New Statutes California Business Owners Should Know About

Earlier this week, I wrote about new statutes California community association managers and board members should know about.  So, I thought I should also talk about new statutes California business owners should know about.  Surely our legislators put great effort into passing lots of legislation to materially improve the business climate in our economically hard hit state. 

Well, no, not really.  I suppose there is a silver lining, though.  At least the folks in Sacramento didn’t go out of their way to make the business climate even worse.

Better luck next year, I suppose.

In the meantime, what to blog about?  I’ve got it! 

Considering the impending Super Bowl game, you may be happy to hear that Assembly Bill 58 amended Penal Code Section 337a, and added Penal Code Section 336.9, to eliminate misdemeanor and/or felony criminal penalties for friendly sports betting pools.  That Super Bowl pool at work?  Now it is only punishable by a fine.  If the stakes are small enough.  Or it doesn’t fall under some other exception.  So okay, these new statutes aren’t perfect (not even for California).  And I should warn you to read the full text of the law yourself, if you are considering doing anything which it may pertain to, because it’s full of all sorts of complexities (and I know less about criminal law than most criminals do).  (You can find it at:  http://www.leginfo.ca.gov/pub/09-10/bill/asm/ab_0051-0100/ab_58_bill_20090806_chaptered.pdf.)   

But it is nice to know that our state lawmakers spent their time on issues which are of such importance to our economy this past year.  I mean, in addition to these new Penal Code provisions, they also passed a law allowing a motor vehicle passenger to turn on a DVD screen in the front seat, as long as the driver can’t see it (Assembly Bill 62).  Oh, and California dentists are now prohibited from making credit arrangements with patients who are under anesthesia (Assembly Bill 171), which makes me wonder how widespread this practice was before (a scary thought). 

Tongue-in-cheek comments aside, there are a few new statutes which, depending upon the business you are in, could be important for you to familiarize yourself with.  If your business is a restaurant, remember that the ban on trans fats kicks in this year (okay, that’s still a bit sarcastic).  If you sell a product or service using recurring periodic fees or charges (an “evergreen clause”, for example), you must be careful to disclose the details and obtain your customer’s specific written consent (Assembly Bill 340).  If you do home remodeling or other contracting work, be very sure that you have the necessary license(s), as a first offense will now cost you up to a $5,000 fine and up to six months in jail (Assembly Bill 370).  And if yours is a small, home-based child care business (for six or less children), you must be licensed in pediatric first aid and CPR (Assembly Bill 1368), just like larger child care facilities.

New Statutes California Community Association Managers and Board Members Should Know About

One would have hoped that during 2009 California’s legislators would have had their hands full addressing our state’s budget crisis, but they did manage to squeeze in some time to amend and adopt legislation affecting community associations.  Listed below are the statutes which I believe will have the greatest impact on community associations, their managers, board members and residents.  Unless otherwise noted, all of the statutes listed below were adopted in 2009 and are effective as of January 1, 2010.

1.  If your association has a swimming pool or spa, you should already be familiar with the federal Virginia Graeme Baker Pool and Spa Safety Act (15 USC 8001), requiring pools and spas to be retrofitted with anti-entrapment devices (drain covers meeting specified standards).  This Act became effective in December 2008, and pool retrofits should have been completed by January 1^st of this year.  The federal Act includes a section establishing a grant program to assist States with enforcement, education and administration costs, but only States meeting the federal Act’s minimum State law requirements are eligible.  To meet those requirements, California Assembly Bill No. 1020, which amended Section 18942 of, and added Sections 116064.1 and 116064.2 to, the California Health and Safety Code, was passed.  The bill imposes standards both for newly constructed public swimming pools and for the retrofit of existing public swimming pools (and community association swimming pools and spas do fall within the definition of “public” swimming pools).  All pools and spas must be retrofitted by no later than July 1, 2010, unless they have already been retrofitted to comply with the federal Act.  Since both the federal Act and the new State legislation pertain to health and safety issues for children, it would be very poor risk management for an association to ignore this legislation. 

 2.  California Assembly Bill 1353.8 declares any governing document provision which prohibits, or has the effect of prohibiting, water-efficient landscaping to be void and unenforceable.  The governing documents of many California community associations would contravene this new legislation.  As noted in my prior posts regarding solar energy for community associations, it is reasonable to assume that California community associations will see much more legislation pertaining to such “green” issues in the near future.  (I predict that the next big thing will be clotheslines.)

