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Will Your Exempt Employee Still Be Exempt?

By Deborah Petito|

In March of 2014, President Obama asked the Department of Labor to update the overtime regulations under the Fair Labor Standards Act (FLSA).  On May 17, 2016, the Department of Labor released its Final Rule (“Final Rule”) which only provides changes for the minimum salary requirements for exempt (white collar) employees.  The Final Rule revises the federal regulations related to the FLSA.  The last time overtime regulations were revised for while collar workers was in 2004.  Normally, federal laws and regulations do not impact California employees because California’s laws are generally more stringent than federal laws and regulations, however, this new rule will impact California exempt employees.

New Federal Salary Minimum for Exempt Employees

Under both California and federal law, in order to classify an employee as exempt from overtime and other wage and hour requirements, the employee must meet both a salary and duties test.  The Final Rule provides that exempt employees must earn a minimum salary of $46,467 in order to be exempt.  The new federal salary requirement is effective beginning December 1, 2016.  In California, the salary minimum for an exempt employee is two times the minimum wage which is currently $41,600 (2 x $10 x 2080 hours).  As of December 1, 2016, California exempt employees will also need to be paid a minimum of $46,467.

Under both California and federal law, employees must also meet the duties test (executive, administrative, professional) to be exempt.  The duties test for an exempt employee has always been more stringent under federal law which requires that exempt employees spend more than 80% of their time on exempt duties as compared to California which only requires that exempt employees spend more than 50% of their time on exempt duties.  The Final Rule does not affect the duties test for exempt employees.

Many California employers took a business risk that their determination of which employees were exempt would never be reviewed by the Department of Labor.  Now that the federal salary minimum will be higher, California employers may see more Department of Labor complaints which may result in a review of whether not exempt employees are actually exempt under federal law.  This article does not discuss the specific duties test for each exemption, but they are similar under federal and state law and can be found in the California wage orders or in the federal regulations.
Under the Final Rule, exempt salaries will be automatically updated every three years based upon wage growth over time.  The Department of Labor anticipates that the minimum salary will rise to $51,168 in 2020 and will post new salary levels six months prior to their effective date with the first posting on August 1, 2019.

Non-Discretionary Pay and Catch Up Provisions

The Final Rule also allows employers to pay up to 10% of the increased salary in non-discretionary bonuses, commissions or other incentive payments.  The key word is “non-discretionary.”  Employers may pay any shortfall in the salary minimum if the employee does not earn the required amount in non-discretionary income at the end of any quarter.  Any shortfall must be paid by the employer in the first pay period following the quarter (the prior 13 weeks) and can only be used to catch up the amount paid to the employee in the prior quarter.

California law does not have a catch up provision and as the California or local minimum wage rises, the minimum salary for California exempt employees may be less than 10% of the newly established federal minimum of $46,467.  For example, in Los Angeles County the minimum wage will be $10.50 as of July 1, 2016 which means that an exempt employee will need to earn $43,680 as of that date under California law in addition to meeting the duties test for the exemption.  Therefore, employers in Los Angeles County would have to either pay a minimum salary of $46, 467 or pay non-discretionary bonuses, commissions, etc. in the amount of $2,787 to meet the federal minimum salary requirements.

Employers also need to be mindful of city ordinances regulating the pay of employees in specific cities.  Los Angeles, Santa Monica, San Francisco and San Jose have already established separate minimum wages for their cities and this trend will continue.  Thus an increased burden is placed on employers to keep track of what local governments are doing in cities where employers maintain their businesses or where employees perform work in those cities.

Highly Compensated Employees 

Under federal law, a highly compensated employee is exempt if they earn a minimum salary, have primarily office or non-manual duties and “customarily and regularly” perform at least one of the duties of the applicable exemption.  The Final Rule raises the minimum salary for highly compensated employees from $100,000 to $134,004.  California does not have a similar provision so any exempt employee would need to meet all requirements of the duties test to be exempt.

