Legal insight decision making for small business and entrepreneurs: a judicious approach.
Each year the United States Supreme Court (USSC) issues a limited number of Writs of Certiorari. This action constitutes initiation of the legal process that requests a lower court to deliver the record in the case the USSC has accepted for review. The USSC accepts and decides only a finite number of cases and remarkably few of these involve business interests. For example, in each year from 2005-2009, the USSC docket heard or will hear as few as 63 cases and as many as 74 cases; but of these cases, only a baker's dozen directly affect business interests. Knowledge of this finite universe of USSC cases that affect business interests is power; in fact, these select cases provide rich lessons to the wise and wary.
BACKGROUND AND LITERATURE REVIEW
Amid growing concern that even the wise and wary are not savvy to the lessons of the USSC decisions affecting business (Cutler, 2003; Hemingway& Maclagan, 2004) nor even to the need to comply with underlying laws and regulations (Rondinelli, 2007) some have concluded that the failure to seek and access information (Roth, 2005) does inhibit firm performance and can indeed impede success. Researchers have observed that companies of all sizes are adept at developing and implementing mission statements (Gumbus& Lussier 2006), but this does not translate to ability to develop awareness of legal issues and consequent legal insight decision making.
Minority and non-minority entrepreneurs, whose likelihood for failure exceeds the average failure rate for new businesses (Kaplan, 2003; Kuratko, 2005; Mendoza, 2007) are in accord with this perspective. Indeed, the term "entrepreneurial cognition" aptly describes the process of overcoming ignorance and doubt to find opportunity to act and make decisions (Shepherd, et al 2007) such as should be made in the arena of legal issues and practices, without regard to firm differences. In fact, decision making which involves the owners and managers of the firm, especially in the legal arena, can lead to conflict, as aptly noted by family business scholars, (Eddleson, Otondo & Kellermanns, 2008; Brigham, DeCastro & Shepherd, 2007; Steier & Ward, 2006) and the field for future research is rich (Heck, Hoy, Poutziouris & Steier, 2008); although the available data and published research on judicially affected legal issues is less so.
The opportunity to act and make beneficial decisions affecting legal issues does not rest solely in the hands of the firm's legal counsel; indeed, the majority of small businesses seek legal counsel in a reactionary rather than proactive manner. Even small business academic gurus, Hornsby, Kuratko, Naffzinger, LaFollette and Hodgetts in a co-authored seminal study, "The Ethical perceptions of small business owners: A factor analytic study" published in 1994 and using a 16 item questionnaire developed by Longenecker, McKinney and Moore (1989) equated legal decision-making with ethics rather than with legal knowledge (Hornsby, Kuratko, Naffzinger, LaFollette & Hodgetts, 1994; Longenecker, Moore, Petty, Palich & McKinney, 2006). The literature thus describes and characterizes the legal decision as an ethical decision; though whether the decision is made by the small business owner or the hired hand legal counsel, legal decisions are not, in fact, related to ethical perceptions. Further, most small firms do not retain in-house legal counsel, but resort to out-sourcing formal legal advice as needed or when a perceived legal issue arises.
While scholars note strategic planning is the optimum weapon to enhance organizational performance (Ensley, Carland & Carland, 2003), legal issues strategic planning is sometimes omitted from the mix of planning elements. In studies of nascent business development, the formation of the legal entity or selection of legal form of business may figure as merely a step in development (Fiore, Lussier, 2007). Studies of small businesses that engage in formal and informal planning and the importance of planning is presumed and validated by many scholars (Allred, Addams & Chakraborty 2007). However, there is disagreement upon the dimensions of the planning and the inclusion of all the fundamental business functions (especially the legal function) in planning. In the Allred study, the ranking of legal planning was near the bottom for both formal and informal planning. Other scholars measuring internal and external considerations of planning, in particular strategic planning identify only a very low Pareto analysis result for each of the legal factors measured: legal environment and legislation regulation (Hodges & Kent, 2007). Whether the study involves home-based businesses (Bardwell, Spiller & Anderson, 2003) or studies of business success factors, including financing and planning even with boot-strap methods (Van Auken, 2003), these studies often tangentially shed light on the related legal issues; but do not focus on the risk of consequential legal remedies. The lack of legal insight and failure of effective legal decision making can be deduced from the increase in small business lawsuits, arbitrations and bankruptcies--all of which are on the rise according to the statistics available via BLS and according to many insightful researchers (Gaskill, Van Auken & Manning, 1993; Lussier, 1995; Palmer, Andaleeb & Joyner, 2005/2006; Carter & Van Auken, 2006).
