By Kim K. Steffan


As a small business owner myself, I understand why my business clients are sometimes hyper-focused on current operations to the exclusion of other business concerns.  The customers or clients to be served today are understandably the priority.

However, business owners can’t afford NOT to have succession plans, both for voluntary exits (like retirement, cashing out, or passing the baton to a younger generation) and involuntary exits (like what happens if the business owner becomes disabled or dies).  One-owner businesses and multi-owner businesses have different challenges to plan for.

For a one-owner business, the plan should always include a will and a durable power of attorney, and may include life insurance and/or disability insurance.  A durable power of attorney gives someone else legal authority to make business decisions or run the business if illness or injury makes you, the owner, unable to do so.  If you have a sole proprietorship, the business literally dies when you do.  The assets of the business will pass to whomever inherits from you by your will or by the intestate succession statute, and business debts will become your estate’s debts.  For the business to have legal continuity after your death, you’ll want to make your business a corporation or limited liability company (LLC).  Your interest in the corporation or LLC passes to heirs under your will or under the intestate succession statute, but the corporation or LLC continues to exist.  If a sole owner of any type of entity dies without a will, the business or its assets may get divided among a number of heirs; this causes practical problems if not all the heirs are interested or talented in running the business.

For multi-owner businesses, failure to plan for one owner’s death may mean that the remaining owners get to be in business with the deceased person’s spouse, parent, child, or other relatives.  Even if the heir is a nice person, he/she may know nothing about running this business.  A properly prepared buy-out agreement entered by all the owners prevents this problem.  It allows the business to buy out the estate of the deceased owner, keeping control in the business, but giving the estate cash instead.  Alternatively, an agreement can provide for an owner to pass his/her interest in the business on to a spouse or children by a will, but converting the ownership interest to a non-voting interest.  The heirs will still receive dividends if the business is profitable, but they won’t have a say in management. Life insurance and disability insurance can help implement these types of agreements.

Lawyers and accountants often take a team approach to helping clients who want to sell their business, or to transition over time to a younger generation or to key employees.  Accountants help with valuing the business and tax planning.  Lawyers help make sure clients have thought through the necessary details, and turn the plan into an enforceable written agreement.  It is important to sellers that they be paid the agreed-upon amount. Special planning is required if the seller wants to do seller-financing, which obviously carries more risk of non-payment than being paid in full at closing.  Tools for sellers offering financing include personal guarantees of payment by the buyer and getting adequate security for the balance owed.  Lawyers and accountants tailor their advice to each seller’s situation, because each one is unique.


Kim K. Steffan is an attorney with Steffan & Associates, P.C. in Hillsborough.  She can be reached at 919-732-7300 or



By Kim K. Steffan, Attorney


            If you own or manage a business that wants to rent space, do you know what to look for, and what to look out for, when negotiating and signing a lease with a landlord?  Here are some tips.

            First, remember that whatever the signed lease says, that’s the rule that will apply to your case.  Unlike residential leases where a statute can trump a lease (and can sometimes protect the tenant more than the lease), courts usually enforce commercial leases exactly as written.  That makes it important to pay attention to the terms of the lease before signing it.

            Some commercial landlords propose a lease that is one-sided in their favor.  How much can you negotiate with a landlord?  It depends on the rental market.  If the supply of rental space is tight, the landlord may figure that if you don’t accept his terms, the next person probably will.  When the rental occupancy rate is low, though, you have a good chance of negotiating some changes.  In any event, it never hurts to ask.

            Clients often ask whether they should or must sign a personal guarantee of their corporation’s or LLC’s lease.  It’s always best to have only your company or LLC liable for business obligations (like a lease) and not sign a personal guarantee.  However, many commercial landlords will not lease to a small business without a personal guarantee (much like a bank won’t loan a small business money without a personal guarantee).  You may not be able to avoid it, in which case, be aware what you are signing.  If you are personally liable for a lease, it may make you more cautious about how long the lease goes, how open ended common area management (CAM) fees are, etc.  

