Israel Samuels LLP

A Law Firm for Businesses

When The Sole Member Of An LLC Dies

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A single member Limited Liability Company is dissolved when its sole member dies unless:

  1. The operating agreement allows for continuation of the LLC and sets forth a mechanism to install a successor to the deceased member; or
  2. The heirs, successors, and assigns of the deceased member’s interest elect to continue the LLC within 90 days of the sole member’s death.

Consequently, a single member LLC can survive the death of its owner. The first exception must be set forth in the Operating Agreement. The second exception is set forth in the California Revised Uniform Limited Liability Company Act (“CRULLCA”) Section 17707.01:

Regarding the second exception, an heir, successor, or assign of the member’s interest can become a substituted member without the permission or consent of the heirs, successors, or assigns or those administering the estate of the deceased member.

Under the CRULLCA, the heirs, successors, and assigns of the membership interest are to be determined by either the deceased member’s estate plan, or if no estate plan exists, by the law of intestate succession.

If the single member wants to ensure the LLC is dissolved, the operating agreement should contain a provision with the proper instructions. Otherwise, the LLC will be subject to the provisions of Section 17707.01 of the CRULLCA allowing for the
potential of unwanted heir(s) to operate the LLC.

If you are the only member of a single member LLC and wish to identify a successor to your interest or require the LLC to dissolve upon your death, contact the LLC’s business attorney to assure that the LLC’s Operating Agreement conforms to your wishes.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Non-Compete Provisions Are Permissible Between California LLC Members

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Generally, non-compete provisions are unenforceable in California. However, there are exceptions.

One of those exceptions is when an owner of a business sells the company’s goodwill or interest in the company. Business and Professions Code section 16601 provides, in part, that “any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity” may agree with the buyer to refrain from carrying on a similar business within a specified geographic area. The important factors
that should be carefully considered are the business entity, its goodwill and its impact within a specified geographic location.

The term “business entity” means a partnership, limited liability company, or corporation. Business and Professions Code section 16602.5, permits a member of a limited liability company to agree not to compete “upon or in anticipation of a dissolution of, or the termination of his or her interest in” the limited liability company.

An LLC operating agreement can, and should, set forth the terms and conditions of the non-compete provision in the event a member decides to sell his or her goodwill of the business and consider the fair market value of the goodwill. A limited liability company’s operating agreement that contains a provision for departing members to sell their interests back to the company for an amount less than fair market value — without including goodwill – that yet still impose a covenant not to compete, will not support the imposition of a non-compete provision.

The operating agreement should specify a reasonable geographic location taking into consideration the type of business; the market reach of the company; and the future business prospects of the departing member.

Non-competition provisions should be included in an operating agreement to avoid potential litigation when a member terminates its interest in the company and attempts to compete with the former company. If your California LLC has multiple members but does not have a noncompetition provision in its operating agreement, the LLC should consult its legal counsel to evaluate whether a noncompetition provision is necessary, its scope, terms, and conditions.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Erick Gets FUCT!

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Erick Brunetti had an idea. He designed a clothing line and named it “FUCT.” Then, he tried to register “FUCT” as a trademark. However, since “FUCT” could be interpreted to be profane in violation of regulations against registration of immoral or scandalous names, the United States Patent and Trademark Office (PTO) rejected federal registration of the trademark. Brunetti brought a First Amendment facial challenge in the Federal Court of Appeals. That court held the prohibition violated the First Amendment. The PTO filed a writ with the United States Supreme Court that the Supreme Court granted.

The Supreme Court sided with the Court of Appeals and permitted federal trademark registration of “FUCT.” It found the refusal to register “immoral or scandalous” was overbroad. Therefore, the regulations violated the First Amendment. The Supreme Court observed:

There are a great many immoral and scandalous ideas in the world (even more than there are swearwords), and the Lanham Act covers them all. It therefore violates the First Amendment.

So, Erick got to register “FUCT.” What immoral or scandalous term would you like to trademark? Check with your attorney to see if it is still available!

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Surprises For Out-Of- State Companies That Hire In-State California Employees

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Many out-of-state companies desire access to the California market. It is large. California has the sixth-largest economy in the world. However, employers in California can face disruptive regulatory oversight, unusual and complicated employment laws with substantial penalties for noncompliance and will be confronted by employee-friendly courts and administrative agencies.

Even employers who are primarily based out-of-state with only a few employees in California still must comply with California employment law.

