Legislative Updates Owners of PA LLC’s & Partnerships Need to Know – Part 1
Written by Joanne Murray
The Pennsylvania General Assembly, with significant input from the Pennsylvania Bar Association’s Business Law Section, recently passed Act 170, which overhauls the statutes governing partnerships and limited liability companies (often referred to as unincorporated entities or alternative entities). This Act brings these statutes up to date with the uniform laws on which they are based and is now in effect for all new and all existing unincorporated entities. These comprehensive amendments provide default rules for governance and other matters that fill the gaps in the absence of an operating agreement or partnership agreement (or the absence of applicable provisions in those documents). Accordingly, it is important for owners of partnerships and LLCs to review their governing documents and be sure they have a clear understanding of how these new rules apply to them. Owners should work with counsel to draft provisions to vary these default rules if that is the desired outcome.
One significant change brought about by the Act is the recognition that equity interests in unincorporated entities are bifurcated into governance rights (including consent, management, and information rights) and economic rights (i.e., the right to receive distributions). The amendments adopt a concept called a “transferable interest”, which is an interest in the partnership or LLC that includes only economic rights. The holder of a transferable interest has no governance rights; he or she has only the right to receive distributions from the entity (but not the right to demand or sue for distributions). The transferable interest approach honors the “pick your partner” principle, which assures owners of a business entity that they will be able to choose the co-owners of the enterprise. Under the revised statute, the only interest that can be conveyed to a non-member is a transferable interest, unless the operating agreement provides otherwise or the other owners expressly agree. Thus, a creditor foreclosing on a member’s equity interest or a person seeking to attach a spouse’s equity interest in a divorce proceeding can take only a transferable interest. This limitation on the rights of non-members affords owners important protections from assertions of control by outsiders which may not be in the best interest of the entity or its members. The exception to this rule is that a creditor foreclosing on an equity interest in a single-member LLC will take the full membership interest (governance and economic rights). The rationale for this exception is that because there is only one member, the “pick your partner” rationale does not apply to limit the rights of the lender.
The Senate Turns Its Eye To Employer-Sponsored Health Insurance Plans
Written by Patricia Collins
Earlier this week, the Wall Street Journal reported that Senators are considering a tax on employer-sponsored health insurance plans to raise revenue. It is not my intention to discuss the politics of this proposal, and instead, I write to consider how such a proposal would alter the economics of recruiting and retaining employees.
Until now, it went without question that those who secured health insurance through their employers did so on a pre-tax basis. Employers, for their part, can deduct the cost. This incentivizes employers to offer health insurance coverage to employees as part of a compensation package. Health benefits are hugely important to employees when deciding whether to accept new positions. As such, these plans are powerful recruitment and retention tools.
In my practice, time and again, I hear that talented and experienced employees do not want to leave their current employment, not because of well-drafted restrictive covenants (as many employers believe), but because of their compensation package, that includes health insurance. Spouses and children may have medical conditions that require care, and employees resist the stress of leaving behind good coverage for new jobs or self-employment. Employees believe, in many cases correctly, that the cost of health insurance is cheaper through employer-subsidized plans than in the individual market, and that they can get better coverage for their dollar through their employer.
This is particularly true right now, as the healthcare debate rages on, and employees feel insecure about how their health insurance will work in the future. The Senate’s proposal would remove a tool from an employer’s recruitment arsenal, and dramatically change the economics of recruiting and retaining talented employees. Of course, employers have other tools, and should not rely totally on health insurance, but it is hard to overstate the importance of this coverage to employees. The implementation of such a tax would mean that employers would need to reconfigure compensation packages and rethink the manner in which they provide health insurance coverage to employees.
Lawmakers have referred to the tax-favored treatment of employer-sponsored health insurance plans as discriminatory to those who purchase their health insurance individually. Interestingly, removing these tax protections would also remove the incentive for employers to provide such healthcare. It would be interesting to know from these lawmakers if that is what they intend. A move away from employer-sponsored health insurance does not just change the economics of the employment relationship; it changes the economics of healthcare.
Of course, the healthcare debate impacts employer / employee relationships even as the status of the Affordable Care Act and employer-sponsored health insurance remains unclear. It is simply impossible for employers, or for their lawyers for that matter, to plan for changes in healthcare while proposals are floated and then rejected by lawmakers. However, the proposal to end the tax-favored treatment of employer-sponsored health insurance would mark a radical change. It will be interesting to see if it makes its way out of the pages of the Wall Street Journal.
