With the recession still looming and employers worried about hiring employees and/or spending money, many are turning to independent contractors to perform the work that their layed off counterparts used to perform.  Obviously, employers don’t have to pay the requisite taxes if they hire independent contractors; however, they must beware of the major pitfalls that may come with working with independent contractors and treating them like your employees.  This article addresses the difference between the two and how you might protect your business.

            First, the determination between an employee and independent contractor is complex, but is essentially made by examining the right to control how, when and where services are performed. Typically most employers think if they pay the contractor directly and issue a 1099 to the contractor for IRS reporting purposes, they are safe.  Wrong.  If you treat the independent contractor like you did or do your employees, you may be in trouble.  In application, if you require that independent contractor work at a certain location for certain hours under your supervision and control, then that “independent contractor” is more likely an employee. 

Another rule of thumb is that with employees, the employer typically provides the equipment, materials and tools to do the job, while an independent contractor will provide his or her own.  Categories of workers where the lines are often blurred include construction workers, home health aides and truck drivers.  If your business is in any of these lines of work, you should definitely contact an attorney and decide how you classify the people working in your business.

           The determination of an independent contractor status isn’t based on how he/she is paid, how often he/she is paid or whether he/she works part-time or full-time. Please note, no statutory definition exists to determine what an employee is, but there are three basic things to look at:

   1.  Behavioral control

   2.  Financial control

   3.  Type of relationship

            Second, you can ask the IRS to make a determination as to whether an employer-employee relationship exists by filing Form SS-8, Determination of Employee Work Status for Purposes of Federal Employment Taxes and Income Tax Withholding.  Be advised, if the IRS finds that an employer incorrectly treated an employee as a nonemployee, the employer will be liable for the social security and Medicare tax withholding that he or she failed to withhold and pay.

Finally, if you unilaterally decide that the person hired is an independent contractor without consulting an attorney or the IRS and the IRS disagrees with your classification of a worker as an independent contractor and you have not paid taxes on that worker, you will be liable for back taxes and perhaps penalties.  Clearly, this is not a position you or your company wants to be in.

One of the biggest issues this week with clients are covenants not to compete—drafting and enforcing them. As many of you may know, the case law on this topic has changed over the years and has never been quite clear enough for the employer and lawyer to interpret. However, the Courts are answering the need to better interpret the Texas Statute with continued published opinions.

Typically, clients want their management or sales personnel who are privy to confidential information or company trade secrets to sign these types of agreements. Often times, employers want employees to sign these agreements while still preserving the at-will employment status. The quick answer in Texas is that covenants not to compete are enforceable so long as they are reasonable and are signed in conjunction with the employee receiving some type of consideration. (Be advised, this is just a general answer). The consideration is usually confidential or trade secret information.

The Texas Supreme Court in Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844 (Tex. 2009) made it easier to enforce covenants not to compete when it held that the consideration given to the employee in exchange for the covenant (confidential information) need not be explicitly recited. It is enough if the employee is in a job that would require the use of such information. Also, look at Gallagher HealthCare Ins. Servs. v. Vogelsang, 2009 Tex.App. LEXIS 6838 (Tex.Ct.App.–Houston [1st. Dist.] 2009) for an appeals court enforcement of a non compete, even where the recitation of the nature and type of the confidential information was arguably vague and conclusory.

The Bottom line: Texas courts are moving away from formalistic analysis of non compete cases and toward a more practical and equitable approach of asking whether a covenant is needed to protect an employer’s confidential information, and if so, what’s a reasonable restriction on the employee’s ability to make a living. This is a much better position to be in for employers and their counsel.

As with any contract for your business and especially a covenant not to compete, be sure to fully understand the business need.  And, with regards to the covenant, make the restrictions reasonable in light of the employers need to restrict the employee from competition.

        Small business owners are quick to get started with their business and begin selling their products or services so as to make money.  Many owners either start their “entity” online or may have a corporate lawyer set up the company.  If the small business owner completed step one setting up an entity to operate a business, they are steps ahead many other companies.  Now, if those small business owners actually set up an entity, do they continue with “stuffing their corporate record book” during the tenure of the entity.  In my experience, the answer is no.  With that, does it matter and if so, why?  And, do you even know where it is?

            First, corporate record books contain the formal minutes of the corporation’s stockholders’ and directors’ regular and special meetings held during each year. The books should contain the articles of incorporation, corporate by-laws, stock certificates, resolutions and minutes of corporate meetings.

