Small Businesses Often Make Crucial Legal Mistakes

Even highly competent employees sometimes make serious legal errors while handling human resource, management, accounting and other business tasks. Since federal, state and local laws are constantly being updated, you must regularly speak with numerous employees to be sure they’re making timely and lawful decisions.

Should the feedback you receive concern you, it’s always best to consult with your Houston business law attorney to be sure you know how to promptly correct any possible errors. Lawsuits are often filed over very basic legal mistakes.

What are some of the most common legal errors that businesses keep making?

Most mistakes are made when employers try to be flexible with their rules. While compassion can go a long way toward helping you get along better with your employees, clarity and consistency are crucial. Always exercise caution when addressing the following issues.

  1. Each employee must be properly classified. You need to look at each position separately, based on all pertinent state and federal laws. If you simply decide to treat everyone as an “exempt” employee, you might be sued if you fail to provide proper overtime pay or adequate rest periods.
  2. Lunch breaks must be provided when required by law. Some employees may be entitled to a meal break after completing a specific number of hours during a shift.
  3. Make sure you’re properly labeling workers as either employees or independent contractors. You may hear from the IRS if you make this type of mistake. Take the time to speak with your lawyer about how you should carefully interact and communicate with independent contractors. Once a worker has strong legal grounds for believing that “employee” status has been conferred, you can be sued for specific benefits.
  4. You must be sure all employees understand what constitutes “sexual harassment.” If you’re sued in this field, one of your strongest defenses will be that you promptly trained all new managers and employees to help create a healthy work atmosphere. You must also develop a secure way for employees to submit complaints before problems escalate.
  5. You cannot punish or fire an employee for simply taking a leave of absence under the Family Medical Leave Act (FMLA). To protect yourself, keep accurate records of all employee evaluations being conducted at routine intervals. If you’re particularly concerned about the behavior of someone taking FMLA leave, ask your attorney when you should sit down with that employee to discuss why you’re carefully monitoring their work performance – before letting them go.
  6. Be sure to issue final paychecks on a timely basis to all employees who are leaving. Find out if you’re required to provide this type of check even before an employee has returned all employer-provided equipment, vehicles or other materials.
  7. You must handle making loans to employees in a very careful manner. While this is often a kind gesture, you must set up a formal repayment schedule. Never simply deduct a portion of what’s owed from each future paycheck.
  8. Be sure to properly handle all employer obligations under the Americans with Disability Act (ADA). You may need to make appropriate work accommodations and should always treat such workers fairly. Most disabled workers take great pride in being highly dependable and productive workers.
  9. COBRA healthcare coverage must be offered and administered properly. Give serious thought to creating a comprehensive package of this medical insurance paperwork so that it’s immediately ready to be given to qualified employees when they leave. Timing is critical so potential coverage won’t lapse.
  10. The Health Insurance Portability and Accountability Act (HIPAA) must be explained and handled appropriately. Employees have a right to privacy regarding their medical data and information – be sure you’re adequately protecting it while processing claims.
  11. Pension concerns must be addressed in a timely and proper manner. The Employee Retirement Income Security Act (ERISA) is a complicated law that requires extreme attention to detail. Always request legal advice when uncertain how to administer it.
  12. You must carefully handle all responsibilities under the Consumer Credit Protection Act (CCPA). You may need expert help calculating all your employees’ paycheck deductions for lawful wage garnishments – including those for child support and student loans. Look for highly respected software that may help your most experienced workers.
  13. Equal Pay Act. This law must be carefully followed since too many businesses keep failing to pay men and women fairly when handling similar work.
  14. Title VII concerns. Your company must avoid discriminatory practices when hiring, laying off and firing employees. Many businesses are learning to use multiple interviewers with highly diverse backgrounds so that fairness can be readily achieved.
  15. OSHA laws. You must make sure to keep adequate records covering all workplace accidents and injuries for an appropriate number of years — if you employ ten or more workers.

Should you have any questions about these topics, please contact your Murray Lobb lawyer to discuss your concerns. We have extensive experience providing legal advice to our clients so they can can readily comply with all federal, state and local laws.

