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Michigan Limited Liability Companies: Stay in Good Standing and Maintain your Corporate Formalities.

February 4, 2020 Leave a comment

Happy Tuesday, all. Well, we are in February now, which, if you live in the Midwest means you are hoping for a glimpse of sun and looking for brighter and warmer days. I am reminded of my trip 6 months back to Amsterdam and the beautiful canals.

Amsterdam Canals, Netherlands

A client recently inquired about whether or not he needed to file his LLC’s annual statement in order to stay in good standing with the State of Michigan.

The answer is “Yes.”

The Michigan Department of Licensing and Regulatory Affairs (“LARA”) reminds us that annual statement are due by February 15 of each year.

Consequences for Failing to File:

LARA also reminds that:

“Section 909(2) of the Michigan Limited Liability Company Act, 1993 PA 23, provides that if a domestic or foreign professional limited liability company does not file the annual report by February 15, then in addition to its liability for the fee, a $50.00 penalty is added to the fee.”

“Penalties will be assessed for 2018 annual reports received after March 1, 2018.”

Further LARA reports that, an LLC that “fails to file its annual statement/report or the filing fee is not paid for two years, the limited liability company will not be in good standing.  The status of the limited liability company will be “active, but not in good standing.”

“A limited liability company that is not in good standing is not entitled to a certificate of good standing; its company name will be available for use by another entity, and no document will be filed on behalf of the company other than a certificate of restoration.”

Is your LLC in Good Standing?

Occasionally I will have a business client come in and I will ask – just to make sure – “is your business still in good standing?”

The common answer is “I think so.”

And of course, after I perform a quick internet check with the State of Michigan it is all too common that I discover that either the LLC is “not in good standing” or worse, the company has been dissolved automatically for failure to file annual statements.

A Word on Resident Agents:

My law firm is happy to provide our business clients with resident agent services. One of the benefits of an LLC is that it provides its owners a level of privacy protection.

You can check out a recent ABAJournal Article on how a Court is making Jared Kushner’s real estate partners disclose their identity.

Michigan law requires Limited Liability Companies to have appointed a Resident Agent.

MCL 450.4207(1)(b) requires an LLC to have a resident agent. A person, or business with a physical presence in the State of Michigan.

Michigan law does not require that an “owner” of the LLC be the resident agent.

“The resident agent appointed by a limited liability company is an agent of the company upon whom any process, notice, or demand required or permitted by law to be served upon the company may be served.” MCL 450.4207(1)(b).

Many of my real estate investment clients will utilize my law firm as resident agent when filing their articles of organization with the State of Michigan.

In Conclusion:

Business owners, if you get these annual statements from the State of Michigan, or from your attorney – do not disregard them! Maintain your Corporate Formalities.

Questions? Comments?

E-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Latest Update on Bill to Limit Non-Competes against Lower-Wage Employees.

January 22, 2020 Leave a comment

Here’s a shot of Downtown Grand Rapids I took today from the Amway Grand Plaza Skywalk.

Pearl Street, Grand Rapids, Michigan

A month ago I posted on non-compete agreements.

As mentioned before, I am thankful for Judge Yates with the Kent County Business Court who issues a lot of opinions on this area. In fact, he issued one just a few days ago that is helpful:

You can check out this December 3, 2019 Temporary Restraining Order issued by the Kent County Business Court.

In this instance, a local hair salon (where I used to get my hair cut until they moved from downtown) had their stylists sign non-competes.

The stylists left their employer to work with a competitor. The salon filed an Ex-Parte TRO to stop the stylists from working for a competing hair salon.

The Court, in its opinion, granted in part and denied in part the Salon’s request. The Court (at least before a hearing on the evidence) allowed the stylists to work for a competitor and limited the TRO simply to prohibit the stylists from soliciting customers of their former employer.

A broad takeaway from this brief opinion – yes, non-competes are generally enforceable, but not in all cases. The restrictions must be reasonable.

A question to ask: Is it reasonable to prohibit a hair stylist from going to another salon and using the stylists’ general knowledge and skill to cut hair somewhere else?

Is a business really harmed by this type of competition?

Trending to protect low-wage workers from unreasonable restrictions.

Just recently, Michigan’s Attorney General joined the Attorney Generals of several states in a letter to the FTC dated November 15, 2019 to ” to urge it to use its rulemaking authority to bring an end to the abusive use of non-compete clauses in employment contract.”

