Articles Posted in Small business

Help WantedBuilding a team is one of the most important steps in creating a successful business. Taking on employees, however, creates an employer-employee relationship that could fall under the jurisdiction of local, state, and federal employment laws. One issue in employment law that has received considerable attention in recent years is the use of criminal history in hiring decisions. Employers may be hesitant to bring on a new hire with a criminal record for a variety of reasons. Laws in many jurisdictions, however, restrict employers’ ability to use criminal history as a factor. New York City has one of the most restrictive laws in the country on this issue, and many jurisdictions are following its lead. New Jersey business owners may find their state’s law less restrictive, but it applies statewide.

Laws limiting businesses’ consideration of criminal history in employment decisions are often known as “Ban the Box” (BTB) laws. They prohibit employers from asking about criminal history during the initial stages of the job application process. The “box” that these laws ban is the checkbox on a typical job application form asking whether an applicant has ever been convicted of a felony or another offense. Checking that box, for some employers, could mean automatic rejection of the application. From job applicants’ point of view, this makes it difficult for certain individuals to find a job, regardless of whether their particular criminal history would have any impact on a particular job. If people with a criminal history cannot find a job, they might be more likely to commit more crimes. See, e.g. N.J. Rev. Stat. § 34:6B-12. Employers need to know their potential liability in this area.

The New York City Human Rights Law (NYCHRL) generally prohibits discrimination on the basis of criminal convictions or arrest records. N.Y.C. Admin. Code §§ 8-107(10), (11). It also prohibits employers from discriminating in job advertisements, such as by stating that a job is only open to people without criminal records. Id. at § 8-107(11-a)(a)(1). Employers cannot inquire about a job applicant’s criminal history until they have made a “conditional offer of employment” to that individual. Id. at § 8-107(11-a)(a)(3).

Handicapped signThe Americans with Disabilities Act (ADA) of 1990, 42 U.S.C. § 12101 et seq., significantly affected businesses across the country, requiring them to install facilities to ensure accessibility for people with disabilities. After more than 25 years, this aspect of the ADA has become commonplace, but the ADA’s reach to online, “virtual” spaces is still a matter of dispute. As more and more business is conducted online, the issue of website accessibility has gained in importance. This refers to measures that allow people with disabilities, such as impaired vision, hearing, or mobility, to use a website. A recent trial in an ADA discrimination lawsuit is believed to be the first to address website accessibility under the ADA. Gil v. Winn Dixie Stores, Inc., No. 1:16-cv-23020, verdict and order (S.D. Fla., Jun. 12, 2017). The verdict, which found a business liable for failing to make its website accessible to an individual with vision impairment, could affect businesses all over the country.

Title III of the ADA prohibits discrimination on the basis of disability by “public accommodations,” which are defined broadly to include hotels, restaurants, theaters, retail stores, laundromats and other service-oriented businesses, public transportation terminals, parks, museums, schools, and exercise or recreation venues like bowling alleys. 42 U.S.C. § 12181(7). The statute requires businesses “to design and construct facilities…that are readily accessible to and usable by individuals with disabilities,” unless doing so would be “structurally impracticable.” Id. at § 12183(a)(1). It set a deadline of “30 months after July 26, 1990.” Id. Perhaps the most common conception of an accommodation required by the ADA is a wheelchair ramp that allows access to a building. This is far from the only type of disability covered by the ADA, however.

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bookThe structure of a corporation establishes a division of rights and responsibilities among at least three groups. Ownership of the corporation is vested in the shareholders, while directors are charged with its overall management. Officers are responsible for the corporation’s day-to-day operations. A shareholder who is not also a director or officer may not have much of a role in the operation or management of a corporation, but they have rights to information about the corporation’s financial status. The Delaware Court of Chancery recently ruled in favor of a shareholder seeking access to a corporation’s books. Rodgers v. Cypress Semiconductor Corporation, No. 2017-0070-AGB, order (Del. Chanc. Ct., Apr. 17, 2017). The court’s order offers useful guidelines for shareholders seeking access to corporate information.

