Archive for category Common Problems

Caution on Employees Signing Non-Competition Agreements

I have seen many employees, especially young people, having problems or losing sleep after they sign non-competition agreements while accepting a job offer. The problem is especially acute among young adults, who are glad to receive a job offer but do not pay close enough attention to what they are signing. Many are signing their rights away. Some mention their concerns to their new employer, who replies not to be worried about it since the employer does not enforce those non-competition provisions anyway (which is not a satisfactory answer).

When presented with a non-competition agreement, keep in mind that these agreements have severe consequences to your rights in the future and can potentially cause major problems if not properly negotiated. Accordingly, when asked to sign an agreement with non-competition provisions in it, be sure and consult an attorney before signing it.

When I review such agreements for employees after they have been presented with the agreement from a new employer, I am generally successful in having the non-competition agreement stricken and instead replaced with the employee agreeing not to solicit certain customers of the new employer for a reasonable period of time (such a restriction if properly limited can be reasonable, as opposed to a non-competition agreement which in some circumstances can be unreasonable). Non-competition provisions, for example, can be reasonable if the employer agrees to pay a severance to the employee equal to the amount of time he or she is unable to work in his or her preferred line of work while he or she waits for a non-competition restriction to end.

Some employees find that they will be working in a different line of business, but most commonly it is the same or a similar business and a non-competition agreement can adversely impact their right to earn a living in the field of his or her choice.

This is an issue I have seen time and time again. Georgia law in the last few years has been changed to allow greater enforcement of non-competition agreements.

Accordingly, it is imperative when presented with such a non-competition agreement not to sign it, and consult an attorney to help negotiate it to something that is more reasonable such as a narrowly-drawn non-solicitation provision. Often, when the new employer is presented with the concerns of a new employee, the non-competition restrictions may be deleted (or replaced with a less restrictive and more reasonable non-solicitation restriction). The employer usually appreciates the concerns of the new employee.

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Importance of Buy-Sell Agreements

Whenever a company, corporation, or a limited liability has more than one owner (unless the owners are married), a buy-sell agreement can be of critical importance.

When a person goes into business with another person, typically they do not want the risk of being in business in the future with some unknown person. Without a buy-sell agreement, things can occur which cause a business owner’s interest in a company to go to another person. This can happen by a voluntary sale or gift, death, divorce, or an involuntary transfer to creditors or a bankruptcy trustee.

For example, without a buy-sell agreement: (1) If a co-owner dies, the deceased co-owner’s estate or family members will then own the deceased co-owner’s interest in the business (unless the deceased co-owner’s valid Will states otherwise); (2) If a co-owner becomes involved in a divorce, then his or her spouse can potentially make a claim to his or her interest in the business; (3) If a co-owner has creditors (whether by contract or in tort, such as a bad car accident), and a creditor obtains a judgment against the co-owner or his or her estate, then the judgment attaches to the co-owner’s interest in the business, and the creditor can levy on it and become a co-owner of the business (and hold it hostage); (4) If a co-owner files bankruptcy, then without a buy-sell agreement a bankruptcy trustee may make a claim to the bankrupt co-owner’s interest in the business and sell it to a third person (or hold it hostage). In all of these situations, without the presence of a buy-sell agreement, then a co-owner may find himself or herself in business with a total stranger.

In the event of death by a co-owner, without a buy-sell agreement the other co-owners do not know what to do as to the deceased co-owner’s estate or family, and the deceased co-owner’s estate or family does not know what to do as to the business. Depending on the deceased co-owner’s percentage interest in the business, this can adversely (and disastrously) affect the continued operation of the business, and, regardless of the percentage interest of the deceased co-owner, can result in time-consuming and costly litigation among the surviving co-owners and the deceased co-owner’s estate or family. A buy-sell agreement can avoid these situations and provide a road map for the surviving co-owner to have an option to buy out a deceased co-owner’s interest in the business from the deceased owner’s estate or family.

Typical provisions in a buy-sell agreement provide that a co-owner may not sell his or her interest in the company, without first giving a right of first refusal to the company and the other co-owners. This prevents a co-owner from selling or giving his or her interest in the business to a third person. A typical buy-sell agreement also provides what happens in the event of death of a co-owner. A buy-sell agreement can provide that the other co-owners or the company may have a discretionary option (or it can be a requirement) to purchase the deceased co-owner’s interest in the business from the deceased co-owner’s estate. A buy-sell agreement can provide that the purchase price of the deceased co-owner’s interest in the company is to be at “fair value,” leaving the determination of “fair value” for a later date should it become necessary. Alternatively, a buy-sell agreement can provide a mechanism, such as an appraisal process or formula, for determination of fair value, arbitration, or provide a set dollar amount (an issue with a set dollar amount is that the fair value of the business will undoubtedly change over time).

A buy-sell agreement can provide that if the surviving co-owner exercises his or her discretionary option to buy out the deceased co-owner’s interest from the deceased co-owner’s estate, then the purchase price of the deceased co-owner’s interest in the company is paid by, for example, 20% cash down, and the balance financed, for example, at the Wall Street Journal’s prime rate plus 2%, amortized over a period of 3 years and payable in equal, successive monthly or quarterly installments (the terms can be adjusted in the buy-sell agreement to whatever terms work for the co-owners). This payment obligation is documented by a Promissory Note and secured against the deceased co-owner’s interest in the company, so that if the business fails to make the required payments, the deceased co-owner’s estate can get back the deceased co-owner’s interest in the business back. This same arrangement in a buy-sell agreement can be made applicable in the event of divorce, involuntary transfer (creditors), or bankruptcy of a co-owner.

