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.

Why You Need to Create a Business Succession Plan NOW

Why You Need to Create a Business Succession Plan Now

Even when all owners of a company plan to work until the very end of their lives, there’s still a need for a viable business succession plan. After all, anyone can become totally or partially disabled as a result of a serious car accident or die of a deadly disease on almost any day.

When business owners hide from this reality, they often create havoc for all surviving partners or family members. Instead, it’s better to move forward at a calmer time to carefully address these types of possible future events.

Your Houston business law and estate planning attorney can help you decide on the best way to either pass your business on to others — or liquidate all the assets to meet your own needs and those of your survivors.

General questions you must answer yourself about any succession plan

  • What is the current market value of this business and all its assets?
  • Who is the best possible buyer? Do I prefer to sell the business to a co-owner, family member, employee or a third party?
  • Am I more likely to sell the business sooner rather than later? Am I interested in selling the company now due to health, retirement or other reasons?
  • Is this business tied to its current location? If not, would it be reasonably simple for the business to be moved elsewhere and successfully run by someone there?
  • What preferences do I have about how the sale should be financed? Am I willing to personally finance the loan? If so, what type of collateral should I require?
  • Which business advisors should I consult with while securing all the required contracts and other paperwork? Besides business and tax lawyers, do the specific assets of my company require me to consult with real estate agents, insurance and business brokers, bankers and financial advisors?

It’s often wise to start this process by locating and reviewing all your current business contracts and deeds. Next, give some thought to your company’s most productive and respected employees. Then, carefully determine the current market value of every business asset. Finally, schedule confidential, preliminary talks with any co-owners, family members who work for you, other key employees and perhaps one or two other potential buyers of your company.

Once these initial tasks have been handled – or while you’re completing them – it’s wise to meet with your Houston business law attorney.

Advantages and disadvantages of selling to different parties

Unless you’re the sole owner of the company and simply want to liquidate all the business assets and not sell (or transfer) the company to others, you must carefully evaluate each potential buyer and decide which one is best qualified to run the company in your absence.

  1. One or more family members. In most instances, it’s usually best to sell to only one family member, preferably one who is already involved in the business and respected by your employees. Ask your attorney about the best ways to prevent future challenges to any decision you make. One approach might involve drafting a buy-sell agreement that clearly states who is going to be running the company — and asks all others who currently work there (or own shares) — to sell their shares to the person you’ve named as your successor. This approach often helps minimize future family disagreements.

When selling a business to a family member, you may want to execute a self-canceling installment note (SCIN). Your attorney can explain why that may be useful;

  1. A key employee who is highly knowledgeable and well liked by other workers. The most common drawback to selling to a key employee is that the person may not be able to give you a large down payment in cash. Be prepared to execute a buy-sell agreement that clearly lists all the valuable collateral for any loan you may be willing to finance. You can also suggest that this employee try to obtain an SBA (Small Business Administration) or bank acquisition loan that will provide you with up to 70% or more of the purchase price upfront;
  2. You can sell your shares to your co-owners. Be sure to clearly indicate the sale’s price and all purchase terms;
  3. An outside third-party or competitor. Be very careful when selling to this type of buyer if you’re financially depending on the person to keep running the company. Due diligence is critical when evaluating every potential buyer.

Since this article only provides a broad overview of the types of issues involved when drafting a business succession plan, you’ll need to obtain competent legal help to handle this entire process. Should you already have some type of succession plan, we can help you decide if it’s time to update it.

All our Murray Lobb attorneys have the necessary experience to help you create a business succession plan that’s specifically tailored to your company’s unique needs. We look forward to helping you draft all the contracts and other documents you’ll need while selling your business.

 

Brief Overview of Texas and Federal Whistleblower Laws

All employers must respectfully interact with employees who report alleged wrongdoings in the workplace. Often referred to as “whistleblowers,” these individuals are trying to correct illegal practices or behaviors they believe are harmful to many. Although some whistleblowers may have improper motives, you always ignore them at your own peril – especially since there are Texas and federal laws designed to protect them under certain circumstances.

The following information about whistleblower laws and related activities can help you better understand why an employer must obtain timely legal advice from a Houston business law attorney once any employee threatens to file this type of complaint.