New Jersey law defines “shares” as “the units into which the proprietary interests in a corporation are divided,” and a “shareholder” as “a holder of record of shares in a corporation.” N.J. Rev. Stat. §§ 14A:1-2.1(l), (m). Any shareholder has the right to request financial documents, including balance sheets and profit and loss statements, from the corporation. Certain shareholders “have the right for any proper purpose to examine…[the corporation’s] minutes of the proceedings of its shareholders and record of shareholders.” Id. at § 14A:5-28(3).

Delaware law goes further, giving shareholders the right to inspect a wide range of corporate documents upon a “written demand under oath stating the purpose” of the shareholder’s request. 8 Del. Code § 220(b). If the corporation denies the shareholder’s demand, the shareholder can petition the Court of Chancery to compel production. A plaintiff in such a case must establish standing as a shareholder, compliance with the “form and manner of making a demand for inspection,” and a “proper purpose” for the inspection.” Id. at § 220(c).

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stormtroopersIn closely held businesses, minority shareholders—generally meaning shareholders with less than 50 percent of the company’s voting shares—can easily find themselves at a disadvantage in disputes with majority shareholders. New Jersey’s Oppressed Shareholder Statute (OSS), N.J. Rev. Stat. § 14A:12-7 et seq., provides shareholders with a means to assert their rights when they suffer from bad-faith actions by other shareholders. They do not necessarily have to be in the minority to qualify as oppressed shareholders under the OSS, according to New Jersey courts. A recent decision illustrates how shareholders can benefit from this statute. RP v. SP, No. UNN-C-108-13, mem. op. (N.J. Super. Ct. Chanc. Div., Dec. 22, 2016).

Avoiding conflicts that lead to litigation is obviously the goal of any business owner. Still, it is useful to know which options are available should a company’s operating agreement fail to provide an adequate means for dealing with conflict. The OSS authorizes courts to intervene in a business for various reasons, with remedies ranging from the appointment of a custodian or provisional director to the dissolution of the business entity. If a corporation has no more than 25 shareholders, the OSS allows court intervention if “the directors or those in control…have acted oppressively or unfairly toward one or more minority shareholders in their capacities as shareholders, directors, officers, or employees.” N.J. Rev. Stat. § 14A:12-7(1)(c).

“Control,” in this context, refers to control of the corporation’s voting stock. A “minority shareholder” can include not only a shareholder with a minority of shares but also one who “does not have control of the corporate shares with respect to voting rights.” Berger v. Berger, 249 N.J. Super. 305, 317 (1991). A minority shareholder, under this definition, can also be an “oppressed shareholder” under the OSS, regardless of whether they actually own a minority of shares. Balsamides v. Perle, 313 N.J. Super. 7, 16 (1998).

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penguinDigital technology enables businesses to store information electronically, without the need for expansive file cabinets and storage facilities, and to transmit data quickly and efficiently. It also exposes businesses to the risk of data breaches, which expose consumers to risks like identity theft. The Federal Trade Commission (FTC) recently issued guidelines regarding compliance with two major federal statutes that protect consumers and their privacy:  the Health Insurance Portability and Accountability Act (HIPAA) of 1996, Pub. L. 104-191, 110 Stat. 1936 (Aug. 21, 1996); and the Federal Trade Commission Act (FTC Act) of 1914, 15 U.S.C. § 41 et seq.

HIPAA is a comprehensive law dealing with various aspects of health insurance, but it is perhaps best known to the public for its provisions regarding medical information privacy. The statute directed the Department of Health and Human Services (HHS) to present “detailed recommendations on standards with respect to the privacy of individually identifiable health information” to several Congressional committees. Pub. L. 104-191 § 264, 110 Stat. 2033. HHS developed a set of standards and procedures from this, commonly known as the Privacy Rule, found at 45 C.F.R. Part 164.

In a very general sense, the Privacy Rule only applies to health care providers, insurers, and related businesses, described as “covered entities.” 45 C.F.R. 160.103. The Rule also applies, however, to “business associates,” defined to include any “subcontractor that creates, receives, maintains, or transmits” PHI. Id. This definition can apply to many types of businesses besides medical professionals and health care providers.

