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Actually, this blog post is not really about binders full of women – the title is pure, unadulterated pandering. But it is about the conversation that generated that Tweet-worthy sound bite. In case your computer, smartphone, television and ears were down this week, let’s recap. At the October 16, 2012 town hall Presidential Debate, an undecided voter asked how the candidates would address pay inequality for women. President Obama answered by referencing his support of the Lilly Ledbetter Act. Governor Romney answered with a story about binders full of women searching for female candidates, and providing flexibility for female employees. An employment lawyer drooled. Please note that this is not a political discussion, but a legal one, and the analysis that follows is about whether the law would permit the approaches recommended by the candidates.
President Obama had the easy path. The Lilly Ledbetter Act is now the law. Under the civil rights laws, employees have 180 days from the alleged discriminatory act to file a complaint with state or federal equal employment commissions. If the employee fails to file the claim in the time required, the employee’s claim is forever barred. Poor Ms. Ledbetter discovered, too late, that she was paid less than a male employee for the same work. The court dismissed her claim because she filed it more than 180 days after the first discriminatory paycheck. The Lilly Ledbetter Act states that the statute of limitations for an equal pay claim resets with each paycheck. It was the first statute that President Obama signed into law.
Governor Romney’s answer invites employment lawyer criticism. To be clear, this is not political criticism, but legal criticism. The answer essentially had two parts: first, his search for female candidates and second, his willingness to provide flexibility to female employers who needed to get home to make dinner. Let’s start with the search for female candidates. The civil rights laws prohibit discrimination on the basis of gender. It was not clear from Governor Romney’s answer whether or not he was referring to an affirmative action program, or whether there was a written diversity plan at issue. But, certainly, the goal of employing an underrepresented group in the office of the governor is a laudable one.
Nevertheless, an employment lawyer worries. Imagine two candidates, both with comparable education and experience, both interviewed well, and, in all respects were both qualified candidates. One is male, one is female. Could the governor decide to hire the female candidate solely because she was female? Put another way, would it be discrimination on the basis of gender for an employer to deny employment to the equally qualified male candidate solely on the basis of his gender? The legal answer is yes. An interesting defense to such a claim is that the governor had made a policy decision that his cabinet must reflect the views of qualified women. Employers should always base their decisions on qualifications for the job. Where an employer has decided that gender, for example, is part of the qualifications for the job, they must also articulate a legitimate business reason for such a qualification.
Governor Romney also talked about the need for flexibility for female employees. Tsk tsk, Governor Romney, tsk tsk. The law requires that Governor Romney provide the same level of flexibly for all of his employees, regardless of gender. The law also requires that Governor Romney avoid making employment decisions based on gender stereotypes (i.e., the woman needs to get home to make dinner). An employment lawyer loses a few hours of sleep.
Interestingly, this is the place where the candidates intersect. The law requires equal pay for equal work, and the Lilly Ledbetter Act keeps that claim alive with each new paycheck. But employees, male and female, do ask for flexible work schedules, and many employers are happy to oblige to keep good candidates. Our advice: don’t be like Governor Romney! Make sure flexibility is available to all employees, and that the pay is commensurate with the work provided.
The candidates’ discussion does highlight the challenges for employers: sometimes, an employer’s good intentions, the realities of the workplace, and the requirements of the law seem at odds with one another. Even presidential candidates struggle with these competing concerns. It is our experience that employers can work through these complex issues and strike a balance with good legal and human resources advice.
With less than 5 months remaining in 2012, we have had many clients take advantage of the current $5,120,000 exemption from federal estate taxes by engaging in some form of lifetime gifting. We have helped clients to establish Family Limited Partnerships (FLPs), Grantor Retained Annuity Trusts (GRATs), and Intentionally Defective Grantor Trusts (IDGTs). In many cases, multiple strategies have been combined to provide the client with additional planning benefits, including the potential for even greater estate tax savings.