Even seasoned, knowledgeable researchers and academic proponents of business models may omit the legal component in research and conceptual theoretic; in fact, no legal functions were included in a proposed comprehensive review of core components of a business model and no reference to legal matters were identified in the definitions of business models in a seminal article about the creation of an empirical model to test theories of guidance to achieve sustainable advantage (Morris, Schindehutte, Richardson, & Allen, 2006). Thus, a review of the literature that addresses these various issues reveals that relatively few legal issues matters or studies have been reported in the literature of small business journals unless one considers topic specific articles, or studies reporting client satisfaction with bankruptcy legal representation (Palmer, Andaleeb & Joyner, 2005/2006) or other topic specific reviews concerning regulatory or general category legal issues.
Identifiable legal issues affecting new ventures are likely to include matters like business format, intellectual property, liability, regulation, contracts, tax, employment, finance and real property (Malach, Robinson & Radcliffe, 2006). In a comprehensive survey of 292 legal clinic clients who were generally in planning or pre-start up phase, analysis of the type of business rather than the legal issue was the focus of the study (Malach, Robinson & Radcliffe, 2006). This study targeted the stage of the business development as a distinctive factor in legal issue identification; it reveals significant useful information regarding the type of issues identified, but opts to use a proxy of frequency to rank importance of those legal issues. The attempt to quantitatively rank the relative importance of the legal issues is confined to new ventures and based upon frequency, rather than seriousness of consequence or risk of the legal decision (Malach, Robinson & Radcliffe, 2006).
Though identification of important legal issues has been the subject of several studies (Heriot and Huneycutt, 2001) as noted by Malach, et al, the literature might lead some to conclude that while distinct legal issues are the subject of scholarly study, those studies omit any cognitive recognition of a connection with the judicial remedies imposed by the USSC in its fine series of legal decisions affecting business. Indeed, the relevancy of legal issues to new ventures and the rank by frequency that the legal issue arises (Malach, Robinson and Radcliffe, 2006) does not draw any conclusions about the judicial remedies imposed upon legal decisions made by firms, small businesses and/or entrepreneurs. Over a period of several years, the author has used simple questionnaires to elicit responses from business owners and managers, MBA students, SBI students, academics, lawyers and entrepreneurs to gauge legal knowledge on business related legal issues within key USSC and other high or key court decisions (for years 2004, 2005, 2006, 2007, 2008, 2009). As will be seen, it appears that knowledge of recent USSC decisions affecting legal decision making and which can provide legal insight to entrepreneurs, business owners and managers is hiding in plain sight.
This paper fills a gap in the literature of analysis of key legal issues by identifying the legal issues that create significant problems to business success and describes correlative judicial remedies to those legal issues. This paper proposes a logical next step in the development and examination of a new conceptual body of business related legal, ethical and regulatory matters; the concept called LIDM, Legal Insight Decision Making.
