Starting December 1, 2016, a new overtime rule goes into effect that employers should be aware of that will impact employees on salary.  The Fair Labor Standards Act (FLSA) is a federal law that applies to all employers across the country. It guarantees a minimum wage to all employees as well as overtime compensation if over 40 hours a week is worked.  Overtime pay is calculated at a rate not less than one and one half the employee’s regular rate of pay for all time worked in a week in excess of 40 hours.  Many employers are under the mistaken belief that if they pay an employee a salary that the overtime laws do not apply.  This is incorrect.  Weekly salary divided by 40 (hours) must not be lower than the federal minimum wage then in effect.  As with any law there are exemptions and this is the focus of the new overtime law for salaried employees.

Under the law as it currently stands, there are overtime exemptions for employees who perform professional, executive, administrative, outside sales or computer functions. These exemptions are referred to as white collar exemptions.  To be considered exempt, employees must meet certain minimum criteria related to their primary job function and must be paid on a salary basis of not less than a specific minimum amount set by the Code of Federal Regulations (CFR).  Today that minimum amount under the CFR is not less than $23,660 annually which translates to a weekly salary of $455.  Stated differently, your employees are not entitled to overtime pay if you pay them at least $455 a week and their primary duties fall under the “white collar” exemptions.

Effective on December 1, 2016, this changes drastically and modified white collar exemptions will be put in place. The minimum amount required to be paid on an annual basis will be increased to $47,476, which translates to $913 a week.  If an employer pays its employee a salary of less than the $913 floor, the employee will now be entitled to overtime.  In addition, the highly compensated exemption will be increased from $100,000 to $134,000.  The new law also has automatic increases every 3 years tied to certain performance indices.

Last week, President Obama signed the Defend Trade Secrets Act of 2016 or DTSA into law.  This new law provides the owners of trade secrets a private right of action against those individuals or entities who misappropriate trade secrets.  This new law for theft of trade secrets must be brought in federal court within three years of the theft.

While there are other benefits of the DTSA, the most powerful arrow it adds to your quiver is a civil ex-parte seizure of property.  In extraordinary circumstances, where you can show that an injunction alone will not be sufficient, you can actually petition the court to seize the property or trade secret you allege is in the control of the defendant.  As expected, the threshold for this type of relief is extraordinarily high and requires you to describe with a high degree of specificity the location and description of the property to be seized.  Once seized, a hearing will be held within seven (7) days of the seizure to determine if this was appropriate.  As with injunctive relief, a bond must be placed with the court in case your allegations are ultimately not true.

This new law does not replace the various trade secret laws in each state, but rather provide a uniform approach at the federal level that is more in line with the protections for patents, copyrights and trademarks. Previously if a trade secret was stolen there may have been several states to choose from with regards to where a plaintiff might commence its lawsuits.  Obviously, it would make sense to file in the state where the laws were the most favorable to the client.  Now however, the newly enacted DTSA, being a federal law, will greatly curb against this type of abusive forum shopping.

Last week we recognized the passing of Prince and discussed what impact the lack of a business succession plan might have upon his business empire.  This week we’ll cover the elements of a business succession plan.  First, it’s important to understand what a business succession plan is, and what it’s not.  A succession plan is a way to transfer control and ownership of a business to predetermined key people over time in a way that does not harm current operations.  It is generally comprised of a series of documents, including shareholder agreements, buyouts, stock pledge agreements, insurance policies and even your Will and trust documents.  These documents all need to be coordinated to carry out your overall plan in a way that reduces confusion and removes the potential for lawsuits at what may be the most perilous time for your business.  What you generally want to keep out of your plan are surprises.  This isn’t the place to tell junior you’ve always disapproved of his moral compass because surprises lead to conflict, which often results in costly litigation.  This is one of those times where Main Street can learn from Wall Street.  Just like everyone wants to know Warren Buffett’s successor, your customers, partners, vendors and employees are happiest when everyone knows what to expect.

The core of any business succession plan is to spell out in writing how a change in control is going to impact the operation, and thus success, of your business.  While there are lots of options, your choice will most likely be driven by your relationship to the person assuming control.  For example, if the business is being left in the hands of a family member, or a trusted existing member of your business, you may want to consider having a stock buy-out that is funded by insurance or through a tax deferred account.  This can be accomplished through a separate agreement or it may already even be in place if you have a well thought out shareholder or operating agreement.  You can also structure the plan so the business assets can be leveraged for purchase financing, although this carries additional risk.  Alternatively, if control is going to a new individual, or business for that matter, the insurance policy doesn’t work as well for obvious reasons.  In those cases, we often see earn out agreements where retiring shareholders receive an up-front lump sum followed by a series of payments over time.  Often these agreements require the departing owner to help transition clients to the new owner, gradually reducing their role in the company over time.  For tax purposes, these deals may take the form of a “sweetheart” consulting agreement or just straight cash payments.