This isn’t a recent phenomenon. Several years ago Jimmy Johns was sued by a State Attorney General for its use of non-competition agreements to restrict employees rights to “make sandwiches” for a competitor.

Earlier this year the Legislature proposed a bill to restrict non-compete agreements with “lower-wage” employees – defined generally as $15.00/hr or $31,000 annually.

This bill has made some progression.

You can check out the House Fiscal Agency’s January 15 Analysis of the House Bill Substitute.

According to the Report, the changes to the Bill surround the definition of “Low-Wage Employee”

Low-wage employee would mean either of the following:
1. A minor.
2. An employee, as defined in section 203 of the federal Fair Labor Standards Act who receives annual wages from the employer (excluding overtime) at a rate less than 138% of the last published federal poverty line for a family of three. The bill would require the Department of Labor and Economic Opportunity (DLEO) to keep this rate posted on its public website.

It seems there is a growing trend to protect employees from unreasonable restrictions on the ability to work. States are pushing for limitations on non-competes against employees – particularly employees in lower skilled jobs.

And it is hard to argue with sensibility of binding “sandwich artists” or “hairstylists” from making a living. That being said, under Michigan law non-competes are general enforceable.

MCL 445.774a provides:“1) An employer may obtain from an employee an agreement or covenant which protects an employer’s reasonable competitive business interests…”

Questions? comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Business Law Update: Consequences for Misclassifying Employees as Independent Contractors

January 8, 2020 Leave a comment

Schuss Mountain, Bellaire, Michigan

Happy New Year! We celebrated the New Year up north with lots of snow. It was a beautiful way to start the New Year.

Businesses: There are Consequences to Misclassifying Workers

Businesses: misclassifying your  workers as independent contractors v.s employees (“IC” vs “EE”) could cost you serious money.

Apparently a local landscaping company found this out the hard way.

According to a December 31 article posted on MLive, this company will have to pay “32 former employees $59,212 in back wages and an equal amount in liquidated damages.”

Calling a worker an IC just to save on paying taxes may seriously hurt your business in the long run. States are enacting laws to make businesses pay for such misclassifications.

New Laws Penalizing Businesses for Misclassification

Back in September 2019 California passed a Bill to correct misclassification of workers as Independent Contractors

Around the same time, Michigan proposed a similar Bill, House Bill 4877

HB 4877 would place the burden on the employer to prove, by a preponderance of evidence, that the employee was not misclassified – with the threat of penalties.

That Bill was referred to the committee on commerce and tourism and has made no movement.

Court Cases go Back and Forth on the Issue

As reported by the ABAJournal, The 9th Circuit Court of Appeals, provided a victory for FedEx Truck Drivers classified, by their employer FedEx, as “independent contractors”  – reversing  “a finding in multidistrict litigation in Indiana and held that nearly 2,700 plaintiffs in California and Oregon are in fact employees.”  See the ABAJournal article here

Different Tests to Determine IC vs EE

States, Federal Government agencies, and Courts all have their own standards of how to distinguish independent contractors from employees.

Look at the Code of Federal Register, as provided by Cornell Law School,  for the definition of Employee and you will get one definition; go to the IRS website and you will find another extensive resource on the subject, see that resource here.  States have their own rules, statutory and case law, as well.

One of the reasons for the lack of uniformity, is that the distinction between IC/EE matters for different reasons – from the federal government’s perspective, it matters, among other things,  from a Federal tax stand point- or whether or not an EEOC , or fair labor standards act claim is at issue.  From a state law perspective, the distinction  can matter regarding unemployment/workers compensation taxes and claims.

Under Michigan law, 3 conditions must be met in order to find an individual is an employee for purposes of Workers Disability Compensation Act Claims, MCL 418.11(1)(d) –  employee means every person performing service in the course of the trade, business, profession, or occupation of an employer at the time of the injury, provided the person in relation to this service does not maintain a separate business, does not hold himself or herself out to and render service to the public, and is not an employer… McCaul v Modern Tile and Carpet, Inc 284, Mich App 610, 616 ( 2001)

The Fed Ex Case

As reported by the ABAJournal:

Under a “right to control” test that applies in both states (California and Oregon), the FedEx drivers are clearly employees, not independent contractors, a three-judge appellate panel held.”