The Texas Whistleblower Act

This statute is found in Sections 554.001 (and following) of the Texas Government Code. It only provides protection against employer retaliation for public employees – not private ones. The law expressly forbids public employers from suspending, terminating or otherwise imposing adverse personnel actions employees who report alleged legal violations by the employer or co-workers.

However, the complaining party – who must report the alleged wrongdoings to the appropriate law enforcement authority – must undergo (exhaust) all employer grievance or appeals processes before being allowed to sue the employer. Under the Texas statute, all whistleblower lawsuits must be filed within 90 days of the reported wrongdoing.

Damages may include obtaining a legal injunction against the employer – as well as receipt of all back pay owed if the employee was terminated (or demoted) in a retaliatory move. Successful whistleblowers (who meet all statutory requirements), are also entitled to receive full reinstatement, all fringe benefits owed, full seniority rights, actual damages, reasonable attorney fees, court costs and a set maximum of possible other compensatory damages.

Furthermore, a supervisor found to have violated the complaining employee’s rights under this Texas statute (Section 554.008) can be forced to pay up to a $15,000 civil fine.

While the burden of proof is on the whistleblower, the possible penalties can be formidable.

Federal laws often relied upon by various whistleblowers

  • The Sarbanes-Oxley Act (passed shortly after all the illegal Enron activities). It mainly addresses the penalties available in the wake of fraudulent accounting practices.
  • The Dodd-Frank Wall Street Reform and Consumer Protection Act.
  • OSHA violations. Many construction workers and other employees file “whistleblower” complaints based on these Occupational Safety and Health Administration statutes and regulations.
  • Various Department of Energy laws and statutes.
  • Environmental Protection Agency (EPA) laws and regulations.
  • Federal airline regulations.
  • The False Claims Act (as recently updated).
  • The Fraud Enforcement and Recovery Act of 2009.
  • Hazardous waste regulations.
  • The Patient Protection and Affordable Care Act — and other government statutes related to the provision and receipt of proper medical care.

While this list isn’t intended to be comprehensive, it provides a general overview of the types of statutes and regulations often referenced in many whistleblower complaints.

The following information reviews the most common types of illegal retaliation some employers take upon learning that a whistleblower complaint has been filed.

Forbidden, retaliatory actions taken by some employers

  • Job termination. Far too many employers look for “clever” ways to fire complaining employees once they learn a whistleblower complaint may be filed.
  • Demotion. An aggrieved employee may be called in and told that there have been long-standing complaints about his/her performance – requiring demotion to a lower position with considerably lower pay.
  • Thinly disguised harassment on the job.
  • Retaliatory discipline. This may include the placement of highly negative performance reviews in an employee’s file – making it much harder for the workers to receive any future promotions or favorable recommendations upon leaving the job.
  • Blacklisting. Some employers will “discreetly” contact their peers throughout the same industry, purposefully designating the specific, complaining employee in hopes of preventing that person from every landing another job in that same field.

Two high-profile whistleblower events help explain how such actions often unfold

One of the best ways to gain a stronger understanding of whistleblower activities is to read all you can about how former Enron employee Sherron Watkins reported her concerns about her employer. You may also want to learn more about all the late FBI agent W. Mark Felt (“Deep Throat”) did to expose President Richard Nixon’s illegal activities tied to the Watergate scandal.

As one Texas Monthly article puts it, the Enron scandal involved highly questionable financial practices that included the creation of financial entities to help Enron conceal the company’s growing debt from Wall Street, regulators and the general public. The book Power Failure provides an in-depth look at how all of Enron’s troubles began and how its illegal activities ruined the lives of so many.

Conclusion

Always make sure your company (or government office) provides all supervisory personnel with comprehensive training on the proper ways to respond once a whistleblower complaint has been filed (or is referenced by an employee). And remember that retaliatory acts must be avoided since they’re illegal and often very costly.

If you believe an employee is preparing to file a “whistleblower” complaint against you, please contact one of our Murray Lobb attorneys right away. We can explain your legal rights to you and help you take the proper steps to respond appropriately. Timely intervention can prevent critical misunderstandings and unnecessary litigation.

