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San Diego Amends Its Paid Sick Leave Ordinance

By Deborah H. Petito

Effective September 2, 2016, Employers Who Have Employees Working in San Diego Can Front Load and Cap Paid Sick Leave

There are now six cities with paid sick leave laws. San Diego’s paid sick leave law was effective on July 11, 2016, however, the law as adopted by the voters in June left a lot of unanswered questions.  On August 3, 2016, the City Council approved an implementing ordinance that answers most of those questions.  The main question that employers had was whether or not accrued paid sick leave could be capped.  Under the original ordinance, there was no cap which meant that employees could accrue unlimited paid sick leave.  The implementing ordinance allows a cap of not less than 80 hours.  This means that once an employee subject to an 80 hour cap accrues 80 hours of paid sick leave, the employee cannot accrue any additional paid sick leave until the employee uses some paid sick leave.

The other question answered was whether employers could front load the 40 hours of paid sick leave required by the original ordinance. The answer is yes.  If front loaded, employers do not have to impose a cap because they may prohibit carryover of sick leave.  However, the 40 hours must be front loaded regardless of the employee’s status as full-time, part-time or temporary.  Employers who use the accrual method (not less than 1 hour for every 30 hours worked) must be permitted to carryover unused sick leave.

The original ordinance allows employees to cap sick leave usage at 40 hours of paid sick leave each year. That was left unchanged in the implementing ordinance.

Differences With Other California City Paid Sick Leave Laws

The San Diego 80 hour cap is higher than any other city in California. Four of the cities have a 72 hour cap for large employers.  Los Angeles and San Diego do not differentiate between large and small employers.  Some of the provisions are consistent, such as an employee is only entitled to paid sick leave if they work a minimum of 2 hours in the city per week and employees cannot use their paid sick leave until they have been employed for 90 days.  The challenge is for an employer who has employees working in more than one city with a paid sick leave law.  Such employers must decide whether to have separate policies or one policy that gives all employees the greatest benefits.  Each of the cities have separate posting requirements and they all have a required poster.  If employers have employees working remotely, how do they comply with the posting requirements?

Enforcement Provisions Added

The San Diego implementing ordinance also provides some teeth to ensure enforcement and compliance. The implementing ordinance establishes an Enforcement Office in the City which will eventually issue regulations.  However, employees are not required to complain to the City’s Enforcement Office and are allowed to sue their employers and to obtain attorney’s fees if they are successful.  The statute of limitations under the implementing ordinance is 2 years.

Under the implementing ordinance, any adverse action against an employee within 90 calendar days of the employee exercising their rights provided under the ordinance creates a rebuttable presumption that the employer retaliated. This puts the burden on the employer to prove that their actions were not retaliatory.

There are also penalties for employers who violate the law. Some of these penalties include:

  1. Liquidated damages up to $1,000 for a violation not resulting in termination;
  2. Liquidated damages up to $3,000 for a violation resulting in termination;
  3. Civil penalties of not more than $1,000 for each day that the employer fails to provide paid sick leave; and
  4. Penalties for failing to provide notice and posting.

If an employer ceases business operations, sells its business or transfers its interest any successor becomes liable for unpaid damages and penalties.

Steps for Employers

  1. Determine whether you have employees in any of the six California cities with paid sick leave laws.
  2. Make sure your paid sick leave policy complies with the paid sick leave laws that apply to you and make necessary revisions.
  3. Notify employees and post the appropriate notices.
  4. Monitor local ordinances.
  5. Monitor local governing boards and entities to ensure you are aware of new paid sick leave laws or changes to existing paid sick leave laws.

Thank you for joining us on CIarkTalk! We look forward to seeing you again on this forum.  Please note that 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 have any questions about the San Diego implementing ordinance or sick leave in California, please feel free to contact Deborah Petito by email at dpetito@clartktrev.com or Leonard Brazil at lbrazil@clarktrev.com or telephonically by calling the author at (213) 341-1359.

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DON’T WANT DISPUTES WITH YOUR BUSINESS PARTNER? FOLLOW THE MONEY!