“The drivers must wear FedEx uniforms, drive FedEx-approved vehicles, and groom themselves according to FedEx’s appearance standards,” wrote Judge William Fletcher in both opinions. “FedEx tells its drivers what packages to deliver, on what days, and at what times. Although drivers may operate multiple delivery routes and hire third parties to help perform their work, they may do so only with FedEx’s consent.”

The fact that FedEx called the drivers independent contractors in an operating agreement did not change their actual status as employees, the court said.”

Take Away: 

This last point made by the 9th Circuit Court of Appeals cannot be under stated- how you decide to label your workers is not going to determine their true status as either IC or EE.  How are your workers  actually operating? E.G. – Do you truly have control over their duties to the extent that they are effectively employees?

Definitely a conversation you may want to have with  your legal and tax counsel.

Questions? comments?

email: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Fintech Charters No More?

November 5, 2019 Leave a comment

Good morning, all. It is Tuesday in Grand Rapids. Just last week I was in Belgium and snapped some photos of the beautiful city of Ghent, here is one of my favorite.

Ghent, Belgium

Last year I posted that the Office of the Comptroller of the Currency (OCC) announced it will begin accepting applications for national bank charters from fintech companies In July 2018.

Joseph M. Ottin, Comptroller of the Currency gave the following remarks concerning Fintech Companies:

“The federal banking system must continue to evolve and embrace innovation to meet the changing customer needs and serve as a source of strength for the nation’s economy,” 

Mr. Ottin also commented that accepting applications from Fintech Companies:

helps provide more choices to consumers and businesses, and creates greater opportunity for companies that want to provide banking services in America.”

You can read the full press release here.

Fintech recap…

The prior OCC, Thomas Curry announced in 2017 that OCC would move forward with considering applications from financial technology (fintech) companies to become special purpose national banks.

“The OCC published a paper discussing the issues and conditions that the agency will consider in granting special purpose national bank charters.” You can check that paper out here

What’s made clear from the press release is that “[e]very application will be evaluated on its unique facts and circumstances.

Fintech Charter: Praise, Debate, Criticism and a Lawsuit.

The propriety of a Fintech charter has been supported by the Fintech community in general.

As previously reported by Crowdfund InsiderBrian Peters, Executive Director of Financial Innovation Now  “a public policy coalition comprised of Amazon, Apple, Google, Intuit and PayPal” stated;

“FIN believes that payments and lending regulation needs streamlining for the modern era. We commend the

OCC’s leadership and vision in driving this regulatory discussion. The OCC has rightly concluded that its approach must evolve to ensure that all American consumers and small businesses are empowered with better access to the benefits of financial technology.”

According to Crowdfund Insider  “Fintech Charter could benefit innovative financial firms that can provide superior services at a lower cost for both consumers and businesses.”

That being said, the propriety of such action by the OCC has been questioned by others, and officially sued by the Conference of State Bank Supervisors as an “unprecedented, unlawful expansion of the chartering authority”- check out the Press Release from the CSBS back in April of last year.

Fintech Charters Overturned by Federal Court.

Well it appears a federal court recently sided with the CSBS. I recently read an article by Attorney Daniel S. Cohen from K&L Gates informing that a Federal Court struck down the Fintech Charter.

Why Fintech Intrigues me – Purpose Driven.

Regardless of how the appellate courts ultimately rule on Fintech Charters, I’ve previously talked about why fintech is so intriguing.

I’ve highlighted some fintech companies doing unique things in the past, like Lemonade.

a. taking a risk doing something different (being an innovator);

b. disrupting business as usual;

c. for the good of others (being mission driven).

That’s social entrepreneurship at its finest.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka

Real Estate Law Update: Published Court Case: the Scope of a Construction Lien and consequential damages.

September 11, 2019 Leave a comment

I took this photo today – flags at half mast in downtown Grand Rapids.

I will #NeverForget where I was – at the cafeteria in McDonel Hall @michiganstateu watching the horror on the T.V.

Thank you all who gave their lives and prayers to all who lost loved ones 18 years ago today.

Flags at half mast outside of DeVos Place, Downtown Grand Rapids, Michigan

Yesterday a published court decision came out that affects the scope of a construction lien. Check out TSP Services, Inc. v National Standard Company, et al

Update: On September 17, 2019 the Court Vacated its Prior decision and issued a new decision – see here

This case involves a breach of contract claim and a construction lien foreclosure claim.