Although the above strategies are excellent ways to take advantage of the current planning opportunity, we have also been encouraging our clients to consider using Qualified Personal Residence Trusts (QPRTs). For those not familiar with a QPRT, it is simply the transfer of a personal residence to a trust, wherein the donor retains a right to reside and use the residence for a term of years. At the expiration of the term, the real estate passes to the trust beneficiaries or is held in further trust for them. The QPRT provides for an initial discount on the gift because of the donor’s retained right to live there and it also allows any appreciation in the value of the property to move out of the donor’s estate tax free. However, when discussing the QPRT strategy with fellow estate planners, CPAs, financial advisors, and in some cases, even the clients themselves, the strategy is often dismissed out of hand, on account of the low interest rate environment we are in. The stock response I usually get is… “QPRTs work better in high interest rate environments.” In many ways, the low interest rates have caused the QPRT to be forgotten. But it should not be.
While it is true that low interest rates decrease the value of the retained interest (right to live in the property for a term of years), which increases the value of the gift, there are a few factors currently in play which mitigate the higher gift value assigned to the transfer. The primary factor is the depressed real estate values. Most of our clients’ primary residences are located in Bucks and Montgomery counties, the Philadelphia suburbs, Princeton, New Jersey, and the Saucon and Center Valley areas to the north. Their vacation residences are often located in Florida or at the Jersey Shore. These locations are very desirable places to live and vacation, yet such properties are being appraised at 25%-50% below market values from just a few years ago. While we do not have a crystal ball, we feel such properties have the potential to increase in value, with such appreciation outside of the Donor’s estate. This would likely make up for the smaller discount attributable to the current low rates.
Another major factor in favor of using a QPRT, even in this low interest rate environment, is the current $5,120,000 lifetime exemption from federal estate tax. This unprecedented exemption makes the smaller discount on the gift less problematic than in prior years when the exemption was substantially lower. In my experience, the donor often does not feel as compelled to drive down the value of the gift given the larger exemption the donor currently has to work with.
Finally, gifts of fractional interests in real property allow for discounting of the gifts to the QPRT. Assuming clients don’t mind the added complication and cost associated with gifting fractional interests to two separate QPRTs, the transfer of fractional interests adds value to the trust.
Similar to a GRAT, a donor who transfers real property to a QPRT must survive the QPRT term for the strategy to work. However, like a GRAT, a QPRT is as close as you can get to a no lose proposition in that, if the donor does not survive the term, the donor is in no worse position than if the donor had done nothing, except of course for the legal fees incurred to implement the strategy.
One advantage the QPRT has over the GRAT or the FLP is that the strategy has not been under attack in recent years, and if done properly will be a safe harbor. Additionally, some clients feel more comfortable gifting an asset that is not generating income, which is the case with most personal residences. The retained right to live at and use the residence for a number of years also provides a measure of security not found with outright gifts. Finally, upon the end of the term, the QPRT will usually provide that the donor may lease the residence from the QPRT or the trust remainder beneficiaries. This provides another mechanism to move additional assets out of the donor’s estate (via rent) without using any gift tax exemption.
These are exciting times for estate planning, but the current opportunities may not be available on Jan 1, 2013. Some have even described the situation as the perfect storm, and in many respect it certainly is. So please carefully consider the use of GRATs, FLPs, and IDGTs, before year end, but don’t forget the QPRT.
Employment agreements, especially those for key employees which include non-competition terms, must be carefully drafted. What should they include? Here are eight (what’s magic about ten?) musts:
1. Define the Restrictions. The non-compete should, first and foremost, clearly define the prohibited zone by industry segment, by geography and by time. Because these covenants are disfavored in the law (certainly by every trial court which I’ve ever asked to enforce one of these agreements) employers must leave no doubt about the restrictions and be able to tie each to an identifiable protectable interest. The covenants are not enforceable unless they are required to protect such interests, and then only to the extent the restrictions are reasonable.
2. Protectable interest? Courts will not enforce these covenants unless the employer has an interest which can only be protected by the restriction. Eliminating competition is not a protectable interest but, for example, protecting customer relationships is. Consider how the particular employee could hurt your business and tailor the restrictions to provide protection in those areas.
3. Reasonable? A covenant prohibiting competition anywhere in the country is not likely to be enforced where the employee’s relationships were confined to one state or region of the country. Such a broad restriction would likely be found to be unreasonable. Similarly, temporal restriction should be limited to the time required to give the employer’s new representative time to meet and solidify relationships with the customers.
4. Don’t forget to protect your people. A well drafted employment agreement will include provisions which prohibit the employee from inducing your employees to move to the new employer. Losing one key employee is bad enough; losing three or four may be catastrophic.