The author, utilizing information from previous case studies which included in-depth interviews with business owners and managers, created a set of revised questionnaires to determine generic respondents' pre-knowledge of key legal issues. These questionnaires include: Top 25 Legal Issues Legal Audit[C] tool, Top 3 Survey Tool, Small Biz and Entrepreneurs Survey; these are included in the appendices. Respondents were not randomly selected; instead, they were voluntary participants in legal seminars, academic meetings, MBA students, undergraduate business students, business consulting clients, economists, entrepreneurs, or others seeking information about key business related USSC decisions and related legal issues. Except for the business consulting clients, no demographic or firm related data was gathered. Key legal issues were drawn from the following topics: Agent and Principal law, Arbitration, Bankruptcy, Contracts and Collections, Damage(s) Control, Embezzlement, Eminent Domain, Employment Law, Fraud, Independent Contractors, Intellectual Property protection, Privacy, Sarbanes-Oxley Rules, SPAM law, Tax Law, Tax Matters and Liability, Trademarks and Trade Secrets, Truth in Lending (TILA), Regulation "Z". Questionnaires, surveys, focus groups and consulting inquiries using the Top 25 Legal Issues Legal Audit[C] tool, Top 3 Survey Tool, Small Biz and Entrepreneurs Survey were utilized to collect information and to determine general legal topic knowledge.
For example, in the Top 25 Legal Issues Audit[C], business owners, managers, consultants, economists, entrepreneurs and others review the integrated components which are necessary for healthy legal status of any business entity. The Top 25 Legal Issues Audit[C] tool is a checklist of items ranging from compliance matters, to collection and contract suggestions which should be in place for every business. The twenty five issues pertain to all business forms, and most items also pertain to non-profits. This tool is useful to raise awareness of specific legal practices which should be in use to maintain legal health and acts as a diagnostic for legal errors and omissions. It is useful both as a teaching device to raise awareness, and a list of best practices for model legal health.
Exhibit A: Top 25 Legal Issues Audit[c] 1. Business License on File in All Jurisdictions in Which Doing Business 2. Proper & BEST Legal Form Of Doing Business& Yearly Compliance [Sole Prop/ Partnership/ LLC/SCorp/C-Corp] 3. Federal/ State/ Local Tax Compliance 4. Multi-jurisdictional Tax Compliance 5. Insurance Policies: Liability & Umbrella 6. Worker's Compensation 7. Health Insurance 8. Contracts with Employees customized 9. Contracts with Partners customized 10. Contracts with Suppliers/Vendors customized 11. Office/Warehouse/Other Property Lease Contracts customized 12. Equipment Lease Contracts customized 13. Current Licenses or Compliance Records For Specialty Workers or IKs Government Regulations Posted On Site For OSHA/ABC/Etc. 15. Intellectual Property is Recognized and Registered 16. Pensions, Disability, Other Benefits 17. Arbitration Clause & Collections Policy Clearly Stated On All Contracts 18. "As-Is", Warranties, Guarantees etc. Clearly Stated On All Sales Invoices 19. Facilities Accessible To Handicapped 20. Facilities in Good Repair/No Dangerous Conditions 21. Calendar Of Dates For All Required Tax Filings & other "compliance" filings 22. Bank Accounts and Financial Data Up To Date and regularly audited 23. Partnership/Key Person Insurance 24. Disposition of Business Assets Written Plan Exists In The Event Of Emergency or Death 25. Up To Date Will on File with Attorney with Accurate Description of Directions for Disposition of Business
Perceived problems facing business owners are likely to range from macro (the economy) to micro (the collection of past due accounts), and there may be cyclically popular problems of supply, sales, cash-flow and innumerable other problems faced by businesses no matter what size or industry.
A short questionnaire called Top 3 Survey Tool was developed to aid identification of top problems facing business owners; the resulting topics solicited from the use of the Top 3 Survey
Tool were culled to reveal the top legal content problems. The resulting topics then were analyzed in conjunction with relevant USSC decisions on those topics.
