Utah 2017 Legislative Update – Employment Law Issues
The 2017 session of the Utah Legislature produced few bills affecting employment law; but two bills recently signed by the Governor and one bill that was not passed this year may have an impact on Utah businesses.
Summary of Bills and Suggested Action
1. HB0238S01 Payment of Wages Act Amendment
2. SB0170 Workers' Compensation Workgroup
3. SB210 Equal Pay Amendments
The 7th Circuit's Landmark Anti-Gay Discrimination Ruling
On April 4, 2017, an en banc decision in Hively v. Ivy Tech Community College, the Seventh Circuit became the first federal Court of Appeals to hold that Title VII of the Civil Rights Act of 1964 prohibits discrimination on the basis of sexual orientation.
Title VII prohibits employment discrimination "based on race, color, religion, sex and national origin." The U.S. Equal Employment Opportunity Commission had previously held in Baldwin v. Foxx, 2015 WL 4397641 (July 15, 2015) that the statute barred discrimination on the basis of sexual orientation, and some U.S. District Courts had agreed, but no Court of Appeals had previously done so.
Other Circuits, applying the Supreme Court's 1989 decision in Price Waterhouse v. Hopkins, have held that discriminating against gay employees was a form of gender stereotyping that fell within Title VII's gender bias prohibition.But the Seventh Circuit’s analysis went beyond this indirect approach, finding that "[t]he logic of the Supreme Court's decisions, as well as the common-sense reality that it is actually impossible to discriminate on the basis of sexual orientation without discriminating on the basis of sex, persuade us that the time has come to overrule our previous cases." The majority opinion acknowledged that its interpretation exceed the intent of the drafters of Title VII, and Judge Posner in a concurring opinion explicitly supported modernizing the statute.
The Hively decision opens a split with other Circuits and raises the possibility of Supreme Court intervention following the Senate's confirmation this week of Justice Neil Gorsuch to replace Justice Antonin Scalia.
The Eleventh Circuit held in March of 2017 that sexual orientation discrimination is not prohibited by Title VII, and the Second Circuit rejected a similar claim in March, although it accepted the employee's "gender stereotype" theory. The plaintiffs in those cases might now seek en banc review.
District Courts in circuits that had previously accepted only the "gender stereotype" theory might be emboldened to apply the Seventh Circuit's reasoning. Given the general trend toward recognizing and protecting LGBT rights, including the Supreme Court's landmark gay marriage ruling in Obergefell v. Hodges, employers would be wise to closely follow the reaction to the Hively decision.
Employers in states that do not explicitly prohibit discrimination based on sexual orientation should be aware that such discrimination will likely be found unlawful under Title VII, either through the "gender stereotype" theory or potentially as a direct violation of Title VII.
Selecting a Board of Directors for Your Startup? Don’t Believe the Common Wisdom
Everything you've read about selecting a startup board of directors is wrong.
Okay, that may be an exaggeration. But a casual internet search regarding the selection of a board of directors for a startup corporation produces hundreds of well-intentioned articles about the characteristics to look for in director candidates. These articles urge a balanced, qualified and engaged board of directors. They rightly point out that board members provide strategic advice, lend credibility, provide oversight and expertise. A large, diverse board will expand access to sources of funding and employee recruitment. The articles recommend that you select board members to offset your weaknesses and challenge your assumptions.
In short, the common wisdom is that an entrepreneur should select qualified, intelligent, experienced individuals who have the breadth and depth of experience that he may lack, as well as an objective outlook. An ideal board, they argue, consists of a mix of company executives, shareholders, and unaffiliated individuals who bring unique talents and perspectives. For purposes of this article, I will call this the “Dream Board”.
Who can argue with this idealized business school view of the world?
A Dream Board sounds like a perfect idea. However, these experts are wrong. The concept of a startup corporation having a Dream Board completely ignores stark legal realities.
No one wants to be on your board
First, except in the rarest of circumstances, an entrepreneurial startup cannot attract such a board of directors. For liability reasons, qualified, intelligent, experienced and valuable board members do not want to be on a startup’s board. Board members can be targets of litigation. Startups can rarely afford meaningful Directors and Officers insurance. The startup cannot offer compensation or benefits that justify any reasonably intelligent and qualified individual to join the board. Indeed, the only way to lure these individuals in is to give up a stake in the new company, which may interfere with needed future financing in the future, as well as deprive the entrepreneur of control of the business. To paraphrase Groucho Marx, you do not want on your board any director who would agree to be on your board.
The board controls rather than advises
Second, while a dream board might provide great advice and guidance, the primary duty of a startup’s board of directors is to protect the interests of the shareholders. Because a startup typically has at most a handful of shareholders, the persons most capable of protecting the interests of the shareholders are the shareholders themselves. Therefore the founders of the corporation should be on the board.