5. What happens if the employer sells the business? Unless the covenant can be assigned, it is lost and the employee is free to compete. Restrictive covenants are important assets of the business. Absent assignability, the value of those assets is lost if the business is sold.
6. A tolling provision? It may take some time for an employer to learn that a former employee has violated the covenant. Litigation to stop that violation takes more time. A well drafted document will include a tolling provision which stops the clock from running while the employee is in breach.
7. Protect confidential information. The employment agreement should protect confidential information and trade secrets. Employees are often privy to sensitive information which is necessary to do their job. When they leave employment, that information should stay behind. Make sure that the employment agreement provides that confidential information and trade secrets will not be “used or disclosed” after the sale. Define confidential information as broadly as possible, but keep in mind that it does not include information known to the public or easily discoverable.
8. Make violation risky. The former employee must know that if he chooses to violate, it will cost him. The tolling language, mentioned above is one way to get that point across. Another is to provide for recovery of attorney’s fees if the restrictive covenants are violated and enforcement litigation results.
There is a large body of state specific law surrounding the interpretation and enforcement of these agreements. Make sure the attorney who you engage is experienced in this area of the law.
Estate Planning and Elder Law practitioners in Pennsylvania routinely recommend to clients that they execute a Durable General Power of Attorney naming an agent to be empowered to act on their behalf as an essential estate planning instrument. At a recent seminar presented, in part, by Montgomery County Judge Ott, he outlined what he considered the standard to determine capacity for the principal who is executing a Pennsylvania Power of Attorney.
The Principal must:
1. Understand the nature of the authority delegated to the Agent(s); and
2. Understand the nature of his or her assets to be delegated to the Agent(s); and
3. Understand the meaning of the Power of Attorney Notice now required for all Power of Attorneys.
The attorney should establish and document that all three of these standards have been met in order to avoid the instrument being overturned (invalidated, revoked) on the basis of incapacity, which could expose the attorney and/or the Agent to complications and possible liablility.
Two guys are sitting at a bar discussing how they are going to quit their current jobs and start their own business. A lawyer sits next to them, overhears their happy ramblings and pipes in, as lawyers always do, that their mutual promise to devote 100% of their working energy to the new biz has to be reduced to writing. You know this joke, right?
Well, maybe not, and maybe it’s not such a knee slapper anyway. Under Delaware’s Limited Liability Company Act (the “Act”), a person may be admitted to a LLC as a member and may receive a LLC interest without making a contribution or being obligated to make a contribution to the LLC. If an interest in a LLC is to be issued in exchange for cash, tangible or intangible property, services rendered or a promissory note or obligation to contribute one or more of these items, however, the LLC’s operating agreement can and should, identify that obligation. The Act goes further and makes it clear that the operating agreement may provide that a member who fails to perform in accordance with, or to comply with the terms and conditions of, the operating agreement shall be subject to specified penalties or consequences, When a member fails to make any contribution that the member is obligated to make, the operating agreement can provide that such penalty or consequence take the form of reducing or eliminating the defaulting member’s proportionate interest in a LLC, subordinating the member’s interest to that of nondefaulting members, a forfeiture of that interest, or a fixing of the value of his or her interest by appraisal or by formula with a forced redemption or sale of the LLC interest at such value.
If only our clients made it easy on us by letting us write agreements with such detail! A more common scenario is the member who wants us to get rid of the 50% member, formerly a dear buddy, who walked out the door for whatever reason after a few months (or, even worse, walks in and plays on the computer all day doing nothing that needs to be done). Unfortunately, without an operating agreement that clearly identifies expectations with respect to contributions of services and remedies for breach, it is a challenge to argue the defaulting member forfeits his or her interest for failure of consideration as s/he might for failure to “pay” for the interest with cash or property.