Required by State Law

            Under Texas law, a corporation must maintain a corporate record book according to the terms of the Texas Business Organizations Code as well as the entity’s bylaws.  Failure to do so may create liability.

Any Stockholder has the Right to Review the Corporate Record Book

            At any reasonable time, a shareholder has the right to review the corporate records book at any reasonable time.  Included in the corporate records are the accounting records and minutes authorizing any actions.  In private corporations, failure to allow a shareholder to review records many result in litigation and damages.    

Tort or Breach of Contract Claim Arises

            A primary purpose of doing business as a corporation is to insulate stockholders from unlimited liability for corporate activity. Limited liability will ordinarily exist even when the corporation is closely held or has a single shareholder.  Clearly, the stockholders have a vested interest in maintaining the limited liability of the corporation.  One way to “pierce the corporate veil” is to ignore the corporate formalities including but not limited to maintaining the corporate record books.  If the shareholders/officers do not abide by the corporate formalities, personal liability may result.  Simply put, any stockholder does not want to be in this position.

Failure to Maintain Corporate Records Book

            Another problem with the failure to maintain the corporate records book many result in a determination by the Court that the entity is simply an alter ego of the corporation thereby jeopardizing the personal assets of the individual owner. 

            Moreover, in a closely held corporation, one record that should be in the corporate record book is a buy-sell agreement not only between family and friends but also between a husband and wife.  Imagine the problems that are created when a disgruntled shareholder sells his/her shares to a competitor and without a buy-sell agreement governing that transfer, the other shareholder(s) may be in business with a competitor or someone he/she does not know or like.

            Simply put, this article addresses some of the important reasons to maintain a corporate record book and know where it is at all times.  You may never need to produce it to anyone but you should be prepared in the event you do. 

One of the most important factors in the dissolution of a marriage in Texas is the duty to support any and all children of the marriage.  Parents have the duty to support their child, which includes providing the child with clothing, food, shelter, medical and dental care, and education.  Tex. Fam. Code §151.001(a)(3).  The duty to support begins at the child’s birth, and ends either with the minority of the child ending, the termination of the parent-child relationship, the child entering into active military service, the death of the child, or remarriage of the parents.

The Texas Family Code has set out guidelines for child support.  These “guidelines” set the percentage to be paid by the non-custodial parent based on that parent’s net income, and the number of children of the marriage.  Several factors may be considered when applying these guidelines, however there is a presumption that the following percentages are in the best interest of the child:

1 child of the marriage = 20% of the non-custodial parent’s net resources

2 children of the marriage = 25% of the non-custodial parent’s net resources

3 children of the marriage = 30% of the non-custodial parent’s net resources

4 children of the marriage = 35% of the non-custodial parent’s net resources

5 children of the marriage = 40% of the non-custodial parent’s net resources

6 children of the marriage = 45% of the non-custodial parent’s net resources

            In addition to the monthly support payments, the non-custodial parent is required to maintain health coverage for the children of the marriage.

These are just the basics of child support in Texas, and one should contact a qualified attorney for a comprehensive evaluation of rights and duties.  Also, please look to this website for future articles on related topics.

After spending months writing and talking about topics that interest your business, this article focuses on what may happen in your personal life (or someone you know).  With that and the current expansion of my law firm, I figured this was a good topic.  While divorce can be a sad event, it is one that needs to be reviewed and discussed in depth to make sure that everything is done properly and with as much ease as possible.

As you know, one of the hardest decisions anyone will ever make is the choice to end a marital union.  The decision is not simplified by the legal aspects involved in the dissolution of marriage.  The first things clients want to know are, “what are my options”, and “how do I start the process.”

Filing the Petition - First, I am always of the opinion that it is best to be the Petitioner (the party who files for the divorce).  As the Petitioner you drive the bus, for the early stages of the process anyway, whereas the respondent is primarily reactive.  In order to qualify for a divorce in Texas, one of the spouses has to have been a resident of the state for a continuous six month period and of the county of filing for a continuous 90 day period prior to the filing of the Petition for Divorce.  Once a suit for dissolution of marriage has been filed, the respondent must be served with the citation unless this service has been waived.

Fault - The grounds for the divorce must be stated in the petition.  Texas offers both “Fault” and “No-Fault” Divorce.  A divorce based on no-fault grounds can be granted without proof that one of the spouses was at fault for the end of the marriage.  No-fault grounds include insupportability, living apart, or confinement in a mental hospital.  The most common of these is insupportability.  This type of no-fault divorce may be granted if it can be established that the marriage is insupportable because of discord or conflict that destroys the legitimate ends of the marriage, and there is no reasonable expectation of reconciliation.  Fault grounds for divorce in Texas include, cruelty, adultery, felony conviction, and abandonment.  Texas is a community property state.  Fault grounds may be specified in the petition for the dissolution of marriage so that the circumstances may be considered by the court in determining an equitable division of the community property.