Many People Start New Businesses After Age 50

A large percentage of Americans launch new companies and careers after turning fifty. In fact, the term “encore entrepreneurs” has been coined to describe this steady trend. In her book, “Your Life Calling: Reimagining the Rest of Your Life,” Jane Pauley profiles some rather amazing people who’ve transformed their “retirement years.” Many of them are now realizing personal dreams that are helping others both locally and in distant parts of the world.

In a recent New York Times article addressing this topic, one man in his early sixties said that he’s so happy with his new company (which creates educational and training videos) that he may never retire. Fortunately, many larger cities often have “incubators” designed to help people get new companies off the ground — and venture capitalists who are eager to consider funding start-ups with a strong likelihood of success.

Texas remains a great state for new businesses

Every year, many media outlets rank multiple Texas cities as great places to design and build new companies. Be sure to review our Texas governor’s office publication entitled “Texas Business Incubators.”

Once you’ve got a great idea for starting a business, consider scheduling an appointment with your experienced Houston business law attorney to obtain the valuable legal advice you’ll need.

Here are some additional facts and figures that can provide useful insights into some of the best fields to enter (and others to avoid) as you move forward with getting your new company up and running.

Facts and statistics about older Americans starting new companies & becoming self-employed

  • Fifty-one percent (51%) of new start-up business owners are between the ages of 50 and 88. In fact, those aged 35-49 only start about 33% of new companies — and those age 35 or younger only form about 16% of them. Fortunately, you don’t often need a lot of money to get a new company off the ground. Many older entrepreneurs start their companies with $2,000 or less.
  • The Dallas Morning News reports that during each month in 2017, roughly 400 out of every 100,000 Texans became entrepreneurs. A large percentage of those individuals were seniors. Many of their businesses were formed in Austin, Dallas and Houston.
  • About 80% of new Texas business entrepreneurs start their businesses based upon immediately available opportunities – rather than the simple need to find work.
  • Between the year 2000 and 2016, the number of self-employed New Yorkers rose by 63.7 percent. While the country’s economic downturn back around 2008 certainly influenced that trend, it clearly isn’t the sole or main force behind it.
  • About 69% of Americans start their businesses at home.
  • Roughly 42% of all new businesses are formed as S-corporations and 23% are LLCs. Of course, a very large number of small businesses are simply run by solo entrepreneurs.

Which types of new businesses tend to succeed the most often?

  • Those offering insurance, real estate or financial services. After four years, about 58% of these are usually still viable.  Businesses in the financial realm often offer tax preparation, bookkeeping or payroll services.
  • Companies renting or leasing automotive equipment.
  • Legal service businesses.
  • Medical, dental and other healthcare services.
  • Religious organizations.
  • Specific types of administrative or company management services.

Types of new businesses that frequently fail sooner than others

  • Stores selling beer, wine and liquor
  • Auto dealerships
  • Oil and gas extraction service companies
  • Grocery stores
  • Beverage manufacturers
  • Furniture stores
  • Companies selling lawn and garden equipment

After going over your business plans with trusted family members or friends, consider reading more about the different types of business structures you can choose from and what’s normally involved with starting a new Texas company.

Hopefully, you’ll decide to join the many other Texans who’ve discovered that running a business when you’re older can be a very gratifying experience – one that can add even greater purpose to your life.

Our law firm invites adults of every age to contact one of our Murray Lobb attorneys for legal advice when either starting a new business – or simply needed help with one that’s already thriving.

Key Traits New Business Partners Must Readily Offer

Although only 20% of new businesses fail during their first year, roughly half of them cease operations during their first five years. Frequently, the biggest problems develop because the founders failed to choose the best group of partners available to start the company.

Each potential business partner’s personality traits, ethical values, passion and proven skills must be carefully evaluated. Only then can everyone work hard together to define and establish high performance standards while carefully marketing the company’s goods and services to the public.

Here’s a general overview of the partner skills and traits that some business experts believe can provide a new company with a strong chance to succeed for many years to come.

