Should My New Texas Business Be Formed as an “S” Corp or an LLC?

While deciding which business structure will best serve your needs, always consider several key factors. For example, look at how many employees you plan on hiring and how much time you want to spend managing the company. You should also make sure you’re fully protecting your personal assets against future lawsuits and not incurring any excess taxes.

One excellent way to choose the best structure for your company is to meet with your Houston business law attorney. The two of you can discuss all that you might gain (or lose) by starting your company as either an LLC (limited liability company) or an “S” corporation.

Before noting some of the basic steps involved with forming an LLC and an “S” corporation, here’s a brief overview of the unique offerings and drawbacks of both structures.

What are some chief advantages and drawbacks of starting an LLC?

Depending on the size of your business and the types of goods or services you’re selling, you may prefer an LLC for the following reasons.

  • It offers a less formal structure. An “LLC” is also often easier to manage than an “S” corporation, especially when you have few employees. And you’ll never need to have any board meetings to tackle problems tied to issuing stock certificates;
  • You can readily change this business structure (once all proper paperwork is filed). If

you’re running an “S’ corporation, you’ll first have to arrange a formal board meeting before trying to change the business structure);

  • All members of an “LLC” do not have to be permanent residents or U. S. citizens;
  • You can more easily divide up who handles most of the daily work – while allowing others to just be investors. You can also simply divide up the profits based on each person’s initial investment and daily work contributions;
  • Disadvantages of an “LLC” compared to an “S” corporation. These can include having all the company profits subjected to self-employment taxes. Your growth may be limited since your business cannot issue any stock shares. Always ask your Houston business law attorney about any other potential disadvantages that may apply to your unique situation.

Why do some entrepreneurs prefer forming “S” corporations – despite the limitations?

  • Formality is viewed more favorably by some. Outside businesses often prefer interacting with companies that employ a more formal corporate structure;
  • You can often use this structure to avoid double taxation of income;
  • Profits are passed on to the shareholders (by way of their paid dividends). Therefore, the company does not have to pay taxes on those profits;
  • Possible drawbacks. All shareholders must be permanent residents or U.S. citizens. There can be no more than 100 shareholders. Added state filing fees may apply. Also, the IRS

tends to monitor “S” corporations very closely since some people try to improperly avoid certain taxes by wrongfully using this business structure.

What are some basic issues that must be addressed while forming an “LLC” in Texas?

  • Membership. You’ll need to decide how many owners or members you’ll have and if they’ll share all the managerial duties;
  • Naming your business. You must choose a unique name to avoid confusion with already existing companies;
  • File all required forms. You’ll need to start with a certificate of formation (Form 205) that must be filed with the Texas Secretary of State’s Office;
  • Registered agent. You must name a registered agent who can accept the service of process on behalf of your company;
  • You’ll need to create an operating agreement. It’s usually best to ask your Houston business law attorney to draft this document for you after you’ve

discussed the precise nature of your new business;

  • Fully satisfy all state and federal paperwork requirements;
  • Obtain all required state and local business licenses that may be required for your industry.

(Note: Some of these same steps may also be required while forming an “S” corporation below, regardless of whether they’re listed).

Here’s a brief review of key issues involved in starting an “S” corporation in Texas

  • The drafting of Articles of Incorporation. These must be filed with the Texas Secretary of State’s Office;
  • Stock certificates must be issued to all initial shareholders;
  • All applicable business licenses and certificates must be obtained in a timely manner;
  • You’ll need to file Form 2553 with the Internal Revenue Service. (Your lawyer can first check to be sure you meet all the qualifying terms for creating an “S” corporation).

Please feel free to contact one of our Murray Lobb lawyers so we can answer your questions about each of these business structures. We can also help you draft all the documents you’ll need to transact business throughout the year.

Should You Always Enforce Covenants Not to Compete?

Covenants not to compete are binding contracts that are designed to protect companies against exiting employees unlawfully sharing different types of proprietary information, “trade secrets” and intellectual property with their new employers and others and engaging in post-employment activities that can be detrimental to the company they left.

Before discussing whether it’s wise to develop an ironclad attitude toward enforcing these covenants, it’s helpful to review the basic reasons why these documents are usually drafted and what standards courts consider when deciding whether they should be upheld.

Companies must protect specific types of information

Whether your business sells cutting-edge security software or sends out consultants to advise clients in mostly rural areas, your employees often learn highly detailed information about how you help your clients. If you were to always let key employees leave and immediately put that proprietary information and knowledge to work for a competitor, your business might quickly lose its competitive edge and market dominance.

Therefore, many companies regularly require employees to sign noncompete agreements to prevent them from using what they learn while employed for a limited time post-employment. Should former employees violate these agreements, they (and their new employers) can often be sued in court.