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meetingThe owners of a corporation, typically known as shareholders or stockholders, are shielded from individual liability for corporate debts. This is one of the main purposes of organizing a business venture as a corporation. Protection from liability is not absolute, however, and courts can “pierce the corporate veil” to hold shareholders individually liable for a variety of reasons under both statutes and common law. New York’s Business Corporations Law includes a provision that allows courts to hold the “10 largest shareholders” of a corporation liable for unpaid wages owed to the corporation’s employees. N.Y. Bus. Corp. L. § 630. The New York Legislature amended the law in 2016 to ensure that it applies equally to domestic and foreign corporations.

Shareholders, as a matter of general legal principle, may not be held individually liable for the corporation’s debts as long as any actions by the shareholders are reasonable and directed toward the benefit of the corporation. Self-dealing by a shareholder, the use of a corporation by a shareholder as an “alter ego,” or acts that are illegal or grossly negligent may result in individual liability. A wide array of court decisions have identified circumstances in which courts may pierce the corporate veil. Certain situations also allow courts to hold all shareholders or a distinct group of shareholders strictly liable for corporate debts.

Section 630 effectively imposes a strict liability standard on a group of corporate shareholders. An employer with a claim for unpaid wages must serve written notice on a shareholder, either within 180 days of being terminated or 60 days after reviewing the corporation’s shareholder records. The statute identifies the 10 largest shareholders based on “the fair value of their beneficial interest as of the beginning of the period during which the unpaid services…are performed.” N.Y. Bus. Corp. L. § 630(a). These shareholders are jointly and severally liable for the amount of unpaid wages.

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highway signsThe Commerce Clause of the U.S. Constitution gives Congress the power “to regulate Commerce…among the several States.” U.S. Const. art. I, § 8, cl. 3. Federal laws can therefore regulate business activities if they affect interstate commerce. This authority has led courts to identify a converse legal principle, known as the “dormant” Commerce Clause, which holds that state laws may not discriminate against out-of-state businesses in a way that impedes interstate commerce. A petition for certiorari currently before the U.S. Supreme Court could lead to changes in how states may regulate interstate commerce. Texas Package Stores Assoc., Inc. v. Fine Wine and Spirits of North Texas, LLC, No. 16-242, pet. for cert. (Sup. Ct., Aug. 19, 2016). The petitioner is asking for clarification about the scope of the dormant Commerce Clause in relation to the rarely-discussed Twenty-First Amendment, which ended Prohibition and gave broad authority to the states to regulate alcohol.

The U.S. Supreme Court has given Congress very wide authority under the Commerce Clause. The dormant Commerce Clause is essentially the negative converse of this authority. If Congress can regulate interstate commerce, the states cannot unreasonably impede it, nor can they discriminate against out-of-state businesses in favor of in-state businesses. For example, the Supreme Court found that a Massachusetts law imposing a tax on milk produced out of state, while providing a subsidy for in-state milk producers, violated the dormant Commerce Clause. West Lynn Creamery, Inc. v. Healy, 512 U.S. 186 (1994).

The Twenty-First Amendment ended the period of American history known as Prohibition, when alcohol was banned nationwide, in 1933. The Eighteenth Amendment, ratified in 1919, had started Prohibition. Section 1 of the Twenty-First Amendment officially repealed the Eighteenth Amendment. Section 2 states that transporting, importing, or possessing alcohol in any U.S. state or territory is prohibited if it is done “in violation of the laws thereof.” This has generally been construed to mean that the states have broad authority to regulate alcohol within their own jurisdictions. Courts have had to address the apparent conflict between § 2 and the dormant Commerce Clause on several occasions.

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chess gameDebt collection is, unfortunately, an inevitable part of doing business for just about every business in New Jersey, the country, and probably the world. Whenever a business relies on customers or clients for revenue, it runs the risk of unpaid bills. Any business or individual engaging in debt collection should be aware of the time limit to bring a lawsuit, known as the statute of limitations (SOL). The New Jersey Appellate Division recently ruled in a case involving a dispute over retail store credit account debts. The parties disagreed over whether the six-year SOL for breach of contract claims should apply, or the four-year SOL for sales of goods. The court ruled that the four-year time limit applies. Midland Funding v. Thiel, et al., Nos. A-5797-13T2, A-0151-14T1, A-0152-14T1, slip op. (N.J. App., Aug. 29, 2016).