            Commercial leases commonly shift all or most maintenance and repairs to the tenant.  Try to negotiate the landlord being responsible for maintenance and repairs that are permanent or long-term in nature, like roof repairs, painting, etc.  Since tenants are commonly asked to be responsible for heating and air conditioning repairs, try to negotiate a dollar limit per year, since replacing a compressor would be expensive and would benefit the landlord long after your lease term has probably ended.

            It is easier for a landlord to evict a commercial tenant who fails to pay rent than it is to evict a residential tenant who is in default.  You may know that residential landlords have to go to small claims court to get an eviction order, but that is not so with commercial leases.  It is legal for a commercial lease to allow a landlord to change the locks to evict a tenant who is in default for a period of time set by the lease.  If a tenant leaves her property in the space and doesn’t pay rent, a commercial lease can allow the landlord to deem the contents abandoned.  The landlord can move it out and sell it, give it away, or throw it away, if the lease allows this.

            I represent both landlords and tenants in commercial leases (just not in the same transaction or in any other situation that would pose a conflict of interest, of course).  I find commercial tenants who see me for problems with their landlord or with their lease often didn’t read the lease carefully before they signed it, and didn’t try to negotiate better terms.  There are some other technical legal issues that are important, but are beyond the scope of this article, like indemnification and duty to mitigate damages; a legal review can address and explain these issues.  An ounce of prevention can be worth a pound of cure when it comes to signing a better lease, or at least signing your lease with your eyes open as to what the rules are.



By Kim K. Steffan, Attorney


            Job losses during difficult economic times caused some people who had always paid their bills to become delinquent on debts like credit cards and consumer loans.  In some cases, creditors got judgments against them, or threatened to.  A common question in those cases is whether their creditors can take their retirement accounts.  Many of those clients have put a little away each year for a long time, and would hate to lose this retirement nest egg.

            The good news is that retirement accounts which you fund while you are working are generally safe from most creditors.  N.C. General Statute section 1C-1601 covers what assets creditors can seize and sell to satisfy judgments – a topic which is entirely separate from filing bankruptcy, by the way.  Under that statute, money in your 401(k), traditional IRA, Roth IRA, and/or 403(b) is protected.  Whether you file bankruptcy or not, NC law applies to allow an unlimited dollar amount of protection for qualifying retirement accounts.  Your contributions to your employer’s pension plan (like the N.C. State Retirement System) are also safe, but for a different reason – because they are held by the pension plan and are not assets in your name. 

            In fact, if you see creditor problems coming up, you might choose to contribute as much as you can (subject to annual limitations by law, which depend in part on your age) to protect those dollars from creditors too.  If those same funds are left in your bank account or used to purchase an extra vehicle, for example, a creditor can easily take the funds or the vehicle to satisfy a judgment entered against you.

            The rule I’ve described governs consumer debt like credit cards, furniture store loans, deficiency judgments on vehicle loans, personal loans, etc.  As you might guess, there are some non-consumer creditors that can seize your retirement accounts – e.g., when the United States, North Carolina, or a County is the creditor, or when needed for paying alimony or child support.

            Some clients follow up with this question:  Didn’t I hear news about a U.S. Supreme Court case making retirement accounts fair game for creditors?  The Clark case in the summer of 2014 held that when you inherit an IRA from someone other than a spouse, your inherited IRA funds are not protected from your creditors.  Why treat IRAs inherited from someone other than a spouse differently than retirement accounts you have funded?  Those accounts are treated differently for tax purposes than the retirement accounts you fund for your retirement.  Inherited IRAs (from other than a spouse) don’t have to be left untouched until you retire.  In fact, the IRS requires that you take the money out of these inherited IRAs within a few years anyway (because they want to tax you on the income).  That makes these inherited IRAs more like money market accounts than like true retirement accounts.  A special rule still protects IRAs inherited from a spouse, because the law recognizes that most couples plan together for retirement using both spouses’ accounts.  A lot of news coverage that was just too summary made it sound like the USSC had held all retirement accounts were fair game for creditors, which is not accurate. 