Temporary Relief - The petition can also ask for temporary relief such as a temporary restraining order, temporary injunction, and/or temporary orders.  Temporary relief is typically sought to preserve marital property and to protect the parties during the suit.   

Final Relief – The Original Petition must request dissolution of the marriage.  However, several other forms of final relief may be sought in the Petition, such as asking the Court to divide and confirm the marital estate.  Further relief might include reimbursement, economic contribution, spousal maintenance, group health-insurance coverage, a name change, the enforcement of premarital and postmarital agreements, federal income tax responsibilities, tort claims, attorney fees and court costs. 

60 Day Waiting Period – A divorce suit may not reach final judgment until it has been on file for at least 60 days.  The length of time it takes to have a final judgment rendered, and the dissolution of the marriage legally binding, depends largely on the separating spouses.  If the parties are in agreement on the terms of the divorce and the distribution of assets, a judgment may be entered as soon as the 60 days have passed.  However, if the parties are not in agreement, mediation and/or trial may be necessary, and the divorce may not be final for many months. 

This is a brief overview of the divorce process.  Please check back for articles detailing specific portions of the marriage dissolution process including in depth coverage of various topics in this article as well as custody, visitation, and child support.

As you know, my main focus is on your business and keeping businesses out of legal trouble.  Acting as your in-house counsel on a flat monthly fee, I can help with the decision making process and management of your business so your company can avoid lawsuits and ease many of the stumbling blocks you face everyday.  One overlooked area is where do the people in these companies turn when they have personal issues?  We have a solution…we have added a family, criminal and probate section to the firm.

Recently, my wife, Mandi Krasney, joined the firm leading the new personal assistance section that focuses on all aspects of family, criminal and probate law.  This section handles divorces, custody, adoption, all misdemeanor and felony cases as well as will construction and the probate process.

With the addition, The Krasney Law Firm can handle both your business and personal needs. 

Living in a competitive worldwide marketplace, every company should take great care and pride in protecting their personal confidential information that they don’t want their competitors to use.  Sometimes that information you deem confidential rises to the level that Texas Courts and statutes recognize as a “trade secret”.  With that status, the owner has a privilege not to divulge that information in Court or otherwise.  Regardless, every company should take steps internally to protect that information and if in a lawsuit, be sure that the confidential information rises to the level of a trade secret to take advantage of the privilege.  Moreover, in the event that the confidential information meets the threshold, the company still must have taken active steps to safeguard the information.  If the company fails to observe the formalities of the information, the privilege may have been waived.

            The following factors are use to “determine whether a trade secret exists…:”(1) the extent to which the information is known outside of his business; (2) the extent to which it is known by employees and other involved in his business; (3) the extent of the measures taken by him to guard the secrecy of the information; (4) the value of the information to him and to his competitors; (5) the amount of effort or money expended by him in developing the information; (6) the ease or difficulty with which the information could be property acquired or duplicated by other.”  The Texas Supreme Court has held that the party claiming a trade secret should not be required to satisfy all six factors because trade secrets do not fit neatly into each factor every time.  In re Bass, 113 S.W. 3d 735, 739-40 (Tex. 2003).   Clearly, the threshold is quite high and any company should try to prove and preserve as many factors as possible to claim a trade secret.

            In application, if you have trade secrets that you must share with an employee, you should require that employee to sign an employment agreement with some defining restrictions including a confidentiality agreement and/or a covenant not to compete.  Obviously, you don’t want that employee leaving with your trade secrets to directly compete with you.  When the trade secrets are revealed, you should make a deliberate effort to label them as such and keep a firm record of what information that person has.  In the event that the previous employee is using your trade secrets, your company may have rights and damages against that employee and/or his/her new company.  Those issues should be explored and pursued to protect your business and value. 

            So, the morale of the story is to be careful and proactive when dealing with confidential proprietary information specific to your company.  You never know who might use it to your detriment.    

I have provided several articles over time on mechanics and materialmen liens; however, I now I want to provide clients and readers with a chart that they can keep next to their computer.  Please remember that lien law is complex and statute specific but this chart at least gives you an idea of when lien letters need to be sent or a lien filed in relation to work done for another party.  One thing to remember with this chart is that the timelines run with each month of invoices and each project done for the customer.  In short, do not wait until the very end of a project to file a lien because some of your rights may have jeopardized. 