How these deals are structured, and financed depend on multiple factors unique to each business, but they all have some of the same considerations at the planning stage.  Does it make sense to have your CPA do regular valuations of your business in case a shareholder wants to leave at some point in time?  Should there be limitations on when a departing shareholder can cash out in order to protect the financial condition of the company?  Are there key people who should be covered by non-compete agreements as part of any sale?  These and other considerations are best discussed with your business attorney long before the succession plan actually needs to be used.

By now, it is common knowledge that we have lost Prince, one of the greatest artists of our time. Though he is gone, his legacy will live on in his music, movies, and various other distributions of his image and art. Unfortunately, Prince had no will.  According to various estimates, Prince’s net worth at the time of his death was roughly 300 million with an additional 100 million expected in the next five years alone from fans that will continue to purchase the late singer’s songs and other memorabilia in his honor.  And if this is indeed true, this may be one of the worst business succession failures in recent memory in the music industry.  It just takes a second to recognize that Prince’s impact on society was far greater than just his music.  There were literally hundreds of thousands of tweets, articles and blog posts reflecting the impact Prince made upon them.  In short, Prince was an iconic brand that conducted business at his compound known as Paisley Park Studios just outside of Minneapolis.  Without having a will that established who will control his iconic brand, Prince essentially was running a multi-million dollar business without succession planning.

So why then do you want to have continuity succession planning in place? There are many considerations to take into account and in no particular order they are: mortality, tax planning, life changes or events to just name a few.

Mortality.  The only certainty in this world is that no one is getting out of here alive.   What will happen to your business when you are gone?  This can be a very emotional question and likely the biggest reason why people do not have estate plans.  People don’t like to talk or even think about their own death.  However, if you don’t deal with it, your survivors under the laws of intestate succession will be the ones running your business.  Think about how much effort you placed into getting your business going.  How hard you worked to create that brand and what it stands for.  Do you want your brothers and sisters or children running the show?  What about your business partners? The people with whom you share your personal and professional life may not be suited or capable of successfully working together and picking up the pieces after you did not plan carefully enough.  Truth be told, if you have partners (fellow shareholders), then they are also partly to blame here. While they are not responsible for your estate plan, they are equally responsible for not having a business succession agreement in place.  More on this agreement later.

For the viewers, reality television offers an escape and a harmless entertaining view of what a new house, fashion choice, or social situation might be like. For participants however, the experience can be anything but harmless.  On the HGTV show “Love It or List It”, homeowners turned to the show producer Big Coat TV and contractor Aaron Fitz Construction to renovate their North Carolina home. The couple had deposited $140,000 into an escrow account with Big Coat TV prior to construction to cover the cost of the renovations performed by Aaron Fitz Construction during the course of the taping. Plans were submitted for what the couple was looking for prior to agreeing to have their experience filmed.

In practice however, the episode shows an entirely different contractor who is not licensed in North Carolina.  A scaled down and subpar version of the original plans was completed.

The homeowners have since filed a lawsuit in Durham County Superior Court asserting claims for breach of contract and deceptive trade practices. The lawsuit contends that the work completed was shoddy and left the home “irreparably damaged”, with holes in the floor, low grade supplies, windows painted shut and more. It also questions why payments were not distributed as agreed to in the original contract as well as Big Coat TV’s use of unlicensed professionals. Instead of the couple paying for their renovation with a licensed contractor and having it filmed for a television program, they essentially paid for a set to be built that benefits the show and its advertisers that leaves this family with a potentially uninhabitable home.

Last week on March 30, 2016 the U.S. Supreme Court rendered a decision that significantly helps white collar defendants defend themselves against the Department of Justice (“DOJ”), Securities and Exchange Commission (“SEC”), Internal Revenue Service or whatever agency might be prosecuting them.  The Supreme Court held that the Sixth Amendment to the U.S. Constitution requires that a defendant must have access to his or her funds that are not tainted by criminal conduct to pay for the defense costs of a lawyer of his or her choosing.  Please click here to read a copy of this decision.

Prior case holdings allowed the government to restrict a defendant’s access to “untainted” or “innocent” assets in an amount sufficient to offset against what the government agency alleged it could expect to obtain after conviction and forfeiture proceedings. Stated differently, at the inception of a case the government would deprive a defendant from using his “clean” or “untainted” money which resulted in a defendant not being able to hire a skilled defense team of his choosing.  Before a defendant’s case even began, he was placed in a position of defeat.  This forced defendants to borrow money from family to defend them or otherwise be defended by an over-worked Federal Defender.