AMM congratulates our 2017 Super Lawyer and Rising Star attorneys named in Pennsylvania Super Lawyers listing by Thomson Reuters.
Jessica Pritchard, chair of the firm’s Family Law practice group, was named one of the “Top 50 Women” attorneys by the publishers of Pennsylvania Super Lawyers magazine. Ms. Pritchard has been included in the Super Lawyer listing for the past three years.
Elizabeth Fineman, an associate in our Family Law department, was named a 2017 Rising Star by the same publication for the fifth year.
Both Pritchard and Fineman concentrate their practices exclusively in Family Law.
Super Lawyers is a rating service of outstanding lawyers from more than 70 practice areas who have attained a high-degree of peer recognition and professional achievement. This selection process includes independent research, peer nominations and peer evaluations. To learn more, please visit www.superlawyers.com.
Let’s check in with the January 2017 case filed in the United States District Court for the Eastern District of Texas challenging the Obama Administration’s proposed changes to overtime regulations. Those regulations would have required employers to reclassify many employees considered exempt from overtime rules to non-exempt status, requiring the employer to now pay overtime to those employees. The rule was widely considered a boon to employees, but a burden for small businesses and nonprofits.
Those rules would have required that in addition to meeting certain requirements with regard to an employee’s duties, the employee must also earn a minimum salary of $47,476 to qualify for “exempt” status. The current rule requires that the employee earn a minimum salary of $23,660. The dramatic increase in the salary requirement caused employers to reevaluate classifications and to generate new policies regarding overtime and work hours in advance of a December 1, 2016 deadline.
As previously discussed on this blog, on November 22, 2016, the Eastern District of Texas entered an injunction prohibiting enforcement of the new rules. Many clients have asked me, dreading the answer, whether that injunction remains in place. On December 1, 2016, the United States Department of Labor appealed the injunction order, and sought a stay of the Court’s order prohibiting enforcement. The Court denied the stay, and the matter is now on appeal. During the appeal, the Department of Labor cannot enforce the new rules. The appeals court granted a request submitted by the Department of Justice to extend time to file appellate briefs while “incoming leadership personnel” considered the issues. That brief is now due on June 30.
The Trump Administration has three choices: defend the rule, withdraw the rule, or rewrite the rule. Labor Secretary Alexander Acosta has telegraphed that a review of the rule was necessary, but that the salary increase was too dramatic. However, the Department of Labor’s repeated requests for extensions to file a brief indicate that it is not necessarily an easy call. For example, because the Eastern District’s order granting the injunction called into question the rulemaking authority of the Department of Labor, there may be good reason for the administration to challenge the court’s injunction order, even though it does not necessarily agree with the rule.
The overtime rules will remain in limbo until at least June 30, 2017. We will continue to monitor the situation. In the meantime, employers are not required to change their overtime policies or the classifications of their employees.
Sue Maslow has been named Vice Chair of the ABA Subcommittee of the Business Law Section Drafting Human Rights Protections in Supply Contracts. Ms. Maslow, a highly experienced business and transactional attorney, and a founding partner of the firm, is well versed in this rapidly developing and evolving area of the law. A number of high profile cases in recent years have illustrated the potential for serious financial and reputational consequences to multinational companies who disregard initiatives in the United Kingdom, France, the Netherlands and California, and fail to consider and understand the relevance of anti-forced labor and minor labor laws in their international transactions.
Attention Employers: Working Families Flexibility Act Contemplates Changes to FLSA Overtime Rules
Written by Patricia Collins
By Patricia Collins, Esquire
On May 2, 2017, the House passed the Working Families Flexibility Act. The purpose of the Act is to give employees flexibility in how they choose to be paid for overtime: in wages or in compensatory time off. The Act crystallizes a tension I see often in my representation of employers.
Presently, the Fair Labor Standards Act (“FLSA”) requires employers to pay nonexempt employees overtime compensation for work hours in excess of 40 in a workweek. Employers cannot compensate employees for those overtime hours in compensatory time off (“comp time”). Such a policy violates the FLSA, exposing the employer to liability for the unpaid overtime hours as well as penalties and attorney’s fees.
The FLSA prohibition against payment in comp time is intended to protect employees from abusive overtime demands by employers. The statutory obligation to pay additional wages for hours over forty in a workweek, so the argument goes, forces the employer to base the decision to require overtime hours on business and financial considerations. The FLSA’s ban on comp time legislates a policy determination that offering comp time will not protect employees from abusive demands by employers.