 3.  Several new statutes pertaining to community associations’ disclosure obligations were passed during the last legislative session.  Board members and managers should review and familiarize themselves with the provisions of these new statutes, including:

     a.  Amended Civil Code Section 1350.7 and amended Corporations Code Section 20 (pertaining to electronic distribution of documents);

      b.  New Civil Code Section 1363.005 (which requires distribution of a statutorily proscribed “Disclosure Documents Index” at the request of any member);

      c.  New Civil Code Section 1365.2.5 (regarding new assessment and reserve funding disclosure requirements).

Feel free to contact me for a copy of the full text of these new statutes, or you can find them at http://www.leginfo.ca.gov/calaw.html.  In addition, I am always happy to meet, free of charge, with board members and managers, to discuss complying with the new statutes (or any other issue of concern to your community).

Starting a Business? Remember That Hope Isn’t a Plan.

Optimism is a necessary component of the entrepreneurial spirit.  When it comes to starting and running a business, however, ignoring legal risks and hoping that nothing bad will happen is not a plan.  There is just too much that can go wrong.  Identifying your legal risks and then addressing them to eliminate the risks you can and minimize and manage the risks you cannot eliminate is not a failure of optimism.  Instead, knowing what your business liability risks are and managing those risks should free you to move forward with developing and growing your business with realistic hope, not nagging worries.

What are the most common (and most important) legal liability issues businesses (no matter how small) face?  I don’t know that any business attorney would be able to produce a comprehensive list of every possibility, but here’s my attempt at a reasonably complete outline of the issues which should at least be considered by every entrepreneur:

1.  Business Formation Issues:  Should the business entity be a sole proprietorship, partnership, LLC or corporation?  Even a single owner can incorporate or form a single-member LLC, and this decision is not strictly a legal matter, but should be made in consultation with an experienced business accountant as well.    

 2.  Business Governance Issues:  Once a decision regarding the type of legal entity the business should be is made, creating governing documents for that entity must be considered.  Even a single-member LLC should, ideally, have an operating agreement (and may have to have one to keep its legal status, depending on the jurisdiction).  A business with more than one owner (whether LLC members, shareholders or partners) needs governing documents, period, even when the business is family owned and operated.  What happens if someone wants “out”?  What happens if someone wants someone else “out”?  How will decisions be made if everyone doesn’t agree (particularly if there are only two owners)?  How do you get paid, how much, and how is that to be decided?  And, something which is very important to cover (but often entirely overlooked) – what happens when it’s all over (also known as the “exit strategy”)?  You have a choice – hire a lawyer at the beginning, while everyone still likes each other, to formalize your relationship, or wait until a conflict develops and then hire a lawyer to litigate it.  I’ll give you three guesses about which approach costs less, and the first two guesses don’t count.      

3.  Employment Issues:  Whether the business has employees or independent contractors, there are legal liability issues which should be addressed and managed with appropriate written agreements.  See here for a related post on some of these issues.  As far as I am concerned, there is no good reason not to have a written employment and/or independent contractor agreement.  In addition, serious consideration should be given to creating an employee handbook to cover not only the terms and conditions of employment, but such issues as technology use and potential abuse (including e-mail, social media, your website, etc.) and intellectual property issues such as non-disclosure agreements and/or assignments (if pertinent to your business). 

4.  Transactional Issues:  What will your business buy, rent or sell?  Whatever it is, you’ll need a contract.  See here for a related post on this issue.  As discussed below, form agreements from the internet are worth just about what you pay for them (probably much less).  If you start there, be sure not to end there, if you’d like to keep the money you earn.         

 5.  Capitalization Issues:  Unless you are a sole proprietor bootstrapping the startup of a business with your own personal savings, the manner in which the business will be capitalized must be considered and the associated legal issues handled appropriately.  Venture capital, equity and stock option compensation all give rise to legal liability issues which must be effectively managed in order for the business to succeed.  Even small businesses with no employees, in which the owners provide all of the “sweat equity”, can benefit greatly from an agreement which explains just exactly what in the way of rolling up the sleeves is expected of every member; it sure helps to prevent misunderstandings, hurt feelings and, ultimately, deadlock or worse among the business owners.

