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Earlier this year, amendments to Pennsylvania’s statutes governing partnerships and limited liability companies (often referred to as unincorporated entities or alternative entities) went into effect. I recently blogged about the “transferable interest” concept adopted by the Act. Today, in Part 2 of this series, I highlight another significant change brought about by Act 170: the clarification of the fiduciary and other duties owed in the context of an unincorporated entity. In general, there are three basic duties:
• Duty of loyalty: generally, a duty to avoid self-dealing, competing and usurping company or partnership opportunities
• Duty of care: a duty to refrain from gross negligence and recklessness
• Duty of good faith and fair dealing: a duty to deal fairly and consistently with the terms of the parties’ agreement and the purpose of the entity
In a general partnership, each partner owes the above duties to each of the other partners and to the entity.
In a limited partnership: (a) the general partner owes each of these duties to the limited partners and to the partnership; and (b) the limited partners owe only a duty of good faith and fair dealing to each other.
In a manager-managed LLC: (a) the manager owes these duties to the members and to the entity; and (b) the members owe a duty of good faith and fair dealing to each other. In a member-managed LLC, the members owe these duties to each other and the company.
Some of these duties may be modified by agreement of the parties. In their operating or partnership agreement, the parties may modify, but not eliminate, the duty of loyalty and the duty of care, as long as the modification is not “manifestly unreasonable.” This standard is not defined and is left to the courts to interpret, but in general the agreement cannot convert the relationship into a strictly arm’s length relationship. The duty of good faith and fair dealing may not be modified or removed, but the owners’ agreement can identify the standards by which this duty will be measured.
Clarifying its earlier rulings, the Court of Appeals for the Third Circuit (which includes Pennsylvania) has ruled that a single utterance of a racial slur at the workplace could support a claim for harassment.
In this case, two African-American males (plaintiffs) brought suit challenging their firing on the basis that their termination was discriminatory and racially motivated.
The employees specifically alleged that when they arrived at work on various occasions, an anonymous note was written on the sign-in sheets: “don’t be black on the right of way.” They also asserted that while they had more experience working on pipelines than the non-African-American workers, they were only permitted to clean the pipelines rather than work on them. Significantly, a supervisor of these two African-American employees used a severe racial slur to threaten firing if a specific project was not completed to his satisfaction.
The two employees reported this offensive language to a superior and two weeks later they were fired without explanation. After being rehired they were again terminated for “lack of work”.
The suit filed in federal District Court specifically alleged unlawful harassment, discrimination and retaliation. The District Court dismissed the harassment claim, holding that the facts in the complaint did not support a finding that the alleged harassment was “pervasive and regular”. The Court also dismissed the related claims of discrimination and retaliation.
I hear a lot of interesting stories in my line of work: there are as many interesting employment law problems as there are interesting people, which is to say, a lot. A recent opinion from the United States Court of Appeals for the Fourth Circuit encapsulates this variety nicely, and serves as a reminder not to disregard unorthodox employee requests.
In EEOC v. Consol Energy, the Equal Employment Opportunity Commission sued Consol Energy on behalf of one of Consol’s employees, Beverly K. Butcher. Mr. Butcher worked diligently for Consol Energy for 37 years when his employer decided to install a biometric hand scanner to track employee attendance. Consol required each employee to have his or her hand scanned, and then, upon entering or departing the workplace, required the employee to wave the hand over the scanner.
Mr. Butcher identifies as a devout evangelical Christian. While the hand scanner seems like a fairly innocent and efficient way to track employees, Mr. Butcher did not see it that way. Mr. Butcher’s faith informed his belief in an Antichrist, whose followers are condemned to everlasting punishment. The followers of the Antichrist are identified by the Mark of the Beast. Mr. Butcher feared that the use of the hand scanner would result in his receiving the Mark of the Beast. No one disputed that Mr. Butcher’s belief were sincerely held. Indeed, Mr. Butcher resigned rather than submit to the new hand scanning rules, after his employer failed to accommodate his request.
The EEOC sued on Mr. Butcher’s behalf, arguing that the failure to accommodate Mr. Butcher’s sincerely held religious belief violated Mr. Butcher’s civil rights. A federal jury in West Virginia returned a verdict in excess of $550,000 in Mr. Butcher’s favor, finding that Consol had constructively discharged Mr. Butcher in violation of his rights to accommodations for his religious beliefs. For want of a simple accommodation, Consol Energy risked a verdict in excess of a $550,000, not to mention the related legal fees and expenses. Interestingly, Consol does not appear to have offered any operational reason for its failure to accommodate: other employees were permitted to clock in by entering their personnel numbers into a keypad, without additional cost or burden to the company. Indeed, email produced in the case seems to indicate that the employer was scoffing at the religious objection.
It would have been cheap and easy for Consol to accommodate the request. The failure to do so appears to be based on a judgment about the validity of the request. This type of fact pattern presents itself often in many contexts: religious accommodations, disability accommodations, requests for medical leave. It is easy, as Consol Energy appears to have done, to disregard requests as “kooky” or “odd.” This is a mistake. If the accommodation is not needed, or is overburdensome, or is not based in fact, that will come out in the accommodation process. The danger lies in not following the process that such a request, however strange, requires. Certainly, it is well worth the effort in the beginning to avoid the stress and expense of litigation later.
Reprinted with permission from the June 27th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited.
Earn out clauses in business acquisitions are notoriously fertile ground for disputes. Complicated post-closing performance metrics, access to information, modifications to accounting methodologies after closing, tracking and collection of revenue information all present opportunities for buyer and seller to disagree. The classic struggle of seller’s effort to maximize sale return juxtaposed against buyer’s focus on transforming the operations of the acquired enterprise for long term success necessarily create friction. Both sides bring their unique perspectives to the interpretation of the exhaustively negotiated purchase agreement with the new benefit of hindsight.