Steps California Employers Should Take

All employers should make sure that their exempt employees are paid the highest applicable minimum salary (federal, California or local) as of December 1, 2016.  If employees classified as exempt do not meet the salary test, employers can do one of the following:

  1. Increase the salary of the employee to maintain their exempt status (assuming they also meet the duties test); or
  1. Reclassify the exempt employee as non-exempt and have that employee record their hours worked, including their meal breaks each day.  In this case, you need to pay the employee overtime for all hours worked over 8 in a day or 40 in a week.  The overtime requirements are also contained in the California Wage orders.   (The Wage Orders can be found on the California Division of Labor Standards Enforcement website – dlse.ca.gov.)

If you need assistance in determining whether or not an employee is exempt or whether they are being paid appropriately, please contact Deborah Petito or Leonard Brazil in the Clark & Trevithick Labor and Employment Department.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice if you need assistance in determining whether or not an employee is exempt or whether they are being paid appropriately.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Debbie Petito dpetito@clarktrev.com orLeonard Brazil lbrazil@clarktrev.com by email at or telephonically by calling the author at (213) 629-5700.

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Crowdfunding: Is it for Everyone?

By Rajnish Puri |

Regulation Crowdfunding issued under the Securities Act of 1933 (Securities Act), became effective on May 16, 2016, six months after the Securities and Exchange Commission (SEC) published the final rules relating to Section 4(a)(6) of the Securities Act.  The regulation provides guidance to startups and small businesses on how to raise money from smaller investors via the Internet.  But, is raising capital through a crowdfunding mechanism for everyone?  This article briefly examines the background for the regulation, provides an overview of the key rules, and makes certain practical observations about the effectiveness of the crowdfunding process.

The term “crowdfunding” is designed to allow (and encourage) “crowds” to “fund” businesses with relatively low dollar investments.  Broadly speaking, federal and state securities laws, make it unlawful for persons to sell securities unless sold pursuant to a registration statement effective under the Securities Act or under one of the several exemptions authorized under the Securities Act.  To facilitate raising capital for startups and small businesses using the Internet and social media platforms, and to provide individual (including non-accredited) investors an opportunity to invest in those entities, Congress established a regulatory framework for crowdfunding by enacting the Jumpstart Our Business Act (JOBS Act) on April 5, 2012.  The legislation was codified in Section 4(a)(6) of the Securities Act, with Regulation Crowdfunding providing guidance on the finer aspects.  When sold in compliance with Section 4(a)(6) and Regulation Crowdfunding, the securities qualify as an exempt transaction (Crowdfunding Exemption) obviating the need for a registration statement.

Who Is Eligible?  Only companies organized under the laws of a state or territory of United States are permitted to raise capital using the Crowdfunding Exemption, so long as they are not subject to the reporting requirements of the Securities Exchange Act of 1934.  Foreign companies, investment companies, companies with no specific business plans and companies that have failed to comply with the reporting requirements of Regulation Crowdfunding during the two-year period immediately prior to the crowdfunding offering, are not authorized to avail themselves of the Crowdfunding Exemption.

Rules for the Issuer. The Crowdfunding Exemption caps the amount an issuer may raise in a 12-month period to $1 million using crowdfunding offerings.  (Note: Crowdfunding offerings are not integrated with other types of offerings – for example, a Regulation D offering – and an issuer is free to raise capital independent of the Crowdfunding Exemption so long as it complies with the requirements of the other exemption.)  The offering must be transacted using only one intermediary online-platform that must be registered with the SEC.  For each offering, issuers must file Form C with the SEC using EDGAR, the SEC’s electronic filing system.  The disclosures accompanying Form C include, among other things, the filing of the company’s reviewed or audited financial statements (depending on the size of the offering), a description and discussion of the business, information about officers, directors and owners of 20% or more of the company, and related party transactions.  If there are any material changes or updates to the information included in the original Form C, issuers are required to file amendments using appropriate forms prescribed for such purposes.  The rules also require that, after a crowdfunding offering has been completed, issuers file financial statements with the SEC and post the statements and other disclosures on the issuer’s website on an annual basis.

Limitations for Investors. Individual investors are subject to certain limitations with respect to their investments in a crowdfunding offering.  Securities acquired may not be resold for a one year period.  The amount an individual may invest during a 12-month period in all crowdfunding offerings is limited by the individual’s annual income and net worth (without taking into account the value of the individual’s primary residence).  If either the annual income or the net worth of an individual is less than $100,000, the maximum amount that can be invested is the greater of (a) $2,000, or (b) the lesser of 5% of the individual’s annual income or net worth.  If the annual income and the net worth are equal to or greater that $100,000, the maximum amount that can be invested is 10% of the lesser of the individual’s annual income or net worth, subject to an annual limit of $100,000 for all crowdfunding offerings.