Indeed, while it is nice to discuss “selecting” an ideal board, the startup board is selected by the owners, and they may have conflicting views on who should be on the board. But typically they will agree that each of them should be on the board.
The shareholders who have invested in a startup should not give up the control of the corporation to third parties who do not have the same substantial investment that the founders do. The board of directors votes on critical issues such as raising capital, selecting officers, approving mergers, acquisitions, dissolutions, and the like. While founders getting advice on those issues is great, actually making the decisions about the company’s future should stay in the hands of the founders. Even adding one outside director can shift control so that a minority owner can join forces with the outside director and wield control.
In short, the board of directors should represent the interests of the owners, because the board makes critical decisions that may significantly impact the owners.
One important issue often overlooked by the experts who recommend the Dream Board is that directors have the unfettered right to inspect the books, records and properties of the corporation. This right can be used as a weapon if there is a disagreement on the board. A dissident director can wreak havoc, asserting legal rights and disclosing information about the company that the company might not want public.
My recommendations for the composition of a startup board of directors are as follows:
If the startup thrives, new investors and adequate finances may allow the corporation to select and recruit its Dream Board. Until that happens, striving to build such a board will be a waste of time and energy, likely be fruitless, and even if successful, create as many issues as it solves. Keep the board size small and closely related to the corporation’s owners, and the corporation will be more likely to function properly and set itself up to grow.
7 Insurance Questions Every Startup Founder Should Ask Themselves
So you founded a startup. Money is tight and challenges abound. Among the many issues you must address is a business plan that protects you, your investment and your company. This means thinking about insurance.
Purchasing insurance is a difficult proposition for any startup. To founders, insurance is an immediate cost that presents only attenuated benefits. Most startups struggle with capitalization and may view insurance as a luxury purchase they simply cannot afford. Many startups will either forego or postpone buying insurance. But this is usually a mistake. Insurance is the most cost-effective way for a startup to transfer risk away from the company and its founders. Furthermore, potential clients and investors may require that a startup carry insurance or at least may view an insured company as a safer partner.
Once a startup begins thinking about insurance, the question becomes what type(s) of insurance should it purchase? To answer, one must understand the risks that the company and its founders realistically face. Based on my experience as an insurance attorney dealing with claims that have become contentious, it is common for a startup to buy insurance that is ultimately valueless, since the coverage—while broad—does not apply to the company’s actual risks.
For example, one of my clients bought a significant amount of property and liability insurance. Yet the biggest risk the company faced was employment claims by the workers it employed. This would have made employment practices liability insurance (“EPLI”) a wise investment. Unfortunately, the company did not carry this kind of insurance, and its premiums guarded against risks that were either non-existent or too remote to justify the investment. Meanwhile, the company was exposed to a risk that, in retrospect, was fairly obvious and could have been avoided. This was an expensive mistake.
Founders themselves must decide whether the investment in specific insurance makes sense given the company’s budget and risk-management goals. In making this decision, it is important to work with an experienced insurance broker. But I should emphasize the word “with”—insurance decisions should not be left to a broker. Making insurance decisions requires that founders carefully evaluate their company’s risk profile and whether it makes sense to allocate scarce resources to protect against those risks.
What follows are some basic questions that founders should ask themselves when thinking about their company’s insurance needs. While this list is not exhaustive, it can serve as a useful starting point.
1. Does your startup have personal or real property, or does it take possession of significant client property?
If the answer is yes, it is worth thinking about buying first party property insurance. While there are several kinds of property insurance policies, these policies most typically protect against the risk of physical damage to property you possess, along with the risk that your business operations will be interrupted after property is damaged. Risk profile is key. If your startup involves people working remotely on a laptop, and the company owns or rents minimal personal or real property, there may be little reason to buy first party property insurance.
2. Is there a chance your startup injures someone or damages their property?
If yes, you should consider purchasing commercial general liability (“CGL”) insurance. This is the basic coverage carried by most companies, and it protects against three categories of risks. One of these categories—“personal and advertising injury”—I discuss in the following section. The other two are liability for “bodily injury” or “property damage.”
If your company is placing products into the stream of commerce or engaging in conduct that presents a risk of physical injury to third parties, you probably need CGL coverage. Likewise, if your startup has operations that could damage another’s property, CGL coverage will be a good idea. Again, your risk profile is key. If your startup is internet based and you sell no products, then carefully consider whether a claim for “bodily injury” or “property damage” justifies investing resources into a CGL policy.