Certainly, arbitration pursuant to the Commercial Rules of the American Arbitration Association is common in any number of business contracts. When the parties elect that process, they accept the applicable Rules and agree to adopt the procedures which have been developed by AAA. In the earn out or deferred consideration context, however, acknowledging the sheer number of potential conflicts surrounding inherent accounting practices, scriveners often incorporate a unique mechanism for dispute resolution in their transactional documents. When the issue is theoretically limited to a calculation, the parties go to great pains to define the applicable accounting terms and may design a system of dispute resolution which does not contemplate many of the applicable provisions of the Commercial Rules or empower any judicial or quasi-judicial third party to control the process.
Indeed, transactional practitioners have developed language which seeks to avoid the intricacies of AAA arbitration in preference for what should be a predictable accounting calculation based on verified numerical results of operations. In such cases, parties most commonly agree to submit any dispute related to the earn out to an informal resolution process using mutually agreed upon accountants to serve as “expert consultants and not as arbitrators.” The sole purpose of the accountants’ participation is the review of financial information relating to post closing operations and the calculation of deferred consideration; which calculation would be “final and binding”.
The Pennsylvania General Assembly, with significant input from the Pennsylvania Bar Association’s Business Law Section, recently passed Act 170, which overhauls the statutes governing partnerships and limited liability companies (often referred to as unincorporated entities or alternative entities). This Act brings these statutes up to date with the uniform laws on which they are based and is now in effect for all new and all existing unincorporated entities. These comprehensive amendments provide default rules for governance and other matters that fill the gaps in the absence of an operating agreement or partnership agreement (or the absence of applicable provisions in those documents). Accordingly, it is important for owners of partnerships and LLCs to review their governing documents and be sure they have a clear understanding of how these new rules apply to them. Owners should work with counsel to draft provisions to vary these default rules if that is the desired outcome.
One significant change brought about by the Act is the recognition that equity interests in unincorporated entities are bifurcated into governance rights (including consent, management, and information rights) and economic rights (i.e., the right to receive distributions). The amendments adopt a concept called a “transferable interest”, which is an interest in the partnership or LLC that includes only economic rights. The holder of a transferable interest has no governance rights; he or she has only the right to receive distributions from the entity (but not the right to demand or sue for distributions). The transferable interest approach honors the “pick your partner” principle, which assures owners of a business entity that they will be able to choose the co-owners of the enterprise. Under the revised statute, the only interest that can be conveyed to a non-member is a transferable interest, unless the operating agreement provides otherwise or the other owners expressly agree. Thus, a creditor foreclosing on a member’s equity interest or a person seeking to attach a spouse’s equity interest in a divorce proceeding can take only a transferable interest. This limitation on the rights of non-members affords owners important protections from assertions of control by outsiders which may not be in the best interest of the entity or its members. The exception to this rule is that a creditor foreclosing on an equity interest in a single-member LLC will take the full membership interest (governance and economic rights). The rationale for this exception is that because there is only one member, the “pick your partner” rationale does not apply to limit the rights of the lender.
Earlier this week, the Wall Street Journal reported that Senators are considering a tax on employer-sponsored health insurance plans to raise revenue. It is not my intention to discuss the politics of this proposal, and instead, I write to consider how such a proposal would alter the economics of recruiting and retaining employees.
Until now, it went without question that those who secured health insurance through their employers did so on a pre-tax basis. Employers, for their part, can deduct the cost. This incentivizes employers to offer health insurance coverage to employees as part of a compensation package. Health benefits are hugely important to employees when deciding whether to accept new positions. As such, these plans are powerful recruitment and retention tools.
In my practice, time and again, I hear that talented and experienced employees do not want to leave their current employment, not because of well-drafted restrictive covenants (as many employers believe), but because of their compensation package, that includes health insurance. Spouses and children may have medical conditions that require care, and employees resist the stress of leaving behind good coverage for new jobs or self-employment. Employees believe, in many cases correctly, that the cost of health insurance is cheaper through employer-subsidized plans than in the individual market, and that they can get better coverage for their dollar through their employer.
This is particularly true right now, as the healthcare debate rages on, and employees feel insecure about how their health insurance will work in the future. The Senate’s proposal would remove a tool from an employer’s recruitment arsenal, and dramatically change the economics of recruiting and retaining talented employees. Of course, employers have other tools, and should not rely totally on health insurance, but it is hard to overstate the importance of this coverage to employees. The implementation of such a tax would mean that employers would need to reconfigure compensation packages and rethink the manner in which they provide health insurance coverage to employees.
Lawmakers have referred to the tax-favored treatment of employer-sponsored health insurance plans as discriminatory to those who purchase their health insurance individually. Interestingly, removing these tax protections would also remove the incentive for employers to provide such healthcare. It would be interesting to know from these lawmakers if that is what they intend. A move away from employer-sponsored health insurance does not just change the economics of the employment relationship; it changes the economics of healthcare.
Of course, the healthcare debate impacts employer / employee relationships even as the status of the Affordable Care Act and employer-sponsored health insurance remains unclear. It is simply impossible for employers, or for their lawyers for that matter, to plan for changes in healthcare while proposals are floated and then rejected by lawmakers. However, the proposal to end the tax-favored treatment of employer-sponsored health insurance would mark a radical change. It will be interesting to see if it makes its way out of the pages of the Wall Street Journal.