triple IPA and telling dirty jokes, some in his sales team will follow his lead.  In Massachusetts, there is strict liability when a supervisor sexually harasses a subordinate.  If you can't trust your managers and supervisors, then you have a big problem.  If you haven’t provided sexual harassment training to managers recently, here is your excuse to do so.

4. Check with Your Insurer.

The end of the year is as good of a time as any to review your insurance coverage with your broker.  If you don't have a good broker who will take your call and answer your questions, find one who will.  Insurance is complicated and gaps in coverage are more common than business owners may think.  Checking your various policies for a holiday party will also serve as a good year-end check.

5. Remind People that it is a Party and they Can Have Fun.

The key here is to make it clear that the party is voluntary.  No one is going to get paid wages, so no one has to attend.  Hold the party when employees are not working.  You do not want any claims of failing to pay wages or overtime.  Don't require any employees to perform any duties, such as checking coats or tending bar, which could be viewed as work requiring pay.  This may also prevent a worker's compensation claim if someone is hurt at the party (check with your insurance broker).

If you have any questions about dealing with liability issues for an open house or company party, call me at 617.338.7000. As always, the above is general information, not legal advice.

Should a Single-Member LLC Have an Operating Agreement?

'Mirror, mirror...' found at https://flic.kr/p/PBXr1n by Rolf Dietrich Brecher (https://flickr.com/people/rolfdietrichbrecher) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

When you have more than one Member in your Massachusetts Limited Liability Company, having an Operating Agreement is almost a must.  Called an “LLC Agreement” in some states, an Operating Agreement is a formal legal document that sets forth the rights and duties of Members and Managers, including financial issues and working relations.  But what about when you are the only Member?  Isn't this just an agreement with yourself?  Why would you need it?

You might get away with not having an Operating Agreement if you are the sole Member of the LLC, but you should strongly consider having one. Consider these "pros" for doing so:    

  •      An Operating Agreement helps to establish that the Limited Liability Company is separate from the owner, helping to avoid any risk of having personal liability.

  •      Operating Agreements set out procedures for record-keeping and distributions, which can provide clarity to the Member and Manager of the LLC on how to act in certain situations.  

  •      The Operating Agreement can set out a succession plan in case the owner dies or becomes incapacitated, so your family has an easier time knowing how to run the business.  This could also help with estate planning.  

  •      An Operating Agreement can set out the procedures for admitting additional Members.    

  •      If you have a separate Manager, the Operating Agreement can guide the operation of the business.  

  •      Operating Agreements can avoid having your LLC governed by state default LLC and business rules.

  •      Many third-parties such as insurance companies, title companies, and banks may demand to see an Operating Agreement before doing business with you.  

  •      Presenting an Operating Agreement to investors/lenders can give them an idea of your business plan to make them more willing to provide you with the necessary financing.  

The biggest “con” to having an Operating Agreement is the cost.  You want it done right, by a lawyer who knows what he or she is doing. You might be reluctant to spend money on legal fees that could go to operations or supplies or more material things.  Some other potential cons:

  • Having an Operating Agreement in place dictating procedures can limit the flexibility of LLC owners somewhat, since you may not have complete autonomy in any scenario.

  • If your Operating Agreement is poorly drafted and not a fit for your business or industry, it could create more problems than it solves. A “standard” Operating Agreement free from the Internet is worth every penny that you paid for it.

  • There could be some problems with self-dealing in the creation of the Operating Agreement since you are negotiating an organizing document with yourself, but this is unlikely.  

In summary, the pros outweigh the cons, as long as you do it right.  

Adam P. Whitney, Esq. 617.338.7000, awhitney@awhitneylaw.com

Brandon J. Sloane (J.D. Candidate - 2020, Boston College Law School)

WHAT HAPPENS TO SALES COMMISSIONS NOT YET PAID WHEN THE EMPLOYEE QUITS OR IS TERMINATED?

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Intro:  Disputes over sales commissions are often the subject of litigation. The stakes are high. Under the Massachusetts Wage Act, a commission can be considered wages. Failure to pay wages can result in liability for triple damages, payment of the employee's attorney's fees, litigation costs, and 12% interest.

Commission Defined:  Massachusetts courts have generally defined a commission as a payment of money due to an employee based on sales.  A true bonus is not a commission.  A true bonus is not based on an individual’s employee’s sales.  It may be wholly discretionary or may be based on the overall profits of the company.  A bonus is not subject to the Wage Act.  However, just calling a payment a “bonus” or a “sales bonus” doesn't itself exclude it from the statute.

The Wage Act:  The Massachusetts Wage Act was enacted to prevent the detainment of wages. G.L. c. 149, Secs. 148, 150.  The Wage Act is a powerful statute for employees, and it can be enforced by the Attorney General.  Failure to pay wages when they are due can result in a lawsuit by the employee.  The employer will be liable for triple damages for unpaid wages, interest at 12 percent, and the employee's attorney's fees and costs.  There is also personal liability for the officers of the company, which could include managers or members of a limited liability company.