In 2011 in the case of Sullivan v. Oracle, the California Supreme Court held that non-California residents working in California for a California-based employer were subject to California’s daily overtime laws when they worked in California for a whole workday.

It remains open whether non-California residents who work partial days in California will be subject to California’s wage and hour laws. In 2018, the Ninth Circuit requested the California Supreme Court address this issue, but the Supreme Court has not yet ruled.

Some of the surprises that may be found in California by out-of-state employers, of which California employers should be familiar with, are:

  1. Minimum Wage—As of January 2019, the minimum wage for larger employers (having more than 26 employees) became $12. Meanwhile, California has no shortage of jurisdictions that have their own special minimum-wage laws.
  2. Daily Overtime—California non-exempt employees must be paid at one and one-half times the regular rate for all hours worked over eight in a day (and any hours worked on a seventh consecutive workday during a workweek) and must be paid double-time for all hours worked over twelve in a day (and any hours worked over eight on a seventh consecutive day during a workweek). Federal law only requires overtime pay only when employees work more than forty hours during a workweek.
    Out-of-state employers need to comply with the more liberal California law.
  3. Itemized Wage Statements—California employers must provide specific items of information on wage statements. If they do not there are significant statutory penalties.
  4. Meal and Rest Periods—Non-exempt employees working in California must be provided certain meal and rest periods. Employers are required to keep accurate records of employee meal periods and pay a penalty when either meal or rest periods are not provided.
  5. Independent Contractors—California frowns on businesses that classify workers as independent contractors instead of employees. Misclassifications can trigger liability for missed meal and rest periods, unpaid overtime and unpaid expenses, and even significant civil penalties.
  6. Discrimination and Harassment—California recognizes “protected characteristics” in addition to those that appear in federal law anti-discrimination laws, including characteristics such as hairstyle, sexual orientation, and gender
    identity or expression.
  7. Local Ordinances—Many California local governments impose additional obligations on employers within their jurisdictions, such as a higher minimum wage, additional paid sick leave, and healthcare insurance surcharges.

Out-of-state employers who wish to establish a California presence need an in-depth understanding of California business and employment laws and must be able to correctly implement compliance policies. The best advice is to engage a qualified
California business and employment attorney to guide the company through the labyrinth of applicable California laws and regulations.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

May Get Even Harder to Hire an Independent Contractor in California

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Now pending in the California Senate is state Assembly Bill 5. The Bill was passed by the Assembly at the end of May 2019. AB 5, if passed by the Senate and signed into law by the Governor, will make it difficult for companies to hire workers as
independent contractors instead of employees. These workers will be afforded the same labor protections and benefits as employees including unemployment insurance, health care subsidies, paid parental leave, overtime pay, workers’ compensation, and a guaranteed minimum hourly wage.

AB5 expands on the California Supreme Court’s decision last year known as Dynamex. The ruling and the bill require businesses to use the so-called “ABC test” to figure out whether a worker is an employee. To hire an independent contractor, businesses must prove that the worker (a) is free from the company’s control, (b) is doing work that isn’t central to the company’s business, and (c) has an independent business in that industry. If the worker does not meet all three of these
conditions, then the worker must be classified as an employee.

California businesses are panicking over the possible passage of AB5. Many businesses and organizations are lobbying for exemptions. Among the professions to be excluded from the ABC Test, as AB5 is presently drafted, include doctors, dentists, lawyers, architects, insurance agents, accountants, engineers, financial advisers, real estate agents, and hairstylists who rent booths at salons.

If AB 5 becomes law gig workers would, for the first time, have a safety net. The state of California would also benefit. The State estimates that it loses $7 billion in tax revenue each year from companies that misclassify employees.
In light of the Dynamex and this proposed legislation, Employers should consult with their business attorneys to avoid misclassification of their workers and engage in legal planning as to the structure of the business to explore whether they can avoid turning their present “independent contractors” into employees.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Cap on Rent Increases May Soon Apply to Some California Residential Landlords

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At the end of May 2019, the California Assembly narrowly passed a statewide rent-cap proposal. At present, the bill is in committee for review in the California Senate. If approved by the Senate and signed by the Governor – two actions that pundits have deemed likely – Assembly Bill 1482 would apply to most properties not covered by local rent control ordinances — including rented single-family homes and condos in cities with rent control. The Bill, as presently drafted, exempts properties that are less than 10 years old. Property owners with no more than 10 single-family homes are also presently exempt from proposed law. The Bill is also expected to undergo key changes in the Senate.