Top skills and traits your partners must have and be willing to share with each other

  1. Trustworthiness, discretion and moral integrity. In addition to partners whose references say they’re definitely trustworthy– you also need people who have an innate need to treat others fairly and want to act as good role models for ethical business behavior;
  2. Keen intelligence and a proven track record of success. Ask all potential partners about their past business successes and failures. Find out if they have truly learned from all past experiences. The crucible of the workplace often provides the best measure of a potential partner’s ability to succeed in a new business venture. Look for highly intelligent partners who can readily respect other people’s creativity — while still bringing their own fresh, original ideas to the table;
  3. Able to maintain a consistently positive, “can do” attitude. Nothing can bring a business to its knees quicker than one or two partners who keep forecasting doom. Be sure each person will remain actively involved in all key company decisions and “go the extra mile” without being asked to do so on many occasions;
  4. Able to display strong, supportive communication skills. All companies need strong communicators who can create proper standards for respectfully interacting with others. These standards must apply to all in-person meetings, phone conversations, the exchange of emails and the use of social media. Each partner must also clearly communicate his or her support for others within the company;
  5. Can offer unique skills that help balance out those offered by the other partners. In addition to someone who can handle complex accounting matters, you’ll also need partners who are strong planners, innovative geniuses, marketing wizards and product (and service) development experts. You’ll also need at least one partner who maintains strong connections to industry experts who can provide your company with timely advice, crucial consultants and other contacts over the years;
  6. Can remain open-minded and is willing to constructively resolve conflicts with others. Always learn all you can about each potential new partner’s openness to the ideas of others and ability to compromise on matters. Also try to evaluate the person’s mature ability to acknowledge personal mistakes – and learn from them. You don’t need any partners who constantly try and prove themselves “right” about everything;
  7. Has the ability to handle different levels of risk and uncertainty. This may be the hardest trait of all to discern – but it’s well worth finding out if someone can remain fully productive – even when unexpected business challenges arise. Always ask about past business difficulties and how the partner candidate personally responded to them. Resilience in the face of change is a key trait of all successful business partners.

Once you’ve selected all your partners, you’ll need to meet with your Houston business lawyer to draw up a partnership agreement that clearly addresses such matters as each person’s roles and responsibilities, how (and when) everyone will be compensated – and how the company must respond when anyone chooses to leave the partnership.

Please contact our Murray Lobb office so we can provide you with the guidance you’ll need when forming any new business. Our firm’s lengthy experience working with professionals in numerous fields allows us to provide you with the help you’ll need.

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.

How the Texas Business Opportunities Act Seeks to Help Consumers

One the main goals of the Texas Business Opportunity Act is to protect consumers interested in starting their own businesses from scam artists eager to defraud them out of their money. When ads appear on TV or via email — promising large profits in exchange for a small, initial investment – it’s never wise to assume a valid offer is being made.

Some of the most common business opportunity ads often claim that you’ll need to do very little work before you’ll start receiving your first profits. That’s rarely an honest offer since running a business is often hard work. Now that so many older Americans (and others) have been laid off from their jobs, it’s critical to carefully review each offer and look for “red flags” warning you of possible fraud.

The following information will help explain some of the different ways that the Texas Business Opportunity Act tries to regulate the way that many programs go about seeking investors and operating in this state.

Types of business offers governed by the Texas Business Opportunity Act

  1. Those that require the buyer to pay at least $500 to begin setting up the business that’s being sold;
  2. Where the seller claims that you’ll earn back your initial investment (or more) in profits; and
  3. The seller promises to do one or more of the following acts to close the deal:

a). Provide you with a location – or help you find one (that’s not currently owned by you or the seller) where you can use or operate the goods or services being leased or sold by the seller;

 b.) Help you create a marketing, sales and production program (unrelated to a formal franchise business governed by separate laws);

 c.) Promises to buy back products, equipment or supplies (or goods made from them) provided to you so you can run the business.

To further protect the public from dishonest business offers, the Attorney General of Texas requires parties making offers that meet the description above to first register with the Secretary of State and provide any applicable bond or trust account required.

Whenever you become interested in investing in any business opportunity that even vaguely appears to be covered by the Texas Business Opportunity Act, it’s always best to review the matter with your Houston business law attorney. Our firm can check to be sure the seller’s company has formally registered with the Texas Secretary of State’s Office and posted all required funds.

