Under the federal Fair Labor Standards Act (FLSA), employers in “for-profit” enterprises are required to pay compensation to their employees, including a designated minimum wage and overtime pay.
An issue often faced by employers is whether an intern or student is actually an employee entitled to compensation, or whether the intern or student may work without receiving pay.

On January 5, 2018, the United States Department of Labor (“DOL”), which enforces the FLSA, announced in Field Assistance Bulletin No. 2018-2, that it was now going to follow the decision of several appellate courts in promulgating a new test for determining if an intern is actually an employee entitled to compensation.

Specifically, the DOL, announced that it would use the “primary beneficiary test” to determine the status of the would-be intern.  The test is intended to be flexible and allows courts or the DOL to review the “economic reality” of the relationship to determine which party, would-be intern or employer, is the primary beneficiary of the relationship.  

As part of the “primary beneficiary test”, the DOL adopted seven factors used by the courts:
1. The extent to which the intern and the employer clearly understand that there is no expectation of compensation. Any promise of compensation, express or implied, suggests that the intern is an employee—and vice versa.
2. The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.
3. The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit.
4. The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar.
5. The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning.
6. The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.
7. The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.

The DOL  stated that no one factor is determinative of the issue and  that the ultimate classification of intern or employee “under the FLSA necessarily depends on the unique circumstances of each case”.
With respect to volunteers for governmental services and non-profits, the Wage and Hour Division of the Department of Labor set forth the following in Fact Sheet No. 71:

“The FLSA exempts certain people who volunteer to perform services for a state or local government agency or who volunteer for humanitarian purposes for non-profit food banks.  WHD also recognizes an exception for individuals who volunteer their time, freely and without anticipation of compensation, for religious, charitable, civic, or humanitarian purposes to non-profit organizations.  Unpaid internships for public sector and non-profit charitable organizations, where the intern volunteers without expectation of compensation, are generally permissible.”

Employers who use interns should carefully review whether they are complying with the law.  AMM’s Employment Law attorneys can assist you with this and all compliance issues.  To learn more about Michael Klimpl, visit ammlaw.com. 

The Employment Law Department here at Antheil Maslow & MacMinn wishes a Happy New Year to all of our clients.  In the interest of making this year the best it can be, we offer the following New Year’s resolutions for employers:

1. Resolve to document:

Document everything: employee successes, employee’s failures to meet expectations, attendance, complaints, suggestions, and anything that may be of significance to the employee or the workplace.  This is good risk management for employers.  For employees, it is a fundamental aspect of workplace fairness, and prevents the situation where an employee may be caught off guard by a particular decision of the employer. 

A corollary to this resolution is to make documentation easy.  For example, managers can use email, which will include a date and time stamp, be maintained on company servers, and creates an electronic paper trail. Managers are more likely to comply with a simple system.

2. Resolve to retain key employees:

We spend much of our day talking about restrictive covenants – agreements not to compete or solicit customers and employees after the termination of employment.  We draft them, read them, counsel employees and employers about them.  While these agreements are important to protect the employer, they will not help employers keep their stars.  Instead, employers should ensure a positive workplace, where key employees know that they are appreciated.  Some ways to accomplish this:  fair compensation and benefit programs; attainable equity or bonus programs; realistic work-life balance policies; and recognition of employee successes.  It is also worthwhile to recognize that “stars” exist at every level in an organization:  the top salesperson and the reliable receptionist both contribute to the success of the business. 

3. Resolve to cultivate the culture:

This resolution will help with resolution 2, but is important in its own right.  How are managers communicating with employees?  Are they fair, professional and clear?  Are you looking the other way on unprofessional or inappropriate conduct?  Do you ever say “That’s just (insert name here)” about a particular manager? 

What we learned in 2017 is that it is folly to look the other way on a toxic workplace culture:  it wastes time, pulls focus from work, results in bad press and litigation, and chases away good employees. 
 
A focus on these three resolutions will help lower risk and ensure a compliance workplace.  Feel free to contact us to help accomplish these resolutions.

According to the National Center for Charitable Statistics (NCCS), more than 1.5 million nonprofit organizations are registered in the U.S.   We are proud to represent many such nonprofit organizations operating in the greater Delaware Valley.
These organizations serve the communities in which we live with steadfast passion and dedication.  The focus on community improvement, volunteerism and charity is remarkable.  We are pleased to play our small part in furtherance of their lofty goals.

Unfortunately, not everyone involved in the nonprofit industry shares the same altruistic philosophy.  Invariably, we read newspaper stories about the nonprofit treasurer who diverted funds destined for an ambulance squad or the director that diverted hundreds of thousands from youth athletics programs.  The question becomes, what is a nonprofit to do when defalcation is discovered? 

Generally, the law imposes no duty upon an individual or organization that discovers a financial defalcation to report the facts discovered to the authorities.  Only with respect to certain crimes, mostly involving abuse or child pornography, does a duty to report criminal activity arise.  Under current statutory law, no such duty exists upon the discovery of a theft or diversion of nonprofit funds.    