How the Wage Act Applies to Commission:  The Wage Act contains the following language: “This section shall apply, so far as apt, to the payment of commissions when the amount of such commissions, less allowable or authorized deductions, has been definitely determined and has become due and payable to such employee, and commissions so determined and due such employees shall be subject to the provisions of section one hundred and fifty.”

What Does Definitely Determined Mean?:  Definitely determined means that you can determine it arithmetically.  You can calculate how much is due.  It's an open question as to when they must be calculable. 

What Does Due and Payable Mean?:   Commissions are “due and payable” when any contingencies relating to their entitlement have occurred.  

Other Key Language of Statute:   “No person shall by a special contract with an employee or by any other means exempt himself from this section or from section one hundred and fifty.”  This "special contract" prohibition creates confusion.  Employers, on the one hand, are allowed to create their own policies and define when a commission is due. But if they are too draconian in denying commissions, some courts will rule that you are exempting yourself from the Wage Statute by a “special contract,” which is not allowed.  This is especially true if the employer fires the employee.

Continued Uncertainty:  What if the employee is fired or quits before payment is made?  When do you have to be able to calculate it?  When does it have to be due and payable?  You should see by now there is no easy answer to this question.  The law is far from an exact science.  The answer is, it depends.  A lot depends on the commission contract or compensation plan.  A lot may depend upon whether the commissions were to be paid in the near future or distant future.  A lot will depend on how good the lawyers are for each side of the dispute.  And a lot will depend upon how the particular judge in your case views the law, at least until we get some more clarification on the statute.  Just yesterday, the Massachusetts Supreme Judicial Court heard arguments on these issues in the Parker v. Enernoc, Inc. case.  We may get at least some new clarifications on these issues next year.  Until then, I have some takeaways below.

The Takeaway for Employers:  Commissions agreements have to be drafted extremely carefully.  You can change them at any time, but only prospectively.  There are a few tricks of the trade that can protect you.  Moreover, when an employee leaves and commissions are in their pipeline, the employer must proceed with caution.  This is even more so if the employee is terminated.  If it can be inferred that you fired the employee to deprive the employee of commissions, you might be held liable for the commissions no matter what your contract says.  This is a doctrine called the covenant of good faith and fair dealing.  Some courts would triple those damages, others would not.  The Massachusetts SJC may decide whether tripling is proper in the Parker case.

The Takeaway for Employees:  You probably cannot negotiate the language of your contract unless you have a lot of bargaining power.  But if you can, it would be worth hiring a well-versed lawyer.  You might be able to negotiate if you are a part-owner of a small corporation or LLC.  The Wage Act will still apply to you.  While you are employed, there are steps you can take to document your earned commission.  And if you are no longer working at your employer, but you have earned commissions in your pipeline, make sure you go to a lawyer who really knows what they are doing.  These claims can be screwed up easily.

The above is general information and not legal advice.

Adam P. Whitney, Esq.

awhitney@awhitneylaw.com

617-338-7000

Document Your Ownership Interest or Stock Rights in an LLC or Corporation

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Fox Mulder’s motto was “Trust No One.”  Lawyers can understand this. Oftentimes, the practice of law is all about being paranoid.  We have to assume that your business partner will screw you over, or that your employer will not fulfill your expectations. Don’t rely on a handshake, oral promises, or vague documents to establish your ownership interest in a business entity.  That’s true whether it is a Limited Liability Company, Family Business or Corporation. The courthouse steps are littered with the hopes of those who received false promises of equity.  

Sometimes vaguely promised equity claims can prevail.  I was part of a trial team that prevailed on an equity claim when a promise was literally written on a bar napkin.  We obtained seven figures for our client.  But you don’t want to have to roll the dice on a judge and jury.  Get it and writing and make sure it is clear and without contingencies.  

The greatest abuses I usually see are employees who are “promised” stock or stock options or some other type of equity interest in employment offer letters.  These promises are often empty and meaningless, although they sound good, and the sales pitch makes it appear that everything will go swimmingly (“These are just formalities that are lawyers make us write.”). The devil is usually in the contingencies.  You have to be employed to get the stock.  Your stock has to be approved by the board. Vaguely defined profitability benchmarks must be reached.  Some companies notoriously fire employees before the stocks vest.  Others have boards that never approve the stock.  It turns out, the “formalities” matter.

Sometimes people go into business with others and think that they are an “owner,” but have no documentation to prove it.  Sometimes people deliberately do not document their ownership for some reason or another, be it a pending divorce, tax reasons, immigration reasons, a noncompete or some other reason.  This failure can come back to bite you if your business partners get greedy (and they always do in my world).  Others go to work for the family business expecting that they will be made owners, but it doesn’t always happen.