Exhibit B: Top 3 Survey The top three problems facing business owners: [a]-- [b]-- [c]-- The top three reasons entrepreneurs/businesses ARE successful: [a]-- [b]-- [c]-- Three preventable problems for small business: [a]-- [b]-- [c]--
CORRELATIVE JUDICIAL REMEDIES
As a result of these initial questionnaires, common flawed legally related business practices capable of harming businesses were identified and the legal insight decision making opportunities requiring knowledge could be organized. The key knowledge factors for each topic generated an alpha legal topics chart and those in turn could then be related directly to legal decisions (primarily USSC decisions) on those topics.
Exhibit C: Table of Sample Issues and Cases Issue Case Arbitration Vaden v. Discover Bank Bankruptcy United States v. Galletti Contracts and independent contractors Estrada v. FedEx Ground Embezzlement & Fraud Stoneridge Investment Partners v. Scientific-Atlanta Inc. Appendices: Surveys Small Business and Entrepreneurs Survey [T]/[F] Arbitration clauses permit litigation in court. [T]/[F] Bankruptcy permits full discharge of debts. [T]/[F] Contracts w. usurious Collections policies are void. [T]/[F] Damages cannot be limited or capped. [T]/[F] Embezzlement is the most prosecuted white collar crime. [T]/[F] Fraud/Forgery/Falsification is on the rise. [T]/[F] Regulation "Z" prohibits undisclosed fees to be charged to credit card holders. Legal Issues Knowledge Survey questions & Response Scale: [0 = None/Low to 5 = Strong/High] 1. My knowledge of uses of Arbitration clauses in 0-1-2-3-4-5 contracts is: 2. My knowledge of recent USSC decisions affecting 0-1-2-3-4-5 business practices in employment law & bankruptcy is: 3. My understanding of anti-SPAM law and practice 0-1-2-3-4-5 is: 4. My understanding of the Federal Sentencing 0-1-2-3-4-5 Guidelines is: 5. My knowledge about Intellectual Property 0-1-2-3-4-5 protection for small business and entrepreneurs is: 6. The likelihood of embezzlement becoming an 0-1-2-3-4-5 issue in most businesses is: 7. For most businesses, I believe Risks of 0-1-2-3-4-5 Marketing via email and running afoul of Anti-SPAM laws is: 8. The benefits of filing for Bankruptcy 0-1-2-3-4-5 protection in 200X, compared with pre-2005, are: 9. The likelihood of a local economic empowerment 0-1-2-3-4-5 agency taking private land to turn over to another private entity is: 10. The effect of USSC NY & MI wine industry 0-1-2-3-4-5 decision about importing wine in my state is: SPAM SURVEY 1. All 50 States have criminal Anti-SPAM laws- [T]/[F] 2. Over 80% of inbound messages to consumers are [T]/[F] SPAM- 3. Unsolicited E-mail with false transmission information is criminal in which states? 4. To date there has been no successful [T]/[F] Prosecution of "Kingpin" Spammers sending Fraudulent Bulk messages- 5. "Misdemeanor" SPAM rises to "Felony" SPAM under your STATE law if: [a] -- [b] -- [c] -- 6. Under the Federal CAN-SPAM Act, any State [T]/[F] Anti-SPAM laws relating to falsity or deception are pre-empted. 7. Anti-SPAM laws provide for both civil and [T]/[F] criminal penalties. 8. Private parties may institute legal action [T]/[F] under Anti-SPAM laws. 9. Under state statutes, Out-of-state SPAMMERS [T]/[F] cannot be prosecuted. 10. Penalties include: X -- jail time: Y -- $$$ Wage Law & Overtime Survey 11. Under the Federal Overtime rules, only hourly [T]/[F] workers are entitled to overtime pay. 12. Flex timers, managers or administrators [T]/[F] working from home are exempt from overtime pay laws. 13. Union employees are covered under the Federal [T]/[F] Wages & Overtime rules. 14. Independent Contractors are exempt from [T]/[F] Overtime Pay rules. 15. Penalties MAY include: X -- jail time: Y -- $$$Fines Z -- Back wages for up to 2 prior years Wage & Hour Law Changes Survey Federal mandates for overtime pay have created the latest "class action" vehicle of choice in business law. Unintentional failure to pay overtime wages is corrected by civil suit-BUT intentional failure to pay overtime may bring punitive damages & jail time. Q. Who is entitled to Overtime pay? Response: Eminent Domain Survey 16. Under the 5th Amendment, Eminent Domain may [T]/[F] only be exercised by the States. 17. Eminent Domain permits taking of Private [T]/[F] Property for public use upon payment of just compensation. 18. Kelo v. City of New Londonpermits only a very [T]/[F] narrow interpretation of "public Use". 19. States may alter Eminent Domain rules. [T]/[F] 20. Private companies may be sued if they fail to [T]/[F] put private property obtained by eminent domain to a promised use.