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.

Hurricane Harvey: Avoiding Fraudulent Repair Contractors

Fortunately, many first responders and volunteers nobly rushed out to help residents of Houston and surrounding areas after this catastrophic hurricane unleashed torrential rainfall and flooding. However, too many people lost their lives during the lengthy onslaught and far more suffered extensive property damage. As survivors try to reclaim their lives, they must exercise great caution when hiring repair contractors so they can properly repair and rebuild their homes.

Based on Texas Attorney General website information, and on our country’s recent storm history, we now know that many dishonest “scam artists” tend to show up (often from out of town) right after natural disasters like Hurricane Harvey. They eagerly try to convince desperate homeowners that they alone know how to repair their homes quickly and for far less money than their competitors.

Our general advice to you is to do your homework and carefully check out each contractor’s business reputation before signing on any dotted line. As we stated in our Labor Day email, we will review any contracts from contractors who want to perform work on your property.  We will do this free of charge limited to contracts that are presented to you by the contractor. Please call us for assistance.

Basic Considerations When Planning to Repair Your Home

To help you obtain the quality repairs you need, we’ve summarized some key steps below that can help you hire a competent repair contractor. Specific warnings have also been added so you can spot some of the many “red flags” indicating that someone either isn’t properly skilled or licensed as required under Texas law. Hopefully, you can avoid being swept up in what “60 Minutes” has called “The Storm after the Storm” when disreputable contractors sweep in to make a fast buck while you’re still grieving various losses.

Key Steps to Take While Getting Your Home Repaired

1. Only hire a contractor who has a fixed, local business address (or one nearby) and who offers fair terms of service. You need to hire someone who has lengthy experience doing the type of work you require and who can provide you with local references. This person must be willing to accept partial payments as the job progresses, while regularly paying all subcontractors for their labor and materials as the project moves forward;

2. Search for a contractor who has worked for someone you know and quotes reasonable fees. Whenever possible, only hire someone who has worked for a family member, close friend or business associate. If you cannot find someone that way, then at least call the Houston Better Business Bureau to check on the company’s reputation. Don’t let anyone pressure you into quickly signing a contract so you won’t lose a special price break.

3. Take the time to solicit several bids before choosing the best one (which may not be the lowest). Those who bid too low are often hoping to trap you into later adding other fees that aren’t properly covered in your repair contract.

4. Check online websites to see if you can learn more about each contractor. When you contact the Houston Better Business Bureau, ask if there are any recent negative or unresolved complaints on file. Remember, no listing at all is not necessarily a positive sign. You might also consider visiting such websites as HomeAdvisor.com and the Angie’s List website. The latter one now allows everyone access to most general information for free. Also check the name of the owner(s) of the company. Many times, unscrupulous contractors form new companies to hide their real reputation. Check with the Secretary of State in the state in which the company is incorporated and get the names of individuals shown as officers and directors;

5. Get every contract term in writing – never agree to a mere oral contract for this type of work. Also, avoid signing a contract that’s missing key terms, due dates, or estimated amounts for materials. You can be sure that if you let any lines remain blank, they’ll often be filled in later with terms that greatly benefit the contractor at your expense. Also, keep in mind that if the main contractor fails to pay all subcontractors, they can place liens on your home until you pay them. If the contractor disappears, most courts will hold you liable for the unpaid wages and materials;

6. Find out if the contractor is fully licensed to do the type of work you want, based on Texas law. If you’re unfamiliar with the laws in this area, call your Houston business law attorney here at Murray Lobb for timely advice. Also, make sure the contractor will be securing all required permits before the two of you sign a contract and let the work begin. Keep in mind that it can be a a negative “red flag” if the company says it’s your responsibility to obtain the permits;

7. Inquire about the type of insurance the contractor carries. The company should normally be carrying worker’s compensation, personal liability, and property damage coverage. Don’t just take the company’s word – ask to see proof (insurance certificates) clearly indicating that all such policies are currently in force;

8. Request the inclusion in your contract of a “sign-off checklist” tied to all payments. This will help you hold on to your property and hopefully avoid the placement of any liens upon it because your general contractor left the area, without paying all subcontractors.

