Law Office of Adam P. Whitney Blog
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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...

'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/)
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'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/)

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...

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A Minority Owner's Right to Inspect LLC Records or Corporate Books and Records

An LLC (Limited Liability Company) Member in Massachusetts has a right to inspect certain records of the LLC. This includes basic information, such as the certificate of organization, the names and addresses of all Members and Managers, and a copy of the operating agreement.

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Don't Cause Self-Inflicted Harm to Your Business because You Thirst for Revenge

Think carefully before you embroil your company in a lawsuit. Lawsuits are expensive and risky. A lawsuit can backfire in several ways. You can face counterclaims. You can be charged with the legal fees and costs of your opponent if your claims are not well grounded. You expose your company to producing private business documents and testifying under oath, which can open you up to more problems.

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'Alec Ross and Emily Banks at the AMCHAM reception in Auckland, August 31, 2012' found at https://flic.kr/p/d79SjE 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/)

Does Your Business Need an Outside General Counsel?

Big companies have their own attorneys on payroll and at the ready. As likable as most attorneys are, businesses would not keep them on the payroll unless they added value. A general counsel acts as a strategic partner. She understands the business, puts it in the best legal position, and protects it from potential liability. When a dispute arises and a business needs immediate legal action, things go much better when an attorney who is already familiar with the business and issues is ready...

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Employment Severance Agreements Should Be Drafted or Reviewed By Your Attorney

Severance agreements, also called separation agreements or sometimes settlement agreements are legal documents that can greatly impact legal rights and obligations. Some may consider these standard legal documents. While there are many standard provisions, careful drafting and review are in order. Even experienced attorneys make mistakes when drafting these documents. While they seem simple and straightforward, they are more complicated than one would think and there are many traps for the...

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Massachusetts Employers Should Prepare for the New Pregnant Workers Fairness Act

Synopsis: This new statute amends Chapter 151B, Section 4 and provides substantial rights to employees and applicants based on pregnancy and pregnancy-related conditions.

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The Massachusetts Wage Act as it Applies to Directors and Investors

Subtitle: The President or CEO of an Underfunded Corporation or LLC Is in a Unique Position to Face Double Financial Disaster

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

'100 shares of the Chicago Great Western Railway' found at https://flic.kr/p/e5jWfW by Mike Miley (https://flickr.com/people/mike_miley) used under Creative Commons Attribution-ShareAlike License (http://creativecommons.org/licenses/by-sa/2.0/)

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?

'Money Hedge' found at https://flic.kr/p/chEbX5 by Tax Credits (https://flickr.com/people/null) used under Creative Commons Attribution License (http://creativecommons.org/licenses/by/2.0/)

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


A Minority Owner's Right to Inspect LLC Records or Corporate Books and Records

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An LLC (Limited Liability Company) Member in Massachusetts has a right to inspect certain records of the LLC. This includes basic information, such as the certificate of organization, the names and addresses of all Members and Managers, and a copy of the operating agreement.

Minority LLC Members who feel that they are being oppressed or frozen out will want to obtain as much information as possible, including especially financial information. A Massachusetts LLC must, by statute, have an office in the Commonwealth where it must keep certain records. These records include the following:

  1. Income tax returns for last three years; and

  2. Financial Statements, if any, for the last three years.

Any Member of the LLC shall be allowed to inspect and copy the records, at that member's expense, and at reasonable times. Subject to the provisions of the Operating Agreement or standards set by the Manager(s), each Member shall also be allowed to obtain “true and full information regarding the state of the business and financial condition of the limited liability company, [. . . inluding] other information regarding the affairs of the limited liability company as is just and reasonable.” M.G.L. c. 156C, Sec. 10.  How to determine what is "just and reasonable?"  The wise majority owners should develop uniform standards regarding access to documents to prevent a claim of unfair treatment by the minority owner. The test is whether a request is “reasonably related” to the Member's interest. A minority owner that makes repeated and numerous requests may be seen as being a pest or having an ulterior motive. By contrast, a Delaware court (addressing a similar statute) ruled that the following were “proper purposes” for requesting documents from the LLC: (1) putting a valuation on one's ownership interest; and (2) investigating potential wrongdoing by the majority.

If the majority owners refuse a request for information, the minority owner must determine what action to take. There are no “LLC Police” to call. A minority owner will have to file suit to obtain the documents it wants. If there are enough facts to support such a claim, a minority owner can also bring a claim for a freeze out, which occurs when the majority owners violate their fiduciary duties to the minority owner and frustrate her reasonable expectations of ownership.  A Member's ownership interest in an LLC is considered personal property and a Member is entitled to obtain an accounting from a fellow Member, but you will have to file suit for an accounting. At least one Massachusetts court has held that a Member of an LLC is entitled to an accounting from a controlling Member or Manager where there is a fiduciary relationship between the parties. By contrast, there is no right to an accounting against the LLC itself because there is no fiduciary duty owed by the LLC to the Members.