Common types of proprietary interests you’ll usually want to protect

  • Trade secrets. Perhaps your company has invented a manufacturing process that should not be shared with any competitors. It’s also possible that you’ve designed a highly effective training program for your employees that makes them uniquely effective at handling their work. You clearly don’t want them to share those training methods with others;
  • Client databases. You’ll want to prevent all departing employees from reviewing any past buying practices, requests and needs of your clients;
  • Other highly confidential materials. These could include almost anything – perhaps you’ve implemented a specialized marketing plan that’s helped your business grow several times over during recent years.

These examples should help remind you of the many proprietary types of information you must protect by requiring your exiting employees to sign covenants not to compete.

Within such covenants, you’ll need to address various topics that may include the following ones.

  • A specific time period. Any time period must be reasonable, normally 1-3 years;
  • A description of the types activities the employee cannot engage in post-employment. You can list specific industries, customers or businesses the departing employee should not contact for a new employer;
  • A specific geographical area where the departing employee cannot work. You can state a certain region where the employee who left cannot compete with you for a set time period.

When evaluating the reasonableness of covenants not to compete, courts look to see if they are over-broad or too restrictive. While businesses have a right to protect certain information or “legitimate business interests”, they aren’t allowed to unfairly prevent a departing employee from pursuing most forms of gainful employment.

Should you always enforce your contracts containing noncompete clauses?

Although the most obvious response is to say you’ll always strictly enforce them, it’s important to recognize certain factors before suing someone for not honoring a noncompete covenant.

Please feel free to contact one of our Murray Lobb attorneys so we can help you draft any contracts you need containing covenants not to compete. We can that someone is currently asking you to sign – or assist you in enforcing or defending a lawsuit.

The Basic Steps for Forming a Texas Corporation

Although running a business can be very challenging, it’s often invigorating to reach a point when you may need to incorporate your company. This process is often begun by discussing what can be gained or loss by making this move with your business partners. You should also consider speaking with your Houston business lawyer so you’ll fully understand all the legal implications of making this decision.

The following material reviews the main reasons that many companies choose to incorporate their businesses. It then notes the most common steps that must be taken prior to filing a certificate of incorporation with the Texas Secretary of State’s Office.

Potential advantages that are often acquired by incorporating a business

  • Improved legal liability status. Creating a corporation can provide each individual business partner with added protection against personal liability for the actions of all other executives or employees. It can also offer greater protection for business assets;
  • Critical, everyday activities can be simplified. Upon incorporating, it can become easier to add new owners and investors while still maintaining the same level of control over your company;
  • The company can more easily transact business all around the world. It’s often easier to conduct business in a corporate form in many other countries;
  • It can help you one day take your company public. While your corporate executives and employees may always want to conduct business privately, a time may come when it may be to your financial advantage to take the company public and sell stock.

Those are just a few of the main reasons why many business executives decide to incorporate their current companies or partnerships.

Common steps you must take when you’re ready to incorporate your business

  1. Name the corporation. Try to choose a name that suits your business and helps raise your profile. You and your lawyer will need to conduct a formal search to see if any of the names you’d like to choose are currently available in Texas;
  2. Select a registered agent and office. Be prepared to designate a trustworthy party to serve as your registered agent and name the city where that person will keep his or her office;
  3. Choose which parties will be named as the corporation’s organizers or incorporators. The names and addresses of each of these individuals must be listed within the certificate of formation;
  4. Designate your corporate directors. After the certificate of formation has been filed, the directors take over running your business. These highly knowledgeable executives must also have strong management and interpersonal skills that will help them successfully negotiate all future decisions and transactions;
  5. Draft a brief statement, indicating the corporation’s official business purpose. While this may sound rather straightforward, it’s often wise to run this description by your lawyer to be sure you’ve fully covered all key aspects of your intended business transactions;
  6. Consider obtaining professional help with the completion of your official certificate of incorporation. Like other states, Texas has specific expectations for the precise information that must be included. Since these requirements can change periodically, it’s often wise to ask your lawyer to review the contents of your certificate of incorporation;
  7. Pay the required fees. These should normally be posted on the Texas Secretary of State’s online website. If you prefer, your lawyer can submit your fees and certificate of incorporation for you.

While this list of common steps isn’t intended to be fully comprehensive, it should clearly indicate the basic steps that you and your business partners should take if you decide that it’s time to incorporate your business.

Please feel free to contact the lawyers at Murray Lobb so we can answer any specific questions you may have about this process. We’ve helped many clients incorporate their businesses over the years – and we’re ready to put that experience to work for you.

Administering the Family Medical Leave Act (FMLA)

Prior to the passage of the FMLA in 1993, American workers had few options when they needed extra time off from work due to their own serious medical conditions and accidents – or those of immediate family members. In fact, workers often had to use up all their vacation and sick leave benefits, if entitled to any, and then worry about their job security if they needed more time off. (However, eligible women could seek the special help offered by the 1978 Pregnancy Discrimination Act). 