Each week I am asked by clients about issues that their reach beyond their business—from their children buying houses to preparing wills.  This week, I decided to focus again on the will process and share a few questions from clients and my answers.  I think the testate process is interesting and necessary to keep the family peace but also to protect your personal and business assets.

1.                  I recently remarried and love my husband; however, before we married we agreed to keep our assets and money earned before marriage separate.  In fact, we agreed not to change our wills so that our money and assets will continue to go to our children.  But, my husband and I live in my home.  After I die, I want my husband to be able to stay in our home (even though I own it).  Can he? 

      Answer:          Good question.  Even though you did not leave the house to your husband (and presumably left to your children that do not live there), your husband has a right in Texas to live in that home until he dies.  Only after your husband dies do your children have full rights to the property.  During your husband’s lifetime, however, he is responsible for the maintenance and insurance on the home.  Obviously, it would be to his benefit to be kind to the children and let them know that he is taking good care of his home that he shared with their mother.  Be advised, that your husband’s right to stay in the home does not change even if he remarries. 

2.                  Can I leave my children and grandchildren out of my will?  I do not want them to inherit anything.  Instead, I want to give my possessions to charity.

      Answer:          Yes.  You can will your property to whoever you choose and can choose not to will anything to your children or grandchildren.  No Texas law exists that requires anyone to leave any property to their children.  However, your children may choose to contest the will and seek legal recourse.  They can do this during the probate process and challenge your capacity at signing or that you signed under undue influence.  They may also challenge the signature or your witnesses.  Clearly, this may be an uphill battle.  Be sure to discuss these issues with your attorney.  One remedy could be that you have a will signing video that memorializes all the proper procedures and reflects your full testamentary capacity to sign the will.

3.                  My parents left my brother, sister and I their home.  It is paid in full and I want to sell to realize some cash.  My sister wants to live there and refuses to sell.  My brother wants to sell.  We do not want her to live there but she is attached to the home.  What can we do to force her to sell?

            Answer:  Unfortunately, if your sister refuses to sell her portion of the house, you will need to file a lawsuit to partition the sale.  You have an equal right to your portion of the house and since it cannot be physically divided, the Court will need to order a sale.  Even though that is the procedure, you should speak with your siblings and advise that the sale will not realize the same amount of cash like you would now by selling considering the partition process is expensive.  You may visit with an attorney and see what solution you could work out amicably.

The Texas Deceptive Trade Practices Act is also known as the Consumer Protection Act which as the phrase implies is designed to protect consumers; however, it also protects businesses in large transactions.  The DTPA provides that all “false, misleading, or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.”  To better understand the DTPA, we need to review a few statutory definitions. 

            Definitions

            Trade or commerce means the “advertising, offering for sale, lease, or distribution of any good or service, or any property, tangible or intangible, real, personal, or mixed, any other article, commodity or thing of value wherever situated and shall include any trade or commerce directly or indirectly affecting the people of this state.”  The term “good” includes tangible things or real property purchased or leased for use.  “Service” includes work, labor or services (except for professional services) purchased or lease for use, including services furnished in connection with the sale or repair of goods.  Finally, the term “unconscionable action” is found throughout the statute and it is defined as one that “takes advantage of the lack of knowledge, ability, experience, or capacity of a person to a grossly unfair degree.”

            Who can File?

            Under the statute, only consumers can file a DTPA action.  The definition of a consumer is broad and far reaching.  Consumers include any individual, partnership, corporation or governmental entity that seeks goods or services by lease or purchase.  Clearly, most businesses fall within the definition and can therefore seek relief.

            So What Does Someone Have To Do to Me?

            The statute includes a laundry list of violations but the most common are misrepresenting goods and services in an effort to induce purchase or false statements regarding the need for repair or service.  In application, the statute would cover situations like unnecessary car repairs, buying a used car, buying a home, purchasing materials for your business or home, and all transactions in between.

            So What if Someone Violates the DTPA?

            If you think someone has violated the statute and specifically something in the laundry list of violations, you file a suit under the DTPA after giving the appropriate notice letter and opportunity to settle.  If the suit continues, the jury may award damages.  If the action was deemed intentional or done knowingly, the actual damage award may be trebled (or multiplied by three).

            Finally, if you think someone has violated the DTPA, consult a lawyer to preserve your rights.  Nonetheless, you will have only two (2) years to file a suit from the date of the first violation.