Undoubtedly there will be extensive litigation over the interpretation over what a “reasonable fee for the assistance of counsel” means as that term was used by the Supreme Court.  Also, it is important to remember that “untainted” means that a defendant will not be able to use the money he has from selling cocaine or from liquidating his “burglar tools”.  This too will undoubtedly be subject to great litigation going forward as well.  However, being able to cite to a Supreme Court case that relies upon the Sixth Amendment is a great strategic arrow to have in a defense attorney’s quiver when we now make our emergency motions to set aside government restraining orders that froze our clients’ assets.  Previously we were making these arguments but did not have the power of a Supreme Court case directly on point.

As shocking as it may be, in this day and age there are still many hospitals and medical-related businesses that have not made sufficient risk assessments relating to patients’ protected health information (“PHI”) and their third party vendors that have access to this information.  This is pertinent to large organizations such as hospitals, smaller organizations like a physician or dental office, and the third party vendors that work with these types of entities (for example- IT and copy repair companies or cleaning services).  Last week, a resolution agreement between the United States Department of Health and Human Services Office for Civil Rights (“OCR”) and North Memorial Healthcare proved that this issue is still extremely relevant and potentially costly. In this instance, North Memorial self-reported to OCR that an unencrypted laptop containing the PHI of approximately 10,000 individuals was stolen from its third party vendor.

Unbelievably, there was no business associate agreement between the hospital and its vendor.  At the conclusion of its investigation, North Memorial agreed to pay 1.55 million dollars to resolve allegations that it violated HIPPA and agreed to enter into a robust compliance program relating how it would enter into business associate agreements (“BAA”) going forward.  If you are interested in reading a copy of the actual Resolution Agreement, please click here.

Before addressing what North Memorial agreed to do going forward, understand that, North Memorial, as a “covered entity,” was required to take certain steps to protect PHI under HIPPA and to report any breach of this obligation directly to OCR.  OCR is the governmental agency in charge of enforcing the rules and regulations surrounding the privacy of individually identifiable health information and has the authority to conduct compliance reviews and investigations of complaints alleging violations of HIPPA rules generally.

On January 4, 2016, Pennsylvania Governor Tom Wolf eliminated the Capital Stock Tax and Foreign Franchise Tax for all taxpayers effective for tax years beginning on or after January 1, 2016. Previously, the Capital Stock and the Foreign Franchise were imposed on all limited liability companies (LLCs), corporations and a few other entities that were formed or doing business in Pennsylvania. These taxes were not imposed however on an entity that was formed as a state law partnership. As a result, the limited partnership was the entity of choice to own real estate.

With these taxes eliminated, Pennsylvania joins the rest of the country with the LLC now being entity of choice for owning real estate. Keep in mind however that with while this is the law right now, there still is no budget in place. The theory is that the elimination of these taxes will spur economic development and create greater tax revenue in the long run at the cost of losing what had been declining capital stock tax revenue.

Who knows what will happen if the budget is just a little short of what is needed that the January 4, 2016 repeal isn’t tweaked to bring the budget into balance. Regardless, this is the law as it stands today and we are here to advise you of the best way to invest in real estate while protecting your assets and giving you the most flexible management choices that are available. If you have any questions, please feel free to contact Doug Leavitt at Danziger Shapiro & Leavitt, P.C.

President Obama signed into law last year the Bipartisan Budget Agreement of 2015 and it changed, among other things, the manner in which the IRS will audit partnerships. This change will also apply to Limited Liability Companies (LLCs) that elected to be treated as partnerships for tax purposes. While this new law goes into effect for taxable years beginning after December 31, 2017, clients need to consider now how this impacts their current partnership agreement and whether changes need to be made in advance.

Partnership Audit Rules Today

Under the rules in effect today, IRS audits of partnerships and LLCs are primarily conducted under a single administrative proceeding at the business entity level. The ultimate tax liability is decided at the entity level and any adjustments decided by the IRS flow through the entity (remember-the partnership is a pass through for tax purposes) and are allocated to the individual partners or members. In addition, the law in effect today requires that certain members of the partnership need to be notified of major findings during the audit process. Finally, the partnership level audit does not necessarily bind all partners.

President Obama recently signed into law The Fixing America’s Surface Transportation Act also known as the “FAST Act”. What people may be surprised to learn is that this new law also adds Section 7345 to the Internal Revenue Code which provides in part as follows:

“(a) In general.—If the Secretary (of State) receives certification by the Commissioner of Internal Revenue that any individual has a seriously delinquent tax debt in an amount in excess of $50,000, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport….”

Think about this for a second. Your passport will now be used against you as a collection tool. If notified by the IRS, the Secretary of State may pull your passport; refuse to renew it or even to issue you one in the first place. The monetary threshold for a “seriously delinquent tax debt” is only $50,000. Once you consider this includes interest and penalties, it is easy to see how quickly this threshold can be met.