3. Does your startup face soft intellectual-property claims?
If yes, it is worth exploring both CGL coverage and a specific media-liability policy. As mentioned above, the third category of risk that CGL policies protect against is called “personal and advertising injury.” Without getting into the weeds, “personal and advertising injury” under a CGL policy traditionally includes, among other things, coverage for soft IP claims. These include claims for things like trade disparagement, along with trade dress, slogan or other forms of advertising appropriation. However, many insurers now use exclusions to eliminate coverage for soft IP claims. For this reason, it is also worth exploring coverage under a media-liability policy or its equivalent. Media-liability policies typically cover the kinds of soft IP risks that used to be covered by a CGL policy. They also cover risks that were never traditionally covered by a CGL policy but which many companies facing soft IP claims want to guard against. When thinking about soft IP coverage, it is important to work with an experienced broker who can sort through CGL and media-liability policies to ensure they are tailored to your company’s needs.
4. Does your start-up face hard intellectual-property claims?
If yes, it is worth thinking about an intellectual property liability policy. These policies typically cover hard IP claims, like patent, trademark, or copyright infringement. There can be significant overlap between coverage under an intellectual property policy and a media-liability policy. So you should work with a broker who understands these nuances.
5. Does your startup face cyber risks?
If yes, it is also worth considering a cyber policy. These are new insurance forms that have become widely available only recently. Cyber policies typically protect against claims by third parties for data loss, breach or theft, and liability claims that are related to computer or internet use. They also cover claims by your own company for software damage, data loss or other computer-related losses. For startups working in the tech space, cyber policies may be the single most important piece of insurance. Interestingly, cyber policies tend to be quite affordable. And they usually provide broad coverage. Because these are new products, quality can vary among insurers. Your broker should understand the differences between various cyber policies and should help you purchase the one that is best suited for your company’s needs.
6. Does your start-up hire employees or independent contractors?
If yes, it might be necessary, depending on the number of workers you hire, to consider EPLI coverage. Because many EPLI policies exclude coverage for violating state and federal wage laws—which is one of the most significant risks an employer faces, particularly in a state like California—you should look at EPLI policies that include coverage for these claims.
7. Do the founders need to protect themselves personally?
If yes, you should consider Director’s and Officer’s (“D&O”) liability insurance. D&O policies typically protect founders against claims for any “breach of duty” allegedly committed while running the business. Coverage under a D&O policy is typically quite broad. If the founders are worried about being exposed to personal liability for acting in their corporate role, purchasing D&O insurance presents a great way to protect founders individually. D&O policies have an added benefit: Most extend coverage to the company itself. This is an often overlooked aspect of D&O insurance that may add significant value to the company’s overall risk-management strategy.
Before investing your startup’s limited resources into insurance, think carefully about the realistic risks your company faces. This will provide greater peace of mind, a better return on your purchase, and it will help avoid the kinds of insurance mishaps that are far too common among startups.
Relocation of Las Vegas Office
Payne & Fears LLP is pleased to announce it has relocated its Las Vegas office to the following address effective April 3, 2017:
6385 S Rainbow Blvd
Payne & Fears Supports Grand Opening and Dedication Ceremony for Nevada Supreme Court Building
Gregory King, Managing Partner of Payne & Fears’ Las Vegas office, attended the opening ceremony and dedication for the newly built Nevada Supreme Court and Court of Appeals Courthouse. We were a proud sponsor of the dedication and participants were able to tour the new building after the ribbon cutting. The Nevada Supreme Court Building is located at 408 East Clark Avenue, Las Vegas, Nevada.
Commission-Only Employees Entitled to Separately Paid Rest Periods
A California Court of Appeal recently ruled that employers who pay their non-exempt sales employees on commission must separately compensate them for mandatory rest periods. All California employers with commission-based plans, especially those with commission-only pay, should carefully review their policies to ensure compliance with the court's holding.
Key California Employment Law Cases: February 2017
The key California employment law cases from February 2017 involve collective bargaining/union and wage and hour issues.
Collective Bargaining/Union Issues - Vasserman v. Henry Mayo Newhall Memorial Hospital, 8 Cal. App. 5th 236, 213 Cal. Rptr. 3d 480 (2017)
Wage and Hour - Vaquero v. Stoneledge Furniture LLC, 9 Cal. App. 5th 98, 214 Cal. Rptr. 3d 661 (2017)
Negotiating the Maze of Overlapping Leave Laws
Our experienced employment lawyers will review major federal and California laws regarding employee leaves of absence and how they impact employers in 2017 and beyond.
Bio-Rad Verdict Could Spur GC Whistleblower Claims
February 10, 2017 - Rod Sorensen, managing partner of the Silicon Valley office of Payne & Fears, was interviewed by The National Law Journal. Regarding the popular legal topic - whistleblower claims.