Fortunately, the Family Medical Leave Act is still helping many 21st century workers address critical family caregiving duties and remains one of the signature pieces of legislation from the Clinton era.

Here’s a brief overview of specific provisions of the act that can help your qualified workers.

What basic opportunities does the FMLA offer qualified employees?

If a worker meets the minimum qualifications referenced below, it’s possible to take up to twelve (12) weeks of unpaid leave during a calendar year to take care of seriously ill family members, new children or the individual’s own major medical condition.

In 2008, the Family Medical Leave Act was updated so that qualified workers could also take time off work to take care of immediate family members who became very ill (or were seriously injured) while serving in the military.

The FMLA guarantees that qualified workers can take the extended time off work without having to worry about losing their jobs, their seniority or their employer-provided health care insurance.

Which types of employees are qualified to use the FMLA?

  • Those who have employers with 50 or more workers on the payroll for at least 20 workweeks during the preceding or current calendar year. A worker may still qualify even if all the 50 workers aren’t working at the same site – if they work within a 75-mile radius of one another;
  • Those who have worked for their employer for a minimum of 12 months, for a total of at least 1,250 hours. This means that many part-time workers may not qualify for FMLA leave. However, there are special rules that may apply to workers who are teachers, are highly paid – or are flight crew members of airlines;
  • Employees taking time off from jobs to handle their own “serious health conditions” – or those of covered family members. This time may also be used to take care of a new child or a servicemember in the immediate family who has been wounded.

Note:  Now that same-sex marriage is legal in all 50 states, LGBT (lesbian, gay, bisexual and transgender) individuals can also qualify like other workers to take care of their family members.

General questions often raised about the FMLA by employers and employees

Question 1:   Can the leave time requested be intermittent during a calendar year?

Answer 1:     Yes, if all the time that’s taken is counted toward the maximum amount of time off

                     allowed (12 weeks).

Question 2:  What government agency oversees and administers the FMLA for all federal

                     employees – as well as all state and local government workers and private

                     employees?

Answer 2:   The U. S. Department of Labor’s Wage and Hour Division. This is noted in Fact

                   Sheet #77B entitled, “Protection for Individuals Under the FMLA.”

Question 3: Are all workers qualified to take time off from their jobs under the FMLA entitled

                     to receive pay while away from work?

Answer 3:    No. The FMLA doesn’t require employers to pay qualified employees while they’re

                    taking this type of leave. However, it’s up to your employer to let you make a claim

                    for regular vacation time, sick leave or annual time off.

Question 4: Can a qualified worker ever be granted more than 12 weeks of paid or unpaid

                     FMLA leave in one year?

Answer 4:   An exception only exists for qualified family caregivers of wounded

                    servicemembers. They’re allowed to take up to 26 weeks off from their jobs in a

                    given calendar year.

Question 5: Can a qualified worker request more than 12 weeks off under the FMLA to take care

                    of a newborn – or a newly adopted child?

Answer 5:   In general, the answer is “No.” However, individual states can pass their own

                   versions of the FMLA and provide somewhat different benefits. To date, the Texas

                   Workforce Commission says that Texas has not passed such legislation.

Although the Family Medical Leave Act is a straightforward piece of legislation, it’s been updated with new rules and regulations and interpreted by the courts. Therefore, it’s usually wise for employers to ask their Houston employment lawyer for help if they have any specific questions about properly handling FMLA issues.

Please feel free to contact Murray Lobb so we can help explain any specific aspects of the FMLA to you as you provide its benefits to your employees. We’re always available to research any questions you may have.

Most Common Hiring Discrimination Complaints

In a work world where the average tenure with any given employer is declining, many companies must routinely advertise and fill both new and established jobs. Yet as common as this process has become, every employer must periodically stop and re-evaluate how all job applications are being reviewed, skills tests are being administered and interviews are being granted and conducted.

After all, implicit bias (discriminatory hiring) remains a constant threat to maintaining an even playing field for all job applicants. And though most Texas employees are hired on an “at-will” basis, (allowing them to leave when they choose – and be fired without notice or cause), certain federal, state and local laws forbidding hiring discrimination must still be obeyed.

The most critical laws protecting employees against discrimination are set forth below, followed by examples of the types of hiring questions employers should avoid. Finally, the roles played by the TWC (Texas Workforce Commission) and the EEOC (Equal Employment Opportunity Commission) regarding employee complaints are also briefly noted.

Federal, state and local laws provide many anti-discrimination protections to Texas workers

Both federal laws and Texas statutes have been passed providing job applicants and employees with protections against discrimination on the following grounds.