The rights to records of a minority shareholder of a Massachusetts corporation are similar, but not identical to the rights of an LLC Member. A shareholder should be able to articulate specific facts regarding possible mismanagement or wrongdoing by the controlling interest in order to see financial records, meeting minutes and other business records (other than the basics).

The takeaway is to first check the Operating Agreement or Shareholder Agreement or other company documents and then the statute to determine what documents a minority owner is entitled to. Both sides should consider carefully whether their dispute over records can be resolved without resorting to litigation. Perhaps an independent mediator could help the parties resolve their dispute before both sides incur substantial legal fees.  In other situations, someone is being unreasonable or someone is hiding something. This is a recipe for contentious litigation, so you better lawyer up if you think that the minority owner is being unreasonable or has an ulterior motive, or if you think that the majority is hiding something. As always, this post contains general information in a cursory fashion and is not legal advice.

By Adam P. Whitney, Esq.

617.338.7000

Don't Cause Self-Inflicted Harm to Your Business because You Thirst for Revenge

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Think carefully before you embroil your company in a lawsuit. Lawsuits are expensive and risky. A lawsuit can backfire in several ways. You can face counterclaims. You can be charged with the legal fees and costs of your opponent if your claims are not well grounded. You expose your company to producing private business documents and testifying under oath, which can open you up to more problems.

As a successful business, you have to deal with some dirty, rotten scoundrels. These could include competitors, current or former business partners, former employees or other business enemies. They may pull various dirty tricks on your business. Steal your key employees. Defame you. Falsely report you to government agencies or authorities. They may even file frivolous lawsuits against you or your clients. If you are feeling paranoid, it’s only because they are out to get you.

These dirty tricks can hurt your business. It is human nature to be enraged and want to fight back. Resist the temptation to go off half-cocked and respond in kind. Take a deep breath. Tell yourself that it is just business. Now start plotting your revenge.  Plotting is the key word. Speak to an experienced business litigator about the risks and rewards of various courses of action. You may greatly hamstring your own position if you do not plan carefully.

For example, don’t defame your opponents just because they have defamed you. Defamation law, which includes libel and slander, is surprisingly complicated. Unless you are 100% sure that the nasty letter/e-mail you are about to send is not even arguably defamatory, you probably should not send it.

Just because someone sues you does not mean you can or should sue them back. They may have a right to sue you or to report you to the government. These are protected activities under the Massachusetts Anti-SLAPP Statute. A lawsuit or counterclaim in this situation could subject your company to having to pay the other side’s attorney’s fees and costs, much to the delight of the scoundrel who took actions against you.

The takeaway is that businesses can get themselves in serious trouble when they act to harm a competitor, even when the competitor drew first blood. It’s like in sports when the referee always notices the player who reacts to a dirty play with one of his own. Your reaction, or over-reaction, may get your business in trouble and may even mask the original bad act by your business enemy.

The best revenge is to continue your success and crush your competitors in the market. You also may have a legitimate legal claim against them that will allow you to sue for your damages. While you should only file legitimate suits seeking legitimate damages, litigation may send an additional message that you will not be a punching bag. Sometimes there are other legal and ethical guerrilla tactics for particularly unsavory scoundrels.

There is no legal advice here. Contact a business litigator in your jurisdiction if you need legal advice on this topic.

By Adam P. Whitney, Esq.

617.338.7000

awhitney@awhitneylaw.com

Does Your Business Need an Outside General Counsel?

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Big companies have their own attorneys on payroll and at the ready. As likable as most attorneys are, businesses would not keep them on the payroll unless they added value. A general counsel acts as a strategic partner. She understands the business, puts it in the best legal position, and protects it from potential liability. When a dispute arises and a business needs immediate legal action, things go much better when an attorney who is already familiar with the business and issues is ready for action.

Many private businesses cannot justify the cost of a full-time general counsel on the payroll. But could your business benefit from a long-term relationship with an outside general counsel? Think of the benefit of having a lawyer who understands your business and how you operate. You can quickly vet issues, including complex employee termination issues, contract issues, client issues, government issues and competitor issues. Your lawyer can keep you up to date on changes in the law so that you make the necessary changes in your handbook. He can train you and your managers on how to avoid legal traps. An outside general counsel is ready to immediately send a letter to competitors, ex-employees or others who pose a threat to your business.