While I continue to look out for case law in support of the idea of forfeiture in the context of LLCs, a recent Kansas case did address alternative remedies for breach of obligations with respect to contributions of cash. In Canyon Creek Development, LLC v Fox, the court struggled with the appropriate remedy available to a LLC when a member failed to satisfy a required capital call. The defaulting member, Fox, argued that he should not be held personally liable for the nonpayment of a post-formation capital contribution where the only remedy set forth in the operating agreement was a reduction of his ownership interest. Interpreting a statute that appears to be similar to the Act, the court ultimately agreed with Fox, making a distinction between the initial contributions (which could be in the form of cash or services, measured by their “net fair market value”) and later capital infusions which had to be in cash (unless the manager otherwise consented). The court concluded that the statutory default rule that a member is obligated to perform any promise to contribute cash or property or perform services, even if a member is unable to perform, supports the proposition that a member may be required, at the option of the LLC, to contribute an amount of cash equal to the agreed value of any initial, unmade, contribution. The court stated this was the law even where the LLC may have other rights against the noncontributing member under the operating agreement or other law. Turning to subsequent capital calls, however, the court found it significant that the remedy of cash damages, the most fundamental remedy for breach of contract, was conspicuously absent from the provisions of the operating agreement. Thus, the court concluded that the failure to include such a fundamental remedy as damages when a member fails to contribute additional capital after the LLC’s initial capitalization was not an oversight, but rather expressed a clear intent that damages are not recoverable from a member who failed to contribute additional capital after the venture was up and running. In the Fox case, the right to reduce the breaching member’s LLC interest was all that the LLC could do to punish the breaching member. No divorce, but better than a non-collectable judgment for a sum certain from my perspective.
In a recent case that may not bode well for the enforcement of noncompete agreements in Pennsylvania and New Jersey, the Virginia Supreme Court reversed twenty years of Virginia precedent relating to noncompetes, agreements pursuant to which an employee agrees not to compete with an employer for a period of time after the termination of employment. Until this recently, Pennsylvania, New Jersey and Virginia had similar laws relating to noncompetes. Historically, courts in all states have not looked favorably on such agreements, and have used various tools to limit or deny enforcement of noncompetes. Prior to the court’s decision in Home Paramount Pest Control v. Shaffer, the law in Virginia was similar to Pennsylvania law: a Court could re-write overbroad noncompete agreements so that the document was consistent with the employer’s protectable interests. In Home Paramount Pest Control, the court stated that it would no longer re-write such provisions, and that it was free to refuse to enforce a noncompete that was overly restrictive.
The former employee in Home Paramount Pest Control signed a noncompete agreement that prohibited him from competing with his former employer’s fumigation business in any manner, in any geographic area where he worked for Home Paramount Pest Control for a period of two years after his termination. Prior to this case, it was well settled that if the court found the restrictions of the noncompete broad, it could rewrite the document and enforce more reasonable provisions. The court generally exercised its re-writing power to limit the geographic or temporal scope of the document, or to find that specific conduct did not violate a noncompete if the employer could not articulate a protectable interest in prohibiting the conduct, even where the clear language of the agreement prohibited the competitive conduct. Generally speaking, “protectable interest” means that the employer has provided something to the employee that it has the right to protect, such as access to trade secrets, or specialized training. If the restriction on future employment did not match a protectable interest, the court would not enforce the restriction.
In Virginia at least, this is no longer the case. The Virginia Supreme Court noted that it had “incrementally clarified” the law relating to noncompetes so dramatically over the past two decades that it was free to find the noncompete unenforceable in this case. Most interestingly, the court focused on language that lawyers generally believe is good drafting. The agreement in question contained a list of prohibited activities designed to address every conceivable kind of competition, as well as the ubiquitous “in any capacity whatsoever” catch-all for good measure. The court found that the employer could not articulate a protectable interest that would justify such a sweeping prohibition. Specifically, the court was looking for a nexus between the employee’s job duties, and the prohibitions imposed by the noncompete.
In the good old days, the court would simply have revised the agreement to remove whatever restrictions were too broad, such as the “in any capacity whatsoever” language. Or, the court may have found that there was no protectable interest in prohibiting the employee from engaging in his current employment. But the Virginia Supreme Court refused to do so, noting that incremental changes in the law required a different result. I will not bore the reader with the court’s very interesting discussion of how the doctrine of stare decisis applies to the case, except to note that the court recognized its decision as a departure from well-settled law.
While this case does not apply in Pennsylvania or New Jersey, many states have seriously limited the enforceability of noncompetes. We are making sure to discuss these issues with our clients, and draft noncompetes as narrowly as possible. We are also thinking creatively about other solutions to the problem of competition, trade secrets and specialized training, such as non-solicitation provisions. The Virginia Supreme Court has given us new reasons to draft carefully.