            So, if you’ve fallen into trouble with consumer debt, you can usually rest easy that your retirement accounts you’ve worked hard to put away for your future are safe.  They will withstand consumer creditor claims and still be there to help support you and your spouse during retirement.



In recent years, more uses for drones (technically “unmanned aircraft”) have been developed. Farmers want them to identify where water or fertilizers are needed. Law enforcement envisions using them in criminal investigations. Private investigators could use them in surveillance. News organizations want to have them photograph dangerous places, like storm aftermath or riots. Amazon would like them to deliver packages to your house. A new state law took effect October 1, 2014 limiting the use of drones.
Note that the Federal Aviation Administration (FAA) has its own rules about drone use. The FAA is still developing rules, but basically a drone cannot be used for commercial or business purposes without an FAA permit. Under both federal and state laws, it is generally lawful for anyone to use model aircraft under 55 pounds in the sight of the operator on property where he has permission, away from manned aircraft, for recreational purposes.
The rest of this article assumes that the drone operator has an FAA permit, and assumes that the operator seeks to use the drone for something other than recreational purposes. A NC Department of Transportation license must be obtained before using a drone for commercial purposes. Under the new law, a person, company, or government agency may use a drone to conduct surveillance of any person, dwelling, or land only with the consent of the person or of the owner of the dwelling or land. Permission of the landowner is required to launch or retrieve a drone from their property. Without permission, no one may use a drone to photograph any individual for the purpose of publishing or disseminating the image. There is an exception for news agencies photographing newsworthy events or places where the public is generally invited.
Special rules for law enforcement attempt to apply existing laws about warrants to drones. If officers get a warrant based on probable cause, they don’t have to rely on these exceptions. Just as a police officer can search in plain sight (e.g., in an open front yard) without a warrant, an officer’s drone can view and photograph in plain sight. Since warrants aren’t required when an officer has a “reasonable suspicion” that quick action is needed to swift action is needed to prevent imminent danger to life or serious damage to property, to prevent the imminent escape of a suspect or the destruction of evidence, to conduct pursuit of an escapee or suspect, or to facilitate the search for a missing person, a drone can also be used without a warrant for these purposes.
Some privacy advocates worry about police using drones to photograph protestors. The new law allows officers to use drones to photograph gatherings to which the general public is invited on public or private land (e.g., if the protestors are gathered on a public street). If the protestors hold a closed meeting at someone’s home in order to plan an upcoming gathering, drones cannot lawfully take those photos without consent. However, consistent with federal law, police may use drones without a warrant to counter a high risk of a terrorist attack by a specific individual or organization if the US Secretary of Homeland Security or the Secretary of the NC Department of Public Safety determines that credible intelligence indicates that such a risk exists. If police gather evidence in violation of the statute, it is not admissible in criminal court unless the court determines that it was “obtained or collected under the objectively reasonable, good-faith belief that the actions were lawful.”
The new law makes it a criminal offense to use a drone to disrupt a manned aircraft, or to disrupt someone who is lawfully hunting or fishing. It is also a criminal offense to distribute images taken by a drone without the consent of the person photographed or the owner of the property photographed. If you are the victim of unlawful surveillance or photography, you may seek a Court injunction to stop it. You may also sue in civil court for actual damages. If the case involves disseminating photos, you may choose to sue for $5,000 per image instead of proving damages. Because technology changes rapidly, we should expect to see further development in federal and state laws concerning drones.


With the economic slowdown, more small businesses have fallen behind on paying sales tax and payroll withholding taxes.  These are called “trust taxes,” because businesses collect them from other people (customers or employees), and are supposed to promptly send them to the State.  The N.C. Department of Revenue has announced a new program called the Small Business Counseling Program.  It gives small businesses a break on penalties and fees on these taxes if they will follow a repayment schedule and participate in free, confidential business counseling.  Businesses are eligible if they have 200 or fewer employees, and if they haven’t been the subject of criminal investigation or prosecution for being behind on these kinds of taxes.