As is evident in Exhibit C, the very issues identified as problematic are the same issues presented to the high court under the writs of certiorari. For example, cases involving arbitration, bankruptcy, contracts have been selected and distinguished by USSC recent decisions and provide opportunity for legal insight decision making. In the following section, a select few topics will be reviewed (Arbitration, bankruptcy, contracts and independent contractors, embezzlement and fraud) and the judicial case in point is described to illustrate the Legal Insight Decision Making model.
LEGAL INSIGHT DECISION MAKING
Arbitration in lieu of civil litigation is favored in federal law and this deference to arbitration has been the most pervasive change in business practice in the last decade. The status of the "Arbitration" clause in contracts, as well as strategic use of the arbitration clause by big business, was noted by academic scholars at the turn of the century (Bardwell, 2001) to mark a new strategic defensive posture by lending and credit institutions. The revelation of this posture was evident due to the requirement of the federal Privacy Act which requires such institutions to annually disclose terms and conditions of the lending/borrowing relationship via mailing of an annual Privacy Notice to its customers.
Close reading of Privacy Notice Disclosures reveal that beginning in the early 2000's, arbitration clauses were regular conditions imposed as conditions of borrowing and lending by most US financial institutions. This effectively minimized costs and risks to lending and credit institutions by automatically affording the manifest protections of arbitration. The obvious benefits of arbitration include: choice of forum and choice of arbitrator to resolve the dispute by the lending institution; no jury; no appeal; no judicial precedent; and, until the Supreme Court ruled in Green Tree v. Bazzle, no class actions in arbitration. Furthermore, the Federal Arbitration Act (F.A.A. 9USC [section] 1 et seq.) pronounces, and federal court and USSC have agreed, that arbitration clauses are valid and preferred under law; that arbitration is favored over litigation and that arbitration can be compelled where there is a valid arbitration clause. Thus, by employing the legal tactic to force arbitration as a condition precedent to obtaining financing, the entire system of civil litigation was effectively flat out removed as an option to resolve all disputes related to financing by the lending and banking industry.
As recently as March 9, 2009, the USSC ruled to support arbitration clauses in contracts between lending institutions and its customers in the case, Vaden v. Discover Bank. Vaden v. Discover Bank, 07-773, 08 C.D.O.S. 2829, was decided 03-09-2009 in the Supreme Court of the United States on Writ of Certiorari to the United States Court of Appeals for the Fourth Circuit opinion filed March 9, 2009. Justice Ginsburg delivered the opinion of the Court; she opined that "Section 4 of the Federal Arbitration Act, 9 U. S. C. [section]4, authorizes a United States district court to entertain a petition to compel arbitration if the court would have jurisdiction, "save for [the arbitration] agreement," over "a suit arising out of the controversy between the parties." Justice Ginsburg describes the typical facts giving rise to the case stating that... "The litigation giving rise to these questions began when Discover Bank's servicing affiliate filed a complaint in Maryland state court. Presenting a claim arising solely under state law, Discover sought to recover past-due charges from one of its credit cardholders, Betty Vaden. Vaden answered and counterclaimed, alleging that Discover's finance charges, interest, and late fees violated state law. Invoking an arbitration clause in its cardholder agreement with Vaden, Discover then filed a [section]4 [Federal Arbitration Act] petition in the United States District Court for the District of Maryland to compel arbitration of Vaden's counterclaims. The District Court had subject-matter jurisdiction over its petition, Discover maintained, because Vaden's state-law counterclaims were completely pre empted by federal banking law. The District Court agreed and ordered arbitration. Reasoning that a federal court has jurisdiction over a [section]4 [Federal Arbitration Act] petition if the parties' underlying dispute presents a federal question, the Fourth Circuit eventually affirmed."