Many nonprofits are reluctant to report the defalcation.  The negative publicity which follows a public disclosure can be devastating to the credibility of an organization that is already competing for donor dollars.  Based on such pressures, for-profit organizations often choose to forego even the private exercise of confronting the accused in an effort to seek recovery preferring instead to simply take steps to ensure the same kind of breach of trust could not be repeated.  In the nonprofit world, such private decision making is in sharp contrast to fiduciary duties owed to the organization and the moral, if not legal, duties which are founded in the donor/donee relationship.   Moreover, the public nature of nonprofit tax filings may render disclosure inevitable,  such that the desired privacy cannot be maintained. 

Large nonprofits must file an Internal Revenue Service Form 990 each year.  The form summarizes the financial performance of the nonprofit.  In turn, every Form 990 that is filed is publicly available with just a few key strokes.  The Form 990 requires that the organization report to the IRS whether the organization “became aware of a significant diversion of the organization’s assets” in the current year.  Thus, the IRS requires the organization disclose defalcations which amount to a “significant diversion”. 

Despite potential negative publicity associated with disclosure of malfeasance in nonprofit administration, the inevitability of disclosure weighs in favor of a more transparent approach.  Best practices suggest that the entity’s Form 990 be reviewed by the board of directors prior to submission to the IRS, in fact,  the redesigned form asks whether the tax return was furnished  to the board for review prior to filing.  An astute donor – particularly a business savvy donor - is likely to read the 990 with a critical eye.  The worst scenario is that a director or donor becomes aware of the defalcation and subsequently questions the adequacy of management response, potentially a death knell to contributions, and the tenure of the secretive executive director. 

In addition, the nonprofit’s auditor, while not required to disclose every fraud in a footnote to the financials, would need to consider whether the theft had a financial impact on the statements.  If the dollar amount warranted it, it might have to be reported directly on the statements – either as a line item-loss from fraud or a receivable for repayment of stolen funds. 

Further, the question of the directors’ fiduciary duties to the organization in such circumstances has not yet been addressed.  Certainly, the directors of a nonprofit, having been placed in a position of trust by the organization, and bear some responsibility for effective management and control.   To date, no court has imposed liability upon the directors of a nonprofit for failing to investigate potential recovery, failing to report defalcation, or failing to seek recovery of proceeds unlawfully diverted.   While that is certainly not what the volunteer directors sign up for, we can see that case coming. 

Navigating the potential exposure requires a complete understanding of financial controls and information, reporting requirements and the composition of the board of directors.  Generally, the best advice is to conduct a complete investigation, proactively adopt whatever policies are necessary to prevent a re-occurrence, and report the bad actor to the relevant authorities.  Such actions would certainly satisfy any duty to the organization. 

In the many years I have been working as outside counsel to closely held businesses, one of the frequent pitfalls leading to costly litigation and operational conflicts is the failure of shareholders to adequately document and formalize their expectations, especially as it relates to minority shareholders.  The first question I ask when contacted by a business owner who is dealing with shareholder conflicts is “What does your shareholders’ agreement say?”  Unfortunately, too often, the answer is “What shareholders’ agreement?”   

Many small businesses are formed by a group of people who share a collective belief at the time of formation.  There are often unwritten understandings as to the division of roles within the business.  Almost universally, the expectation is that all of these founding shareholders will devote ongoing resources to the business.  Conflicts arise when those expectations diverge, when one shareholder fails to perform within the business, or even when a shareholder exits the company.   
 
When conflict does arise, mechanisms for resolution can be limited, complex and expensive.  Certainly a transfer of a non-performing shareholder’s stock seems like a simple straightforward course of action.  However,   in the absence of an agreement providing for transfer upon specified events, the business has no absolute right to remove a shareholder or force a transfer of the share ownership interest.  Even a shareholder who has ceased to be actively involved in the business continues to enjoy all of the rights attendant to the ownership of the shares: the shareholder need not come to work, need not contribute capital, need not pursue business opportunity in the name of the company.  Employment may end, but the right to enjoy distribution of profits does not, as long as share ownership persists.  As most small businesses are organized as subchapter “s” corporations, profits must be distributed in accordance with share percentage. 

Ownership of stock gives rise to all of the rights provided by statute.  Minority shareholders enjoy the right to obtain information about the performance of the company, attend and vote at shareholders’ meetings, and receive distributions of profits derived from corporate operations.  Minority shareholders can be an impediment to stock transfers, anchors against change and obstacles to capital expenditures. Such situations are a constant bone of contention among owners of small businesses. 
 