The Department recognizes that when a business falls behind on sending in taxes it collected from someone else, it is often a symptom of bigger management or financial problems.  It means the business is using these funds (which it held in trust to be paid to the State) for other financial obligations (utilities, payroll, loan payments, etc.) which it cannot meet, like robbing Peter to pay Paul.  When the Department waived penalties and fees in the past without requiring business counseling, they would see the same businesses falling behind on these taxes again and again.

For this program, the Department sets up a payment plan over 6 to 24 months, depending on the amount due, and waives hefty penalties and fees.  The Department requires paying the taxes owed plus 5% interest.  In return, the business must stay current on its new tax obligations, follow the payment plan on delinquent taxes, and participate in one-on-one, free, confidential business counseling with either the Small Business Technology Development Center (SBTDC) or the N.C. Small Business Center Network (SBCN).  The counselors do not share any information about the business with the Department; they do share whether the business participates.

SBTDC is a business advisory service of the University of North Carolina system, with offices near many member schools.  Nearby offices are in Chapel Hill and Durham.  SBCN is a business counseling service of the NC Community College System, which is available in almost every county in the state.  Both SBTDC and SBCN are experienced in areas ranging from financial analysis (including cash-flow), marketing, operations, strategy, and performance.  I have served for years on the Regional Advisory Board for the SBTDC’s Chapel Hill office.  Speaking from experience, SBTDC is an exceptional resource for all small business owners and managers, whether the business is having problems or wants to build on current success.  Both SBTDC and SBCN provide counseling services for small businesses generally, in addition to the Department of Revenue program.

What happens if the business doesn’t meet all of the program’s requirements?  The Department will reinstate penalties and fees, which are quite steep.

For more information, call the NC Department of Revenue at 1-877-252-4549 or visit  To learn more about SBTDC, go to, and for SBCN, go to  The Department hopes to have a win-win program where the State collects delinquent taxes, and participating businesses save money on settling up their tax debt while achieving better financial health to prevent these problems from arising again in the future.


How Contracts Help Your Business

Q: I own my own small business. Should I have my own standard “form” contracts?

A: Yes. A standard or form contract is a valuable tool for a small business owner. Having a standard contract with customers or clients prevents misunderstandings and protects the business owner.

With the magic of computers, a business can even make its “fill in the blank” contract look customized and special for each customer. This can be helpful in marketing. Some business owners don’t label it as a “contract,” if that word would be intimidating to customers. Some business owners put the contract provisions in a brochure or flyer format that also describes and promotes their business, to combine marketing and contract efforts. Companies who use estimates can add terms and conditions, with a special section for the customer to sign so as to turn the estimate into a contract if the customer wants to go ahead with the work.

One important way a contract helps the business person is to describe what work is to be done for the customer, what the payment arrangements are, and when payment is expected. This avoids later misunderstandings.Contracts also protect you if a customer does not pay.

You should make sure your contract includes two important things:

  1. Be sure it reads that interest at a certain percentage accrues on unpaid balances after 30 days. Having an interest provision (usually 18% per year or less) will allow you to collect a higher rate of interest than the judgment rate (currently 8% per year) between the time the balance is due and the time any judgment is entered in court. Once a judgment is entered, you will be limited to the judgment rate of interest from then on.
  2. Be sure the contract reads that the customer will be responsible for attorney’s fees if you must take legal action to collect unpaid balances. If you do not have a written attorney’s fee provision, you cannot recover your attorney’s fees if you have to sue for collection. You may only need an attorney’s fee provision once every few years, but the time that you do, you will be glad you took the time to put it into your contracts. Otherwise, what you pay an attorney to collect the account comes out of what is already owed to you.

If you are making a warranty on your work, your customers will appreciate your including it in the contract. Because you will be bound by that warranty, think carefully about whether you want to make a warranty and what it is before you put it in your contract.

Depending on your type of business, your contract may need more specialized provisions. These might include indemnification (where another party agrees to reimburse you for any claims against you) or ownership of intellectual property rights (like who owns the computer code from the programming work you do for your client). A lawyer can help you decide if you need specialized provisions. A form contract designed for your business needs is a one-time effort that will benefit you with every customer you serve.

