By Kim K. Steffan, Attorney

A May, 2018 US Supreme Court case (Epic Systems Corp. v. Lewis) gave the green light for employers to bar employees from bringing class action arbitration cases for claims like unpaid wages.  In new-hire paperwork with many major companies, employees will see that conditions of getting the job include agreeing (1) to use arbitration instead of going to court over disputes, and (2) in arbitration, an employee must pursue a claim individually rather than as a group.  The Supreme Court approved these agreements, saying they are allowed under the Federal Arbitration Act of 1925, and that they do not violate the National Labor Relations Act.

These agreements make it nearly impossible for an employee to enforce rights under wage and hour laws, like overtime pay rules and failure to pay the agreed-upon amount, because the cases are usually too small to warrant paying a lawyer an hourly fee to take them individually.  They are so small that a lawyer cannot afford to take them on a contingent fee, for instance putting in many dozens of hours for a percentage of $100 in unpaid wages.  Compare this to class arbitrations where a group of employees bands together to bring an arbitration claim that all of them have been shorted their overtime pay. Handled as a group, the economics allow hiring an attorney to bring the case.  In addition to paying an attorney, in arbitration the parties must pay part of the fee for the private arbitrator or panel of three arbitrators.  In individual wage disputes, the employee would have to pay the arbitrator more than the employee would recover, but when the cases are grouped together, the arbitrator’s fee is spread out among many claimants.  By comparison, if a case is heard in court instead of arbitration, there is no fee to the judge to hear the case; tax dollars have already paid for the judge to be in court and hear cases.

This decision follows a 2011 Supreme Court case (AT&T Mobility v. Concepcion) approving arbitration agreements with class action waivers in consumer cases.  As with employment cases, consumer cases often involve small dollar amounts.  If consumers must bring those cases individually and must pay an arbitrator to hear the case, it is economically counterproductive to bring the claim.

In both of these cases, the Supreme Court said that the Federal Arbitration Act of 1925 allowed arbitration agreements to ban class action cases.  The Supreme Court was not bothered by the imbalance of power and funding between companies insisting on arbitration and individual consumers or employees.  Congress originally envisioned arbitration as a way for companies to agree to settle disputes between businesses by private arbitration rather than by going to court.  The idea was that arbitration could be faster and less expensive, due to streamlined discovery rules, informal rules for presenting evidence, and shortened time limits. Arbitration is well-suited for multi-million dollar disputes between two powerful business giants that are equally well-funded. However, over the decades since 1925, companies have expanded arbitration from its commercial roots to include disputes with individual consumers and employees.  Because it isn’t feasible for a consumer or employee to negotiate special contract terms with a big company, consumers and employees are stuck with the take-it-or-leave it arbitration contracts that come with everything from cell phones to jobs with national employers.

The Federal Arbitration Act does not permit states to protect their citizens by limiting arbitration in their jurisdictions.

Since 2000, there have been several bills introduced in Congress to place limits on the use of forced arbitration in consumer and employment cases, or to ban them altogether.  However, none has been enacted thus far.

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.

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.

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.