Summarizing the Vaden decision, the majority of the USSC reversed the 4th Circuit lower court decision and reiterated the power of the arbitration clause by concluding that state courts as well as federal courts are obligated to honor and enforce agreements to arbitrate. Finally, FAA[section]2 is binding on state courts and this requires an interpretation of arbitration clauses which favors arbitration; the exact language of the relevant federal statute section states that FAA[section]2 renders agreements to arbitrate "valid, irrevocable, and enforceable."
The insight gleaned from this latest decision on arbitration clauses should enhance knowledge based decision making and suggests that businesses of any size, in any industry can likewise employ arbitration clauses to avoid litigation and reap the benefits, noted above, of arbitration.
Bankruptcy data available for every jurisdiction from the American Bankruptcy Institute (www.abi.org) demonstrates that the bankruptcy rule changes of 2005, in concert with the downturn in the economy, have meshed to create a statistical upsurge in the filings of chapters 7, 11 and 13 bankruptcies. Some fail to see bankruptcy as a strategic business maneuver and it is a sad fact that business owners often fail to recognize the key warning signs of vendor, supplier, client or customer impending bankruptcy. Since bankruptcy is an exclusively federal subject matter, though individual state rules can apply where permitted, it remains dangerous and short sighted to ignore the warning signs of bankruptcy.
Bankruptcy warning signs include the creation of Receivership status; approximately 80% of businesses in receivership eventually will enter Bankruptcy and the constraints upon creditors who join a bankruptcy proceeding are far more onerous than in the pre-bankruptcy stages. Receivership is a red flag that bankruptcy is imminent.
Other key warning signs that bankruptcy will occur include late pays, reduced pays, or excuses for pays by accounts payable customers. The legal insight objective to keep in focus is to recognize that any disturbed pattern of payment signifies financial stress and financial stress is a precursor to bankruptcy.
Finally, requests to re-negotiate classic terms of longstanding contracts and any reduction in business related communications, known as the ostrich syndrome, also signify financial stress that typically precedes bankruptcy.
Two interesting cases tangentially touching on bankruptcy reached the USSC and the lessons in each case provide significant legal insight decision making opportunity. In the United States v.
Galletti case, a partnership declared bankruptcy, and as we know, back taxes owed to the IRS cannot be discharged in bankruptcy. In the Galletti case, a former partner of the now dissolved partnership argues that he (Galletti) was not responsible for the back taxes assessed by the IRS upon a former partner for a now defunct partnership. In this case, the USSC confirmed that the Statute of Limitations for the IRS to assess a tax is 3 years from the time the tax return is filed, or should have been filed. However, provided the IRS makes the tax assessment within the 3 year limit, then the time permitted to collect the tax debt is 10 years from the date of assessment. Galletti answered a very important legal question about tax liability for defunct partnership: If a "Partnership" is the assessed taxpayer, are the individual partners liable up to 10 years later?
The resounding answer to this question is yes. If the IRS timely assesses the partnership "taxpayer" within 3 years, then the law of Partnership which makes each and all individual partners jointly and severally liable, extends the debt collection period for up to 10 years after the IRS assessment of taxes due; and each individual former partner, even though not personally assessed nor personally notified of the IRS tax assessment, is subject to collections actions for up to ten years until the debt and interest and fines is fully satisfied. Note that the collection power of the IRS ranges from garnishment and attachment to confiscation and the IRS is a supreme debt collector. Obvious lessons from this case include the need to reconcile financial obligations and terminate business entities completely, including all prospective tax obligations. Certainly, the form of business of partnership is less desirable than is any other form of business entity due to the feature of joint and several liability unique to a partnership.