When you start or join a private business as an owner (you think), you are surely working very hard and devoting a great deal of effort and heart into making the business a success. Don’t leave it to chance that you are going to enjoy the fruits of your labor.  Document your ownership interest and have a lawyer review the documentation. A few hundred of few thousand dollars in legal fees could literally save you millions.  Put on your lawyer’s cap and try being paranoid until your interest is well documented.

If you are already in a situation where your claim to equity is tenuous or unclear, all may not be lost. Get legal advice now to see where you stand and what can be done.  Avoiding the problem and hoping that things will work out is no way to go through life. There may be certain guerilla tactics (ethical ones) to strengthen your position.  Even if your position is hopeless, you are better off knowing so you can decide to cut your losses and start over. 

The above is general information, not legal advice.

By Adam P. Whitney

617.338.7000 

 

 

Myths and Realities - Starting or Joining an LLC or Corporation with Friends, Family Members and Acquaintances.

'Alec Ross and Emily Banks at the AMCHAM reception in Auckland, August 31, 2012' found at https://flic.kr/p/d79Sah by US Embassy New Zealand (https://flickr.com/people/us_embassy_newzealand) used under Creative Commons Attribution-NoDerivs License (http://creativecommons.org/licenses/by-nd/2.0/)

As a lawyer who litigates disputes among partners, close corporation shareholders, and limited liability company members and managers, I hear a lot of myths about them.  The myths below are in italics, with my (sometimes snide) comments below each one.

I will be an owner, so of course, I will be employed by the Limited Liability Company.

Unless you have a strong employment agreement for a term of years (or until you die or retire) or employment is guaranteed in the Operating Agreement, there is nothing inherent in being a Member/Owner of an LLC that guarantees employment.  

An LLC Operating Agreement is a standard document that can be found on the internet.

That Operating Agreement that you found on the internet is worth every penny that you paid for it.  It may be even worth less than nothing.  An Operating Agreement that the parties do not understand and that is not specifically tailored to meet the needs and expectations of the members may have unintended consequences.  The provisions might work in your favor, but they might just as well work against you.

We hired a lawyer to set up the company, so she will look out for my interests.

Not necessarily. It is understandable to want to save costs when setting up a company and to jointly hire a lawyer to draft the Operating Agreement or By-Laws.  But that cost-savings comes with a price.  The lawyer cannot advocate for any one of the founders.  The minority owners are in particular need of protection, but the lawyer cannot advocate for the minority because she owes a duty to all the founders.  In a perfect world, everyone gets their own lawyer, but of course, this rarely happens.  If you are the minority owner or you are joining an existing company, at least consider having an independent lawyer review the Operating Agreement and suggest changes to protect you and your expectations in the company.

We are equal owners, so we must get paid the same salary and have equal say.

Nope.  The people running the business (President, CEO or Managers) will decide the compensation.  You could argue that the compensation is unreasonable, but you will have to prove it and you may have to file suit to do anything about it.

As for equal say, usually, the officers, managers or board of directors have all the say.  If you are not one of those, your opinion may count for very little.

At least my business partners won't withhold dividends or engage in self-dealing.

But what if they do?  You need to guard against this as much as possible.  When it does happen, you have a few options: (1) a legal battle; (2) sell your interest to the majority at a discount; (3) go away with your tail between your legs.  

My business partners and I trust each other, so that's enough.

Ha!  That one made me laugh.

Of course, you might be right that your business partners are good and decent people.  But even those rare birds will have legitimate disagreements. Documenting your expectations can help avoid this.

Also, think about what happens if your reasonable business partner dies and her crazy husband Larry inherits her ownership interest.  A buy-sell agreement with life insurance can address this, but it also shows why you need a strong operating agreement or shareholder agreement.

If I need to liquidate or if I can't work with my partners, I can just sell my shares. 

Maybe you can in theory if there are no restrictions on transferability.  But if the environment is toxic, no one will want to buy your interest.  You need an exit strategy going in.  You need to foresee potential disputes and guard against them.

If my business partners try to screw me over, I'll just call the LLC Police.

Okay, I made that one up.  The point is that no one is going to assist you in a private business dispute other than a lawyer that you hire on your dime.  You can't expect the Attorney General or Secretary of State to get involved unless there is a public interest.  

If you have a clear case of embezzlement, maybe you can get law enforcement interested.  But these situations are usually not clear-cut and law enforcement sees them as civil matters.

My own father/son/mother/brother/sister won't turn against me.

Maybe not your family member, but I've seen all of these unsavory situations in family businesses.  

At least I can't be personally liable for corporate obligations or wrongs that I or the LLC commit.