The case went to arbitration and, according to the Opinion, “the arbitrator approved a lien for $782,469.05, which is $641,386.05 greater than the unpaid balance under the contract.” –

Wow!

The very first page of the Opinion gives you much of the information you need to know to understand the holding:

” Michigan law limits a construction lien to the amount of the contract less any payment already made. Although a party suing for breach of contract might recover consequential damages beyond the monetary value of the contract itself, those consequential damages cannot be subject to a construction lien. “

The construction lien act provides: “Each contractor, subcontractor, supplier, or laborer who provides an improvement to real property has a construction lien upon the interest of the owner or lessee who contracted for the improvement to the real property.” MCL 570.1107(1).

“A construction lien acquired pursuant to this act shall not exceed the amount of the lien claimant’s contract less payments made on the contract.” MCL 570.1107(1)

“Michigan’s construction lien act authorizes a lien up to the unpaid balance of the amount contracted. A lien that includes an amount for consequential damages flowing from, but otherwise outside of the four corners of the contract, exceeds the authorized amount of the act. “

To summarize – consequential damages are not allowable under a construction lien.

consequential damages are a permissible damage under contract law – but you won’t get them added to your lien to foreclose on. You will need to find some other way to recover under a judgment.

A good question to ask: what happens if you file a lien and indicate too much?  Is your lien void? Typically. no.

In order to void a construction lien that is filed in an excessive amount a showing of bad faith is required.  Tempo Inc v Rapid Elec Sales & Services, Inc, 132 Mich App 93; 347 NW2d 728 (Mich Ct App 1984).  “A lien is not lost because the amount claimed is excessive, unless the claim was made in bad faith. In such instances, the proper remedy is to reduce the amount of the lien to the correct amount.” Id

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

http://www.dwlawpc.com

Business Law Update: Business Owners: Bill Would Restrict Non-Competition Agreements with Employees.

September 9, 2019 3 comments
Cedarville, Michigan

I hope you all had a great Labor Day Weekend. I spent the long holiday weekend with my family in Michigan’s Upper Peninsula.

On September 4, 2019, Senate Bill 0483 was introduced in the Michigan Senate.

If passed it would limit the enforceability of a non-competition agreement signed between an employer and an employee.

In my opinion – in some pretty significant ways.

I have spent several articles discussing the legal consequences/enforceability issues of non-competes.

It appears the Legislature is wrestling with the question posed by Nick Manes previously with MIBiz in an article a few years back: “Are noncompetes a barrier to growth?

You can check out the text of the bill here

The Bill was referred to the committee on Government Operations.

The Bill has a few key components to it:

1. Require Employers to follow a Specific Procedure prior to executing a non-compete.

The Bill would only permit Employers to execute a non-competition agreement if the Employer followed a procedure intended to notify the Employee of the requirement of signing a non-compete as a condition of employment.

(A) INFORMED THE PROSPECTIVE EMPLOYEE IN WRITING OF THE REQUIREMENT AT OR BEFORE THE TIME OF THE INITIAL OFFER OF EMPLOYMENT.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

http://www.dwlawpc.com

(A) Informed the prospective employee in writing of the requirement or before the time of the initial offer of employment;

(B) Disclose the Terms of the Non-Compete in writing; and

(C) Post the Text of the Law at the Worksite in a CONSPICUOUS LOCATION

2. Non-Compete unenforceable if the Employee is a “low wage” worker.

Defined generally as $15.00/hr or $31,000 annually.

3. Voids Certain Provisions in a Non-Compete – shifts the burden to Employer.

The Bill also has some teeth in it for Employees, including:

  1. Prohibits an Employer from including a clause that states a different state’s laws control the Agreement – this would be an obvious attempt to circumvent the prohibition of non-compete against “low wage” workers;
  2. Gives the Attorney General power to prosecute a violation of the Act;
  3. Automatically places the Burden on the Employer to prove that the Non-Compete was reasonable, as to “scope, duration, time limit.”
    1. Moreover, if a Court limits the non-compete in any respect, the employee is entitled to recover attorney fees.

Wow. This bill has a lot of bite to it – particularly the fee shifting mechanism if a court limits a non-compete in any respect. My first thoughts – if this Bill does come out of Committee, I can’t imagine it will look the same as its current version.

I understand the legislature’s interest in protecting “low wage workers” from unreasonable restrictions. Check out my prior post on the subject of Jimmy John’s non-competes.