Contractors and Status as Independent Contractors or Employees
There has always been a tense relationship between the IRS view on employee status versus independent contractor status and the benefits of the Independent contractor status to the employer. For example, employers are not liable for torts committed by independent contractors, nor are employers responsible for payment of withholding taxes for independent contractors. These two benefits alone created an inducement for the world's largest private ground carrier, Roadway [now FedEx Ground] to declare in California that its drivers were to be classified as independent contractors rather than employees. However, this brilliant bit of business strategy has backfired on FedEx in a rather terrific legal manner.
In a landmark California case, Estrada v. FedEx Ground, the employer FedEx has found that drivers' status as an independent contractors cannot be guaranteed even if so declared under written contract. Current IRS tax laws recognize there are numerous factors which guide but may not absolutely determine the proper classification as either employee or as independent contractor. The FedEx case demonstrates that employers must use 10 classic factors to determine true independent contractor status or they might well rue the consequences. These are 10 classic factors to consider: close supervision, uniforms, training, tools, full time, hours of work, peripheral work, payment, expenses, statutory class. In California, a state statute clearly requires proper classification of workers as either employees or independent contractors and the intentional misclassification of workers constitutes fraud and is criminal under the statute California Labor code [section]2802.
In the landmark case, Estrada v. FedEx Ground filed in Los Angeles Co. Superior Ct. decided on December 19, 2005. Two later appeals modified the ground breaking class action decision against FedEx for misclassifying all single route drivers as independent contractors rather than employees; but left the liability issue intact. FedEx's action was determined by the court to be in violation of California law. This class action lawsuit of about 200 class members in California included an injunction against FedEx to halt the practice and awarded $5.3 million to plaintiffs. Note: $12.3 million awarded for attorney fees.
The consequences of this lawsuit, a dispute resolved via litigation, not arbitration will be tremendous. The details of the dispute have spawned more litigation in other jurisdictions; there are more than 32 suits from 25 states which may or may not be consolidated asking for wage and hour compensation and reimbursement for fuel, oil, tires, repairs and liability insurance; these lawsuits also challenge the practice of firing employees and then re-hiring these workers as independent contractors to avoid paying taxes, benefits, insurance and other employee related expenses and entitlements.
The ripple effects of this lawsuit are enormous. The consequences of using a strategy to circumvent financial costs associated with hiring, training and retaining employees will include an industry wide examination of all carriers who classify drivers as independent contractors; then there will likely be an expansion to other industries who have utilized this independent contractor strategy. For the record, other jurisdictions, including Massachusetts and Indiana have followed the California Estrada v. FedEx court decision and challenged the classification of drivers as independent contractors.
However if the reason for the strategy in the first place was to save costs, then the outcome is essentially one of ironic proportions. The reason this cost-saving strategy has monumentally backfired is that the IRS has already reached back three years from the Estrada decision of 2005 in California and levied over $319 million in fines and penalties against FedEx for failure to pay withholding taxes to the drivers it intentionally misclassified, starting with the tax year 2002; of course, the IRS will utilize its power to assess back taxes for each subsequent year and employ its power to collect those taxes for the full ten year collection period for each assessment period.
Contracts and Designer Contracts
All business contracts one writes are potential allies, but all contracts written by the other party are potential enemies. The legal insight decision making model would emphasize that use of "Boilerplate" contracts, those in which standard terms are inserted without regard to custom requirements of the parties typically benefit the author not the other party to the contract. Therefore, businesses which employ contracts to define relationships and terms and conditions should customize those contracts and use written contracts to clearly state policies that will protect the interest of the contract writers and notify others of specific practices, including arbitration, collection practices, liquidated damages and related custom issues.