By Rajnish Puri

Generally, it is friends or family members who jointly create a new business and in doing so, become business partners. So, why is it that, only in a matter of time, the once-friendly relationships turn sour and, as business partners, the same friends and family have disputes and, in many cases, litigate against each other?  Primarily, money matters . . . I believe.  How can such disputes be prevented?  The famous motion picture in the late 1970s – All the President’s Men – offers a clue.  Remember Deep Throat’s advice to Bob Woodward –  “Follow the Money”? Agreed that those three words led Woodward to reach only the source of the problem in the famous thriller about the Watergate scandal.  However, the advice, if followed when creating agreements among business owners, can bring clarity to expectations in the relationships, avoid fallouts and, most importantly, retain the original friendships –  the primary idea being about keeping an eye on the money from the time of investing in, to the moment of exiting, the business.  In that context, this article offers key ideas to consider for agreements among shareholders of corporations, members of LLCs, and partners in partnerships. For convenience, in the discussion below, the term “owner(s)” includes shareholders, members and partners and, similarly, “company(ies)” means privately-owned corporations, LLCs and partnerships.

Capital Contributions.  Businesses need capital, certainly at the launch and frequently at later stages.  An agreement among the owners should specify the initial capital contributions they are expected to make to the company in exchange for their ownership interest.  That’s the easy part.  But, what happens when the company needs more money? The owners must identify the decision making process to make calls for additional capital and establish the timing and other limitations.  It is just as important to agree on the consequences when one or more owner fails to satisfy the request for new capital.  These may include automatic dilution of ownership percentages in the company or, if other owners step in to make up for the shortfall, whether to treat the shortfall as a temporary loan.  Just like the inflow of money, its outflow, too, requires attention.  In addressing the distribution provisions, owners must describe the criteria for making the distributions and other considerations, like mandatory tax-related payments and repayment of the invested capital before the sharing of profits.

Management and Control. Although the concepts of managing and controlling the business do not directly involve money issues, they indirectly impact such issues. Owners should clearly define the role each would play in the operations of the company and set the voting thresholds required for approving major decisions.  Often, the responsibility to operate the business rests with a few.  A sensitive item is whether or not the operating owners should be entitled to any compensation, which is an expense that reduces the profits.  Without clarity on the issue there’s the risk of some owners feeling they are receiving less benefits than the others.  Similarly, when dealing with the important subjects – typically involving significant money matters such as borrowing, adding new owners, disposition of major assets, real property agreements, and material business agreements – the stakes are high and so is the need for an understanding among the owners as to who among them is/are best suited to authorize decisions on such crucial matters.  Arguably, everyone would like to have a say, but the unanimous voting requirement would give everyone a veto, which might lead to more problems than solutions.

Transferring Ownership.  Unlike publicly-held companies, investments by owners of private businesses are generally not liquid.  There may arise situations in the future when one or more owners wish to cash out from the business for different reasons.  Once again, money plays a role.  Equally compelling is the need to ensure that the entire ownership of the company remains among friendly parties.  The two objectives, sometimes inherently conflicting, are addressed through provisions that require the selling owners to offer their equity interests first to the company or the other owners before selling them to third parties – referred to as the right of first refusal.  A similar situation exists when a significant number of owners wish to sell their interests but others do not.  The majority achieves its goal by providing in the agreement a right to compel the minority to join the sale – referred to as the drag along right.  Both scenarios require the owners to deal with the selling price.  Incidentally, under both situations, third parties play a role in influencing the sale price.

Exits – Forced and Unforced.  Finally there are circumstances – some forced and others unforced – that compel an owner’s exit from the company.  Death, disability, retirement, termination of employment (where owners also are employees), marital dissolution and personal bankruptcy are some such situations.  To address these exigencies, owners should ask themselves the following three questions: first, who has the right or obligation to acquire the interests of the affected owner; second, how is the affected owner’s interest valued; and third, what are the terms of payment?  Absent answers to these questions in the agreements, owners may find themselves in undesired and costly disputes among each other.

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!! If you have questions, feel free to contact the author by email at rpuri@clarktrev.com, or telephonically at 213-629-5700.

 

 

 

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Judgment Debtor Examinations – After the Judgment – What Happens Now?

By Stephen E. Hyam, Esq.

You filed the lawsuit, litigated zealously, and now the judgment is in your favor. Once there is a final judgment in litigation, you are the judgment creditor and you going to be paid, right?  Not necessarily.  Often, the judgment debtor, the person who has been found to owe the money, will simply not make the payment.  This is when the next phase of the case must begin – enforcing the judgment.