Of course, the best solution is an agreement that accurately reflects the understandings of the shareholders at the time the shares are assigned, or the company is formed.  Such agreements can provide clearly defined roles within the business, mandatory transfer upon termination of employment, death or disability, valuation mechanisms and provisions restricting transfer.  Adopting an agreement, at minimum, provides a foundation for the business relationship, and may provide a roadmap in the event of disagreement.    

In the absence of an agreement, a dispute with a minority shareholder requires careful management. The majority must take care to avoid vesting a minority shareholder with breach of fiduciary duty claims or shareholder oppression.   Compliance with corporate formalities is imperative. While there is no guaranty of continuing employment for a minority shareholder (with exceptions), distributions or profits in accordance with ownership percentages is required if the company has elected “s” corporation treatment.  Certainly, majority and employed shareholders may receive compensation for services rendered, but an artificial manipulation of corporate profits would certainly be relevant to a minority shareholder oppression claim.  

Pennsylvania Business Corporations Law provides little relief to a majority shareholder who continues to run a profitable business without the assistance of his or her minority shareholders. The statute provides no right to extract a non-performing shareholder against his/her will at any price, and provides no absolute right of liquidation. Even the nuclear option of judicial corporate liquidation requires that the complaining shareholder allege irreparable harm to the company; an allegation which may be impossible if the business is successful as a result of the majority’s efforts.

Formation of an appropriate and workable shareholders’ agreement requires legal representation; as does management of divergent goals between shareholders.  Owners of s corporations with minority shareholders would be wise to review their governing documents and take proactive steps to safeguard the future value of their shares, and avoid crippling and costly litigation. Antheil Maslow and MacMinn business attorneys are highly experienced in such matters and leverage a team of professionals in differing disciplines to navigate these complex waters.       

A recent article from NPR entitled “Trainers, Lawyers Say Sexual Harrassment Training Fails” got me thinking about employee training programs. Specifically, every employment lawyer will advise employers to provide training for employees regarding harassment and discrimination.  I would like to say that employers follow this advice in order to ensure a professional and safe workplace, but the truth is that employers provide training mostly because their lawyers advise them that training will bolster a defense in the event of a harassment claim.   This cynical approach to employee training is, I think, the reason why the experts cited in the article concluded that training is not working.  
 
Training is a “check the box” activity:  the employer gets to say that it provided training, in the event of a claim.  The employees are required to attend in order to keep their jobs, and so they attend and zone out.  The article accuses employees of going through the motions, but employers probably are too.  The lawyers told them to train, so the employer is training. 

Here’s what I’ve learned:  the serious offenders, those who engage in serial harassment, inappropriate relationships or even assault, are going to engage in that behavior no matter what training you provide.  An employee who lacks the insight to know that certain behaviors are unacceptable (everywhere, really) will not have an epiphany during mandatory employee training.  One-on-one training often helps in these situations, but not always, and not fundamentally (that is, the employee will know what to do to stay employed, but will not really care that the behavior was inappropriate).

Having said that, I want to be clear, employers should provide training – it is good risk management for certain employers.  But, perhaps it should be a more sincere activity on both sides:  employers should consider more interactive training, smaller groups and individualized training for departments.  They should also engage in a healthy evaluation of their workplace culture prior to planning the training. 

Further, if the goal is prevention of harassment, hostile work environment claims or other unacceptable workplace behaviors, training is not always the answer.  Instead, employers should remember that culture comes from the top.  If officers, supervisors and managers maintain professionalism, it sets the tone.  It might be valuable to warn and provide one-on-one training to managers who do not demonstrate professional behavior, but in the end, appropriate workplace behavior should be a qualification for any leadership role. 

No lawyer will ever advise an employer not to provide training, but perhaps it is time to be more thoughtful about what training looks like for specific employers.  Avoiding litigation cannot be the only goal, or the training will never work.  We can work with employers to come up with a training plan that complies with the law, and is appropriate for their business.

Although the weather is just starting to change to cooler temperatures, the holiday season is fast approaching.  Holiday displays are up, holiday music is already playing and even the pre-Black Friday sales have started.   It seems that with the warmer temperatures well into the fall, the holidays have snuck up on us all.  While it is easy to get wrapped up in the spirit of the  season, if you have minor children and a custody agreement or order, it is time to take a look at your custody documents  and give some thought to what lies ahead in the next several weeks.
 
Before you make plans with your children, it is important to see what the holiday schedule is for this year.  Which days of the holidays are your children with you, what times are they with you, and who is responsible for transporting the children?  It is important that you know the answers to all of these questions.  Take out your custody agreement or order now and look through the schedule for Thanksgiving through New Year’s.  If you have questions, now is the time to ask your attorney, not on Thanksgiving morning.  We all know that a lot of advance planning occurs for the holidays, and family gatherings are scheduled.  If it is important to you that your children celebrate with you and your extended family, you want to be sure to make your plans around when you have physical custody of the children.  Knowing the details of the holiday schedule now will enable you to make plans based upon the custody schedule and keep everyone happy, which should result in a more peaceful holiday for you.