Contracts should be used to define deadlines and to state consequences and expectations on the face of the contract; thus requirements for parol evidence will be moot.
Embezzlement and Fraud
Query: What percentage of small businesses may be likely to experience an incidence of embezzlement during the lifetime of the business? Response: 100%
All embezzlers share the same characteristics: they are intelligent and trusted employees placed in a position of control with little or no oversight due to their very loyal personality.
Fraud is a complex and multifaceted illegal behavior; creative accounting, escrow fund abuses, tax evasion, billing "errors", valuation and insurance frauds are examples; but the list is endless and both civil and criminal sanctions are available to remedy fraud. Criminal fraud is more likely to be prosecuted than ever before due in part to private attorney general statutes including those created by Sarbanes-Oxley, according to official court statistics (usdoj.gov; www.uscourts.gov; www.soxact.org).
The increase in fraud prosecutions is related to multiple factors including perceived public demand and support to prosecute, convict and punish. Some reasons fraud investigations and enforcement are favored by prosecutors include mandates of Federal sentencing to uniformly impose stiffer penalties; higher standards of personal liability and responsibility by owners, directors and firm fiduciaries; the fact that fraud defeats the corporate shield laws; and unfortunately, the fact that media darlings are created [prosecutors] and destroyed [defendants].
Stoneridge Investment Partners v. Scientific-Atlanta Inc. decided January 2008 by a 5-3 majority provides a current example of extension of fraud liability. In this case, Chief Justice John Roberts first recused himself, but then sold his stock in an involved firm and rejoined the justices to fully participate in the deliberations. The USSC ruled that 3rd parties were not liable under the SEC for investor losses due to 2nd party fraud even if those 3rd parties actually knew of the fraud. The reasoning for this outcome is entirely based upon a strict reading of the SEC provision rule under question. In the question at hand, a class action suit, in which the class was seeking redress and damages under SEC rule 10(b) from 3rd party deep pockets, the class must prove that a legal cause of action exists under SEC rule 10(b) justifying vicarious liability for actions not recognized under the SEC 10(b) rule. To date, the 10(b) rule has not been so extended.
CONCLUSIONS AND IMPLICATIONS
No business enterprise can exist successfully without a legal plan to direct, design and even deter the principals from dangerous practices. This is true whether in start up, growth or maturity phase. A comprehensive Legal Audit[C] is a useful tool and can significantly affect business
performance fault lines and how to predict where the quakes will occur using the Legal Audit [C] tool. Knowledge of the key USSC decisions extracting lessons from these decisions and applying this knowledge to gauge the effect upon business issues is essential in the legal insight decision making model.
Track notable decisions regularly. Usually August is prime season to identify hot topic cases and many Certiorari grants are determined over summer and finalized for October; the writs are based upon discord, dissent and politics and thus these elements will affect business practices. Key cases arise from forum differentials in high octane forums such as the 4th and 9th circuits and a modicum of uniformity is desired by USSC. Therefore discord among the circuits on the same or similar issues is a good predictor of certiorari.
Knowledge of the matters at issue relating to business should be an on-going obligation of good strategy and good planning. Managers and owners should react by adjusting business practices to comply with judicial outcomes and adjust current practices by using simple contractual language to define desired outcomes.
Whether the business is in start-up phase, growth phase or is fully developed, all businesses and owners should use a standardized approach to check the legal soundness of their company. A simple, but comprehensive Legal Issues Audit[C]" will be a cost effective and efficient method to identify problem areas and prepare for corrective action.
Leading cases are potent red flags to signal that legal insight decision making strategy should be instituted and implemented to enhance business performance.
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Stephanie Huneycutt Bardwell, Christopher Newport University
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|Author:||Bardwell, Stephanie Huneycutt|
|Date:||Jan 1, 2009|
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