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New Rules For California LLC’s

October 19, 2015 By Israel Samuels LLP Leave a Comment

In an effort to establish rules that allow limited liability members in a limited liability company to disassociate from the company by express will, newly enacted legislation imposes mandatory recordkeeping on limited liability companies.

Aside from offering new exit strategy opportunities for members, the new amendments to the California Revised Uniform Limited Liability Company Act require limited liability companies to:

Designate and continuously maintain in California an office, which need not be a place of its activity in this state, and an agent for service of process. In addition, limited liability companies must now maintain in writing at their designated office in the State:
A current list of the full name and last known business or residence address of each member and of each transferee set forth in alphabetical order, together with the contribution and the share in profits and losses of each member and transferee.
If the limited liability company is a manager-managed limited liability company, a current list of the full name and business or residence address of each manager.
A copy of the articles of organization and all amendments thereto, together with any powers of attorney pursuant to which the articles of organization or any amendments thereto were executed.
Copies of the limited liability company’s federal, state, and local income tax or information returns and reports, if any, for the six most recent fiscal years.
A copy of the limited liability company’s operating agreement, if in writing, and any amendments thereto, together with any powers of attorney pursuant to which any written operating agreement or any amendments thereto were executed.
Copies of the financial statement of the limited liability company, if any, for the six most recent fiscal years.
The books and records of the limited liability company as they relate to the internal affairs of the limited liability company for at least the current and past four fiscal years.

And that is not all there is in the new amendments. Among other things, one gives tax assessors the right to access all of these documents upon request. Another regulates distribution of company assets. A third provides rules for amendments to Operating Agreements. Others describe acceptable and
prohibited provisions in Operating Agreements.

If you own, operate or are a member of a limited liability company, now is the time to assure your limited liability company is in compliance. In addition, you should take careful note should a member consider leaving or closing the doors of the company.

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.

Assembly Bill 465 Vetoed

October 15, 2015 By Israel Samuels LLP Leave a Comment

Last month we reported the California Senate had passed Assembly Bill 465 that was meant to prevent employers from requiring employees to sign an arbitration agreement as a condition of employment. Governor Brown vetoed the measure.

In his veto statement the Governor cited adequate court scrutiny and the far reaching implications of a total ban requiring an agreement to arbitrate as a condition of employment. In addition, he noted cases based on the Federal Arbitration Act pending in Federal Court that could determine such a law is unconstitutional. Therefore, he also believed the law to be premature.

The Legal Status Of LLC Employee Membership Purchase And Option Plans

October 12, 2015 By Israel Samuels LLP Leave a Comment

Under California Labor Code Section 407 investments and the sale of stock or an interest in a business in connection with the securing of a position are illegal. Excepted from Section 407 by Section 408(c) are business interests, investments and stock provided to an employee of the corporation or of any parent or subsidiary thereof, pursuant to a stock purchase plan or agreement or stock option plan or other statutorily permissible agreement; and in transactions connected with securing employment of corporate officers.

Until recently there were no similar exceptions for LLC’s. Effective January 1, 2016, new Corporations Code Section 17704.01(e) will except membership interests issued by any limited liability company or foreign limited liability company to the any employee of the limited liability company pursuant to a membership interest purchase plan or agreement, or a membership interest option plan or agreement and in transactions in connection with securing employment as an officer or a manager of a limited liability company.

If you are an owner of an LLC, next year you will be able to award employees and officers interests in your business just as C-corps and S-corps had in the past. However, if you intend to offer an interest in your LLC, we strongly suggest that you discuss with your legal counsel first.

Is Your Website ADA Compliant?

October 5, 2015 By Israel Samuels LLP Leave a Comment

What? Well, the United States Department of Justice in its infinite wisdom is getting ready to mandate “accessibility” of websites under the Americans with Disabilities Act (ADA). In advance of the issuance of formal regulations the word in legal circles is the Department is presently using ADA settlements to impose its views of accessibility on the businesses it sues as it did in a settlement agreement with edX Inc., a provider of online courses, in April 2015. The settlement resolved “allegations that edX’s website … w[as] not fully accessible to individuals with disabilities … in violation of Title III of the ADA.”