  • Race
  • National origin
  • Color
  • Religion
  • Sex (including various medical conditions directly related to pregnancy)
  • Age (40 and older)
  • Genetic testing information
  • Disability

Federal law also provides specific employment discrimination protection to applicants who may not be actual U. S. citizens.

Federal laws and related regulations designed to protect workers against discrimination

  • Title VII of the Civil Rights Act of 1964 (Title VII). This law was later amended to include The Pregnancy Discrimination Act
  • The Equal Pay Act of 1963 (EPA)
  • The Age Discrimination in Employment Act of 1967
  • Title I of the Americans with Disabilities Act of 1990 (ADA)
  • Sections 102 and 103 of the Civil Rights Act of 1991
  • Sections 501 and 505 of the Rehabilitation Act of 1973
  • GINA – The Genetic Information Nondiscrimination Act of 2008

Many of the legal rights guaranteed to Texas workers under the federal laws referenced above are also protected (and set forth) in Chapter 21 of the Texas Labor Code. Various Texas cities, including both Houston and Austin, have passed additional anti-discrimination laws to protect their residents with unique sexual orientation and gender identity issues. (Additional information about protecting employee rights is set forth on our Texas Governor’s website.)

Here’s some additional, pragmatic information for handling the job application process.

Company interviewers must carefully avoid asking job applicants these types of questions

While the following list is not intended to be comprehensive, it should heighten your awareness of how careful you must be when trying to learn more about applicants who may have certain special needs or limitations that are not directly related to legitimate job requirements.

  • Do you have any disability? (However, if the applicant has a visually obvious disability — or has voluntarily disclosed one – you can normally ask if any special job accommodations are necessary or required);
  • Are you currently taking any medications that might impair your ability to perform the assigned tasks as described?
  • Have you needed to file any workers compensation claims in the past?
  • Are you pregnant – or planning to have a child during the coming year?
  • Have you obtained the results from any genetic tests during the past 10 years that indicate your likelihood of developing cancer (or another debilitating condition)?
  • Have you ever suffered a heart attack or stroke? Do you have any close blood relatives who have suffered from either of these medical problems?
  • Do you currently suffer from depression, bipolar disorder or schizophrenia – or do any immediate family members have these medical conditions?

Under some circumstances, once you’ve hired a new employee, you may be able to inquire about certain disability-related medical conditions. However, you should discuss all the specific conditions that must exist before asking these questions with your employment law attorneys to avoid violating any of the employee’s legal rights.

The TWC and EEOC help current (and prospective) employees with discrimination concerns

When individuals believe that they’ve endured discrimination while applying for work with your company – or while employed by you, they usually contact the Texas Workforce Commission and the EEOC while deciding whether to file a formal complaint.

Should you learn that such a complaint has been filed, be sure to immediately contact our law firm so we can help you prepare a thorough response, detailing all that your company did to fully respect all employee (or job applicant) rights. We can also discuss with you various proactive steps your company can take to try and decrease the chances of having any further complaints filed against you.

IRS Clarifies “Employee” Versus “Independent Contractor” Test

The IRS recently issued clarifying guidelines to help employers determine which workers should be treated as independent contractors or employees. The government naturally wants accurate decisions to be made since they determine when it’s paid certain taxes on each worker’s wages.

The main deductions that should be subtracted from all employees’ paychecks include those for Social Security, Medicare, unemployment and income taxes. When a business has work done by an independent contractor, that person must pay all those taxes in the form of self-employment tax.

What remains the general standard for deciding if a worker is an independent contractor?

If an employer reserves the right to only direct control over the result of the work – and cannot tell a worker exactly what to do and how to handle the assignment – then that worker will usually be legally viewed as an independent contractor.

However, deciding what constitutes specific directions for completing a given task can still fall into a gray area.

Fortunately, there are three basic analytic categories that can help employers accurately determine when workers are properly classified as “employees” or “independent contractors.”

What are the three main categories of analysis for deciding a worker’s correct status?

The IRS indicates that employers should carefully examine the following three aspects of how they relate to workers to determine their proper work status.

  1. Behavior control. An employer may have behavior control over a worker even when it does not exercise it. For example, when such control is involved, it may include telling a worker which specific tools to use and where those supplies should be purchased. Under those circumstances, the worker should be considered an employee. Conversely, the less control over a worker’s behavior, the greater the chance that the person is working as an independent contractor.

If there are strict guidelines for determining the quality of the work provided, there’s a strong chance that the worker is an employee. When the worker is provided a bit more leeway in terms of quality control – there’s a stronger chance that the person is an independent contractor.

Of course, the two parties will usually need to agree to some basic quality standards, regardless of whether the worker is an employee or independent contractor. Finally, if periodic training or ongoing training is required of a worker – that increases the chances that the worker should be treated as an employee.