Hot Topics for Small Businesses

What are some hot topics business lawyers are talking about? To quote Ben Franklin (and probably your grandma too), “ an ounce of prevention is worth a pound of cure.” Thinking ahead about these issues can help your business in the long run.

Do you have a standard contract, or standard terms on your estimate/invoice forms? They should include wording like this: “Interest at 18% per year accrues on balances unpaid more than 30 days. If we must take legal action to collect, customer will be liable for our attorney’s fees.” You can name an interest rate lower than 18% if you prefer. These sentences will allow you to do two important things. First, they allow you to begin collecting interest early, instead of waiting until after a judgment is entered. Second, if you have to sue to collect, they allow you to recover your attorney’s fees.Are your workers who get 1099s truly independent contractors, or are they really W-2 employees in disguise? The IRS cares about this because they receive employer withholding contributions on W-2 employees, but not on independent contractors paid with 1099s. Back taxes and penalties can result if an employer should be withholding taxes, but does not. The IRS has a number of factors to decide whether a worker is an employee or an independent contractor. For example, if you set your worker’s hours, control how he gets the job done, provide the tools he uses, and he works only for you, he is probably an employee. By comparison, if the person you hire works for various other employers too, has special skills, has his own tools, and has control over how he gets the job done, he is probably an independent contractor. Some factors can be more important than others in certain cases. If in doubt, consult your attorney or accountant.

Do you want your employees to sign non-compete agreements? In North Carolina, non-competes are valid only when:They are signed by a new employee as part of being hired, orFor an existing employee, the employee is paid something extra of value in exchange for signing the agreement, like a lump sum payment or a bonus she would not otherwise have received. It is not enough to tell an existing employee that she must sign the non-compete in order to keep her job, nor is it enough to give her a nominal sum of money.

Non-competes must be reasonable in duration and in how wide a geographic area they cover. This is a “pass-fail” test. If the court finds a non-compete is unreasonable, they will strike it down; they will not rewrite it to make it reasonable.Have you thought about succession planning? As baby boomer business owners get older, many are thinking about how to turn the reins over to a new generation. This may involve business planning and estate planning. It is easier to transition a corporation or an LLC to the next generation than it is a sole proprietorship. You may want to develop a plan to transfer ownership incrementally. That way you retain the controlling interest until you are sure they have gained the experience needed to be successful.

Remember that you, your attorney, and your accountant are a team. Relying upon the experience and expertise of your attorney and your accountant can prevent many expensive and time-consuming problems for your business.

Buying or Selling a Business

If you are considering buying or selling a business, what should you be thinking about?

First, are you selling or buying only assets, or the whole business? A buyer usually prefers to purchase just the assets in the seller’s business, so that she does not assume the selling company’s debts. A seller typically prefers an “entity sale,” meaning the sale of the company itself, its stock, its debts and its assets. This relieves the seller of future responsibility on the company’s debts, as the buyer takes them as part of the deal. Of course, the price can be set fairly either way. It is just a matter of doing math to adjust for whether debt is included or excluded.

Second, the seller should consider any personal guarantees he made on loans that are to be taken by the buyer. The seller is still on the hook to the bank for the personal guarantee, even after the business or asset is sold. It is important that the loan be paid off from closing, or that the buyer get his own loan to replace the seller’s loan and its guarantee. Otherwise, the seller remains at risk; if the buyer defaults on payments, the seller who signed a guarantee may have to pay off the loan for an asset he no longer owns. On the flip side, if a buyer simply takes over making payments on a vehicle loan in the seller’s name, when the loan is paid off (which could be years later), the bank will send the title to the seller unless other arrangements are made. That poses a risk to the buyer.

Third, will the price be paid in one lump sum at closing, or will part of it be financed by the seller? If you are a seller providing financing, you will want adequate security for payment. That may include a security interest in business assets, but even better is a deed of trust against the buyer’s real estate, particularly his home. If the buyer pledges his home as collateral for the debt, there is more motivation to pay than if only the business assets are pledged.