The proposed amendments to the ADA, expected to be issued by April 2016, “require public entities and public accommodations that provide products or services to the public through websites on the Internet to make their sites accessible to and usable by individuals with disabilities.” These changes would require websites to be accessible across a variety of ADA-covered disabilities, including blindness and low vision, deafness and hearing loss, learning disabilities, cognitive limitations, limited movement, speech disabilities and photosensitivity.

The present WCAG 2.0 [the Web Content Accessibility Guidelines] provide 206 options to make a website “accessible” including, but not limited to providing links to definitions, removing time limits for activities, providing spoken word versions of text, and ensuring keyboard control for all website functions. However, the choice of one of the 206 options may not result in compliance with the amendments. As one law commentator has observed: Just because you’ve arranged to “provide spoken word versions of text” to fend off a lawsuit on behalf of blind users doesn’t mean you can get out of a lawsuit
representing persons lacking fine hand motor control for not “ensuring keyboard control for all website functions” (i.e., disabling any mouse-only functions and patching any failures this generates in your current design). And even if you can do both those things along with fifty more, you may still be
exposed to a lawsuit if you haven’t gotten around to “removing time limits for activities.”

How can a business protect itself from a website ADA claim? It will not be easy. However, at a minimum, website owners and managers should consider taking the following actions:

Review WCAG 2.0 with legal counsel and/or your IT person to understand what is potentially needed to make your websites accessible across a variety of ADA-covered disabilities;
Discuss with legal counsel and your IT person how to mirror the terms set forth in recent DOJ ADA settlement agreements such as those in the edX Inc. agreement; and
Consider hiring a third-party consultant to conduct a thorough website audit to determine what changes may be needed and to develop a plan for implementing necessary updates.

Strict Gender Pay Equality Bill on Governor’s Desk

September 28, 2015 By Israel Samuels LLP Leave a Comment

California’s Equal Pay laws may become the strictest in the United States. Senate Bill 358 arrived on the Governor’s desk on September 1, 2015 for his consideration. If the Governor signs the bill, and he is expected to do so, it will expand California’s gender pay differential law
starting January 1, 2016.

The Federal Equal Pay Act (29 U.S.C. § 206(d)) and California’s own gender pay equality law (Labor Code section 1197.5) have been in place for many years. Senate Bill 358 seeks to close perceived “loopholes” that make it difficult to prove a claim.

Current law prohibits an employer from paying an employee less than employees of the opposite sex who perform the same job, requiring the same skill, effort, and responsibility, in the same establishment, under similar working conditions.

Payments made pursuant to systems based on seniority, merit, or that measure earnings by quantity or quality of production; or differentials based on any bona fide factor other than sex, are exempt from this prohibition. The Senate Bill would remove the requirement that the pay differential be within the same “establishment,” and would modify the “equal” and “same” job, skill, effort, and responsibility standard. Violation would then require only a showing of “substantially similar work, when viewed as a composite of skill, effort, and responsibility, and performed under similar working conditions.” This would require plaintiff employee to compare herself with men working at any location for the same employer, and in any similar (not the necessarily the same) job.

The Senate Bill also requires employers to affirmatively demonstrate that the wage differential is based entirely and reasonably upon one or more factors. It seeks to add to the three existing systembased factors (seniority, merit, or production-based) a “bona fide factor”: a factor that is not based on or derived from a sex-based differential in compensation, that is related to the position in question, and that is consistent with a “business necessity” (defined as “an overriding legitimate business purpose such that the factor relied upon effectively fulfills the business purpose it is supposed to serve”). The “bona fide factor” defense will not be available to the employer if the plaintiff demonstrates an alternative business practice exists that would serve the same business purpose without producing the wage differential.