This is partially true part of the time, but now always.  Clear? Here's the thing, if you properly follow corporate procedures and record keeping, you may avoid contracts that you did not personally guaranty and wrongs that you were not involved in.  The reality is that the owners of most small businesses are involved in all actions and decisions.  Creditors, banks, landlords and others may insist that you personally guaranty company obligations.  So personal liability can be hard to avoid unless you are a larger, more established business.

As always, the above is not legal advice.

By Adam P. Whitney, Esq.

617.338.7000

The New Massachusetts Equal Pay Act - How Bad Is it for Employers?

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The new Massachusetts Equal Pay Act goes into effect on July 1, 2018.  The basic concept of the statute is that you cannot pay employees differently based on gender.  You are busy running your business, but don't ignore this statute.  You could face lawsuits that result in high damages awards and an award of the plaintiffs' attorneys' fees and litigation costs.  There are attorneys who will be actively targeting your company to find violations.  The statute will be irresistible because any employee will be able to show a prima facie case if he or she is paid less than employees of another gender for comparable work.  The statute is unclear on the employee's burden of proof, but it may fall to the employer to justify any discrepancies in pay.

In my opinion, while the statute is generally well crafted and has laudable goals, there are going to be some unintended consequences that will interfere with an employer's legitimate business judgment.  It doesn't even matter if you did not knowingly violate the statute because it is a “strict liability” statute.  The statute is tricky because you cannot necessarily pay an employee more who has a higher skill level.  You cannot necessarily pay an employee more because the employee commands a higher salary on the open market.  If you have a few outlier employees who have high earnings on your payroll, you cannot lower their compensation to bring your company into compliance with the statute.  You will either have to pay other employees performing comparable work at the same rate (unless you can justify the higher rates based on a specific factor in the statute), or you will have to fire your highly paid outliers.     

You also cannot rely on a contract.  Even a shareholder, minority owner/LLC Member with a specific contract, operating agreement or shareholder agreement could have a claim under the statute even if he or she expressly agreed to the compensation.  Under the express language of the statute, it would not matter if that person contributed less initial equity to the corporation or LLC, because that is not a specific factor in the statute that can justify a discrepancy.

I recently attended a continuing legal education course on the new statute, Mass. Gen. Laws c. 149, §105A. A representative of the Attorney General's Office spoke at the seminar, so I have a pretty good idea of what the AGO will focus on. The AGO has released some thorough and well-drafted guidelines for employers, including guidelines for performing self-evaluations (discussed below).  The AGO is not out "to get" employers, but it does want to eradicate gender-based pay discrepancies.  There are ways to reduce your risks under the statute, but you need to act very soon.  The four big takeaways are: (1) transparency; (2) salary history ban; (3) comparable work; and (4) self-evaluation.

Transparency simply means that employees cannot be prohibited from discussing salary.  You may want to check all your policies and contracts to make sure that there is nothing that prevents employees from discussing wages (limited exception for HR or managers who have access to other's compensation). Consider even putting out a new policy when the statute takes effect.

Salary history is another target of the Massachusetts Equal Pay Act.  Not only can you not ask about it, you can't use salary history to justify unequal pay.  It is potentially even dangerous to ask about salary expectations unless you are just using the expectations to see if they are in the ballpark.  The thought is that women workers are not as aggressive at negotiating.  You can't base salaries on negotiating skill.

Employees can volunteer salary history. Also, employers can seek to confirm salary history after making an offer (although there does not seem to be much of a legitimate reason to do so).  You can also ask about an employee's sales volume at a previous employer, but not the earnings from such sales.

Comparable work is another key concept that I expect will be hotly litigated.  The basic idea is not simply “equal pay for equal work;” it is “equal pay for comparable work.”   One mistake that employers may make is to not compare employees in various divisions.  Also, the nature of the work, not the job title, will control.  If a worker of one gender is earning less for comparable, you must justify it by one of the specific, limited reasons in the statute.

Self-evaluation. This is a peculiar statute in that it gives employers a chance to carefully evaluate their payrolls to see if there is any gender discrepancies (this is likely because the statute is so potentially dangerous and burdensome).  If you make a real effort to do this and to fix discrepancies, you can get a lot of protections against damages claims.  Really, even without the protections, every employer should self-evaluate so as to comply with the statute.  The existence of the protections makes it a no-brainer.  That doesn't mean that there are no risks to a self-evaluation.  There are.  The self-evaluation could be used against you for alleged violations of federal statutes.   

But many employers may conclude that they should still perform the self-evaluation.  A lawyer, accountant or another professional can help you with this.  Smart, proactive companies are already starting their self-evaluations in an effort to protect their companies from what could be a tide of new lawsuits.

This post merely scratches the surface of this important new statute and how an employer should protect itself.  As always, this post is not legal advice.

By Adam P. Whitney, Esq.

617.338.7000