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PENNSYLVANIA’S PROPOSED RULEMAKING UNDER THE PENNSYLVANIA MINIMUM WAGE ACT

Reprinted with permission from the August 18th, 2018 issue of The Legal Intelligencer. (c) 2018 ALM Media Properties. Further duplication without permission is prohibited.

In 2016, the United States Department of Labor proposed changes to regulations regarding exemptions from the overtime and minimum wage requirements of the Fair Labor Standards Act (“FLSA”).  The proposed changes nearly doubled the salary requirement to qualify for these exemptions.  Employers hurried to change policies and reclassify employees in order to meet the December 31, 2016 deadline to comply with the new salary requirement.  In late 2016, a federal court imposed an injunction on the imposition of those rules, and there the new regulations died (more at the hands of the Trump administration than as a result of legal challenges). Among other observations, the federal district court for the Eastern District of Texas concluded that the injunction was necessary because the new salary requirement was so high that it rendered the duties test “irrelevant.” 

The proposed change was dramatic, and would have required significant policy and personnel changes.  Now, Pennsylvania is taking on those salary requirements in a less dramatic, but no less significant way. 

It is not unusual for business owners such as manufacturers and their suppliers and consultants to enter into joint ownership in the pursuit of mutual business goals.  Those pursuing this strategy should consider that such entanglements can lead to costly future litigation should circumstances change and interests of the parties diverge. In a recent case, a dispute arose between owners of a custom manufacturing limited liability company in which AMM’s client (and a supplier to that same LLC) possessed 33 1/3% of the issued and outstanding ownership interests.   The firm’s client also owned 100% of the stock in a separate business entity which supplied materials to the jointly owned custom manufacturer. 

When the owners had a falling out, an issue arose with regard to the payment of outstanding invoices generated by the supplier for materials provided to the jointly owned custom manufacturer.  When a resolution could not be reached, AMM, on behalf of the supplier, commenced litigation.   During the litigation, the majority member of the jointly held custom manufacturer transferred all of the inventory and other assets to a newly formed entity, owned entirely by him, without the payment of consideration, that is to say, without compensating the supplier entity.  The transfer of assets left the jointly held entity with insufficient assets to meet its’ liabilities; including the liabilities to the supplier.   As a matter of strategy, the controlling member of the jointly owned entity allowed default judgment in favor of the supplier and against the jointly held custom manufacturer.  The newly created entity went about doing business utilizing the inventory transferred without regard to the liability to the supplier.

The transfers gave rise to new and additional claims under the recently adopted Uniform Fraudulent Conveyances Act and claims of breach of fiduciary duty; all of which had to be litigated while the newly formed company operated a separate business. Clearly, a small business owner can no longer simply set up shop as a new entity when things go bad and debt accumulates. However, the complexity of ownership structure and relationship between the various entities made judicial intervention very difficult.   In the end, the newly formed entity was forced to file a general assignment for the benefit of creditors; the majority owner lost his interest in all of the respective entities and eventually filed for personal bankruptcy. 

The above is just one of many “war stories” encountered in attempting to unwind jointly owned business enterprises.  Business owners and potential investors should think very carefully before engaging in shared ownership.  What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future.    

The take away for business owners and potential investors is to think very carefully before engaging in shared ownership.  What may seem like a mutually beneficial relationship at the outset can be costly and challenging to undo if things go bad in the future. 

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