Fourth, does the buyer need a non-compete agreement from the seller? Buyers do not want to risk that, after paying good money for a business, the seller sets up shop under another name a few blocks away. Sellers may be selling because they are retiring or moving away. However, a non-compete is still a good idea in case the seller’s plans change. If a seller is retiring or moving away, signing the non-compete will not hurt her.Fifth, what is needed for a successful transition? For some businesses, simply having the seller available for phone or email consultation for a few weeks will be sufficient. For others, it will be important that the seller be physically present at the business for a period of time to facilitate transition.

Give careful thought to details ahead of time, and have proper documentation for your agreement. This will help assure a successful transaction, whether you are the buyer or the seller.

Whether to Incorporate of Form a Limited Liability Company

In the life of many small businesses, the questions usually arise: Should I incorporate my business? Should I form a limited liability company (LLC)? What are the pros and cons? As a lawyer, clients often ask me these questions. Knowing the advantages and disadvantages can help a business owner make the best choice.

Many businesses benefit from forming a corporation or limited liability company. The decision usually turns on two factors: (1) limiting liability and (2) tax planning. A business may decide to incorporate or to form a limited liability company (L.L.C.) for these reasons.

First this article will address corporations. Incorporating a business properly limits the personal liability of the business owners. If there is a claim against the business — for example, if a customer is injured or if a customer/vendor claims the business didn’t fulfill its contract — the most the owners of a properly formed corporation can lose is their investment in the business. By comparison, owners of unincorporated businesses (sole proprietors and partners) can lose their personal assets (residence, car, personal savings, etc.) in addition to losing their investment in the business. Incorporating properly avoids that big risk.

To obtain the desired limit on personal liability, the corporation must be set up and maintained properly. If it isn’t, a judge will let a claimant “pierce the corporate veil” and still reach the owners’ personal assets. In order to find a proper corporation, a judge will require the following:

  1. Proper paperwork to set up the corporation, e.g., Articles, Bylaws, and Organizational Minutes. A lawyer can assure this is done properly.
  2. Proper ongoing paperwork, e.g., annual meeting minutes.
  3. Corporate funds kept separate from personal funds, and a paper trail to show when and why funds have gone from owner to business or from business to owner.
  4. Adequate “capitalization,” which requires some explanation.

Adequate capitalization means having enough resources between corporate assets and insurance to cover most claims that could reasonably be expected against the business. Good insurance coverage for the risks inherent in a particular type of business will go a long way to meeting a judge’s requirements for adequate capitalization. Some types of businesses are more likely to have large claims and therefore need more resources to be adequately capitalized than other types of businesses. The idea is that an owner cannot create a corporation that is a mere “shell” and still escape personal liability.

Tax planning is the other factor in deciding whether to incorporate. An accountant can compare tax rates with or without incorporating. An accountant can help a business owner decide whether he can reduce payroll taxes by taking some profits from the business as “dividends” rather than as salary; dividends are available to owners of corporations, but not to sole proprietors or partners. Many businesses have a tax savings when they incorporate. If the business will become a corporation, an accountant can advise owners whether they will be better off tax-wise being a “C” corporation or an “S” corporation. The difference is how the corporation is taxed. A C corporation pays its own taxes, whereas an S corporation passes profits and losses through to the tax returns of the individual owners (called “pass-through taxation”). Pass-through taxation can often save small business owners some tax expense.

A Limited Liability Company (or LLC for short) is another option for setting up a business. An LLC is a mixture of the rules and benefits of corporations and partnerships. It is like a corporation in that it allows owners (called “members” rather than “shareholders”) to limit their liability to the amount they have invested in the business, so that owners’ personal assets are not at risk. Like a Subchapter S corporation and like a partnership, an LLC can give the owners “pass-through” taxation, meaning that the businesses’ profits and losses are taxed at the owners’ personal rates rather than at a (usually) higher corporate tax rate. Since not everyone can meet the rules for qualifying as a Subchapter S corporation (e.g., limits on the number of shareholders, requirement that S corporation shareholders be U.S. citizens), an LLC will allow those business owners to end up with a similar type of business structure.