9. Obtain your own financing if you can’t pay with a check or credit card. Never sign up for financing through a lender suggested by the contractor. It’s never wise to go through a lender who is a close associate of your contractor since critical terms may be hidden from you. If you can’t pay “cash” – and many people cannot – carefully review the interest rates and fees various banks or credit unions are offering before hiring a contractor

10. Move forward cautiously if you still have a mortgage on your home. Be sure to contact the bank holding the mortgage and obtain its written approval of the contractor you are hiring. (It’s always possible that the bank may already have a short list of reputable contractors that you can choose from when making repairs).

The attorneys here at Murray | Lobb, PLLC would like to help you sort through this daunting task by offering to review any contracts from contractors who want to perform work on your house. 

Please remember that our firm is here to help you as you try to rebuild your home and your life. (If you’re in need of immediate financial or other emergency assistance due to the hurricane, please visit this federal government website.) We look forward to helping you when you call.

Limitations on Covenants in General Warranty Deeds

The covenant language in a typical general warranty deed, which reads as follows:

“GRANTOR WARRANTS AND FOREVER DEFENDS, ALL AND SINGULAR THE SAID PREMISES UNTO THE SAID GRANTEE, AGAINST EVERY PERSON WHOSOEVER LAWFULLY CLAIMING, OR TO CLAIM THE SAME, OR ANY PART THEREOF”

seems straightforward and ironclad. However, in a recent Texas Court of Appeals opinion issued on September 25, 2014, in which our own Kyle Dickson successfully represented the appellant (Grantor), the Court placed two significant restrictions on the covenant to warrant and forever defend. Stumhoffer v. Perales, No.01-12-00953-CV, (Tex. App.-Houston [1st Dist.] 2014, rev’d and remanded).

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The trial court initially held that Grantor’s covenant to defend included attorney’s fees and costs and granted summary judgment in favor of Grantee. With $75,000 at stake, Grantor appealed.

WHAT HAPPENS WHEN THE GRANTOR DECLINES TO DEFEND A LAWSUIT OVER THE TITLE TO THE PREMISES?

The trial court held that, in that situation, the Grantor waived any right to object to the manner in which the Grantee handled the defense of the action. Moreover, if Grantee lost title to any part of the Premises, then Grantor would be liable to Grantee for the fair market value of the portion of the Premises so lost. Ironically, Grantee prevailed in the lawsuit and, thus, Grantor incurred no liability under the general warranty deed.

The lesson is that grantors decline to defend title claims at their own peril.

DOES GRANTOR HAVE AN OBLIGATION TO INDEMNIFY GRANTEE FOR GRANTEE’S ATTORNEY’S FEES ASSOCIATED WITH DEFENDING TITLE TO THE PREMISES?

The Court of Appeals reasoned that, if there had been a failure of title to the Premises, Grantee’s damages would not have included attorney’s fees absent a question of fraud, imposition, or malicious conduct involved. The Court also distinguished several cases in which grantors made additional promises specifically relating to the payment of a grantee’s attorney’s fees, stating no such promise was made in this case. The Court concludes that attorney’s fees are recoverable in Texas only when an agreement between the parties so provides.

The Grantee was also unable to recover attorney’s fees based on a breach of contract because Grantee’s defense of title to the Premises was successful and, therefore, no breach occurred.

As a result of this ruling, a grantee has two options. First, the grantee should get a specific written agreement with the grantor concerning attorney’s fee reimbursement before defending title. If the grantor refuses, the grantee has to weigh the cost of defense against the fair market value of the premises in dispute.

In the case before the Court, one hopes that the Grantee is satisfied that retaining the additional seven feet width of Grantee’s Premises was worth the $75,000 expended in attorney’s fees.