  1. Financial control. Does the worker have to personally cover the majority (or all) of the expenses tied to completing the work? These might include the purchase and maintenance of proper computers, printers, fax machines, scanners and other required equipment. If the worker is covering all those expenses, he or she should probably be classified as an independent contractor.

Stated differently, when a worker has many unreimbursed expenses, that person is usually an independent contractor — not an employee. Independent contractors are also those who retain the right to continue obtaining additional work from other parties. As for the payment for services, independent contractors are usually paid a flat fee – although that arrangement can vary in some cases.

  1. How the employer and worker each perceive the nature of their relationship. When the parties have not negotiated any employee benefits like vacation pay, sick pay, a pension plan and stock options – the worker is usually an independent contractor. While a written contract signed by the two parties can indicate how they view their interactions, it’s not always the only evidence the IRS and the courts will review when classifying the work relationship. All relevant documents and communications may need to be examined.

The main consequence for an employer who misclassifies a worker is that the employer may be required to pay all employment taxes currently owing for that worker – as opposed to requiring the worker to cover them.

What unique emphasis is placed on these three categories in the updated guidelines?

As for behavior control, employers really shouldn’t be telling the independent contractor the exact sequence of events for all tasks to be performed or exactly how they should be handled.

Regarding financial control, only independent contractors can experience a profit or loss while handling assigned tasks. Employees whose expenses are generally covered will usually not experience any profit or loss while completing assigned tasks on a given schedule.

As for how the parties view their work relationship, a fully executed contract can be controlling when other conclusive details aren’t available. However, as briefly noted above, the parties’ communications can usually provide clear indications of whether they’re interacting as employer-employee or employer and independent contractor.

The key bottom line for employers who don’t want to only work with employees – is to allow their independent contractors considerable flexibility while completing tasks – while respecting professional standards acceptable to both parties.

Please give our law firm a call if you need any help determining which workers are employees or independent contractors. We can also help you better understand the many different types of classifications that govern a wide range of employees you may want to hire – and the tax consequences for hiring those who fit in each group.

Our firm always remains available to help you draft many different types of contracts that can serve all your business needs.

An Overview:  Winding Up Texas Corporate Activities

An Overview:  Winding Up Texas Corporate Activities

Corporate officers can choose to formally “wind-up” all business activities when many different factors change. For example, when smaller corporations are involved, key parties may simply want to retire or pursue new goals. In other situations, market trends may change so significantly that corporate officers may want to choose more advantageous business structures. Regardless of why any specific Texas corporation decides to go through the termination process, basic legal steps must be followed carefully.

Since this process can involve different statutes, including detailed sections of the state’s Business Organizations Code, it’s always best to confer with your Houston corporate law attorneys. They’ll readily understand the termination process that the Texas Secretary of State’s Office expects each corporation to complete. (Of course, in some instances, a corporation may be involuntarily terminated for various reasons – including the failure to file annual reports).

Here’s a look at some of the steps you must be ready to take based on our state’s governing laws and the specific realities involved with your business. Although other states may speak of “dissolving” corporations, Texas usually refers to “winding up” corporate matters.

The Texas Business Organization Code’s Two Main Ways to “Wind Up” Activities

  1. The board of directors adopts a resolution. It should state that they are recommending that the corporation “wind up” its activities — after submitting this proposal to all the shareholders. At a properly convened meeting, the shareholders must then vote on this proposal. In general, a two-thirds majority of the shareholders must approve this decision before the winding-up process can begin;
  2. All shareholders must sign a “consent” document. Once this has been done, the “consent” document must be entered into the corporate records. This approach is most common when smaller corporations are involved. Great care must be taken to cover all key termination matters within this consent agreement.

Once this early internal activity has been concluded, numerous other steps must be taken to properly conclude all corporate business matters.

Common Additional Steps Required to “Wind Up” Your Corporation

  • All known parties with claims against the corporation must be served with notice of the current intent to terminate the corporation’s existence;
  • Every necessary corporate lawsuit must be properly initiated and concluded;
  • All corporate property must be properly collected and sold – depending on whether its value is owed in some manner to the shareholders;
  • All corporate liabilities must be properly discharged – including the payment of any taxes owed to the IRS or the state of Texas.

General Tax Issues and Obtaining Required Certificates

While your Texas corporate attorney may be prepared to handle all your corporation’s tax payment issues involved with the “winding up” process, you may also want to confer with a tax attorney.

Keep in mind that your corporation must obtain a “certificate of account status” from the Texas Comptroller of Public Accounts — and a final federal tax return must be properly filed once all corporate finances have been finalized.