Judgment Enforcement Seeks Assets

The purpose of judgment enforcement is to receive payment. First you need to find out if the judgment debtor has assets.  There are many different statutory rights that a judgment creditor can use to discover and execute against a judgment debtor’s assets.  One such right is a judgment debtor examination.  A judgment debtor examination compels a judgment debtor to testify about his or her assets.

Examination Is Under Oath

The judgment debtor examination is taken pursuant to a court order.  It is taken at the courthouse, after the witness has been sworn to tell the truth.  The witness can be the judgment debtor or a third party who has information about the judgment debtor’s assets or owes money to the judgment debtor.  Often, a court reporter is hired to take an accurate transcript of the examination.  The judgment debtor examination can be accompanied by a subpoena that orders the witness to produce documents.

Since the purpose of the examination is to obtain information concerning the judgment debtor’s assets, the party taking the examination is given a wide scope of inquiry. There are few restrictions on the subject matter of judgment debtor examinations if the inquiry could reveal the existence and location of a judgement debtor’s assets.  The purpose of a judgment debtor examination is “to leave no stone unturned in the search for assets which might be used to satisfy the judgment.”  Topics for examination include bank accounts; present employment; future employment prospects; questions about future or contingent interests such as inheritances; and payments due from third parties to the judgment debtor.  The judgment debtor can also be required to explain why real and personal property was transferred to third parties.

During litigation, there is a statutory privilege that one spouse/domestic partner cannot be compelled to testify against the other. However, this restriction is not applicable to judgment debtor examinations.  While the privilege applies to confidential communications between spouses/registered domestic partners, a judgment creditor may ask about property in which the debtor has an interest that is in the possession or control of the spouse/domestic partner, or any debt over $250 owed to the debtor by his or her spouse/domestic partner, because the existence of assets is not considered a confidential communication.

Disputes about the scope of the inquiry are often handled by the Court on the same day as the examination, so the investigation is not unduly delayed.

Third Parties May Be Ordered To Appear

Third parties often have information related to the judgment debtor’s assets. As a result, the post-judgment examination procedure may also be used with persons or entities who are not subject to the judgment, but may have information regarding the judgment debtor’s assets.  With a declaration establishing good cause, a judgment creditor may obtain a court order compelling a third party to attend an examination and (pursuant to a subpoena) bring documents.  The scope of the examination of a third party is essentially the same – to identify and locate a debtor’s assets.

Judgment Debtor Examinations Create An Automatic Lien on All Personal Property Assets

Judgment debtor examinations create an automatic lien on the debtor’s personal property, giving the creditor an advantage over unsecured creditors as long as the debtor does not file for bankruptcy or conduct an assignment for the benefit of creditors within 90 days of the examination.

Are Judgment Debtor Examinations The Best Choice?

The debtor examination gives the creditor the opportunity to ask questions and review documents. Bank records, for example, give clues about the sources of funds received by the judgment debtor and to whom the judgment debtor makes payments.  In certain situations, a judgment debtor examination may not be the best option.  Every case has unique facts and you should consult with legal counsel to determine the best way to collect on your judgment.

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 have any questions about judgment debtor examinations, please feel free to contact Stephen E. Hyam at shyam@clarktrev.com by email or telephonically at (213) 629-5700.

 

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Think Three Times Before Gifting Real Property: The Interplay of Gift Tax, Capital Gains Tax and Property Tax

By Tiffany A. Halimi, Esq.

Think three times before making a gift of real property! To avoid unintended tax consequences, the gifting and receiving parties should consider the interplay of several types of taxes that affect a gift of a real property interest.  Specifically, the trifecta of taxes to be considered are: (i) estate and gift tax, (ii) income tax and (iii) property tax.

  1. Estate and Gift Tax

Each U.S. citizen is entitled to a unified estate and gift tax exemption of $5,450,000 per individual.  The unified estate and gift tax exemption means that an individual may transfer up to $5,450,000 of assets without incurring a 40% gift/estate tax.  Additionally, each individual may gift up to $14,000 to another individual, within a calendar year, without using any of the unified estate and gift tax exemption.  However, to the extent a gift exceeds $14,000 in value, the excess value will be treated as a taxable gift and must be reported on IRS Form 709.  The value of the taxable gift is applied against the gifting taxpayer’s unified estate and gift tax credit.  For example, if a taxpayer gifts a property valued at $1,000,000 to another individual, the taxpayer will have made a taxable gift of $1,000,000 less $14,000, which is $986,000.  The gifting party’s lifetime unified estate and gift tax exemption of $5,450,000 will be reduced by the taxable portion of the gift ($986,000).  Therefore, when making a gift of real property, the value of which is often in excess of $14,000, a taxpayer must consider to what extent such gift will reduce his or her unified gift and estate tax exemption.