If you think that having an outside general counsel is expensive, try not having one. If you leave your company exposed, one bad lawsuit can kill your bottom line or even put you out of business altogether. Owners can sometimes face personal liability, so not just your business assets are at risk. Businesses often reach out to an attorney after an issue has arisen. While this is certainly better than not hiring an attorney, the business will be scrambling to bring the lawyer up to speed. There won't be time to see if the lawyer is a good fit for the company and how it operates. An attorney who values a long-term relationship will also be more conservative with billing compared to an attorney who sees your business as a one-time billing opportunity.

By contrast, having a lawyer who you know, like and trust at the ready will greatly reduce your stress should a sticky legal situation arise. Smaller issues can be nipped in the bud before they grow into vexing lawsuits. Having an attorney who understands how you like to approach problems could make all the difference. Successful business owners and managers are smart, driven and great decision-makers. The right outside general counsel will be a trusted advisor who will provide perspective along with guidance to allow you to make the best decisions.

By Adam P. Whitney, Esq.

617.338.7000

Employment Severance Agreements Should Be Drafted or Reviewed By Your Attorney

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Severance agreements, also called separation agreements or sometimes settlement agreements are legal documents that can greatly impact legal rights and obligations. Some may consider these standard legal documents. While there are many standard provisions, careful drafting and review are in order. Even experienced attorneys make mistakes when drafting these documents. While they seem simple and straightforward, they are more complicated than one would think and there are many traps for the unwary.

Businesses Should Have Every Severance Agreement Drafted or Reviewed by an Experienced Employment Attorney

If you use the severance agreement you found on the internet or that a general practitioner drafted 5 years ago, you do so at your peril. While severance agreements are, at their essence, contracts, they are also governed by a myriad of state and federal employment laws as well as agency decisions and court rulings. As a result, an agreement that was sound five years ago may not be today. Moreover, what applies to one employee may not apply to another.

Why does this matter? For example, if you don't include the right language, the release in your Severance Agreement could be ineffective against Wage Act claims and leave you exposed to triple damages and attorneys' fees. You also need specific language for Age Discrimination claims in order for them to be waived. As you may know, there are new state and federal employment laws going into effect quite frequently (including marijuana laws and pregnancy discrimination and accommodation laws), which might need to be addressed.

Even the contract issues are not as simple as you might think. For example, if you have an existing noncompete agreement with your employee, you have to be careful regarding your merger clause. Otherwise, you could inadvertently void your noncompete agreement. Employers sometimes make mistakes such as this.

Executives and Other Employees Should Have their Severance Agreements Reviewed by an Experienced Employment Attorney

Even if it is a friendly split, look out for your own best interests. When you sign a severance agreement, you will be waiving substantial rights and perhaps taking on substantial obligations, such as noncompetes or non-solicitation provisions or a duty to cooperate. A recent case report in Massachusetts demonstrates why you need professional assistance. An executive entered a severance agreement and inadvertently waived his right to valuable stock options. Although the right was not specifically addressed, the court ruled that the general release provisions controlled, and the executive was out of luck.

While severance agreements are sometimes not negotiable, sometimes they are. You might get a better deal or at least clarify problem language if you hire a lawyer to advocate on your behalf. Consider if the peace of mind and chance at a better deal would be worth the relatively small dollars.

Or you can rely on the company lawyer to do what's best for you (not really).

By Adam P. Whitney

617.338.7000

awhitney@awhitneylaw.com

Massachusetts Employers Should Prepare for the New Pregnant Workers Fairness Act

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Synopsis: This new statute amends Chapter 151B, Section 4 and provides substantial rights to employees and applicants based on pregnancy and pregnancy-related conditions.

Goes into effect: April 1, 2018

Applies to: All employers with 6 or more employees; Existing Employees and applicants

Obligations: Provide accommodations for pregnancy related conditions, including lactation;

Engage in good-faith interactive process to determine an effective, reasonable accommodation;

Accept documentation from a wide range of professionals, not just doctors, including nurses, occupational therapists, midwife and others;

If needed, provide leave of absence, more/longer unpaid breaks, time off, modified schedule, temporary transfers, light duty, job restructuring, modification/acquisition of equipment or seating, assistance with manual labor;

Provide private place (not-bathroom) for expressing breast milk;

Reinstate employee after leave of absence with same position and benefits or equivalent position

Prohibitions: Forcing undesired accommodations on employee;

Forcing a leave of absence;

Retaliating against employee who exercises her rights;

Refusing to hire or promote pregnant employee or applicant

New policy needed: Required by statute to have a handbook, pamphlet or other means of notice by April 1, 2018;

must also give notice to new employees as well as employees who give notice of a pregnancy-related condition

New Training: Training of H.R. and managers recommended

Violations: Violations can result in liability for damages, including back pay, front pay, emotional distress and other compensatory damages, punitive damages, civil fines and attorneys' fees and costs.