Costs versus Benefits.  Because Regulation Crowdfunding went into effect only about a week ago, there isn’t enough data out there, as yet, to accurately determine its impact on the business community or perform a thorough cost-benefit analysis of the legislation.  As a preliminary observation, however, it appears that the costs and administrative burdens of compliance associated with the regulation seem to outweigh the benefits.  For starters, the SEC estimates the preparation and filing of Form C to take about 100 hours, with about 25% of that time being attributed to outside professionals.  Adding to the preparation and filing costs is the compensation an issuer would pay an intermediary for the listing as well as the accountants’ fee for the preparation of reviewed and audited financials – a practice not prevalent among early stage companies.  Apart from the costs, by posting the  financial statements and other material disclosures about the business on its website, a startup or a small business might be at a disadvantage by making the information available to the competition.  Of course there are protections that can be built to secure the data, but, those, too, carry a cost.  With the ability to invest as little as $2,000,  arguably, the number of shareholders in a crowdfunded business might exceed a manageable figure which could add to the administrative burdens of management dealing with shareholder matters – be it information dissemination or simply seeking shareholder approvals for governance issues.  Depending on the size of the proposed offering, alternative exemptions available under the securities laws might be more attractive to the issuers.  By contrast, businesses less willing to work with, or facing difficulty in successfully raising capital through, traditional channels of funding, utilizing the Crowdfunding Exemption could be desirable, so long as they are willing to comply.

Hope you found the above discussion helpful.  In my upcoming posts, I plan to share with the readers practical knowledge and trends on a variety of corporate finance topics applicable to early stage and established businesses.  Stay tuned for another conversation on ClarkTalk!!

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.   If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at rpuri@clarktrev.com or telephonically by calling the author at (213) 341-1322.

 

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Is VC Funding Right for Your Business?

Accepting venture capital funding is one of the biggest decisions many entrepreneurs face during the infancy of their start-ups.  Over the next few weeks, TechInsurance Blog will explore how new tech businesses secure the capital they need to get started.  In  TechInsurance Blog’s most recent post, Clark & Trevithick’s Peter Hogan talks about what VCs are looking for in return for their investment.  Here’s what Peter has to say: http://www.techinsurance.com/blog/business-tips/is-vc-funding-right-for-your-business/

Following your review, if you have any questions for Peter, please feel free to contact him at (310) 629-5700 or via email at phogan@clarktrev.com

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Dangerous Liaisons – Be Careful When Transferring Assets

By Leslie R. Horowitz |

Clients often ask how to protect their assets.  Some refer to this as “asset protection,” a term that connotes the hiding of assets. Sometimes the request is based on a genuine concern for preservation of assets for family and retirement purposes, and sometimes based on a genuine concern that creditors from business transactions will be unrelenting in attempting to recoup potential losses.  Either way, depending upon the purpose and timing of the transfer, any transfer of assets that is not well thought out and carefully planned may be undone by third party creditors, bankruptcy trustees, assignees for the benefit of creditors and State or Federal Court appointed receivers.

Uniform Voidable Transactions Act

The area of law which governs asset transfers is known as the Uniform Voidable Transactions Act (“UVTA”), which was adopted into law by California commencing January 1, 2016.  Previously, the law governing voidable transfers was referred to as the Uniform Fraudulent Transfer Act and, before that, the Uniform Fraudulent Conveyance Act. The name change is relevant, because of the frequent misconception that common law fraud was being committed with regard to the transfer of assets.  Indeed, the elements of fraud are not required under the UVTA or its predecessors to recover transferred assets.