As presently proposed landlords would be prohibited from raising the rent each year by more than 7 percent plus the annual increase in the cost of living. By its terms the proposed law will expire in 2023.

If you are a landlord who owns 11 or more single-family homes or condos that are 10 years old or older in a jurisdiction without local rent control, contact your attorney. Should AB 1482 become law there are strategies you may be able to use to avoid its application to your properties.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

A Word of Warning for Those Rebuilding with Insurance Proceeds

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Ordinarily, when an insured experiences property damage to their home (such as from a fire, explosion or impact) and, thereafter, decides to repair and reconstruct, the insurer ordinarily pays the contractor in the name of the insured for the work as it is completed. Almost invariably the insured will instruct the insurer to include the name of the contractor on all the reimbursement checks and authorize a deposit of the checks into the contractor’s account.

However, as the California Fourth Appellate District finds in Jozefowicz v. Allstate Insurance Company (filed May 28, 2019) this practice is fraught with danger for the insured, especially where the insured has a dispute with the contractor over the scope and quality of the work.

In Jozefowicz, Plaintiff Stanley Jozefowicz sought to enforce a check he did not have in his possession. Jozefowicz instructed his insurer, Allstate, that the contractor renovating his fire-damaged home was to be named on all reimbursement checks and was permitted to deposit checks into its own account. The contractor then contacted Allstate for a check, Allstate sent it, and the contractor deposited it in its own account. However, at the time it was received and deposited by the contractor, Jozefowicz and the contractor were having a dispute over the contractor’s work and performance.

Jozefowicz sued Allstate under California Uniform Commercial Code section 3309, which provides a cause of action on a negotiable instrument where the payee has lost possession of the instrument. Allstate moved for summary judgment, contending Section 3309 did not apply because Jozefowicz permitted Allstate to issue checks to the contractor. The trial court and the California Fourth Appellate District Court agreed. It held that the delivery of the check to the contractor pursuant to the instructions of Jozefowicz made the deliverer of the check an agent of Jozefowicz and, therefore, Section 3309 did not apply and Jozefowicz was out of luck. He could not enforce the check as against Allstate. Therefore, Jozefowicz sole remedy was to sue the contractor to prove construction defects or breaches that would entitle Jozefowicz to potentially recover damages from the contractor.

If you suffer a loss that will be repaired or re-constructed by a contractor with monies to be distributed to a contractor by an insurer, it is essential that you consult legal counsel to assure your agreement with the insurer and contractor requires that reimbursement checks be endorsed by you and the contractor, and sent to you first.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

How to Deal with Employees Who Have, Or May Have, A Mental Illness

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Many employers have seen manifestations of mental illnesses in employees in the workplace. California requires employers of five or more employees to provide a reasonable accommodation for individuals with physical and mental disabilities unless
doing so would cause an undue hardship.

California defines mental disabilities to include mental and psychological disorders or conditions, emotional illnesses, and intellectual learning disabilities. Thus, employers may have to reasonably accommodate employees with dyslexia, ADHD, depression, schizophrenia, or any number of other mental illnesses.

Employers must be cautious when dealing with employees who may appear to be mentally ill. Employers cannot ask the employee whether he or she suffers from a type of mental or emotional condition due to the employee’s right to keep their mental
conditions private. Employers may only ask questions about mental health in four situations:

  1. When an employee asks for a reasonable accommodation;
  2. When the Employer has made a job offer and is asking all applicants for the same medical information;
  3. When an Employer is engaging in affirmative action for people with disabilities (e.g., tracking the disability status of an applicant pool in order to assess recruitment and hiring efforts); or,
  4. When there is objective evidence that an employee may be unable to do the employee’s job or that the employee may pose a safety risk because of a health condition.

California law also protects employees from discrimination based on a perceived disability. Thus, if the Employer believes an employee has episodic depression and takes an adverse action against the employee (like discipline or termination), the employee may claim discrimination based on a perceived disability. California law requires an Employer to initiate an interactive process with the employee when the Employer is aware of the possible need for an accommodation.

An Employer may discharge, or refuse to hire, someone who poses an actual threat of harm to others due to a mental disability since the employee cannot perform the employee’s essential duties without endangering the health or safety of others
even with a reasonable accommodation.

Thus, an Employer aware of an employee that yells, swears, or threatens coworkers, an Employer may have an excellent basis upon which to terminate the employee.