Republicans this week argued otherwise. They argue that permitting employees to take comp time rather than payment for overtime work gives employees flexibility. Democrats who opposed the bill countered that the Act’s provision allowing employers the final say does not adequately protect employees.
Practically, the Act sits at the tipping point of many competing considerations: employers want to establish policies that comply with the law, protect the business, and benefit employees. Employees want flexibility, but they also need to be paid for their work. The reality is that banked comp time can be a liability for employers because there are jobs for which attendance is extremely important, and unscheduled or unpredictable time is off is sometimes expensive or interferes with the progress of work. Further, employees might not be free to use that comp time in the manner they would like if it interferes with the employer’s business. Most employers offer paid time off in a set amount, in order to create predictability as to an employee’s attendance. While this proposed rule might create flexibility and reduce overtime costs, I do wonder whether it is really a savings in the long run.
It will be interesting to see how the Senate balances these concerns, and whether employers will create policies that allow comp time. The bill now goes to the Senate – no word yet on whether they will vote on it. Stay tuned!
Saturday, May 6th, you can support Bucks County Opportunity Council, a great local organization whose mission is to reduce poverty and partner with our community to promote economic self-sufficiency. Antheil Maslow & MacMinn are proud to sponsor this event, please consider attending and supporting this very effective organization and the work they do.
Changing Lives - Frolic on the Farm
A benefit to move people from poverty to self-sufficiency
May 6, 2017 - 6 pm to 10 pm
Glen Oaks Farm
6871 Upper York Road, New Hope, PA 18963
To purchase tickets - Changing Lives
For more information about the event, contact Joe Cuozzo at 215-345-8175 x 204 or jcuozzo@bcoc.org.
Pennsylvania Superior Court Looks Favorably on Disfavored Restrictive Covenant
Written by Patricia Collins
By Patricia Collins
Reprinted with permission from the February 28th edition of the The Legal Intelligencer © 2017 ALM Media Properties, LLC. All rights reserved.Further duplication without permission is prohibited
The Pennsylvania Superior Court, in Metalico Pittsburgh v. Newman, et al (No. 354 WDA 2016, April 19, 2017), dealt a blow to employees attempting to avoid the application of a non-solicitation covenant.
In Metalico, two employees, Newman and Medred, executed employment agreements containing a covenant not to solicit customers, suppliers and employees during the “Post-Employment Period.” The Post-Employment Period varied depending upon the manner of the termination of employment, and commenced upon the last day of employment with Metalico. At the end of the three-year period, Metalico terminated the employment agreements, but continued to retain Newman and Medred as “at-will” employees, and recited new compensation and other terms of employment. These terms differed from those contained in the employment agreement. Newman and Medred were terminated one year later. Metalico filed suit against Newman and Medred, alleging that they were violating the non-solicitation covenant in their subsequent employment.
On the eve of a preliminary injunction hearing, Newman and Medred filed a Motion for Partial Summary Judgment, arguing that the employment agreements containing the non-solicitation covenants had terminated, and therefore the non-solicitation provisions no longer applied. They argued that the agreement to continue as “at-will” employees acted as a novation of the employment agreement.
The trial court agreed with Newman and Medred, and granted their motion for partial summary judgment. But the Superior Court did not agree. Instead, the Superior Court found that the covenant remained in place pursuant to a survival provision in the employment agreement. That provision stated that if employment under the agreement “expires,” the agreement continues in effect “as is necessary or appropriate to enforce” the non-solicitation covenant.
The trial court found that upon converting Newman’s and Medred’s status to “at will” employees, the parties had stated new terms for the employment relationship going forward. In so doing, the parties did not recite that the non-solicitation provision would stay in place. The failure to continue the compensation and benefits provided in the employment agreement, in the trial court’s view, invalidated the non-solicitation covenant. The trial court justly noted: “Metalico cannot claim the benefits of its bargain while denying its employees the same.”
The Superior Court disagreed, noting that because the survival language was included in the employment agreement, it constituted the bargained-for benefit for the employees. The Superior Court rejected any argument that there was a failure of consideration, because failure of consideration only applies if the consideration was never received – the employees here did receive three years of the promised compensation and benefits under the agreement. The Superior Court refused to find that the parties to the employment agreement intended to terminate and extinguish the previous agreement, thus extinguishing the non-solicitation covenant as well. In so doing, the Superior Court relied upon Boyce v. Smith-Edwards-Dunlap Co., 580 A.2d 1382 (Pa. Super. 1990). However, the Boyce case dealt with the use of the restrictive covenant as a defense to a claim raised by the employee.