Even with a buy-sell agreement, often a surviving co-owner and a deceased co-owner’s family will mutually agree to some other arrangement for the surviving co-owner to buy out the deceased co-owner’s interest in the company, with the buy-sell agreement serving as a general road map for the parties to follow and expressing the intention of the co-owners of a company of what is to happen if one of the co-owners dies.

Ideally, a buy-sell agreement will be backed up by life insurance so that the surviving co-owner or the company has the funds to pay to a deceased co-owner’s estate or family in order for the surviving co-owner or the company to buy out the deceased co-owner’s interest in the company (negating the necessity of a promissory note and security). However, many business owners, especially at start-up, find that life insurance is prohibitively expensive.

With or without life insurance, a buy-sell agreement is critical in situations where there is more than one owner of a company.

Other provisions which can be included in a buy-sell agreement are tag along rights (allowing a minority owner to tag along with the majority owners if the majority owners decide to sell their interest in the company to a third party buyer), come along rights (allowing the majority owners to require minority owners to also sell their interest in the company to a bona fide third-party buyer, if the majority owners are also selling their interest to the third-party buyer), put and call provisions, a company option to buy-out a co-owner’s interest in the company if the co-owner is terminated from employment by the company or becomes disabled, voting agreements, and the like. The terms of a buy-sell agreement can be tailored to whatever terms fit the needs and situation of the co-owners.

In setting up a company, many multiple owners do not know whether the company will survive and make it past the first year, and are often cashed-strapped and therefore avoid the expense of a buy-sell agreement. Buy-Sell provisions can usually fairly easily be incorporated into a limited liability company’s operating agreement. If a corporation, buy-sell provisions are included in a separate shareholders’ agreement. Once a company gets off the ground, a buy-sell agreement is of vital importance.

© 2014 Walling Law Firm, P.C.

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Why Have An Employee Handbook?

An issue that I see time and time again is businesses which do not have an Employee Handbook.  An Employee Handbook covers a range of rules and policies of the business, which are impossible to cover in a written Employment Agreement.  If a business has an Employee Handbook, and if an employee violates a rule or policy in the Employee Handbook, then the business can take disciplinary action and reduce the risk that the business may be liable for charges of unlawful employment discrimination. Without an Employee Handbook in place, a disciplined employee can more forcefully argue that he or she has been discriminated on the basis of race, sex, religion, national origin, physical disability, or age, since the business does not have a written policy in place. Without an Employee Handbook, a disciplined employee is more likely to feel that he or she has been treated unfairly.

Matters covered by an Employee Handbook are often conduct-related, such as off-duty conduct which damages the business’ reputation, workplace violence (banning the bringing of knives and weapons to the workplace), outside employment such as moonlighting, moonlighting for a competitor, using company email for political or non-business purposes, on-line conduct at the workplace, acceptance of gifts or money from customers, use of company property for personal business or personal reasons, attendance, use of inappropriate or profane language, alcohol, drugs, bad hygiene, sleeping on the job, and the many other issues which arise from time to time whenever there is a gathering of two or more people.

Having policies in an Employee Handbook allows the business to take disciplinary action when there has been a violation of those policies. A business will often learn of an issue with an employee by way of complaints from other employees, and a business needs to have the tools necessary to discipline an offending employee. Of course, policies in an Employee Handbook should be enforced by the business in a non-discriminatory manner.

A business will want to be certain that the Employee Handbook itself is not an employment agreement, and should specify that employment is at will unless otherwise agreed to in writing. An Employee Handbook has many legal implications, and it should first be reviewed by an attorney. Attorneys who practice in this area have templates which provide the bulk of the provisions for an Employee Handbook. An Employee Handbook is recommended for businesses of all sizes.

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Review your Insurance Policies – A Common Problem

A common problem I see that happens over and over is a client who thinks that insurance covers something that really isn’t covered.  It is amazing how either insurance agents when insurance is purchased verbally lead people to believing that something is covered, the policy has changed over the years so that a matter is no longer covered, there is a misunderstanding, or the client is simply mistaken.

Often it seems when a client asks the insurance agent if something is covered, the insurance agent says “yes, yes, yes, it is covered.”  When there is a claim, the insurance agent responds, “Oh, that is not covered.”

It is costly when clients believe that a matter is covered by insurance and only find out when something goes wrong that it is not covered.  If there is no insurance coverage, the insured (client) may have to hire and pay for its own attorney while the insurance company will provide and pay for an attorney if a matter is covered by insurance.   The duty to defend is a major benefit of insurance.  Most importantly, without insurance coverage a client may be liable for damages for which it thought it had insurance. 

Carefully review or have your attorney review your insurance policies from time to time, preferably annually.  You may find that you do not have a full and current copy of an insurance policy.  The insurance policy may have been slowly amended over the years by the insurance company.  A “declaration page” is only a one or two page summary and is not the full policy.  If you do not or no longer have a full copy of the current policy, contact your insurance agent and they will mail or email you one.  If you review your own policies, be sure and pay particular and careful attention to the part labeled exclusions.  Insurance policies are notoriously difficult documents to read.

If a matter is excluded for which you need insurance, if you notice it before something goes wrong, often your insurance agent can provide a rider or endorsement which insures the matter for an additional (and quite often nominal) premium.

Greg B. Walling, Walling Law Firm, P.C., 8300 Dunwoody Pl., Suite 200, Atlanta, Ga. 30350; tele. 770-349-8215; email greg@wallinglawpc.com

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