As a potential investor, you should also be provided with key information (required by law) about any company – before ever tendering any money.

Legal disclosures companies must provide

When a business offer is made in Texas and is covered by the Texas Business Opportunity Act, the seller must provide specific information to the buyer ten (or more) days before any contract is signed by the parties and before any money is paid to the seller.

Here are some of the disclosures that must be provided.

  • Names and addresses of all parties directly affiliated with the seller in the business being marketed;
  • A specific listing of all services the seller is promising to perform for the buyer (such as setting up a product marketing program);
  • An updated, current financial statement covering the seller’s finances;
  • All details covering any training program being offered by the seller;
  • How all services will be provided by the seller regarding the products and equipment being sold – and all key terms involved with the leasing agreements covering business locations being provided to the buyer;
  • Information pertaining to any of the seller’s bankruptcies (or civil judgments obtained against the seller) during the last seven years.

The importance of distinguishing multi-level marketing offers from pyramid schemes

Make sure the business you’re interested in requires you to do some type of work (such as selling products or services) before paying you any profits. If you are only being urged to solicit additional participants in the business, there’s a strong chance that you’re being “tricked” into building a pyramid scheme that may earn you short-term gains before the entire investment program collapses.

Always obtain legal advice regarding any business that sounds too much like a quick way to earn a lot of money. Attractive shortcuts to huge profits – especially those promoted in many weekend hotel and restaurant seminars – are often sham operations.

Please contact our law firm so we can provide you with the legal advice you’ll need before investing in any new business opportunities.

Buying a New Company:  Conducting Due Diligence

Depending on the nature and size of the business you’re interested in buying, the process of completing due diligence can be straightforward or complex. Fortunately, the basic steps you’ll need to follow are rather standard.

After your lawyer has negotiated a Letter of Intent (LOI) with the seller –  covering each party’s duties and responsibilities involving confidentiality, exclusivity and other matters – you’ll be ready to begin the due diligence phase of possibly buying the company.

The Main Reasons for Performing Financial Due Diligence

This process is partially designed to help determine if the initial evaluation placed on the business is fair and if the company is both stable and viable. Time must also be set aside to review all current contracts and potential legal and regulatory liabilities.

Some of the specific aspects of the business you’ll want your Houston business law attorney and personal accountants to carefully review and examine are set forth below.

  • All accounts receivable and payable
  • At least the last three years of the company’s tax filings
  • All current payroll obligations
  • Most or all the major banking transactions for the past year or more
  • The full nature and extent of any outstanding loans on the books

As this initial list of matters indicates, this process can take many months with some businesses. Normally, the parties negotiate the timetable for completing all due diligence examinations in their Letter of Intent (LOI).

Special Inquiries You Must Include Regarding Other Financial Matters

Hopefully, your review of all the financial accounts won’t turn up any troubling questions that can’t be answered. However, since a small percentage of business sellers may be dishonest, your due diligence team must carefully watch out for certain types of “red flags” or irregularities. These can include some of the following concerns.

  • Missing funds
  • References to non-existing accounts
  • Improperly filed tax returns
  • A varying degree of bad debt that’s regularly written off
  • Unstable profit margins

Your lawyer’s due diligence inquiry must also include carefully reviewing all current contracts with other businesses or corporations.

Key Concerns Involving Executory Contracts

  • When are they each due to expire? (This is important since this information can affect the company’s current valuation and other issues). For example, if current supplier contracts are ending soon, you may soon find yourself having to pay far more for critical supplies;
  • What’s the status of all customer contracts? You need to be sure all funds owed to the company are being collected regularly and all goods and services promised are being delivered in a timely manner. Failure to carefully monitor all contract terms can cost you valuable customers and open you up to major legal liabilities;
  • Are all Service contracts being carefully monitored? Nearly every business is dependent on outside service vendors to keep their manufacturing and other equipment working properly. Likewise, contracts are often in place to secure the professional services of lawyers, accountants, computer repair technicians and others. You must make sure the company is properly honoring all these contracts and renegotiating them in a timely and responsible manner;
  • Are all current leases being properly maintained? Companies can’t afford to accidentally let leases lapse on buildings or other property that are essential to their daily operations.
  • Employee Agreements? Do current employees have employment agreements with non-compete clauses? These must be carefully examined because they cannot be assigned if you are only buying the assets.