It is well-settled that restrictive covenants in employment agreements are disfavored under Pennsylvania law. Courts, including the Superior Court, have refused to enforce such agreements on technicalities. For example, in Socko v. Mid-Atlantic Systems of CPA, Inc., 99 A.3d 928 (Pa. Super. 2014), the Superior Court refused to enforce a covenant not to compete in an employment agreement entered into after the commencement of employment and not accompanied by any beneficial change in the employee’s status, but which recited that it was signed “under seal” under the Uniform Written Obligations Act. The Court found that a seal does not provide adequate consideration to enforce a restrictive covenant. Instead, the Superior Court noted, there must be “actual valuable consideration.” The holding in Socko left employment law practitioners and litigators with the belief that there are no “gotchas” when it comes to restrictive covenants.
Metalico appears to change that. Metalico voluntarily agreed to let the employment agreement terminate and to continue employment on an “at-will” basis. This change of status benefits Metalico, leaving it free to terminate the employees or change their compensation and benefits at will (thus the name) and without concern about the terms of a written agreement. The employees lost these protections. The practical result of the Superior Court’s holding is that the employees lost the protections of the agreement, but retained their post-employment obligations. This is inconsistent with Pennsylvania’s historical animosity towards these restrictive covenants, and appears to truly represent a “gotcha” for these employees.
Metalico expands the universe of enforceable restrictive covenants. This is not an uncommon fact pattern, and one which might have given an employer’s attorney pause prior to filing for a preliminary injunction in the past. The holding could have the impact of reducing the care required in drafting, terminating and enforcing disfavored restrictive covenants, and eliminating some of the defenses available to employees seeking to avoid the covenant. Interestingly, nowhere in the opinion does the Superior Court recite the oft-cited language that such covenants are disfavored in the law. It will be interesting to see if the Supreme Court takes the opportunity to do so on appeal.
Patricia Collins is a Partner with Antheil Maslow & MacMinn, LLP, based in Doylestown, PA. Her practice focuses primarily on commercial litigation, employment and health care law. To learn more about the firm or Patricia Collins, visit www.ammlaw.com.
Lisa Gaier will be honored by the YWCA Bucks County as a 2017 "Woman Who Makes a Difference" at the organization's 26th Annual Awards Celebration on May 11th. Ms. Gaier is being recognized for her many personal, professional and volunteer activities which improve the lives of others and make Bucks County a great place to live.
Lisa Gaier practices in the firm’s Family Law and Estates and Trusts groups. In her Domestic Relations practice, Ms. Gaier advises clients on a variety of issues, including divorce, adoption, child support, alimony/spousal support, equitable distribution and child custody matters. As part of the Estates and Trusts group, Lisa is involved with estate planning including the drafting of Wills, Trusts, Powers of Attorney, and Living Wills, as well as assisting with estate administration and Orphans’ Court matters, with a particular emphasis on guardianships.”
Jessica Pritchard, a Partner of the firm, and chair of the Family Law practice group, will be presenting two upcoming continuing legal educations programs.
On April 18th Ms. Pritchard will be a presenter for the Bucks County Bar Association program entitled “Evidence for Family Lawyers”. The program focuses on the appropriate manner to introduce documentary evidence to support a case in family court. Ms. Pritchard’s co-presenters are Daniel Keane, Esquire and the Honorable Raymond F. McHugh, Bucks County Court of Common Pleas. Jessica Pritchard Chairs the firm’s Family Law Department
On Wednesday, April 19th, Ms. Pritchard will be a presenter at the Pennsylvania Bar Institute Family Law Institute at the CLE Conference Center in Philadelphia. Her program will include guidelines for support, custody, and protection from abuse geared specifically to the lawyer whose practice does not focus primarily on family law. She will offer insights and practical tips to assist clients and strategies to identify pitfalls in these areas of practice.
Jessica Pritchard focuses her practice exclusively in the area of family law, where she handles all phases of the negotiation and litigation of domestic relations cases, including divorce, child custody, child support, alimony/spousal support, equitable distribution, and prenuptial and postnuptial agreements.