State and federal laws, such as the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. § 1692 et seq., regulate businesses that engage in debt collection activities on behalf of third parties. Creditors that attempt to collect their own debts are also subject to various laws and regulations. Prohibited conduct under the FDCPA includes excessive or harassing attempts to contact debtors. The law establishes a procedure for alleged debtors to dispute a debt and to receive documentation of the alleged debt from the debt collector. Violations of these provisions can result in civil liability to the debtor.

Most debt collection efforts do not lead to lawsuits, but a lawsuit offers the only legal means of compelling payment by a debtor. Under New Jersey law, a plaintiff alleging a breach of contract must bring suit within six years of the date of the alleged breach. N.J. Rev. Stat. § 2A:14-1. A four-year SOL, however, applies to “contract[s] for sale” in New Jersey. N.J. Rev. Stat. § 12A:2-725. State law defines a “contract for sale” as any contract for the “present sale of goods” and “to sell goods at a future time.” N.J. Rev. Stat. § 12A:2-106. Parties to a contract for sale may agree to reduce the SOL to a minimum of one year, but the law expressly states that they cannot extend it beyond four years.

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dollarsNew business ideas and practices spring up all the time. Some, but not all, find a niche that leads to success. Government officials at the city, state, and federal levels often keep a close eye on new or unconventional business practices to see how they fit into existing laws and regulations. If regulators determine that a particular business activity falls under their jurisdiction, they may attempt to rein in what they view as regulatory violations. The businesses, of course, might disagree with this assessment. Any new business should be aware of regulations that apply—or might potentially apply—to them. A lawsuit currently pending in a New Jersey federal court demonstrates this sort of dispute. RD Legal Capital, LLC v. U.S. Securities and Exchange Commission, No. 2:16-cv-05104, complaint (D.N.J., Aug. 22, 2016).

The plaintiff alleges that the Securities and Exchange Commission (SEC), a federal agency charged with enforcing securities laws, exceeded its authority under both federal law and the U.S. Constitution by initiating a regulatory action against it for alleged violations of the Investment Advisers Act (IAA) of 1940, 15 U.S.C. § 80b-1 et seq. While businesses in New Jersey and New York that do not provide financial services of any kind are not likely to find themselves subject to this specific statute, the case is illustrative of how the government can seek to impose an existing regulatory framework on a business, even if the business believes in good faith that it is not subject to that framework.

The statute at issue in RD Legal Capital defines an “investment adviser” in part as someone “in the business of advising others…as to the value of securities or as to the advisability of investing in, purchasing, or selling securities.” 15 U.S.C. § 80b-2(a)(11). Congress originally passed this law in the wake of important Great Depression-era statutes like the Securities Act of 1933 and the Securities Exchange Act of 1934. Each law uses a substantially similar definition of a “security,” id. at § 80b-2(a)(18), 77b(1), 78c(a)(10), and each has generated a considerable amount of regulatory opinions and caselaw regarding the scope of this definition.

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Fox NewsCorporate directors and officers owe a fiduciary duty to the corporation and its shareholders to act in the corporation’s best interest. This is commonly known as the “duty of loyalty.” A breach of this duty may expose both the individual officer or director and the corporation itself to liability to the shareholders. Allegations against the former chairman and chief executive officer of a large New York City media company have led to a discussion of whether this individual might have breached the duty of loyalty in connection with an ongoing scandal. While it is important to note that these are only allegations, the ongoing story provides a useful demonstration of the duty of loyalty, as well as a possible defense to a claim of breach.

Under New York law, corporate officers, directors, and majority shareholders are considered “guardians of the corporate welfare.” Alpert v. 28 Williams Street Corp., 63 N.Y.2d 557, 568 (1984), quoting Leibert v. Clapp, 13 N.Y.2d 313, 317 (1963). Even if a particular action does not violate any specific law, it might violate the duty of loyalty if its purpose is “the aggrandizement or undue advantage of the fiduciary to the exclusion or detriment of the stockholders.” Alpert, 63 N.Y.2d at 569.

“Self-dealing” is a common example of a breach, such as when an officer or director has a significant financial interest in a corporate transaction and prioritizes their own interests over those of the corporation. An officer or director can avoid legal liability if they disclose the conflict of interest to the corporation ahead of time and receive approval from a majority of disinterested directors or shareholders. See N.Y. Bus. Corp. L. § 713.

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