Filing a Certificate of Termination

After you’ve obtained a certificate of account status from the Texas Comptroller of Public Accounts, you’ll need to file Form 651 (a certificate of termination) with the Secretary of State’s Office. Once this step has been taken and approved, your corporation’s existence has legally ended.

Added Issues That May Need to Be Addressed

Keep in mind that the information provided above was simply intended as an overview of the Texas corporate “winding up” process. Your attorney will be able to provide you further advice about whether additional paperwork is required. Fox example, certain Texas laws governing corporate mergers may or may not apply to your situation.

Please feel free to contact our law office with any questions you may have about possibly terminating your Texas corporation – or any other business entity. We can provide you with the advice you’ll need to properly handle all required stages of this process.

Gray Areas Keep Emerging in the Field of Sexual Harassment

Sexual harassment cases have remained quite numerous during recent years. Lawsuits involving Fox News, the late Roger Ailes and the transportation giant Uber have kept our judicial system very busy. In fact, in early July of 2017, the Los Angeles Times reported that Fox News had just fired the head of its L. A. sports programming division due to new allegations of workplace sexual harassment.

Perhaps it’s not surprising that while so many claims were being filed during the past five years, courts were being asked to evaluate some newer types of allegations. Several of them involve employees who were fired because their bosses said they were too attractive to have around or interact with on a regular basis. Equally odd are recent workplace problems caused by male employees trying to distance themselves from female co-workers who they claim harbor romantic feelings for them.

Before examining these new issues closer, it’s important to review what constitutes modern sexual harassment.

The EEOC’s Definition of Sexual Harassment

On its website, the EEOC states that it’s simply wrong to harass a person (such as a job applicant or employee) based on that person’s sex. Harassment can include someone making unwanted sexual advances or requests for sexual favors from another worker. While both men and women can suffer sexual harassment, statistics reveal that women file 83% of these claims. Some surveyed workers have said that they believe that this is probably true since men are often  overrepresented in positions of power in the American workplace.

Harassment doesn’t always involve any touching. In fact, offensive remarks about the opposite sex can be enough to constitute sexual harassment. What courts are often looking for is whether various workers’ words and actions have created a hostile working environment. When simple teasing and offhand comments become quite regular, they can legally be viewed as sexual harassment. Even consensual office romances can cause legal problems because when they end, one of the two participants may often wind up fired or demoted.

Relatively new sexual harassment claims involving bosses who fire employees for being too attractive provide new dilemmas for our courts. Likewise, employees distancing themselves from others because they think their co-workers harbor hidden romantic feelings for them are also uniquely troubling. These types of “gray area” claims are discussed further below.

Should It Be Lawful to Fire Someone Who Is Too Attractive – Or a Female?

Oddly enough, one or two courts have allowed bosses to simply dismiss women because they’re so attractive that the men fear they can’t control themselves if they remain in the workplace. One such case was filed by Melissa Nelson against her dentist employer in Iowa. This 33-year-old office assistant had worked for this dentist for many years. However, she was let go after he claimed that his wife had learned that her husband was sharing improper text messages with the young woman.

Of course, this type of employer claim clearly implies that the woman will make poor choices and should therefore be dismissed as some type of precaution. Perhaps the employer just wanted to dismiss her but couldn’t come up with a better excuse. Nevertheless, the Iowa Supreme Court later reaffirmed its decision, denying this fired young woman any type of compensation. The court even tried to dodge its questionable “logic” by saying that the firing was based on feelings – and not the young woman’s gender.

Unfortunately, that Iowa case is not unique. A similar case was filed due to the 2013 firing of a Manhattan yoga instructor who worked in a chiropractor’s office. She was told she was “too cute” — and that her ongoing presence in the office would make her boss’ wife jealous. A judge dismissed her case back in 2016. However, that case isn’t over. In August 2017, an appeals court ruled that the Manhattan yoga instructor can proceed with her case and sue the chiropractor.

What About Men (or Women) Who Want to Avoid Working with the Opposite Sex?

Can an employee refuse to spend legitimate work time with a woman because he believes she has a crush on him? Can this be viewed as some type of sexual harassment? This issue came up recently in an Austin, Texas workplace. William Manno, who had been refusing to work alongside a specific female — is now having to reevaluate and change his behavior.

Thomas Kochan, a Massachusetts Institute of Technology professor and co-director of the M.I.T. Sloan Institute for Work and Employment Research says that when workers inappropriately refuse to interact with others due solely to their sex or presumed romantic feelings – employers may need to intervene. In fact, it can prove very useful and instructive for employees who want to isolate themselves from members of the opposite sex to begin participating in group work activities so they can develop healthier work habits.

Regardless of how one views some of these newer issues, it’s important for all workers to stand up for their rights when any serious harassment behaviors develop.