Can you handle some of this stuff yourself, and save some money?  This may sound strange coming from an attorney, but yes, I think you can.  One can easily stumble into “penny wise, pound foolish” territory in doing so, however.  Several times over the past year, for example, I have been consulted by sole proprietors who used an online service to create their business entities a while back, but then didn’t have any guidance on what to do with them (required filings with the Secretary of State, tax payments, corporate finalities such as minutes and meetings, that sort of thing).  As a result, they derived no protection against personal liability by forming their business entities.  They may as well have saved the money creating a corporation or LLC altogether, purchased great insurance coverage, and operated as a sole proprietor for a while, until they were ready to take on a partner or investor, or hire an employee.  A corporation or LLC you don’t know what to do with is really a waste of time and money to create, even through an online source.

Another example is using form contracts you buy (or find) on the internet.  Again, this may sound strange coming from an attorney, but you may be able to save some legal fees that way.  If you’ve found some contracts on the internet the terms of which you like, there’s no harm in giving them to your lawyer and explaining what it is you like about them.  Certainly, lawyers use their own template contract terms when they create new agreements (you didn’t think we start from scratch every time, did you?)  My own templates are only valuable to me because they are the end product of years of learning and “tweaking”, and they are only the beginning (there is a significant amount of customized drafting required to tailor a template to fit the specific needs of a particular business transaction).  Here’s a perhaps more concrete example.  An employment agreement you found on the internet may be worse than not using an employment agreement at all if its terms violate the employment law of your specific jurisdiction.  So for heaven’s sake, at a minimum you will want to have a business attorney at least review the contracts you intend to use in your business.  And by that I mean all of them.  Because using agreements with conflicting provisions may (you’ve got it) be worse than using no agreements at all.  So, strictly from a cost-benefit analysis perspective, you have two choices.  You can hire a business lawyer to create your business contracts for you up front (i.e., template contracts you can actually use to make money), or you can hire an attorney to litigate disputes over inapplicable or misused internet forms later.  I’ll leave it up to you to guess which approach is the most cost effective for your business.        

 My sense is that there are three big reasons why small business owners (particularly start-ups) don’t want to hire an attorney to help them.  They are ego, money and fear, and I’d say they vary in order of importance depending upon whether or not the business owner(s) has/have prior entrepreneurial experience.  What I mean is this:

 1.  Ego:  You have to be a pretty confident, self-assured person to start a business.  Often, the belief that one knows all one needs to know about all things related to that business, and better than anyone else could possibly, is an associated personality trait.  Of course, most entrepreneurs who try to start and run a business, and actually succeed at it, learn at some point in time that failing to enlist the assistance of a trusted legal advisor is a mistake.  For those entrepreneurs, the second time around is usually the charm, because they have learned to set aside ego in favor of effective legal assistance.

 2.  Money:  If you don’t have it, it’s hard to spend it.  Or, there may be some ego overlap (why pay for something you don’t need?)  Again, there are things you can do yourself to save money, but “penny wise and pound foolish” just doesn’t work for most businesses.  If you can’t afford a large, expensive business law firm, find an experienced solo practitioner who will agree to help you by “unbundling” his or her legal services and performing work for a flat fee, and at least get the basics covered so you can make money and keep some of it too.  It won’t get easier (or cheaper) to handle the legal “basics” than at the very beginning of a business.    

 3.  Fear:  Entrepreneurs who have tried to work with attorneys in the past who tended to thwart rather than facilitate getting business transactions done are understandably fearful of travelling that path again.  The best I can recommend here is that you find a lawyer who advises but doesn’t dictate, and that you spend some time with that lawyer explaining your business and your tolerance for risk.  Treat your attorney as a part of your business team.  It is his or her job to advise you on how to manage your legal risks, but ultimately (unless you propose to do something illegal) it’s your call.  Legal liability risks won’t go away because you refuse to hire a lawyer at all, or do but then avoid discussing your business risks with your lawyer.  And you won’t save yourself any legal fees that way either.  One of the best explanations of this “universal rule” I’ve ever seen can be found here (and in a more humorous way, here).

What Matters Now

For me, the “holiday season” was way too busy, I’ve spent most of January just trying to catch up (and catch my breath), and there have been times when I’ve felt like a rat in a maze.  Sound familiar to you?  I have a stack of notes about topics I want to blog about sitting on my desk, but I will have to push them aside for one more day while I put the finishing touches on my end of year/beginning of year/catch up/wind up/get organized efforts. 