  1. Income Tax

Another tax consideration relating to the gifting of real property is income tax – more specifically, the capital gains tax.  Upon the sale of real property, a capital gains tax is imposed on the taxable profit of the sale, which is generally the difference between the net sales price and the cost basis for which the property was acquired.  It follows that the greater the cost basis, the smaller the gain.  In other words, an increased basis will reduce the difference between the sales price and the basis.  Accordingly, a taxpayer has an interest in having a higher cost basis in order to reduce a possible capital gains tax.

When a gift is made, the recipient of the gift receives the same cost basis that the gifting party had in the real property for the purpose of determining future capital gain. For example, if the gifting party acquired the gifted real property 30 years ago for $100,000, then the receiving party will carry forward that same cost basis of $100,000, regardless of the value of the property at the time the gift is made.

However, the rules about basis are different on death. When an individual dies, the basis of the assets owned by that individual will adjust to fair market value as of the individual’s date of death (usually a step up in basis).  For example, if an individual owned real property that was purchased 30 years ago for $100,000, then, for simplicity of this example, we will assume his basis is $100,000.  If he still owns the property when he dies, and the property is worth $800,000 at the time of his death, his heirs will inherit the property with a basis of $800,000.  Accordingly, if the heirs sell the property for fair market value at $800,000, and their basis is $800,000, they will not have to pay any capital gains tax.  Had the taxpayer gifted this same property during his life, the heirs would not have enjoyed a step up in basis.  Thus, if they sold the property for $800,000 and had a basis of $100,000, they would have to pay a capital gains tax on $700,000 (less allowable deductions).  With respect to the capital gains tax, and without giving consideration to advanced estate planning techniques that consider discounting methods, it is often wise for an individual to arrange to “gift” real property at death, rather than while alive.

  1. Property Tax

Another tax consideration is property tax, which is calculated from the property tax assessed value.  The higher the assessed value, the higher the property tax.  Thus, unlike income tax considerations, where the capital gains tax is reduced by a higher cost basis, with property tax, the tax is reduced by having a lower assessed value.

How do you keep the property tax assessed value low? There are only a few ways to make a gift of real property that results in the recipient keeping the same low property tax assessed value.  First is a gift between spouses.  Second is a gift between parents and children.  Third is certain gifts between grandchildren and grandparents.  There are limitations as to the nature and value of real property that qualifies for the exclusion from property tax reassessment, which will be the subject of a subsequent blog.

 

If you are considering making a gift of real property to another individual, you should consult with an estate planning attorney and make sure all the tax consequences of your gift have been thoroughly considered prior to making your gift. To learn more about estate planning, please contact Tiffany A. Halimi, Esq. or one of our other estate and tax planning attorneys.


 

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 trust and estate issue.  If you wish to consult with the author of this post, please contact Tiffany Halimi by email at thalimi@clarktrev.com or telephonically by calling her at (213) 629-5700.

Circular 230 Disclaimer: To comply with IRS requirements, please be advised that, any tax advice contained in this article is not intended or written to be used, and cannot be used, by the recipient to avoid any federal tax penalty that may be imposed on the recipient, or to promote, market or recommend to another any referenced entity, investment plan or arrangement. For more information, please go to www.ClarkTrev.com

Disclaimer: Certain examples and explanations provided herein have been grossly oversimplified for the purpose of explaining complex tax matters. You should always seek the advice of competent tax professionals to assess how these rules will affect your specific circumstance.

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Employers Are Required To Post Two New Federal Posters Effective August 1, 2016

By Deborah H. Petito

Employers are required to post two new federal posters effective August 1, 2016. One is the revised minimum wage poster and the other relates to polygraph tests.  These posters can be accessed by clicking here.

Thank you for joining us on CIarkTalk!  We look forward to seeing you again on this forum.  Please note that 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 have any questions about minimum wage compliance in California, please feel free to contact Deborah Petito at dpetito@clartktrev.com or Leonard Brazil at lbrazil@clarktrev.com by email or telephonically by calling the author at (213)629-5700.