What All Workers Must Do When They Believe They’re Being Sexually Harassed

  • Keep detailed notes about the offensive incidents. Be sure to write down the specific facts, the dates and times involved — and whether there were any witnesses. Keep this log at home and not in your place of employment;
  • Carefully review any employee handbook you’ve been given. Try to follow your company’s recommended way of handling suspected sexual harassment. If reporting the incident to your immediate supervisor won’t work – you may want to confide in a senior employee you believe you can trust. However, you should first review all the steps named here – before taking any action;
  • Immediately contact your local Houston employment law attorney. Once you’ve scheduled an appointment, gather together all relevant employee handbooks, training materials and other pertinent documents regarding your sexual harassment claim. Your lawyer will tell you exactly which steps to take in the proper order to fully preserve your claim in a timely manner;
  • Be prepared to contact the EEOC (Equal Employment Opportunity Commission). You normally have 45 days from the date of the event to obtain help and advice from an EEOC counselor. Your lawyer can inform you how such claims are normally processed and tell you about other legal remedies you may need to pursue;
  • Seriously think about what you may lose if you don’t file an EEOC claim and consider other litigation. As most women know, some of the worst instances of sexual harassment are never reported. After all, no one wants to become the subject of office gossip if the employer fails to honor your privacy. Likewise, concerns about retaliation are common. Fortunately, there are legal remedies for retaliation. However, if you don’t file a claim, it may become much harder for you to protect your career in the future against the negative repercussions of the current sexual harassment.

Get Ready for the New Overtime Rule

May 18, 2016 – The U.S. Department of Labor has released its final rule on overtime under the Fair Labor Standards Act. The Administration estimates that the new rule will extend overtime protections to 4.2 million Americans who are not currently eligible under federal law. Once effective, the rule will raise the salary level from its previous amount of $455 per week (the equivalent of $23,660 a year) to $913 per week (the equivalent of $47,476 per year) in 2016. The rule will also raise the compensation level for highly compensated employees from its previous amount of $100,000 to $134,004 annually. The final rule also establishes a mechanism for automatically updating the salary level every three years, with the first update to take place in 2020. These changes take effect on December 1, 2016. The Final Rule can be viewed here: https://www.dol.gov/whd/overtime/final2016/

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The final rule does not make any changes to the duties test for executive, administrative and professional employees, which affects the determination of who is exempt from overtime. Administrative employees who do not meet the special provision for administrative employees will be eligible for overtime if they earn below the salary level set in the final rule and they work more than 40 hours in a week.

In response to the new overtime rule, employers have the option of:

A. Paying time-and-a-half for overtime work;

B. Raising the workers’ salaries above the new threshold;

C. Limiting worker’s hours to 40 per week; or

D. Some combination of the above.

Sweeping Changes on the Horizon: Fiduciary Duty of Employers & Others Managing 401K Plans

The statute governing the conduct of plan sponsors and advisors to 401(k) plans is the Employee Retirement Income Security Act of 1974 (ERISA).  Section 404 of ERISA imposes a prudent man standard of care on the employer and other plan fiduciaries, comprised of five standards:

  • Duty of Loyalty – A fiduciary must discharge his duties solely in the interest of the plan participants. This means the fiduciary must avoid conflicts of interest when managing plan assets.
  • Exclusive Purpose Rule – A fiduciary must discharge his duties for the exclusive purpose of providing benefits or defraying reasonable expenses only. The plan must not pay excessive compensation to its investment and service providers.
  • Duty of Care – A fiduciary must discharge his duties with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims. This is also known as the “prudent expert” standard.
  • Duty to Diversify – A fiduciary must diversify the plan’s investments so as to minimize the risk of large losses, unless under the circumstances it is clearly prudent not to do so.
  • Duty of Obedience – A fiduciary must discharge his duties in accordance with the documents and instruments governing the plan insofar as they are consistent with ERISA.

ERISA in § 1113(1) provides that claims brought against fiduciaries under the Act must be brought within six years from the initial breach.

On February 24, 2015, the U.S. Supreme Court heard oral arguments in the case of Tibble vs. Edison International.  This was the first case involving litigation over excessive 401(k) fees heard by the Supreme Court.

The Plaintiffs sued Edison International (Edison) in the U.S. District Court for the Central District of California (district court) to recover losses from alleged breach of fiduciary duty in management of their 401(k) plan based on two theories: 1) that Edison violated certain ERISA provisions by participating in revenue sharing with the funds to offset plan costs (essentially using a portion of the revenue from the participants’ funds to pay administration costs); and 2) that Edison violated ERISA provisions by imprudent handling of plan investments.

The district court granted summary judgment for Edison noting that Edison initially chose the higher-fee retail-class mutual funds for plan investments more than six years before the claim resulting in the plaintiffs’ claim being barred by the ERISA limitations period.

