Operating a business in California today is more challenging and complicated than ever before. To help executives and managers of established businesses, we created this brief “observational” list that captures some of the reoccurring legal issues our firm has noticed with existing businesses. We all work hard to drive sales, reduce operational costs and maximize profits or cash flow. However, many businesses fail to adequately address the points below, perhaps because they are not profit or sales centers, yet these issues can easily consume revenue.
We hope this article will provide a high-level guide to some of the top-line issues we see in existing businesses and will motivate you to challenge your team to address these and/or other issues to strengthen your business.
Perhaps the most glaring legal issues causing concern amongst business executives in California are labor and employment laws and related liability. California has become a hostile and costly environment for employers, as a result California businesses must make a concerted effort to stay compliant with state labor laws or they could be subject to costly litigation, which can expose any business to various forms of damages including: punitive damages, plaintiff’s attorneys’ fees, taxes, and penalties. A classic pitfall is the exempt—non-exempt classifications under state law which has been a huge vulnerability for California employers resulting in a great many class actions. Without being overly dramatic, a class action lawsuit can consume profits, cash flow and severally damage your business. We believe it’s important for your company to utilize an employee handbook that sets forth the company’s labor policies and to make sure that the policies in the employee handbook book are being followed. In addition to an employee handbook, standalone policies should be distributed as laws change. These materials offer guidance to your company’s employees, and can be of great use should a labor and employment dispute arise with an employee. Also, speak with your insurance broker about employer’s professional liability insurance to further mitigate the fiscal impact of employment claims upon your business.
Perhaps the most undervalued senior manager in many businesses is the human resources director. We often interact with company HR professionals and recognize that the true value of a qualified HR professional is not being maximized. A properly trained HR professional in an HR dedicated position can make a material impact on your profits. HR functions are critical and may include: A properly trained and experienced HR professional can be an added value to the senior management team, assisting the business in reducing costs while bolstering company culture and employee morale.
California workers compensation laws are complex and, if left unchecked, can be very expensive for businesses. We encourage businesses to assess the root cause of workers compensation claims. Which areas of the business and operations are causing the WC claims? Are there unsafe areas in your operations? Does the business have germane safety programs for the affected areas? A seasoned HR professional can audit the problem areas and work with safety managers to create safety programs. In addition, this attention to safety should impact your employees, motivating them to report unsafe work conditions or practices. Once these steps are taken, your HR professional should work with your insurance company to proactively close workers compensation cases, meet the medical needs of your employee and return them safely to work.
The core value of many businesses is the information and processes utilized for operations, the information learned and developed by its employees and advisors and its intellectual property. To remain competitive in the long term, executives should take steps to protect this valuable portfolio of information – – don’t forget that this information is a critical component of business valuation. In the current valuation environment, the body of proprietary information and intellectual property your business owns is critical to your business valuation. Time and again, we see companies operating without the documents necessary to protect this portfolio of valuable information or with documents that are simply insufficient. In either scenario, the core of the company’s competitive edge and its most sensitive information is at risk. We always recommend that senior management make every effort to retain legal counsel to design confidentiality programs and draft the required agreements to most effectively protect the company.
The cost of training new and current employees is perhaps a cost that CA law, for the most part, fails to acknowledge. California has a strong public policy in favor of employee mobility, thus, California courts will not enforce non-competition agreements upon California residents. (The enforceability of non-competition agreements varies from state to state.) As a result, businesses in CA have few options in retaining human capital. With limited options, employers are well advised to task their HR department with identifying ways to increase employee retention.
In a good faith effort to reduce costs, non-attorney senior managers may choose to draft and edit contracts, perhaps finding templates on the Internet. This practice can be risky for businesses. We have seen scenarios in which contracts drafted and edited by non-lawyers evolve into disputes and these disputes can become expensive for the business. Legal principles can be complex and ultimately, it is often in the best interest of your business to hire an attorney to draft and edit contracts and legal agreements. Protect your business interests by allowing your attorney to provide the professional services warranted for the agreement.
Working in concert with our view concerning NDAs mentioned above, there are other forms of intellectual property that cannot be protected by NDAs, but still require protection. This includes filing and policing your company IP such as trademarks, copyrights and patents. A more thorough, second tier process involves policing and designing a full-spectrum program for your company that can ensure the value of your intellectual property is protected.
Picture this: three company owners have a falling out—emotions are running high and the parties cannot agree on how to part ways in a fair manner. Each party tends to over value their contribution to the business and as a result, litigation ensues. To avoid this distraction that could ultimately jeopardize your business, we recommend addressing and papering ownership buy-sell agreements before they are needed and while the owners’ relationship is sound. Here is a basic example in which the absence of a buy-sell agreement could hurt the business: You and your partners, Alan and Bob, are shareholders of a sunglass company. The corporate by laws are sound but do not address share transfer at shareholder death or incapacitation. Bob passes away unexpectedly. What happens to Bob’s shares? Is Bob’s wife or son your new partner? Do you have the right or the obligation to buy them out? If so, for how much and on what terms? How does the business or the remaining owners fund the share acquisition? Perhaps Bob’s spouse or children wish to sell their shares to a third party. Maybe Bob’s spouse or children want to participate in the business but do not have the necessary skill set to do so. Clearly these issues can unravel and pile up quickly. Ultimately, a buy-sell agreement can prevent company-endangering disputes between family members, co-owners and spouses. A buy-sell agreement makes sense for any form of business entity. The urgency and complexity of buy-sell agreements depends on how many owners there are and who else might be waiting in the periphery with a financial stake in the business. You can have a buy-sell agreement with two owners or with many. You could have eight owners in a family company and then one owner tries to transfer their shares to a non-family member. Such events are easily prevented with a proper buy-sell agreement.