In the meantime, I want to share with you a valuable gift from Seth Godin, which has inspired me to head into the new year with a new energy and focus.  It is a free e-book, called What Matters Now.  It is well worth taking the time out to read it, and I am grateful for Seth Godin’s generosity in making it available, free of cost, as a New Year’s gift.  

Enjoy!

Furthermore, a rose by any other name . . .

. . . may also bring a visit from the tax man (or woman).  Or the labor board.  Or a process server.

My previous “Rose By Any Other Name” posts have been about (a) misnamed/unnamed insureds and (b) contracts (verbal vs. written).  This post is about independent contractors who are really employees (at least, as far as the federal and state tax authorities are concerned), and other “thorny” employee classification issues.

At this time of rising State and Federal deficits, there seems to be an increased scrutiny of how small and medium sized businesses are classifying their workers.  In addition, attorneys who represent workers before the Labor Board seem to be experiencing an uptick in business, commensurate with rising unemployment.  This is strictly based upon anecdotal evidence (I’m receiving more calls from business owners on the receiving end of employee pay and benefit claims), but my suspicion is that such claims, as well as tax enforcement proceedings, are on the rise and will continue along that trend for some time to come. 

Proper classification of workers as independent contractors or employees (and if employees, as temporary, part-time or full-time and as exempt or non-exempt) can mean the difference between financial survival or failure, particularly for a small business, and small business owners, who do not have their own HR staff, are often the least equipped to make these determinations.  Failure to properly classify employees can leave a small business vulnerable to claims for legally mandated employee benefits such as workers’ compensation and unemployment benefits, for discretionary benefits such as health insurance and paid time off, and for back overtime pay.  Properly classifying employees is particularly difficult for small businesses with fluctuating staffing needs, since it is easy for a busy small business owner to forget to reclassify a temporary employee who becomes permanent, or a part-time employee who becomes full-time.   

The solution?  Well, my instinct as a lawyer is this – put it in writing, and keep it in writing.  Even temporary workers could be given something in writing that makes it clear that their status is temporary, with an approximate time limit.  Then calendar the end of that time limit, as a reminder to revisit the issue of how that worker should continue to be classified.  And even small businesses should have a written personnel policy to point to when your employee classifications (or other employment practices) are questioned.       

More dangerous than a misclassification of an employee is the improper classification of a worker as an independent contractor.  Such a misclassification leaves the employer vulnerable to back payroll taxes and penalties as well, which can be substantial enough to put you out of business.  And, whether a worker should be classified as an independent contractor or as an employee can be a particularly tricky determination for a small business owner to make, since the criteria for independent contractor status used by the IRS, the federal Department of Labor and state labor departments don’t all impose exactly the same standards. and are not “exact” but, rather, are open to some interpretation.  Even large companies, such as Microsoft and Federal Express, have been the subject of expensive enforcement actions alleging misclassification of workers.  The new targets for such actions appear to be small businesses, and I’m sure that has alot to do with the fact that they are the most likely to be mistakenly misclassifying their staff.    

The solution?  Again, my instinct is to put it in writing.  As far as I am concerned, a written contract is absolutely essential.  Even with a written contract, however, treating the independent contractor as an employee may indeed make the contractor an employee, whether that’s what you intended or not.  For an explanation of how the IRS analyzes these issues, see IRS Publication 15A.   

Finally, years ago one of my community association clients learned the hard way that even with no employees it still needed workers compensation insurance.  That is because California’s Labor Code provides that one who hires a worker to perform work requiring a license is that worker’s employer if it turns out that the worker doesn’t have the required license.  (It may shock you to hear that sometimes unlicensed contractors lie about their unlicensed status and either provide a fraudulent contractor’s license number or “borrow” another contractor’s license number.)  The association hired an unlicensed contractor, one of the contractor’s employees was injured, and the association was on the hook, with no workers compensation insurance and with a workers compensation exclusion in its commercial general liability insurance policy.  To get a better feel for how California’s Workers’ Compensation Appeals Board analyzes the issue of employment status, take a look here. 

The solution to this problem?  Legal liability risk management, plain and simple.  A good insurance broker and an attorney to prepare the association’s own contracts, requiring contractors to maintain appropriate licenses and insurance coverage, would have been a big help.