On appeal to the Ninth Circuit, Tibble counsel argued a continuing violation theory proposing that Edison continually breached their duty of prudence by failing to identify on an ongoing basis alternative lower cost fund options for plan participants through 2007.  If this theory was accepted, the last breach would have been in 2007 resulting in plaintiffs’ claims falling within ERISA’s six-year statute of limitations.  The Ninth Circuit affirmed the district court’s ruling.  Tibble petitioned the Supreme Court which granted certiorari to review the case.

While the underlying claim asserts that Edison breached its fiduciary duty in the management of the employee 401(k) Savings Plan, a defined contribution plan sponsored by Edison, the Supreme Court limited review to the limitations issue.

Edison initially claimed it had no continuous duty, and those claims were barred by the six-year statute of limitations, but at oral argument both sides agreed that the duty to monitor was a continuing one. They disagreed on the scope of that duty.  Edison International contended it had no obligation to switch to the less expensive share class, because this was not the type of issue significant enough to warrant “full due diligence.”  The position of the plan participants was that Edison International, as a fiduciary for the plan, had an obligation to make changes that any prudent investor would, which included switching to the lower-fee share class, as part of its continuing duty to monitor investment options.

In response to Justice Kagan’s question as to what a trustee is supposed to do under the prudent person’s standard, Tibble counsel advanced a three-part standard: 1) look at performance on a regular basis, a periodic basis; 2) look at the expenses and determine if there is a cheaper way to get the same investment for less money that’s coming out of the beneficiaries’ assets; and 3) has there been an alteration in the fund management that one ought to look further into.

On the other hand, Edison counsel argued that ongoing, periodic monitoring for anything other than more significant changes such as change in value and risks of the investments is not required.  In response to his contention that all of the changes required to sell retail shares and buy new institutional shares creates disruptions that employees don’t like which is why the monitoring process is usually limited to looking for significant changes.  Justice Kagan was rather incredulous at this proposition by Edison when she observed that, for people who have invested in funds for 30 to 40 years, this would not be much of a disruption at all.  At another point in oral argument, Justice Roberts chimed in questioning how there could be investor confusion.  Justice Roberts proposed that one sentence saying we have been paying .3 percent, and by changing funds, now we’re paying .2 percent, will not have people running out screaming that they’re confused about it.  Justice Kagan responded again with incredulity challenging Edison counsel “They don’t like changes.  They would rather have fees?”

Edison counsel also suggested that all that should be required of the prudent trustee is a periodic review to look only for changed circumstances.  He argued against the Supreme Court endorsing Tibble counsel’s position that the prudent trustee should also look and scour the market for cheaper investment options.  Interestingly, Justice Kennedy seemed to be endorsing the Tibble position when he responded that you certainly would scour the market for cheaper investment options if that’s what a prudent trustee would do.

The Justices focused much of their questioning first as to what kind of monitoring Tibble’s counsel was proposing, what kind of standard he was suggesting.  Then they looked to whether that was what a prudent trustee would do, and what kind of burden this would create for Edison in managing the plan, and finally what effect it would have on the plan participants.

The Justices appeared to support the Tibble plaintiffs’ new “prudent” investor standard.  This Supreme Court was also urged by the government attorneys from the Labor Department to accept this new standard as well.  If the high court adopts this new standard, which appears likely, it could have sweeping effects on companies and employees.  According to the Investment Company Institute, 401(k) plans held $4.4 trillion in retirement assets as of March, 2014.  Some of the funds offered to Edison employees had fees 37% higher than comparable institutional funds.

The Supreme Court’s decision is expected to be out sometime this summer.  It could change how companies fundamentally handle the way they invest for 401(k) plans.  They could move away from mutual funds to lower-cost methods such as collective trusts or separately managed accounts.  One option would be to appoint a “3(38)” fiduciary under ERISA, typically a registered investment advisor (RIA), to transfer the responsibility for managing the plans from themselves to the RIA.  Aside from potential changes in how such plans are managed, there is a lot at stake for both employers and employees in terms of potential litigation.  The Supreme Court’s decision could open a floodgate of litigation regarding the fiduciary duties of trustees for 401(k) plans sponsored by companies across the nation.  This is definitely one decision to keep on your radar.

References

Employee Retirement Income Security Act of 1974 (ERISA), Pub. L. No. 93-406, 88 Stat. 829 (codified as amended in scattered sections of 5 U.S.C., 18 U.S.C., 26 U.S.C., 29 U.S.C., and 42 U.S.C.).

Employee Retirement Income Security Act of 1974, 29 U.S.C. § 1113(1).

Tibble v. Edison International, 711 F. 3d. 1061 (9th Cir. 2013), cert. granted in part, 2014 U.S. LEXIS 4901 (U.S. Oct 2, 2014).