Due diligence can also extend beyond merely reviewing key financial documents and contracts. It should also include a detailed review of all actual or threatened litigation and regulatory investigations.

Your Lawyers Must Review All Current or Likely Lawsuits & Regulatory Challenges

Each of the following issues must be examined regarding all current or anticipated litigation. They may prove crucial if you decide to still buy a specific company since you’ll probably need to request contractual indemnity for all future liability (and litigation expenses).

  • How costly might each case eventually prove to be? In other words, what potential liabilities are involved?
  • Has the business received formal notice that any of its operations may be operating in conflict with any state or federal statutes or regulations?

You must be willing to sit down with your lawyer and the target company’s current legal counsel to sort through all these legal and regulatory concerns since they directly bear on the business’ current valuation and the wisdom or folly of buying it.

While the due diligence concerns referenced above are not intended to be fully comprehensive, they should help you understand many of the critical matters that must be examined. Once you make it through this due diligence stage, you can then either decline to buy the company or move forward into the “closing” or final transactions phase.

Please feel free to contact our law office so we can help guide you through the various stages of due diligence as you try to decide whether you should buy a specific company.

How Should You Respond to Potentially False I-9 Documentation?

At present, the federal government expects companies to carefully examine all I-9 documents presented by job applicants and to ask questions about required paperwork that looks like it may have been altered. Once you receive proper documents that look valid, you must keep your copy of the completed I-9 form on file, ready to share it with ICE (Immigration and Customs Enforcement) upon request. In some cases, you may be given only three days’ notice to produce these documents for all your employees.

To help employers fulfill their duties, ICE provides general guidelines that describe how all I-9 document reviews should be handled. These guidelines are further referenced below, along with topics you should address with your human resource staff to help them avoid accidentally discriminating against applicants and employees while simply trying to obtain fully updated, accurate documents.

What federal law established the need to obtain I-9 documents from job applicants?

Congress passed the Immigration Reform and Control Act (IRCA) back in 1986. It requires employers to obtain job applicant documents that validate each person’s right to work in this country. This task is handled by fully completing a Form I-9 document for each job applicant. To help establish their legal status, applicants can produce such items as:  a driver’s license, a Permanent Resident Card, a US passport, a birth certificate and a Social Security card.

Can some I-9 documents be acceptable even when they initially look questionable?

The simple answer to that question is “Yes.” However, you should always keep notes in your file concerning any odd documents that you first believed might be false – and keep a copy of them. As ICE notes on its website, there are times when a worker may show you documents indicating different last names – and that may be acceptable if the job applicant can provide you with a reasonable explanation for the varied listings.

While employers must be respectful and open-minded while handling required I-9 tasks, they should be acting in agreement with previously established, written employee guidelines clearly noting that all new hires and established employees can be fired for providing any false job applicant documents. When you haven’t already created such written guidelines and acceptable standards of employee conduct, you may later find yourself accused of discriminating against an applicant or employee based upon his or her immigrant (or special ethnic) status.

This type of scenario often unfolds when an employee informs you after being hired that one or more documents given to you before being hired was fraudulent or invalid. This tends to occur when the employee is trying to provide you with newly updated, valid documents.

This specific type of issue was presented to the Department of Justice (DOJ) back in 2015. Unfortunately, instead of issuing an advisory opinion, the DOJ simply noted that employers should already be prepared to handle these types of issues — based on established employee conduct guidelines. Otherwise, they risk being sued for one of at least four employment-related forms of discrimination.

Is it true that some employers have been heavily fined for I-9 violations?

Yes. One of the largest fines recently imposed by the Office of the Chief Administrative Hearing Officer (OCAHO) involving I-9 irregularities was against Hartmann Studios. That company was required (in July of 2015) to pay $600,000 in civil penalties. (That amount had been reduced from the original penalty sought of $812,665.) When Hartmann was undergoing a new inspection back in 2011, the company employed over 700 workers.

While that large sum of money is quite high, it’s important to recognize that Hartmann Studios was unable to provide any I-9s for some of its employees who had been terminated and needed an extension of time to produce documents for others.