If an employee’s mental health appears to reasonably impair the employee’s ability to perform the job, the Employer may require a fitness-for-duty examination for the employee, provided the examination is job-related and consistent with the Employer’s business necessity. A fitness for duty evaluation may be useful:

  1. When, after the Employer confers with the employee, the employee does not admit to, or otherwise realize, the employee has a problem; or
  2. When the Employer believes that the employee’s psychological condition makes the employee a danger to himself or herself, other coworkers, or other members of the public with whom the employee interacts as part of the job.

What should an Employer do if an employee discloses a mental illness or the Employer perceives an employee may have a mental illness?

If an employee discloses a mental illness to the Employer, or the Employer learns about the mental condition, the Employer must keep that knowledge, and any employee medical information received, confidential, although make sure that the HR department is aware of the issue or concern.

Employers should also consider creation of an Employee Assistance Program or a crisis intervention system so the Employer can refer an employee with a perceived or actual mental illness to the program in order to obtain help.

Employers should also include a written policy in the employee handbook that includes accommodations for mental health disabilities. Possible accommodations for employees with mental illnesses include offering more flexible working arrangements, schedules and leave for therapy and other treatment.

If you are an Employer and become aware of an employee with, or perceive that an employee may have, a mental illness, contact your legal counsel to assure your response does not run afoul of the plethora of state and federal laws that apply to
employees who have, or may have, a medical or mental condition.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

Employers’ Right To Attorneys’ Fees In Wage Cases Foreclosed

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California Labor Code section 218.5 (a), in wage nonpayment cases, prohibits an employer from recovering fees when he defeats the employee’s wage claim unless the trial court finds the employee brought the wage claim in bad faith. On the other hand, the Section permits the prevailing employee to recover his or her attorneys’ fees.

California Civil Code section 1717 permits recovery of reasonable attorneys’ fees by the prevailing party if the contract permits such an award.

Recently, in Dane-Elec Corp. v. Bodokh, the California Fourth Appellate District Court addressed what happens to a prevailing employer’s right to recover reasonable attorneys’ fees based on Civil Code section 1717 in light of Labor Code section 218.5 (a). The Court held, unless a bad faith wage claim is involved that would trigger fee entitlement to the prevailing employer, Labor Code section 218.5 (a) controls over the contractual fee provision and the prevailing employer cannot recover attorneys’ fees under the contract.

In California, it is virtually impossible for prevailing employers to recover attorneys’ fees from employees who file invalid wage and hour claims. Therefore, strict adherence to wage and hour laws, while required to avoid liability, damages and penalties, will not stop disgruntled employees from asserting tenuous claims.

If you are a California employer sit down with legal counsel. Together you should draft a program that includes insurance, valid employment contract provisions that can limit the effect of Labor Code section 218.5 (a) and dissuade employee lawsuits, claims handling, employment documentation and recordkeeping. That plan can save an employer thousands of dollars in attorney’s fees and settlements.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

No Class Arbitration If Arbitration Agreement Ambiguous

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The United States Supreme Court in Lamps Plus v. Varela, recently held a class action may not be ordered to arbitration unless the parties’ arbitration agreement expressly states that class claims may be arbitrated.

The Ninth Circuit had ordered the parties to arbitrate the plaintiffs’ class claim based on its finding that the arbitration agreement was “ambiguous” as to whether class claims could be arbitrated and, as a matter of traditional contract law, ambiguities are resolved against the drafter of the agreement (in this case, the employer). The Supreme Court rejected the Ninth Circuit’s reasoning and held, under the Federal Arbitration Act, arbitration is purely a matter of agreement between the parties and parties to an arbitration agreement cannot be ordered to arbitrate claims that they did not clearly agree to arbitrate. The Supreme Court decided ambiguity cannot be used to imply that the parties agreed to arbitrate class claims in arbitration because class litigation is not the type of action that is suitable for the streamlined adjudication process traditionally associated with the arbitral forum.

Although Supreme Court precedent holds that silence or ambiguity in an arbitration agreement cannot be a basis for concluding that the agreement covers class claims, the lower court decisions in the Lamps Plus case show that some courts continue to try to find ways to get around favorable Supreme Court precedents. It is, therefore, incumbent upon employers to expressly state in an arbitration agreement that class, collective, and/or representative claims may not be arbitrated and that no arbitrator shall have authority to preside over any arbitration on a class, collective, and/or representative basis on behalf of more than one employee.

The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.

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