The Senate Bill would also extend the employers’ obligation to maintain records of wages and wage rates, job classifications, and other terms of employment to three years.

In addition, employers cannot forbid employees from disclosing their own wages, discussing others’ wages, asking about others’ wages, or aiding or encouraging other employees to exercise their rights under Labor Code section 1197.5. Employers, however, would not be required to disclose wages. The Senate Bill expressly prohibits employers from discharging, discriminating against, or retaliating against employees who invoke or assist in the enforcement of Labor Code section 1197.5.

The Senate Bill would create an additional employee private right of action with a one year statute of limitations, for employees who have been discharged, discriminated against, or retaliated against for engaging in any conduct protected by the statute.

Employees could seek reinstatement and reimbursement for lost wages and benefits, interest, and “appropriate equitable relief.” Alternatively, employees would be permitted to file complaints with the Department of Labor Standards Enforcement on allegations of employer violations of the new prohibitions.

With the potential for expanded exposure to gender based equal pay claims, employers should carefully consider and memorialize wage classifications based on non-gender based factors, memorialize the reasoning behind each classification and justify in writing the basis for the wages paid. If Senate Bill 358 is signed into law, you may want to discuss those thought processes with legal counsel well before you extend that employment offer and set employee compensation.

Saved By a Private Placement Memorandum

September 22, 2015 By Israel Samuels LLP Leave a Comment

Have you ever wondered why you need a confidential Private Placement Memorandum signed by potential investors when you are looking for investors to invest in your business?

Look no further than the California Court of Appeals in WA Southwest 2, LLC v. First American Title Ins. Co., _____Cal. App. _____ (Cal. App. 4th Dist. Sept. 4, 2015).

The court in WA Southwest found that the plaintiff investors had to plead and prove that they used “reasonable diligence” in order to prevail on claims that they were misled about the true nature of their investment. When the plaintiff investors signed purchase agreements for their
investment, they also reviewed and signed the confidential Private Placement Memorandum. It repeatedly warned potential investors about the risks inherent to the investment including this representative example quoted by the Appellate Court:
“THE INTERESTS AND INVESTOR UNITS OFFERED HEREBY ARE HIGHLY SPECULATIVE. AN INVESTMENT IN THE INTERESTS OR INVESTOR UNITS INVOLVES SUBSTANTIAL INVESTMENT AND TAX RISKS.”

“THE PURCHASE OF INTERESTS AND INVESTOR UNITS INVOLVES SIGNIFICANT RISKS. INVESTORS MUST READ AND CAREFULLY CONSIDER THE DISCUSSION SET FORTH BELOW IN ‘RISK FACTORS.’”

“PURCHASE OF THE INTERESTS AND INVESTOR UNITS IS SUITABLE ONLY FOR PERSONS OF SUBSTANTIAL MEANS WHO HAVE NO NEED FOR LIQUIDITY IN THEIR INVESTMENT.”

The Court found that reasonable diligence did not include “ignoring a private placement memorandum received prior to making an investment.”

Before you solicit investors for your enterprise you should consider this issue and make sure your Private Placement Memorandum contains the appropriate language. The language in the investment offering documentation, including the Purchase Agreement and Private Placement Memorandum, may ultimately be what saves you and your business, and gets you out of court if you end up with disgruntled investors.

Employment Arbitration in California May Become a Thing of the Past

September 14, 2015 By Israel Samuels LLP Leave a Comment

Continuing with our Labor Lobbying theme, did you know that on August 24, 2015, the California Senate passed measure Assembly Bill 465 which prevents employers from requiring employees to sign an arbitration agreement as a condition of employment?

According to a recent article on Assembly Bill 465, the California Labor Federation has no problem with employment arbitrations so long as the choice of arbitrator and rules governing the arbitration are bilateral in nature. It only objects to those employment arbitration provisions that are not conspicuous, easy to read and understand, and those that arise where workers unknowingly submit to an arbitration process unilaterally designed by an employer binding the worker to a decision made by an arbitrator who is paid by the employer. Yet the California Senate sees a need to do away with employment arbitration altogether.