What steps can our office (or company) take now, to make sure were fully complying with all current I-9 document guidelines?

If you haven’t already done so, give serious thought to signing up for the US government’s
E-Verify program that can help you properly process all your I-9 documents. By visiting this government website, you can learn more about how this program works. Your usage of this service may help establish your good-faith attempt to properly handle all I-9 duties.

You may also want to ask your lawyer if you should require all newly hired (and established) employees to sign a form that clearly indicates their awareness that they may be immediately fired for their dishonesty if you ever learn that they’ve provided you with any fraudulent I-9 documents. If you do this, you’ll need to strictly apply this standard.

Please contact our Murray Lobb law office so we can answer any other questions you may have about properly handling all I-9 documents. We can also provide you with advice on drawing up a general employee handbook — that also fully alerts all employees to the possible consequences of supplying your company with fraudulent I-9 documents.

Everyone Should Benefit When an Employee Is Properly Fired

While most people don’t enjoy being fired from a job, everyone can benefit if the process is handled properly. To understand how this result is possible, it’s important to remember that your employees must be able to work together as a team. When one member is completely out of sync with the others or simply cannot do the assigned work in a timely manner, everyone suffers. So, once you’ve efficiently moved through the firing stages, most staff members will finally get the chance to perform at their highest level again.

The following information provides a brief overview of important goals to keep in mind when firing an employee. It also provides tips for protecting your company from wrongful termination lawsuits and describes the best way to meet with people while firing them.

How to Display Good Character and Protect the Business from Lawsuits

  • Be sure to clearly explain all employee management and firing guidelines in an employee handbook. Always hand one of these out to all new-hires on their first day at work and have them sign a simple form noting that they’ve received the booklet and will carefully review it right away. It’s even better to gather together “new hires” within a week or two of their starting at your company and covering basic information in the handbook;
  • Carefully investigate all the facts involved with possibly firing a specific employee. Also, make sure all supervisors are regularly interacting with each employee and telling them when their performance needs improvement – in writing (be sure to have the employee sign and date this form before placing it in a permanent file);
  • Review all applicable state and federal laws regarding termination. If necessary, speak with your attorney if you have any major questions – or believe the employee is likely to sue. Always remember that some employees are very sensitive to issues involving race, gender, ethnicity, religion, nationality, veteran status, disability, age and sexual orientation;
  • Gather together all pertinent, written evidence concerning the employee’s work record. Be prepared to keep this file in a very safe place in case a lawsuit is later filed. While doing this, rethink all the hiring practices that may need to be revised so you can avoid hiring a similar person in the future;
  • Treat the employee with dignity and respect. Don’t gossip about your firing plans. Meet with the employee in a private office setting with at least one other staff member present to serve as a witness. Respect the fact that the process of being fired may be hard on the individual. Unless the employee is guilty of terrible misconduct, remain open to paying a later unemployment insurance claim. Consider offering a severance package in exchange for the employee signing a waiver not to sue for wrongful termination. Be polite yet firm when simply stating the reasons for your decision. Finally, let the individual speak briefly about how they feel about the event. And be sure to pay all monies owed for accrued sick leave and vacation time;
  • Know that you may face sociological repercussions among other workers after the firing. If what you have done in firing a specific person is considered unfair, you may have a problem regaining the respect of many co-workers and superiors. It’s always wise to meet briefly with all concerned employees and simply state that the individual is no longer with the company and that you would prefer to not discuss it further for privacy reasons;
  • Be sure to retrieve all company property prior to providing a last check to the fired employee. You’ll also want to ask for the company laptop and any keys to office property. Be sure to immediately notify your computer and building security forces so they can block the employee’s future access to the company database and email system.  You’ll also need to collect all company I.D. cards and uniforms.

Finally, try to part on pleasant terms with outgoing employees, perhaps noting that you believe that they’ll find a better fit in other positions soon. Everyone really can benefit from a properly handled firing since it can eventually improve workplace morale. In fact, even the fired employee may soon find an equal or better position somewhere else.

Be sure to call our firm if you need any specific advice about preparing an employee handbook, interacting with troublesome staff members — or any other employment law issue.