However, in my opinion the restrictions as written places an enormous burden on the employer to narrowly tailor the non-compete, to a judge’s definition of “reasonableness”. Otherwise, like I said, the fee shifting provision is a huge penalty.

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

Twitter: @JeshuaTLauka

http://www.dwlawpc.com

Michigan Business Law Update: Bill Stuck in Committee that would Allowing Single Member LLCs To Evict Tenants without Legal Representation

December 11, 2018 1 comment

Once again, we are reaching the end of the year. One of the signs that the year is ending:

december

Rosa Parks Circle becomes an ice rink.

See the photo I took from a few days ago.

Another sign that the year is ending, interest groups are pushing to get legislation pushed through the legislature before they die in committees.

One such Bill would give Certain Landlords who own their real estate in a Limited Liability Company the ability to evict tenants without retaining an attorney

 

 

Today

Kent County Rental Property Owners Association  published a post pushing constituents to contact their State Senators to push this bill out of committee.

This Bill was passed by the Michigan House and since September of 2017 has been sitting in the Senate Judiciary Committee

As the RPOA indicates:

 

“For the first time in two decades, the “LLC bill” has a chance of passing.  The bill, HB 4463, would enable single-member LLC’s and LLC’s owned by married couples to handle their own evictions in court without an attorney.  The cases would be limited to the amount of small claims cases—which is the majority of all landlord-tenant eviction cases”

 

History Behind the Bill…

As background, a common scenario in my legal practice:

Investor purchases property in an LLC. Investor locates a tenant. Tenant falls behind in rent. Investor hires attorney to evict Tenant.

 

Why hold real estate in an LLC?

Most of my investor clients own investment real estate in a Limited Liability Company.

This is for liability protection.

Once a limited liability company comes into existence, limited liability applies, and a member or manager is not liable for the acts, debts, or obligations of the company. “Duray Dev., LLC v. Perrin, 288 Mich. App. 143, 151 (2010).

 

Why not hold real estate in an LLC?

Some investment property owners decide not to do so. The primary driving reason from my experience is cost.

Cost associated with setting up the LLC; and

Cost associated with hiring an attorney and evicting non-paying tenants.

Some landlords don’t want to hire an attorney to evict a tenant.

Under current Michigan law, since an LLC is a separate legal person independent of the actual owners of the LLC, unless such owner is a licensed attorney, an owner of an LLC cannot file a lawsuit on behalf of the LLC.

To do so would be the unauthorized practice of law.

You can practice law on your own behalf – just not on behalf of someone else.

Although, the saying goes – he who is his own lawyer has a fool for a client.

 

House Bill 4463 – Would Allow LLCs to Evict without Legal Representation.

House Bill 4463 was introduced in March 2017 and referred to the  committee on law and justice. It has been passed by the House and sent to the State Senate.

The Bill would allow owners of a single-member LLC (or a married couple under certain conditions) to file their own eviction actions on behalf of the LLC without the need for legal representation.

If the Landlord is seeking money damages, the amount, not including taxable costs, must be under the small claims Court maximum.

I commented that I would be surprised if this bill passes, although other states have similar laws. The Kent County RPOA mentions in its post that it is the closest in over decade that such a bill has come to passing – so the RPOA is pushing hard to get this Bill out of committee.

 

As mentioned, the Bill  came out of the committee on law and justice and a substitute bill was referred for a second reading.  The Bill was passed by the House and sent to the Senate Judiciary Committee over a year ago.

 

The Major Difference in the Substitute Bill

The major revision that came out of the committee affects property managers.

The Bill as introduced would have allowed property managers or agents to represent the LLC under certain circumstances – e.g. – having personal knowledge of the relevant facts related to the Property and tenancy.

That language was removed from the first version of the bill.

Under the substitute bill, Property Managers or other Agents would not be allowed to represent the LLC.

Further, this is a “burden shifting” mechanism in the substitute bill – the law would place the burden on the LLC owner to prove he or she is in compliance with the statute. That makes sense – since the legislature would be creating an exception to the rule – only lawyers practice law.

 

It looks like this Bill will die in committee unless constituents can convince their local state Senators to do something about it.

 

 

 

Questions? Comments?

e-mail: Jeshua@dwlawpc.com

http://www.dwlawpc.com

Twitter: @JeshuaTLauka