 

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Complying with California Sick Leave Laws – Can it get any harder?

By Deborah H. Petito

On July 1, 2015, California’s new paid sick leave law became effective.  It applies to almost all employers and requires that employers provide at least three (3) days OR twenty-four (24) hours of paid sick leave.  In August of 2015, the Division of Labor Standards Enforcement (the California Labor Commissioner) issued an opinion stating that employers must offer 24 hours or 3 days of paid sick leave, whichever is greater, meaning an employee who normally works 10 hours in a day would be entitled to 30 hours of paid sick leave at a minimum.  Employers who implemented a policy frontloading twenty-four hours are now at risk of not being in compliance.

The trend to localize minimum wages has extended to paid sick leave benefits.  Six California cities – San Francisco, Oakland, Emeryville, Los Angeles, San Diego and Santa Monica – have implemented their own sick leave laws and they provide greater benefits than California law.  This article does not discuss all of the differences and employers are encouraged to contact their employment counsel to make sure that, in their specific circumstances, their policy(ies) are in compliance.

This fragmentation of paid sick leave rules and regulations  at the local level has made compliance more difficult for employers, particularly those with employees who work in multiple cities.  In Oakland, employers were required to comply by March 2, 2015.  In Emeryville the effective date was July 2, 2015; in Los Angeles and San Diego the effective dates were in July of 2016; and San Francisco and Santa Monica are effective in 2017.  It does not matter that the employer does not have a facility in the city.  The standard is whether the employer has employees who work in the city.  With the exception of San Francisco, employers must comply with the local paid sick leave laws if any employees work in those cities at least two hours in a week.  Employees who drive and deliver product, make sales calls or even those who work from home and live in one of these cities must receive the required paid sick leave benefits.

This creates several issues for employers beyond making sure that employees working in those cities are receiving the required sick leave benefits because the amounts of sick leave required and the rules surrounding how the employer provides the sick leave benefits are different.  It may be possible to give a certain class of employees, e.g. drivers, greater paid sick leave benefits because they work in these cities, but in some cases defining the group of employees who might be entitled to greater benefits may be difficult  and employers face a decision of having various policies or giving all employees greater paid sick leave benefits to avoid an administrative nightmare.

The major difference between the state and local laws is how an employer provides paid sick leave benefits.  Under California law, an employer may use the frontload method by providing all of the sick leave at the beginning of each year or use the accrual method, allowing employees to accrue sick leave at the rate of not less than one hour for every thirty hours worked.  If the employer uses the accrual method, they can cap sick leave at six day or 48 hours each year, which means an employee does not earn any additional sick leave until he or she has taken some sick leave.  Not all cities allow frontloading.  Each of the cities are consistent in allowing employers to use the accrual method and provide one hour of sick leave for each thirty hours that the employee works.  Two of the cities – San Diego and Oakland, do not provide a frontload method.  Logically, one would think that if an employer frontloaded the required sick leave, an employer would be in compliance, however, the Oakland City Attorney has opined that use of the frontload method “may risk” a violation of Oakland’s law.  Most employers chose the frontload method for administrative efficiency.  However, those employers will have to revise their policies if they have employees in cities that do not allow employers to use that frontload method.

There are also several other major differences between the requirements of these cities.  The use increments vary.  California law states an employer cannot require an employee to use sick leave in increments larger than 2 hours and two of the cities, while Oakland and San Francisco have reduced the increment to one hour.  Sick leave under California law and these local laws allows sick leave to be used for family members but the definition of family member differs and Oakland allows employees to use sick leave to care for a service dog.  Certain of the cities have different sick leave caps depending on the employer’s size.  The cities also each have their own posters/bulletins that must be posted.  While the California law does not have a provision allowing an employee to sue their employer for violation of the sick leave law, each of the cities allows an employee to do so and certain cities have penalties for violations.

As varying regulations are imposed by more and more local governmental entities, employers are severely challenged to stay abreast of the new laws, how they differ from state law and how to comply with them.

Thank you for joining us on CIarkTalk!  We look forward to seeing you again on this forum.  Please note that 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 have any questions about the new Los Angeles City Ordinance or sick leave in California, please feel free to contact Deborah Petito at dpetito@clartktrev.com or Leonard Brazil at lbrazil@clarktrev.com by email at or telephonically by calling the author at (213)629-5700.