Transfer to Hinder, Delay or Defraud

The UVTA states that a transaction is voidable under two sets of circumstances.  The first circumstance is when the purpose of the transfer is to hinder, delay or defraud creditors.  This is called “actual fraud” and is judged by a subjective standard.  There are eleven “badges of fraud” that determine actual intent which are set forth in the statute as follows:  (1) Whether the transfer or obligation was to an insider; (2) Whether the debtor retained possession or control of the property transferred after the transfer; (3) Whether the transfer or obligation was disclosed or concealed; (4) Whether before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) Whether the transfer was of substantially all of the debtor’s assets; (6) Whether the debtor absconded; (7) Whether the debtor removed or concealed assets; (8) Whether the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) Whether the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) Whether the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) Whether the debtor transferred the essential assets of the business to a lienor that transferred the assets to an insider of the debtor.  The more “badges” that a court finds applicable to a transaction, the more likely it is to be determined to be voidable.

If the purpose of the transfer is to hinder, delay or defraud creditors, such a transfer tends to occur in situations such as when a party has a lawsuit against him/her, sets up a new legal entity, such as a corporation or limited liability company and transfers personal or real property into the new legal entity, thus attempting to transfer legal ownership to another party. Some parties attempt to transfer assets directly to their children for similar purposes.  Some parties attempt to transfer assets into a trust, seemingly for estate planning purposes, however many such circumstance may be interpreted to fall within the definition of hinder, delay or defraud creditors. The statute of limitations is generally four years.

Transfer for Less than Reasonable Value

The second kind of voidable transfer occurs when a party makes a transfer without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either (1) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction, or (2) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.  This is generally called “constructive fraud” and is judged on an objective standard.  Similar to “actual fraud,” parties may sell personal or real property to a friend or family member for less than the value of the asset (intending to recover it later), thus preserving value for him or herself.  The statute of limitations is generally four years from the date of the transfer.

Protections are Available

There are methods available to protect a person’s assets.  For business purposes, corporations or limited liability companies may be formed to own assets, such as income producing real property.  If such a legal entity holds assets, generally, neither the shareholder of a corporation nor a member of a limited liability company is liable for the debts of the entity.  If a shareholder or member owns interests in other legal entities, the legal entities are not liable for the debts of the other legal entities.  So, if a bankruptcy is needed for one, it will not affect the assets of the other.

Trusts are a useful and valuable tool for family estate planning purposes, but, in California, a trust does not protect the settlors from their own creditors.  Some trusts may protect assets of from future creditors.

Keep in mind, the new entity, either a trust or a corporation/limited liability company, may be set up to protect assets as long as the “purpose” is not to hinder, delay or defraud creditors and does not render the transferor insolvent at the time of the transfer.  The same rules under the UTVA apply. Again, the statute of limitations is four years, but may be seven years from the transfer if actual fraud can be proven. Should the applicable statute of limitations expire, otherwise voidable transfers of assets may be protected from future creditors.

There are no sure fire ways to protect assets, but consulting with a lawyer for business and family estate planning in advance could avoid future problems.

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering this or any other asset protection issue.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Leslie R. Horowitz by email  lhorowitz@clarktrev.comat or telephonically by calling the author at (213) 629-5700.

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Considering Selling Your Business and Wondering Where to Begin? The Anatomy of a Definitive Agreement

By Rajnish Puri |

Part four of a four-part series.

In this four-part series on the subject of selling your business, I have shared with you, based on my experiences, the various stages an owner of a privately-owned business can expect to go through when considering an exit strategy.

As discussed earlier in this series, in the context of a simultaneous sign and close transaction, buyer and seller do not have a legally binding agreement between them until the execution of a definitive agreement, a moment that also coincides with the closing.  It is therefore important to solve, beforehand, the mystery of a definitive document. What does it contain? What do the provisions mean?  How does everything fit together? Before answering these questions, it is helpful to note that a business can be purchased and sold adopting different structures for the transaction – the primary three being a sale of shares, a sale of assets and a merger of entities.  Hence, the respective names for the definitive documents – a Stock Purchase Agreement, an Asset Purchase Agreement and an Agreement and Plan of Merger.  The focus of this conversation is on the first two, they being more common than the third.  Although a given document may have several provisions depending on the terms and structure, broadly speaking, both types of agreements can be categorized into four principal segments as follows.