The above is not legal advice, but just a synopsis of this important new statute that provides pregnant employees and applicants with substantial new rights. Take your obligations seriously and comply with these obligations to avoid liability.

By Adam P. Whitney

617.338.7000

The Massachusetts Wage Act as it Applies to Directors and Investors

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Subtitle: The President or CEO of an Underfunded Corporation or LLC Is in a Unique Position to Face Double Financial Disaster

Last week's decision from the Massachusetts SJC provides guidance on how investors and board members can reduce their exposure for Wage Act claims. See Segal v. Genitrix, LLC, Slip Op. (Mass. SJC, Dec. 28, 2017). Because I litigate these same issues,1 I found the 37-page decision to be a good read. Most business people won't have the time or the interest, but the decision can be found here: https://law.justia.com/cases/massachusetts/supreme-court/2017/sjc-12291.html. Although not reported in the decision itself, the SJC overturned a judgment of over $1.75 million for Segal, the former President of Genitrix, LLC, against two former board members and investors.

As most employers now know, the Wage Act provides strong protection to Massachusetts employees. There are virtually no defenses. If wages are not paid to a Massachusetts employee, liability attaches. Once suit is filed, the company will be found liable for triple damages, attorneys' fees, interest and costs. Smart businesses and lawyers settle wage claims quickly unless there is a particular defense or factual dispute. Wages include hourly pay, salary, vacation pay, and commissions that are due and determinable.

Many of the cases that are now litigated and appealed involve personal liability under the Wage Act. A Massachusetts Corporation must designate a president and treasurer. Those individual officers are considered agents of the corporation who have the management of the corporation. They are liable under the Wage Act by the express text of the statute. The statute provides as follows:

“The president and treasurer of a corporation and any officers or agents having the management of such corporation shall be deemed to be the employers of the employees of the corporation within the meaning of this section.”

In recent years, the SJC has ruled that the term “corporation” also includes Limited Liability Companies. Left somewhat unclear, at least until last week, was whether and under what circumstances investors (including LLC Members and stockholders) and directors could be found personally liable as “officers or agents having the management of such corporation.” The ruling in the Segal v. Genitrix, LLC case is largely favorable to investors and directors.

This post is too short to get into all the nuances of Segal v. Genitrix, LLC and its antecedents. Briefly, the SJC reasoned that the Wage Act “does not impose personal liability on board members, acting only in their capacity as board members, or investors engaged in ordinary investment activities.” Id. at p. 2. The Court went through a long and well-reasoned analysis to conclude that “to impose such liability, the statute requires that the defendants be 'officers or agents having the management' of a company.” Id. Normally, they are not agents and normally they do not have the management of the corporation. There must be particular facts to support both conditions in order for personal liability to attach (which facts were not present in the Segal v. Genitrix, LLC case).

Anyone involved in an LLC or corporation or other entity should be concerned about potential personal liability. We now have a clear picture of ways to do that. Careful crafting of LLC Operating Agreements, corporate shareholder agreements, and other corporate documents are a crucial starting point. An investor and/or director who is not named as an officer and is willing to give up a certain level and type of control can virtually eliminate personal liability under the Wage Act.

The other lesson to glean from this line of cases is the subject of the subtitle of this post. Be wary of being named president or treasurer or manager of an LLC or corporation. Sophisticated investors may be setting you up to be the scapegoat if the business entity is underfunded and cannot pay its employees. As set forth above, Segal was the President of the Company. He apparently will not recover his unpaid wages. He was the President. The buck stopped with him. But it could have been even worse. He could have been stuck with the exposure of triple damages and attorneys' for other unpaid employees on top of not being paid himself (the decision indicates that one other employee was paid after threatening a Wage Act claim).

While most people will not feel sorry for the President or CEO of a corporation or the Managers or other executive officers of an LLC, these individuals are in a uniquely precarious position. When a company is struggling, they may be the last to be paid, as Segal was. Once the company is penniless, there may be no viable targets for a lawsuit by the executive officer. The executive officer may then face insult and further injury on top of injury. He or she may be left personally liable for not just the unpaid wages of others, but triple that amount plus the reasonable attorneys' fees of the other employees. Plus costs and 12 % interest on the base amount for good measure. That might be your reward for working for free and trying to keep the company afloat through tough times.

If you are contemplating running a business as a President, CEO or Manager, etc. and you are not the majority investor, protect yourself with the proper agreements. If you are already the captain of a sinking ship where employees are not getting paid, consult with a qualified attorney immediately to see how you can protect yourself as much as possible.

By Adam P. Whitney 617.338.7000

1I obtained a settlement for a corporate executive of $255,000 in a Wage Act claim against several members of an LLC Board of Managers and a judgment of over $640,000 against another Board Member who served as the de facto CEO (subject to appeal).