An Alternative Financing Option: SBA 504 Loan

PURPOSE
For many fledgling or small businesses, traditional commercial bank loans are either unavailable or cost-prohibitive. So other than finding a new equity investor, which may be difficult or undesirable, what choices does an entity have for infusing capital? If a potential borrower has overall project costs between $250,000 and $12,500,000, one answer may be the use of a Small Business Administration (SBA) 504 loan. Project costs may include land and building purchases, build-outs, remodeling, equipment, professional fees, and refinancing. However, inventory, goodwill, working capital and other fees are excluded. SBA 504 loans are 40% guaranteed by the Federal government in order to promote job creation and retention in “small” businesses. SBA 504 loans are not actually made by the SBA. Instead, certain SBA approved lenders make loans that conform to the SBA’s requirements so that the SBA will agree to guarantee such loans. New, emerging, established or expanding businesses may request SBA 504 loans in amounts up to around $5,000,000. The SBA 504 loans are further restricted to owner occupied (50 %+) real estate and equipment purchases.

ELIGIBILITY
A business in considered “small” for SBA 504 loan purposes if it meets the following conditions:
– Conducted for profit
– Profits are less than $5,000,000 after tax
– Tangible Net Worth is less than $15,000,000
– Appropriate use of proceeds
– Doing business in the United States

STRUCTURE
An SBA 504 loan involves the following entities: a commercial lender, a credit development company (CDC), the SBA, and the borrower. The lender loans 50% of the project cost and takes a first lien; the CDC loans 40% of the project cost and takes a second lien that is guaranteed by the SBA, and the borrower contributes 10% of the project cost (the equity). The borrower’s contribution may even be in the form of land previously purchased. Numerous lenders in the Houston area offer SBA 504 loans. Likewise, several CDCs are active in this market. Specific lenders and CDCs may be targeted by accessing the SBA’s website and searching by zip code.

GUARANTIES
Any person or entity that holds 20% or more of the equity of the borrower will be required to execute a personal guaranty for the SBA guaranteed portion of the loan. This provision insures that the borrower has a strong incentive to succeed in business and repay the financing.

APPLICATION REQUIREMENTS
Before applying for a SBA 504 loan, the borrower should collect the following documentation:
– Entity formation documentation
– Licenses/Permits to conduct desired business
– Personal credit reports for individuals that hold 20% or more of the equity in the borrower
– Business credit reports for the borrower and any entities that hold 20% or more of the equity in the borrower
– Biographical information about the owners and the borrower
– Business Plan
– Financial Statements ( including a Balance Sheet, Cash Flow, and Profit and Loss Statements) for the last 3 years
– Income tax returns for the last 3 years

ADVANTAGES
SBA 504 loans have lower fees and costs because a portion of the risk is being assumed by the SBA. The commercial lender is also only loaning 50% of the funds, so its default risk is lowered. The borrower is only required to inject 10% of the financing, which is lower than the typical 25% requested in a traditional commercial loan.

The CDC’s loan has a much longer term—from 10 years for equipment up to 20-25 years for real estate. This situation allows the borrower to decrease its debt repayment amounts in the near term.
Borrowers that do not have other financing options are able to obtain funding

MYTHS
SBA 504 loans take longer to receive approval and fund. If the borrower supplies a complete application package at the outset, the timing should be comparable. The SBA approval of a CDC’s loan request normally takes about 3 weeks. Once the CDC loan approval has been issued, the borrower essentially has no further contact with the SBA.

SBA 504 loans require two sets of loan documents, so they are more costly. Although there are two sets of loan documents, the SBA’s set is essentially non-negotiable and contains no covenants. Also, any financing with two lienholders will require two sets of loan documents.

The prepayment penalty in the SBA guaranteed portion of the loan makes it unattractive. First, the SBA 504 loan is assumable and current rates are low, so fixing that low rate for the long term may actually be an advantage. Second, the penalty decreases over time, and disappears after year 10. Third, it is only logical that the CDC wants to be made whole for any losses on its debentures that financed its loan.

DEFAULT CONCERNS
Once the loan proceeds have been advanced, the SBA has no involvement in the borrower’s daily business. Even in the event of a default, the first lienholder may negotiate the major terms of any workout or restructure of the financing without the need for SBA approval.

SBA 504 loans are an often underutilized financing mechanism that should appeal to manufacturers, heavy equipment users, real estate owners and developers, medical practices, and other entities that wish to preserve their working capital.