Specifying What is Being Sold and Purchased.  The initial segment of an agreement typically describes, with adequate specificity, the items being sold and purchased at closing – shares, in a Stock Purchase Agreement and, assets, in an Asset Purchase Agreement.  While the description of the shares that are the subject of transfer is relatively straightforward, reaching an agreement on the assets being sold (or retained) often requires more extensive drafting.  Unlike a share transfer where title to the entity’s assets and liabilities remains unchanged, the agreement for the sale and purchase of assets is not just limited to the notion of a transfer – it also requires the parties to address the concepts of which assets and liabilities are retained by the selling entity as well as identifying the liabilities being assumed by buyer.  The actual instruments of transferring title are generally included as exhibits to the agreement.

Purchase Price and Related Nuances.  A substantial segment of an agreement is devoted to describing the amount and timing of the purchase price being paid for the shares or assets, and the contingencies that may lead to adjustments, both upward or downward, in the price.  Other than the amount – something that parties generally establish “firmly” in a Letter of Intent, despite its non-binding nature – almost every element of this section warrants careful consideration by both seller and buyer.  Of the aggregate purchase price, what portion is to be delivered at closing or how much buyer or a jointly appointed escrow agent may holdback for potential post-closing obligations of seller, are subjects typically addressed here.  In certain transactions, particularly those dealing with seasonality in the target business or involving historical swings in revenue streams, it is in this segment where one finds provisions on purchase price adjustments linked to agreed-upon working capital targets and additional payments, or “earn-outs,” contingent upon the target business attaining certain milestones under buyer’s watch.

Statements About the Business.     Labeled as “Representations and Warranties of Seller,” with the exception of “as-is” transactions, this segment ends up being, by far, the most negotiated portion of an agreement.  The section includes several statements from Seller about various aspects of the business, some qualified with materiality, knowledge or both, and many without such qualifiers. (There also is a separate section covering the representations and warranties of a buyer, which is limited to certain fundamental matters and rarely draws intense scrutiny.)  In explaining the primary purpose behind this section, a friend once quipped that, whereas the section dealing with the purchase price provisions describes what a seller would receive at closing, by contrast, this section essentially lays the groundwork for what a seller would have to return to buyer should seller’s statements later turn out to be untrue, subject, of course, to other terms and conditions found in an agreement. In other words, the provisions of this segment are important with potential for serious implications.  It is principally for this reason that counsel for both parties spend significant time negotiating the provisions of this section, with seller’s counsel motivated by limiting the scope of seller’s representations to ultimately limit buyer’s recovery post-closing (as discussed below). Naturally, buyer’s motivation is quite the opposite and counsel’s strategy is dictated accordingly.  An ancillary document associated with this section is the disclosure schedule, which contains information required pursuant to seller’s statements about the business and exceptions to the representations.

Post Closing Matters.   The last major segment of an agreement deals with matters relating to indemnification and restrictive covenants, although each appears in a separate dedicated section of its own.  The indemnification obligations are mutual between seller and buyer, but it is the seller’s that merit more attention.  The provisions deal with survival periods for the parties’ representations and warranties, scope of protections, limitations on liability and a description of procedures to be followed by the parties if problems were to arise.  With respect to the restrictive covenants, the document imposes on seller obligations to not compete in the target business industry and refrain from soliciting the employees or customers of the business being sold.  Finally, an agreement contains general provisions about methods of communication between parties, dispute resolution procedures, and the law governing the interpretation of the agreement, among other matters.

In Part One, Part Two and Part Three of this series, I shared thoughts on First Steps, Purpose of a Letter of Intent, and What Transpires after Signing the Letter of Intent, respectively.  Hope you found the discussion in this series helpful.  In my upcoming posts, I plan to share with the readers practical knowledge and trends on a variety of corporate finance topics applicable to early stage and established businesses. 

Thank you for joining us on ClarkTalk!  We look forward to seeing you again on this forum.  Please note that the views expressed in the above blog post do not constitute legal advice and are not intended to substitute the need for an attorney to represent your interests relating to the subject matter covered by the blog.  You should certainly consult legal counsel of your choice when considering the sale or purchase of a business.  If you wish to consult with the author of this post or another attorney at Clark & Trevithick, please contact Raj Puri by email at rpuri@clarktrev.com or telephonically by calling the author at (213) 341-1322.