An LLC is like a partnership in that there is flexibility to divide profits between owners many different ways. For instance, equal owners in a corporation must divide profits equally, but equal owners in an LLC or partnership may agree to divide the profits so that some owners receive more or less than others, for example, where one owner has devoted more time to the business than another.

It is important that an LLC be set up properly. This involves filing Articles of Organization with the Secretary of State, and having an Operating Agreement that accurately reflects how the LLC will be managed.

Depending on the nature of your business, an accountant may be able to recommend whether an LLC or a corporation gives you tax advantages. That may be the deciding factor whether to form an LLC or a corporation. An LLC can be preferable in some circumstances for the following reasons: (1) A judgment creditor of a member can only access money that would be distributed to the member, and cannot take ownership of the member’s share (whereas a judgment creditor of a corporate shareholder can take the shareholder’s shares), (2) It is easier for an LLC to distribute profits some way other than ownership interest percentages (e.g., 50/50 owners who agree to a 60/40 division of profits for some reason), or (3) One cannot qualify as an S Corporation, but one desires pass-through taxation (e.g., if one owner is not an American citizen). Remember that corporations have existed for many decades, so there is certainty in the rules such as how corporations are taxed, and what rights owners have among themselves. LLCs have only been around since the 1990s. There are some unsettled issues about LLC taxation and about their owners’ responsibilities as to each other, which can be a disadvantage. That uncertainty may or may not outweigh the advantages of an LLC, depending on the other circumstances present.

Each business client’s needs are unique. Attorneys and accountants can help you decide which type of business organization is best for your business.

Job Protections for Returning Military Personnel

Q: What job protections exist for military reserve and National Guard personnel returning from active duty?

A: With recent events in the Middle East, many reservists and National Guard personnel have been called to active duty. Fortunately, some are beginning to return home. A federal law called the Uniformed Services Employment and Reemployment Rights Act of 1994 (USERRA) provides job protection and prescribes rules that all employers and all reservists and National Guard personnel must follow.

USERRA applies to all employers, regardless of size. It applies to all military personnel who have served and been honorably discharged from the uniformed services and those who currently serve in the Reserves or National Guard. The Act prohibits discrimination by employers because of past, current or future military obligations. Its protection extends to hiring, promotion, reemployment, termination and benefits.

An employee is entitled to reemployment after active duty if (1) the employee has given advance written or verbal notice to the employer, (2) the cumulative absences for military service do not exceed 5 years, and (3) the employee reports back to the employer within a set time after returning from active service. The employer can require reasonable documentation of the employee’s military orders as active duty begins. After military service, the time to report back to the employer depends on the length of active service, varying from 8 hours (when returning from active duty of less than 31 days) to 90 days (when returning from active duty of more than 180 days). If the employee is prevented from reporting to the employer within the required time through no fault of his/her own, the time will be extended.

In general, the employee must be returned to the job position and seniority he/she would have held had the employment not been interrupted by active service. USERRA protects employee benefits. For shorter military absences, employers must continue health insurance on the same terms it does for other employees. For military absences between 31 days and 18 months, the employer may require the employee to pay up to 102% of the full premium under the plan. Pension plan rights and contributions under ERISA plans must continue as if the employee had not been absent for military service. An employee on military leave does not continue to accrue additional vacation or sick time while on leave, unless the employer allows employees on other types of leave to accrue vacation or sick time.

USERRA does not require employers to provide paid leave during military absences. If an employee wishes to use his/her earned vacation or personal time off during his/her military leave, the employer must allow it. However, an employer cannot require the employee to use his/her earned vacation or personal time during military absences.

The spirit of USERRA is to treat the employee engaged in and returning from active military service fairly and to prevent discrimination. The rules of USERRA help both employers and employees know what to do and what to expect.

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