If AB-465 becomes law two effects appear certain: it will drive up litigation costs for employers and overburden the judicial system. We will monitor this closely.

New Grocery Employer Change of Ownership Labor Retention Law

September 8, 2015 By Israel Samuels LLP Leave a Comment

Ordinarily, if you sell a business, the new owner has no obligation to retain your employees unless you negotiate such retention as part of the sale. That remains generally true in California unless you are selling a grocery business.

California Labor Code Section 2500, et seq. codified Assembly Bill 359 which protects grocery workers from immediate termination upon a change in ownership of a grocery store.

With certain exceptions, a successor grocery employer must retain eligible grocery workers for a 90-day period, may not discharge those workers without cause during that period, and, upon the close of that period, must consider offering continued employment to those workers.

Will this new law help get fresh meat and produce into low income areas? What will it do to grocery prices? Why did we need this new law?

AAA Rules Give Employment Dispute Arbitrators Power to Decide Class Action

September 4, 2015 By Israel Samuels LLP Leave a Comment

If your employment agreement requires arbitration under the rules of the American Arbitration Association (“AAA”) beware. A California Court of Appeals in Universal Protection Service LP v. Superior Court, No. C078557 (Cal. Ct. App. Aug. 18, 2015) decided an employment arbitration agreement that incorporated the AAA National Rules for the Resolution of Employment Disputes vested the arbitrator with the power to decide whether the agreement authorized classwide relief.

The Universal Protection Service case centered on reimbursement of security guards for employment related business, equipment and training. Each guard had signed an employment arbitration agreement requiring them to arbitrate employment disputes under AAA rules.

The guards filed a class action against Universal for reimbursement of their business and training expenses, as well as other relief. Universal requested the court order individual arbitration for each guard. The trial court denied the motion and ordered class arbitration. Universal
then petitioned the appellate court to set aside the order as being unauthorized under the arbitration agreement.

The Appellate Court determined that the AAA rules granted the arbitrator the authority to decide threshold jurisdictional issues, including whether class arbitration is permitted. It held that the parties’ “agreement to conduct their arbitration under the AAA Rules constitute[d] clear
and unmistakable evidence of their shared intent that the arbitrator decide whether it permits arbitration of class claims.”

So what does this mean? If your employment arbitration agreement requires arbitration pursuant to the AAA rules, the arbitrator may now have the authority to decide threshold jurisdictional issues, including the arbitration of class claims. Without a well-drafted class action waiver, an arbitrator may very well determine claims for your entire work force as a class. Is that good for your business?

To Sit or Not to Sit: That is the Question

August 31, 2015 By Israel Samuels LLP Leave a Comment

Most of the California Wage Orders say:
“All working employees shall be provided with suitable seats when the nature of the work reasonably permits the use of seats.”

But no one yet knows how to define “suitable seats,” “nature of work,” and “reasonably permits.” Furthermore, the provision does not leave room to consider benefits and/or negative factors which may come into play depending on whether or not a seat is been provided.

As a basic legal principle, the principle final authority on the interpretation and meaning of a state law comes from the Supreme Court of that state. So, in connection with a pending lawsuit, the 9th Circuit Court of Appeals has asked the California Supreme Court to clarify the meanings of those terms.

In the judiciary’s favorite game of “pass the buck,” the California Supreme Court invited the California Division of Labor Standards Enforcement to submit, by August 21, 2015, an explanation of how it proposes those terms ought to be defined. Other interested parties will then have 20 days to respond.

The only thing that’s remotely close to clear at this point is that California employers are facing class action exposure for not following a law that no one knows how to follow. Employers should consider providing seats for employees, if that would be feasible in light of the specific job and work environment. Stay tuned for more on this topic in future issues of Business Briefs.